Plaza S.A. (MALLPLAZA) Earnings Call Transcript & Summary

Good day. Thank you for standing by. Welcome to Mallplaza Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Derek Tang, CFO and Corporate Administration.

Greetings, and welcome to Mallplaza Earnings Conference Call. Thank you for joining us this morning. I'm here today with Fernando de Pena, our CEO and the only Latin American member of the Board of Trustees of the ICSC. Also with us is the Investor Relations team represented by Ramón Ortúzar, Sebastián Macchiavello and Matías Guerra. We are pleased to introduce the company's earnings results for the second quarter of 2023. First, we will begin with a brief overview of the company's quarterly results. Second, we will highlight some strategic remarks regarding the quarter. And as usual, we will end with a Q&A session. Starting on Page 2. The second quarter of this year continued with solid operational results. Footfall to our urban centers continued increasing, reaching 68 million visitors during this quarter, increasing 6% compared to the second quarter of 2022. Our tenants' performance continued in good shape despite a more challenging macro environment and consumption levels. Tenant sales reached CLP 1.1 billion, decreasing 3.7% compared to the same quarter of last year, mainly due to low performance of department stores and home improvement stores, but continued to show resilience against overall retail sales in Chile. For example, in Chile, for sales in the metropolitan region, Mallplaza tenants were, on average, 10 percentage points above market sales for the last 4 quarters. In terms of occupancy cost, it reached temporary levels of 11.5% during the second quarter, mainly because of the decrease in sales with tenants and higher condominium expenses associated with inflation. All in all, revenues reached CLP 103 billion during the quarter, increasing 16% year-over-year, mainly because of readjustment of lease contracts, where same-store rent showed a nominal growth of 11% for the quarter and 13% for the last 6 months due to the indexation of lease contracts to inflation and due to increment of leased meters, with a year-over-year increase of 110 basis points in occupancy rate to 94.5% in the second quarter of 2023. As noted in the following page, cost of sales increased 23% year-over-year, mainly because of higher expenses and contributions associated with the 2023 higher property tax. On the other side, administrative expenses increased 27% compared to the second quarter of 2022. This was mainly explained by higher bad debt provisions associated to the financial reorganization process of 2 specific tenants in Chile due to nonrecurring expenses of severance payments related to an organizational structure simplification plan and higher-than-expected expenses in remunerations and incentives associated with a higher CPI. Thus, EBITDA increased 13% year-over-year, reaching an EBITDA margin of 76.5%. It is important to notice that without the one-off expenses of severance payments, the EBITDA margin would have reached levels of 77%. Lastly, turning to Page 5, the net income reached CLP 167.1 billion, increasing 103% year-over-year, mainly explained by other revenues line which increased due to the fair value of investment properties methodology adopted for this quarter. Additionally, the adjusted FFO reached CLP 64.7 billion during this quarter, increasing 31% year-over-year, mainly due to better performance of the operation and less minority interest adjustment because of the purchase of the minority stake of the subsidiary, Nuevos Desarrollos. The adjusted FFO margin reached 63% during the quarter. Moving to Page 6. I would like to highlight that from this quarter onwards, Plaza S.A. adopted a new accounting IFRS policy, changing from an accounting structure at historical cost, construction and/or acquisition value of the asset less depreciation to a fair value methodology, which represents an estimate of the market value of the assets at a point in time according to a certain valuation methodology which we believe will be -- will more adequately reflect the financial situation of the company and will allow Mallplaza to become more comparable with other real estate companies, both national and international. This new methodology applies to discounted cash flows methodology, where future flows are discounted at a weighted average cost of capital rate per country for each given period and in real terms. The applied methodology was reviewed by external expert advisers and will not have effect in the company's EBITDA. The FX of the fair value assessment of our investment properties can influence in certain metrics of the company, such as the overall indebtedness as calculated in our bond covenants. The approximate FX can be seen in our financial statements. I would also like to highlight that on the second quarter earnings release, we provided further disclosure by mall of all of our urban centers. We believe that this information will be helpful to provide further visibility into the quality of the portfolio of assets that Mallplaza is built on, with a broad number of dominant assets in their respective markets. Now I turn the table to Fernando, who will share important strategic remarks.

