Consorcio Ara SAB de CV

BMV:ARA

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to today's First Quarter 2024 Results Conference Call and Webcast. My name is Leslie, and I will be your event specialist today. [Operator Instructions] It is now my pleasure to turn today's program over to Alicia Enriquez, Co-Chief Executive Administrative and Finance Officer. Please go ahead.

[Alicia Enriquez Pimentel, executive]

Thank you, Leslie. Good morning, and a warm welcome to our conference call on the first quarter 2024 results of Consorcio. This call will be also transmitted by a webcast accompanied by a slideshow for visual support. With me on the call to discuss the results are -- Luis Ahumada Russek, Vice Chairman of the Board; and Miguel Lozano, Co-Chief Executive Operating Officer; Germán Ahumada Russek, Chief Executive Officer and Chairman of the Board, will not be joining us in the call at this time. I want to alert everyone that certain statements and comments made during the course of this call mostly consider forward-looking statements as defined by the Securities Litigation reform as of 1995. Consorcio believes that such statements are based on reasonable assumptions, but there are no assurances that current outcomes will not be substantially different from those discussed to date. All forward-looking statements are based on the information available to the company on the date of this call. The company is under no obligation to publicly update or revise any forward-looking statements as a result of new information that may become available in the future. As usual, at the end of our prepared remarks, there will be time for Q&A. We'll wait until then to open the line.

Results for the first quarter of 2024 compared to the first quarter of 2023. In the first quarter of 2024, our revenues came to MXN 1.59 billion, MXN 1.53 billion of which came from the sale of 1,352 homes at an average price of MXN 1,132,600. As we mentioned yesterday in our report by the CEO, we wanted to make note that in the first quarter, we titled homes under the build with Infonavit our Line 3 loan scheme, totaling MXN 277.4 million, mainly in the affordable level segment. The income from homes titled under this scheme is not entered on our income statement until the time the home is delivered to the bank. Once the homes is titled, the developer has a maximum of 6 months to build and deliver it. You may recall that this type of loan allows Infonavit benneficiaries to build their homes through our developer in an authorized housing [indiscernible], comprehensive mode. One of the benefits is that it requires a qualifying score of just 880 -- sorry, for the borrower. Lower than what they need for a traditional loan.

During the construction period, the developer receives installments as the work progresses under the supervision of a managing financial entity. Although the housing revenues reported in the income statement for the first quarter of this year saw a decrease of 3.9%, if we count the MXN 270.4 million in homes titled under Line 3, which will be viewed booked as revenues in the next 6 months, there was a solid growth of 10.8%. Elsewhere, as we announced in our report for the fourth quarter of 2023 in the aftermath of the devastating Hurricane ,Otis, our revenues in the city of Acapulco declined significantly. To put this in context, in the first quarter of 2023, revenues from Acapulco accounted for 16.3% of our housing revenues, while in the same period of this year, this share dropped to 8.4%. Although we are still at only half or [indiscernible] account revenue levels for the city, we see this as encouraging. As it is better than we have estimated, taking into account the magnitude of the [indiscernible].

Breaking down our revenues by segment, affordable entry-level homes brought in MXN 596.1 million in sales and grew by a solid 32.3%, mainly due to the sale of homes in a development that was affected by a delay in obtaining permits in the fourth quarter of 2023. In the middle income segment, revenues totaled MXN 631.5 million, a 5.2% year-over-year growth. Residential segment revenues totaled MXN 303.6 million, down by 44.1%, largely due to lower revenues in the city of Acapulco. As well as to vertical developments currently under construction, which will not be entered as revenues until the second half of the year. Revenues from other real estate projects in the first quarter of this year came to MXN 62.3 million, a growth of 3.2% compared to the first quarter of 2023, supported by higher revenues from our shopping center division.

In the revenue mix for the first quarter of 2024, affordable entry-level homes accounted for 37.5%. Middle income homes 39.6%, and Residential homes, 19%, while the remaining 3.9% came from other real estate projects. In the first 3 months of the year, operating income was MXN 162.5 million with a margin of 10.2%, stable compared to the same period of last year. EBITDA was MXN 235.3 million, and the margin was 40.8%, 90 basis points higher than in the first quarter of 2023. Mainly due to higher interest expense entered on their cost. Net income came to MXN 143.6 million, and the margin fell by 70 basis points to 9%, mainly because of a drop in interest income. Between January and March, free cash flow to the firm was negative by MXN 137.3 million, although excluding land purchases, it would have been practically unchanged. The land bank we acquired, we allowed us to continue operations in Tijuana, Baja California, a city with very good short- and long-term prospects for housing demand.

