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

Good day, and thank you for standing by. Welcome to Mallplaza Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. I would now like to pass the call over to the CFO, Derek Tang.

Greetings, and welcome to Mallplaza earnings conference call. Thank you for joining us this morning. I'm here today with Fernando de Pena Iver, 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 Sebastian Sebastien Macchiavello and [indiscernible]. We're pleased to introduce the company's earnings results for the fourth 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'll end with a Q&A session. We ended 2023 with solid financial results, anchored by sustainable growth in our revenues, EBITDA and FFO, an increase in efficiency measured by EBITDA margin and high levels of occupancy. As you can see in Page 3, footfall to our 25 urban centers continue to grow, reaching 74 million visitors during the fourth quarter, a 2% increase compared to the fourth quarter of 2022. This growth was boosted mainly by the mall in Colombia and Peru, in which both presented a mid-single-digit growth year-over-year, explained by our solid commercial proposal in our urban centers in addition to relevant openings during the second half of 2023, such as the opening of the first IKEA store in Colombia and Mallplaza NQS, 6 H&M stores at the regional level, among others. In terms of annual footfall growth, our urban centers received 285 million visitors during 2023, an increase of 6% compared to 2022. Our tenants sales presented an increase of 0.5% compared to the fourth quarter of 2022, continued to show resilience against slower consumption environment compared, for example, with retail sales of the metropolitan region of Chile that decreased 6% during the quarter. The good performance of the Specialty Retail, Gastronomy and Entertainment segments was offset by the lower performance of the department stores and home improvement. In terms of occupancy cost, we ended the fourth quarter with 10.1%, reaching its lowest level of 2023 and similar to pre-pandemic levels. Demand for leasing space from tenants in our urban centers continue with a solid pace and interest as we totaled approximately 600 new openings at the regional level during 2023, allowing us to reach the highest occupancy rate of the company in the last 4 years with 95.8%. All in all, revenues reached CLP 16.6 billion during the fourth quarter, increasing 9% year-over-year, mainly due to readjustment of lease contracts, increase in leased full square meters and an increase of 0.9% in occupancy rate with a Same Store rent of 8%. In annual terms, revenue reached CLP 191.9 billion, a 13% increase compared to 2022. Moving on to Page 4. Cost of sales increased 45% year-over-year in the fourth quarter, reaching CLP 15.5 billion, mainly due to higher expenses and contributions associated with higher property taxes in 2023. In annual terms, cost of sales increased 25%, mainly because of higher expenses and contributions associated with the higher property taxes and higher spending security, parking operation and energy. Administrative expenses decreased 35% during the fourth quarter of 2023, reaching CLP 11 billion. This decrease was mainly explained by lower bad debt provisions and lower spending and remunerations in line with the organizational structure simplification that the company carried out during the first half of the year. All in all, EBITDA increased 15% year-over-year during the fourth quarter of 2023, totaling CLP 8.7 billion with an EBITDA margin of 75.8%, an increase of 3.7 percentage points compared to the fourth quarter of 2022, in line with the efficiency plan that we have been pursuing during the last years. In annual terms, we reached an EBITDA of CLP 322.2 billion, ending 2023 with a 76.7% EBITDA margin. Net income reached CLP 82.3 billion during the fourth quarter, increasing 413% year-over-year, mainly explained by higher other income due to the revaluation effect of investment properties, higher revenue, lower tax expenses, lower loss due to readjustment units due to the variation in the U.S., lower financial costs and lower administrative expenses, which were offset by lower share in the income of associates due to valuation effects in the investment properties and lower financial income due to lower cash surplus and lower rates. Lastly, the adjusted FFO reached CLP 63.2 billion during the quarter, increasing 12% year-over-year, mainly due to a better performance of the operation, less minority interest adjustment due to the purchase of a minority stake of the subsidiary Nuevos Desarrollos, executed in the second quarter of 2023 and higher FFO from unconsolidated entities. The adjusted FFO margin reached 58% during the quarter. Now I turn the table to Fernando, who will share quarterly strategic remarks regarding the business.