Thank you, Derek. As Mallplaza, we continue to roll out our value proposition of turning out 25 urban in [ 2 places ] that favor socialization and multiple mission to vision, anchored by a solid retail proposal with highly valued brands and innovative gastronomical and entertainment offer and multiple mix-use spaces. If you dive into the details in Page 8 and 9, Mallplaza NQS and Mallplaza Vespucio are great examples of what can be accomplished by transforming our assets into a top-tier urban center. In terms of retail, we are proud to have a portfolio of commercial partners we enforce with important brands and strategic alliances. Example of this are the new and upcoming openings at the regional level of H&M, 19 stores, IKEA with 3 stores, and Decathlon with 4 stores. Gastronomy and entertainment have been one of the categories with the best marketing performance. Mallplaza Vespucio continued to consolidate its external offering, increasing 33% Gastronomy and entertainment sales in the first semester 2023. Cinemas, for example, grew 47% in sales in Chile during this quarter. Year-over-year, anchored by the new movie showtime under the new IMAX screen in Mallplaza Vespucio and Mallplaza Egaña. In addition to this, the second quarter got new openings, such as Centro X urban centers in Mallplaza Los Dominicos. The BullPadel center in Mallplaza Oeste and the inauguration of Arena XP, our second space for gamers now in Mallplaza Oeste. To add some final remarks, Mallplaza has one of the best portfolios of urban centers in the region, where we truly have 25 centers that, as a whole, are key to understand Mallplaza's performance and potential. To us, 10 Tier A urban centers, which are malls that generate a high return on investment and represent a strong competitive position, a high total visit, growth potential and a very high productivity of this urban area is something that very few companies in LATAM achieve. We are convinced that a permanent connection with people, the understanding that our urban centers are leading spaces and they are famously transformed allow us to respond to consumer needs and be able to surprise and enrich everyone's life by doing so. We are now ready for questions that will start the Q&A session.

[Operator Instructions] And it comes from the line of Jorel Guilloty with Goldman Sachs.

So I have 2 questions. One is on the trends of occupancy cost. So we did see that you had some pricing power, with rents increasing while sales were decreasing. But as you think about this trend going forward, I was wondering if you think that there's any limits into how much more you could raise rents if this trend would continue? Or is this something that's seen as transitory and you would be able to continue with the pricing power that you've seen? And then the other question is on the driver for the mark-to-market of assets. You mentioned this is to keep it in line with international standards, but I was more wondering, would this have -- are you also thinking about perhaps matching this increase in inflation, particularly for debt and trying to match it with the increase in -- in growth for the assets, sort of like not outweighing but sort of matching those to both the assets and liability side? Was that a driver for it as well? I guess that's my question. [Technical difficulty]

Yes, Hi Jorel, thank you for your questions. With regard to the first question regarding the trends in terms of occupancy cost, as disclosed in this quarter, we saw an increase in occupancy cost year-over-year. This was partly common expense and promotion fund in part on the lease side. We do know that inflation has been bringing by some impact towards the common expense. Now when looking in terms of sales and sort of sales outlook, there are certain -- when you look at the macro environment, we should expect to see some level of uptick going forward in terms of sales. I mean, when we look at the visitor traffic and level of footfall, this has been presenting an increase of 5.6% overall. And as this rolls out, we should -- this should bring by an impact in terms of occupancy costs as well. Moving to the second question in terms of the mark-to-market of assets. As you well know, this is sort of a standard practice, both internationally and nationally as well when looking at other companies, they have adopted and it's something that IFRS allows you to implement. And with regards to our liabilities on our debt side, it was adjusted by inflation, and this brought by a mismatch because the assets were not adjusted by so in the same standard. So we think that by doing the fair value assessment, this brings -- reflects a better impression of the overall results and the overall status of the company.