Financial position as of March 2024. Cash and cash equivalents totaled MXN 2.06 billion as of March 31, 2024, 10.5% lower than at the close of 2023, mainly due to the purchase of land that I just mentioned as well as investment in housing development inventories. Accounts receivable ended the first quarter of the year at MXN 773.8 million, 7.2% higher than on December 31, 2023, largely due to a slower pace of collection over the Easter week holiday. Accounts with sales receivables turnover was 1.4 months. Total inventories as of March 31, 2024, amounted to MXN 17.2 billion, 2.7% higher than at the end of the previous year. Cost-bearing debt came to MXN 2.42 billion as of the close of March, 2% lower than at the end of 2023. Short-term maturities, meaning debt coming due in the next 15 months made up 10.5% of cost-bearing debt and long term debt 9 -- 89.5%. As of March 31, 2024, 69.8% of our cost-bearing debt was in the form of the ARA 21-2X and ARA 23X notes. 16.1% were stable secured loans for our shopping centers, 7.2% were simple unsecured bank loan without real estate collateral, the remaining 6.9% were leased liability.

Net debt at the close of the first quarter of this year was positive by MXN 357.7 million. Leverage ratios remain at optimal levels. Cost bearing debt-to-EBITDA was 2.44x. The net debt-to-EBITDA ratio was just 0.36x, while the next --- interest coverage ratio was 3.07x. And if we face this ratio on coverage of net interest, meaning interest expense less interest income, it could be at 16.12x. On March 12th, Fitch Ratings reiterated ConsorcioARA's long-term national scale rating of A-plus-(mex) with a stable outlook as well as double-A-minus net rating on the ARA 21-2x notes. According to that agency, ARA's ratings recognize its strategy of maintaining a strong land bank in addition to its focus on maintaining a solid financial profile with high cash balances and temporary investments and revenues that diversified across various market segments. This was coupled with an expectation that leverage will remain in line with the rating and the company's ability to generate positive free cash flow. This report can view as www.consorcioara.com.mx.

Housing industry performance. According to Mexico's National Institute for statistics and geography [indiscernible], in the first 2 months of 2024, industrial activity in general grew by 1.5% compared to the previous year. Construction Industry growth was 12.1%. And in 2023, it was driven mainly by civil engineering work and the building subsector, which includes housing and industrial base, grew by 5.1%. According to data from the Unified Housing Registry group in the first quarter of the year, 44,292 homes were registered -- registered at 4.2% increase from the same period of last year and 28,999 homes were produced, a slight growth of 1.1%. Regarding lending so far this year, information has not just been published on the website of the Ministry of Agrarian Territorial and Urban Development or set up. However, the housing institutes have published some information individually. Economies reports that in the first 2 months of the year, it has placed 23,972 loans for new homes, an increase of 34% over the first 2 months of 2023. Fovissste report 3,579 loans for new homes in the first quarter of this year an 11.6% increase compared to the same quarter of 2023. Infonavit continues to [indiscernible] new credit options to extend home buying options to a greater number of beneficiaries.

In late May, it is expected to activate it, let's join our credit with Line 3 scheme, which we have mentioned in earlier reporting. This is a system by which 2 people can co-own a home either with a family member such as parents, children, or siblings or with a coresident friend or partner without having to prove [indiscernible]. In 2023, 11% of our revenues came from the let's join our credit scheme. In the first quarter of 2024, 58.7% of our revenues came from homes financed by Infonavit, 12.9% from Fovissste and the remaining 28.4% from commercial banks and home purchase without finance.

Shopping centers. In the first quarter of 2024, revenues totaled MXN 170.8 million, a solid 18.3% growth compared to the same period of the previous year, while net operating income was MXN 84.2 million, 21.9% hike. This result corresponds to shopping centers that are 100% owned by ARA and are consolidated into our financial statements, Centro San Miguel, Plaza Centella, Centro San Buenaventura and Plaza Carey, Uni and Mini as well as 50% of Central Latin Americas and Paseo Ventura according to our stake in those properties, which are entered under the equity net. Total gross leasable area in our 6 shopping centers and Uni and Mini shopping centers is 25,484 square meters. The open occupancy rate as of March 31, 2024, was 94.7%, a very competitive ledge.