Thank you, Derek. 2023 was a year of consolidation of our company, being able to deliver winning proposal, generating multiple reasons of visit to our urban centers. We aim to have the best portfolio of the region, and we are in the right path to achieve so. There isn't another company in the region that owns 20 assets that are leaders in their respective markets and 10 which are Tier A urban centers, dominant assets with high productivity feeding high-density markets and with a high purchase power potential. We will continue to reinforce this kind of assets through renovation expansions, and they have a high potential to incorporate new formats and categories entered by the land banks available of this purpose. As Derek mentioned, demand for spaces in assets continue relevance during 2023, opening almost 600 new different proposals on our urban centers. Our strategic alliances with solid brands continue to take shape in addition to new-to-market brands that continue to choose Mallplaza of their platform to enter to the Andes region. Our alliance with H&M continues to develop. This time, with 3 new openings in Chile during the first quarter in Mallplaza Tobalaba, Egana and Arica, reaching 14 H&M stores operate at the regional level, in line with our goal of 19 stores in the 3 countries where we operate. Also in Mallplaza La Serena, we opened a new 2,000 square meters Decathlon store. The first one in the north of Chile, reinforcing the commercial proposal of the Tier A urban center with a diversified offer of different sports products. In Peru, we inaugurated a new 700 square meters Dollarcity in Mallplaza Arequipa, our first store in Peru, boosting the convenience proposal in this urban center. This consolidation of new opening with strategic partners is complemented by the new brands that have chosen Mallplaza as their platform to enter to the Andes region. One example of this is the NBA store that we opened in Mallplaza Vespucio, official store of the most important basketball league in the world. Our 400 square meter space that combines the sales of official merchandise along with a unique experience area. The development of look&feel proposal will continue to be protagonist in line with the strategy of the company to be able to deliver multiple reasons to visit our urban centers. During this quarter, we continued to develop our gamer's proposal in Mallplaza Trebol with the opening of our 300 square meters Movistar Gameclub, a rollout of our opening in Mallplaza Vespucio and Mallplaza Oeste, which has had base effects bringing a new type of business to our new urban centers. In terms of FOB, we are happy to announce the opening of La Factoria, an innovative gastronomic hub where that delivers a unique experience, given the visitors, the possibility to acquire different kind of fresh food products in addition to host new restaurants, such as By Maria, which is the first location in a shopping center, Havanna, El Japones and La Piazza. In addition, we inaugurated Las Terrazas del Puerto in Mallplaza Antofagasta, a new space with a unique location for 8 different new-to-market veterans, boosting the offer of the this Tier A market, that is leader in its market. In terms of growth, our different initiatives continue to take shape, both in terms of greening, brownfield and M&A. We are pleased to announce that we are in the final stage of the construction of Mallplaza Cali, our fifth urban center in Colombia that will mix a combination of entertainment, gastronomy with the rollout of El Mercado and more than 150 solid brands that includes the second IKEA in the country, Decathlon, H&M and the full Inditex brands offer with Zara, Bershka, Stradivarius and Pull&Bear among others. At this date, 91% of the spaces of this urban centers are already leased. In terms of brownfield, our Lifestyle project at Mallplaza Vespucio, one of our flagship urban centers continue to take shape. Expected to open in the fourth quarter of 2024, these 22,000 square meters new space will host a solid fast fashion mix with in flagship format, improving the racetrack of the urine center, convenience services and a 12,000 square meter park. In addition, we continue to develop the expansion of Mallplaza Iquique, a 2,000 square meter space that will host the 15th H&M store in our urban centers in addition to our service boulevard and a new home improvement proposal. Mallplaza NQS, our last M&A, continues to consolidate its complete transformation since it was acquired in 2020, delivering solid results. Just to mention some example, sales per square meter and revenue per square meter have increased by 57% and 43%, respectively, compared to September 2021, last third month, in addition to more than double the amount of visitors per month, exceeding 1 million visitors monthly. We are always actively searching for new M&A opportunities in the market, and this is only possible due to solid balance sheet of the company, ending the year with a net financial debt to EBITDA of 3.4 and with long-term financial debt payment profile with a duration over 8 years. Now I leave you with Derek for some final remarks.