And one follow-up, if I may. So therefore, going back to the occupancy cost question, the expectation is for sales to pick up going forward from this one because we have seen some weakness in Chile overall in sales progress. So if I understand it correctly, the outlook is essentially that of growth?

Well, when looking in terms of the macro level, overall, we did disclose that we have been outpacing overall retail sales in Chile for about 10 percentage points on average. And we do expect this outpace to continue. And as this happens, this should bring by a positive effect towards occupancy costs. I think the other important factor to mention here is that we've been very active in reshuffling our tenant mix and reconverting some of the department stores as well that could potentially bring a positive impact on sales.

[Operator Instructions] We have a question from Marcelo Motta with JPMorgan.

Congrats for the improvements on the disclosure on the release, it definitely help us with our analysis. So 2 questions on my side as well. I mean the first regarding margins, right, we saw margins down on a year-over-year basis. I mean, of course, it has to do a little bit with the increase in taxes that we show in Chile. So just wondering if this should be the new structural level of margins for Mallplaza given now these additional taxes? Or if there is anything that the company can do to offset and bring margins back to previous levels? And the second question is regarding capital structure, right? I mean, leverage, I mean, is not an issue. I mean, you were talking about roughly 3.5x net debt to EBITDA. But just wondering when we think about expansion, the dividends, CapEx, greenfields, brownfields, divestments. I mean, how do you see the best capital structure and how you help with the leverage level that you have today or not?

Motta, thank you for participating in our call, and thank you for the feedback on our earnings and for your questions. First, regarding EBITDA margin, you're correct when you do mention that part of the impact has been the impact on contributions and taxes and local taxes. So this has brought back the level of impact in consumer [ markets ] overall. We disclosed an EBITDA margin of 76.5% in this quarter. If we look at prior the pandemic, this number was closer to 80%. So part of our goal here is always to see ways in which we are able to improve the efficiency of the company in spite of these impacts, such as the local taxes that we mentioned. And to your second question, in terms of leverage, we ended the quarter with a net debt to EBITDA with about 3.7x. We should expect to see this number decrease towards year-end. Part of the impact why we did see this increase was due to the Nuevos Desarrollos transaction. By year-end, this number should be closer to 3x, which provides us with a fortress balance sheet and gives us ample space to look into future investment opportunities.

Motta, sorry, it's here, Sebastian. I also wanted to add something on your first question. The thing is that, structurally, we don't think that we have reached levels of EBITDA margin yet. We think that we can regain our EBITDA margins that we see in pre-pandemic levels, the 80% that we are used to. Because if you see the trend of Mallplaza in terms of margins and you compare it with how cost has been growing since, I don't know, 15 years ago, we have been able to continually reach and continue to have an EBITDA margin of 80%. So I think that's something that you should take into account when making analysis to this company because Mallplaza has been able to reach and to gain levels and to maintain levels of 80% in the past. And we don't think that we cannot do it again in the midterm. We think that for the end of the year, we think that we are going to be at levels of savings 27%, 28%. But we think that in a couple of years, we can be able to pass through all these higher costs that we are seeing right now and be able to reach again levels of 80% of EBITDA margin.

And I don't see any further questions in the queue. I will pass it back to Derek Tang for final comments.

So thank you all for connecting in this second quarter 2023 earnings call for Mallplaza. As mentioned by Fernando, I would like to once more share with you and that Mallplaza has one of the best portfolio of urban centers in the region. And we did disclose, we took the advantage in this earnings in this quarter to disclose further information on all of our assets, whereby this analysis can be made. And we believe that it's key to understand Mallplaza's performance and potential. The top -- the 10 TIER A urban centers, which are modeled to generate high return on investment and present a strong competitive position, a high flow of visitors and growth potential for the company. So both us -- both myself, Fernando and all of our Investor Relations team are available for any future further questions you might have. And thank you once again for participating in our call. Thank you.

Thank you all for participating, and you may now disconnect.