Cancellation of shares. Yesterday, ConsorcioARA shareholders net for our general extraordinary and ordinary Annual Meeting, in which they approved the cancellation of 3,475,534 shares, which had acquired using the stock repurchase [indiscernible} and representing 1.1% of our total capital stock. After that cancellation, our capital stock consisted of 1,222,625,553 shares. Conclusions. In Mexico, healthy demand continues to enjoy solid [indiscernible]. And as we noted earlier, both healthy production and mortgage loan originations have a good start to the year. As we all know, inflation has slowed over the last year and last March, Mexico caught it's benchmark interest rate to 11%. ARA has a substantial high-quality land bank as well as a diversified product portfolio, which places us on solid footing to continue participating actively in our industry. We also have experienced robust finances and a strong team of employees. For the remainder of the year, we will continue to focus globally on meeting our goals for revenue growth and generation of free cash flow for the period. Thank you, and we will now move on to the question-and-answer. Please.

[Operator]

We will now start the Q&A session. [Operator Instructions] The first question from the audio lines is from Mr. Gordon Lee from BTG Pactual. Please go ahead.

[Gordon Lee, analyst]

The two or three questions really related to the Linea Tres from Infonavit -- and I was wondering, Alicia, if you could tell us a couple of things. One, is it similar profitability to the sort of normal Infonavit project? Second, does the customer select a prototype of ARAs? Or are these more custom made? And that's why I asked the question on profitability. And the third question is the collection, is that Infonavit risk that you're taking? In other words, you're collecting from Infonavit? Or are you taking client risk when you're waiting for that collection?

[Alicia Enriquez Pimentel, executive]

Hi, Gordon. Well, it works exactly as a bridge loan. Our client goes to our housing development and choose a prototype. They don't have the chance to change anything about the house. He, or the homebuyer, just choose a prototype. And in six -- we titled the house. This is an important thing because we are building the house knowing that the sale is already there. So, we title the house and in 6 months -- the -- well, we have to up to 6 months, we can deliver earlier, but the maximum months or period is 6 months. We delivered the house, and is when we recognize revenues in -- as revenues in our income statement. And the resources comes directly from Infonavit; so there's a managing financial entity that verifies the work in progress is being executed. And it's still like a bridge loan. It's very positive, Gordon. We are very, very excited about this new scheme because it has a lot of benefits. As we mentioned, workers can buy faster a house because it requires a lower score. So they can buy a faster house. And now, with this new scheme, let's join our credits, with Line 3, we are very excited because as we mentioned, 11% of our revenues in 2023 came from this scheme. And, for example, in the first quarter, it represented more than 15%. So we are very positive, very excited, and it has a lot of benefits to the homebuyer and also to the housing developer because, as you know, in the traditional loan, we collect the price or the value of the house until we title -- well after we title the house. So it is like a kind of bridge loan.

[Unknown Executive]

Gordon.

[Gordon Lee, analyst]

Perfect. But just if I could just follow up with just two clarifications. So the first is, but at the end of the day, your collection risk is -- your credit risk, let's say, is Infonavit, right, not the person buying?

[Alicia Enriquez Pimentel, executive]

That's correct.

[Gordon Lee, analyst]

That's perfect. And then the second question just is from when you title the home, to when you deliver and record the revenue, where we see any sort of -- where it's reflected on your financials it's just work in process inventory. Is that right?

[Alicia Enriquez Pimentel, executive]

Exactly right. That's correct. It's in our work in progress. That's why it's also growing in the last quarter. But it will be something revolving. In fact, we started a little slow with Line 3. But in this quarter, we expect more revenues from this type of loan. But I think -- well, or we estimate that for the second half of the year, it will be something revolving. For example, for this second quarter, we expect minimum to deliver houses for an amount of MXN 150 million, more than that we delivered in the first quarter that we -- it was just $30 million.

[Gordon Lee, analyst]

Perfect. Thank you very much. Sorry.