Thank you, Fernando. Just to finish, I want to highlight how our omnichannel initiatives continue to deliver great results, aiming to boost our tenants and sellers' sales in addition to generating footfall to our urban centers. Our Click & Collect, Dark Stores and Cross-Docking operations handled more than 2.4 million packages during 2023, which represent more than $87 million in sellers' sales, doubling the 2022 number. In addition, our Click & Collect added new functionalities such as Drop Off and Products Return Points. In terms of ESG, we are committed to becoming a net zero company on Scope 1 and 2 by 2035. These efforts led to, for example, during 2023, a decrease of 17% in kilowatts per hour per GLA versus 2019 in energy intensity, in addition to managing to reduce water intensity by 17% cubic meters per GLA versus 2019. We're now ready for questions, and we'll start the Q&A session. Thank you.

[Operator Instructions] And it comes from the line of Alejandra Obregon with Morgan Stanley.

I guess I would like to follow up, first of all, on the fines for store opening delays in Colombia. If you can help us understand the nature of these fines and whether these are recoverable and perhaps whether this has corrected into the first quarter? So that will be the first question. And then the second question is on your omnichannel strategy. I'm curious, it's clearly gaining some traction. So I was wondering if you could help us kind of size the potential and whether you're planning to roll this out to new regions and to new stores? If you can help us size the potential growth for this strategy ahead? That will be very helpful.

Alejandra, thank you so much for participating in our call and for your question -- and for your questions. With regards to the first one, in terms of the fine for store opening delay. As mentioned in the earnings release, this is more of a one-off [Audio Gap] so these were fines that were attributed to delays in openings and that were virtually in this quarter. So we shouldn't expect this going forward. And also to mention and to highlight, as well noted [Audio Gap], I mean, it's a mall that we did several and significant reconversions since we acquired this mall with new store openings over the past couple of quarters. And this [Audio Gap] acted well. I mean when we see it in terms of sales performance, there's been a significant pickup there. So we're very optimistic with the outlook for this mall. Now with regards to your second question, which is on our omnichannel strategy, as we highlighted in the earnings release as well, I mean there have been [Audio Gap] several initiatives here. I think our idea is to, at the end of the day, generate a solution for our retailers [Audio Gap], not only our current retailers, but also outside retailers and also enable the ability for the mall to become more relevant and within the location that is -- that they're present and also to generate more traffic to the mall and outside traffic. So [Audio Gap] within our -- in terms of Click & Collect, as highlighted in the earnings release, I mean there are several brands across the region, we had 8 brands by the end of the fourth quarter. We've been making a [Audio Gap] pickup in terms of the number of packages that are being offered and handled by [Audio Gap] and also other initiatives like Cross Dock in our Dark Stores. So our focus here is how we [Audio Gap] can generate traffic, but also quite conscious as to the profitability of these initiatives as well [Audio Gap] different partners.

Alejandra, I'm Fernando. I would like to add [Audio Gap] in our internal strategy, what we are boosting is online sales [Audio Gap] Click & Collect. We ended this year with 550,000 packages [Audio Gap] not only for the stores in the mall, but any store and anywhere -- so we are boosting [Audio Gap] that online flow [Audio Gap] [Technical Difficulty]

I'm still here, but I think I lost the team.

All right. And we are back. We can hear you now.

When you lost our answer, Alejandra?

So I guess you stopped where you were talking about the number of packages.

550,000 packages in the '23. Now we are even in terms of [Audio Gap] cost. And also we have a new facility that is returns. That is very important for our clients and also for retails.

Got you. That was very clear. And if there's space for one more question on my end regarding tenant health. I guess if you could help us understand, I mean, from your conversations and your recent negotiation with your clients, especially on the anchor department stores. How do you think of performance for 2024, if you can help us understand? If it's perhaps a soft landing or hard landing? Or are we ready to think of a turnaround, especially in Peru and Chile? That would be very helpful.

Great. Thank you, Alejandra. I think in terms of sales outlook, one of the things that we highlight every quarter is the performance [Audio Gap] that our malls have been posting compared to the overall metropolitan region in Santiago and with [indiscernible] in spite of the fact that sales did decrease for Chile 1.5% year-on-year. I mean, that compares with a fall of 5% for the metropolitan region overall. So I mean, we've been consistently demonstrated the spreads. I think it's interesting here to highlight when you think about the tenants [Audio Gap] new store expansions. We had a significant year in terms of store signings. So there are about 600 [Audio Gap] of new contracts that were signed throughout the year. This helped for us to increase our occupancy, and this happened in all 3 countries. So we increased our occupancy to 95.8%, one of the highest occupancies that we've posted over the past couple of years. And this, we expect to continue sort [Audio Gap] of this opening appetite as well. We're very conscious [Audio Gap] performance going forward. The Colombia here was a big highlight with regards to the sales with all the changes that we've been doing within NQS. And also in Peru, I think it's important to highlight that [Audio Gap], which is [indiscernible], this mall was closed for [Audio Gap] in the half of December or last week of December. So there's a drop by -- an impact on sales figure overall. But going forward, I continue to expect this trend in terms of occupancy and appetite for retailers to continue.

And it comes from the line of Jorel Guilloty with Goldman Sachs.

So I have 2. One is, I'm not sure how much color you can provide, but if there's any color you could provide on your current analysis of the Falabella portfolio for acquisition? As I understand it, I think that, that line might be coming up in order to come to a decision. So any color that you can provide on that process? Or how are you thinking about it? Or drivers for it would be helpful. And then I just want to pick up again on the dynamics, particularly for Chile. I mean, Same Store rent for 2023 increased 9%. It seems our sales, though, were negative 3%. Occupancy costs increased to 11.4%, it's 110 basis points higher. So I mean what I was trying to figure out here is supposing that we have another year of weak Same Store sales growth in Chile, low single digits, how does this affect your pricing power considering that your occupancy cost has risen materially? Could we see same levels of Same Store rent growth? Or could we see that reducing? Just overall, how are you thinking about the possibility of pricing power going forward considering the Same Store sales dynamics in Chile? Those are my questions.

Jorel, thank you for participating, and thank you for your questions as well. First, with regards to the MOU that [Audio Gap]. As you well know, we can't comment on specific deals or transactions or potential transactions. What we can comment, however, is with regards to our growth strategy, I mean, we do -- as we've [Audio Gap] in the past, foresee opportunities to expand, to continue to grow our portfolio, especially in markets such as [Audio Gap] Colombia. So this fits in well within this strategy, but we can't comment into a specific trend section. Now to your second question with regards to specifically to Chile and sort of this spread or difference between Same Store rent and Same Store sales and how it affects in terms of occupancy costs and the pricing power that we see going forward. I think couple [Audio Gap] there. I think on one side, when you look at the spread between Same Store sales and Same Store rent, I mean, we report [Audio Gap]. So that includes all our stores within each country. The analysis would be looking into each [Audio Gap] different stores to see what their occupancy costs and what is their ability or [Audio Gap] ability to raise up costs with that regard. So I mean, this metric can be skewed depending on the [Audio Gap] each type of tenant has on sales and on rent. And then when you look at it this way, we can [Audio Gap] combine and add to this, the occupancy rate trended dynamic that we've been [Audio Gap] for retailers to announce expansion plan to continue to open stores. I mean, we've picked up increased occupancy rate [Audio Gap] in Chile ending the year at 96.4%. So this trend continues to go up and [Audio Gap] than the mall in the sense that there's less GLA available for rent and as so contributes towards our ability to be able to increase rent. Now we're constantly looking into ways so we can be more efficient in how we operate our malls as well in terms of the occupancy cost, so to open up room to continue to push up a whole [Audio Gap] increases in rents.

Comes from the line of [indiscernible] with Santander.

Actually, I have -- I have a couple of questions on the operations side. Another couple of questions regarding the MOU. On the operational side -- I'm sorry, I'm sorry, for I'm kind of repeating the same question in a different wording. But we have seen rent per square meter increasing over inflation in the past few years. Is there any room for the strength to keep repeating itself, in particular in Chile? And also, regarding -- could you give us a little more color on the impaired receivables provision? I'm sorry, maybe you mentioned this in the first quarter, but I wanted to have it fresh on my mind. What should we expect for this line in the next couple of quarters? And I can ask you the questions regarding the MOU after these, if that's okay with you?

[Audio Gap] Thank you for the questions as well. First with regards to the operational front in terms of the rent per square meter and sort of this spread compared to sales. It goes a little bit in line with the recent answer to Jorel's question is, its [Audio Gap] sales and revenue per tenant as analyzed was the potential occupancy cost there and the room [Audio Gap] that we have continue to grow and push up rent. Also, I mean, it's part of our focus here, as mentioned before, be efficient in the way we operate our mall in terms of condominium and as well as how we handle the marketing funds as well. That way to open up room for us to be able to consistently pursue incremental rent. And I think it's also, at the end of the day, a supply and demand factor, right? So given the [Audio Gap] delay that we currently have and given that demand has been picking up, I mean, this [Audio Gap] for our ability to set prices. With regards to provision, which was your second question, it's -- we don't provide an outlook as the provision and what we expect specifically for this [indiscernible], right? We are, of course, conscious and focusing on ways in which we can be close to tenants as well, coordinate this well in terms of the provision line. And I guess, you had a third question, which was [indiscernible]

Yes. Regarding the MOU. So when can you guys disclose any information like when is the deadline for the MOU? And the other question is, is the financing decision part of the MOU? Like is it tied up to the purchase of the assets? Or is it separate decision? And like do you fall other board members get a bot regarding the financing of the operation? I guess it's so tight and if it's the same decision or a different decision to purchasing the assets?

Yes. So with regards to the MOU, I mean, we don't comment specific M&A transaction. What I can't comment about the MOU is that when we signed it when we announced it to the market, but there was a 120-day period. And then we will keep the market up to date with regards to the -- this potential transaction. Now with regards to the financing, I mean, this is -- at the end of the day, it's [Audio Gap]. I mean we also don't provide any guidance as to how we will finance this transaction.

Yes, yes. I understand that. My question is, it's the financing decision part of the purchasing? Is like, is it tied up to the purchase of the assets? Or is it like a separate decision? Because -- what I'm aware is that the Falabella's Board members cannot vote on your side, on the Mallplaza side regarding the acquisition of [indiscernible]? But my question is like the financing decision a separate one, so they would be able to both them? Or is it all like the financing of the operations that's tied into the -- how you're purchasing the assets?

Yes. So [Audio Gap] we can't comment specific details to the transaction or details pertaining the transaction. So whatever -- whenever possible, announce -- communicate to the market advances as to the MOU and the entire process of this potential transaction.

[Operator Instructions] And it is from [indiscernible].

Okay, that's great. My question, I leave most of the question I was thinking were already asked. So my question is really quick. I like to understand what's your strategy to transfer the tax expenses increase to the tenants? Because if we take out a close look -- not close look, a rapid to the disclosure of your costs, it seems that the impairments were the one offsetting most of the -- the tax increases. So what will happen when you have no impairments to -- when they turn negative again and they normalize? How will you offset the tax increase?

[indiscernible], thank you for your question. With regards to the property taxes, as well noted in our earnings release and in prior quarters as well, this has been an effect not only for Mallplaza -- but for the industry in general. And our focus here is looking ways into which we can be more efficient and transfer these property taxes as well to the condominium. So this will be -- continue to be [Audio Gap] following quarters.

Do you have any additional questions, Marco? All right. I'm not showing any further questions in the queue, I will turn it back to management for final comments.

Well, thank you all for participating in this fourth quarter 2023 earnings call for Mallplaza. As always, all the team here, the IR team is available for any questions, any [Audio Gap] you might have and always available to take meetings as well with all of you in the future. So thank you once again. And have a good day.

With that, we conclude our conference today. Thank you for participating. Everyone, have a great day.