[Alicia Enriquez Pimentel, executive]

Sorry, Gordon, but the time it will be something revolving.

[Gordon Lee, analyst]

Understood. Perfect. That's super clear. Thank you.

[Alicia Enriquez Pimentel, executive]

Thanks to you, Gordon, very happy to hear you.

[Operator]

Thank you very much for your question. Our next question is from Mr. Anton Monterquarter from GBM. Please go ahead.

[Unknown Analyst]

Can you hear me there?

[Alicia Enriquez Pimentel, executive]

Sure. Hi, Anton.

[Unknown Analyst]

Hi, Alicia, thank you for taking my question, and a little bit related to the Line 3 program also. I was wondering if you expect to continue seeing the same level of sales of this program? As the one seen during this quarter of around $277 million. And if yes, will this mean that once the delivery -- that the deliveries of the properties catch up, you will be having that as additional income on your top line for a sustained period of time?

[Alicia Enriquez Pimentel, executive]

Yes. Well, last year, Anton, this scheme, or Line 3, represented like 3% of our revenues. As I mentioned, we are very excited. We are very positive about this scheme. I already mentioned all the benefits that have for the homebuyers and for the homebuilders. For this year, we expect at least this new scheme will represent around 10% of our revenues. And what happened is that, at first, there was just a couple of projects registered because you have to register, you -- you -- your housing development. And our sales force is now more used to this new scheme. So they are asking us to register more and more housing projects. So it's growing. And for this year, yes, I think -- for example, just imagine, when we have started the second quarter, we already have, for sure, less than -- to be precise, MXN 350 million for this new scheme because in the first half, it was MXN 277 million, but we have MXN 170 million more from the previous year. So that's for sure that in the 6 months, we already have this level of revenues. Unfortunately, we can't report until we delivered the house but -- well financially and operational it's excellent program, I could say. And something important, it's also that it's -- or mainly for affordable entry-level segment that, as you know, with our subsidy, it was a little delayed. So this new scheme helped to that segment.

[Operator]

Our next question is from Mr. Carlos Alcaraz from Apalache Research. Please go ahead.

[Carlos Alcaraz Pineda, analyst]

Thank you for taking my questions. Considering the current inflation environment, will you prioritize the sale of units over pricing crisis? Or what will you privilege considering the current market environment? And finally, the second question, what is the status of your projects in Quintana Roo?

[Alicia Enriquez Pimentel, executive]

Okay. Well -- well, in fact, our projects in Quintana Roo have excellent first quarter. As you know, it's a great state for ConsorcioARA. They did very well. In our report, we talked about a project in Tijuana, but also one project that we have to serve the affordable entry-level segment in Cancun did it really, really well. So our projects are doing very, very well. As you know, in 2022, 2023, mainly, we faced some challenges because good the workforce was difficult to find and to maintain, but now is more stable. And as you mentioned, inflation -- well, and also we mentioned in the call inflation has been decelerating. So that allows the demand -- that allow us to serve the demand that we have now. As you know, the housing deficit is growing without inflation, already with inflation contained and also with a stabilization of the interest rate, I think the housing production is going to increase in this year.

[Carlos Alcaraz Pineda, analyst]

Okay, understood. And one...

[Alicia Enriquez Pimentel, executive]

And the prices -- Sorry, Carlos, sorry. And the prices well, our average price and the prices for each of our segments. It depends on the kind of projects that we have because it's difficult to lower prices. Remember that we have 2 years of really high inflation rate. So it's difficult to lower the prices, on the contrary. But well, I see a stable price.

[Carlos Alcaraz Pineda, analyst]

Okay. Just another follow-up question. Are there being any labor shortages due to the conclusion of federal government projects? And this kind of question for Quintana Roo.

[Alicia Enriquez Pimentel, executive]

Sorry, Carlos. Could you repeat it?

[Carlos Alcaraz Pineda, analyst]

Yes, sure. You have -- there been any labor shortage in conclusion of government project [indiscernible]?

[Alicia Enriquez Pimentel, executive]

Yes. Yes. No, now it's stable. We don't have that problem.

[Carlos Alcaraz Pineda, analyst]

Okay. Understood. Perfect. So thank you very much, and congratulations.

[Operator]

Our next question is from Mr. Al-ayib Gasco from Signum Research. Please go ahead.

[Unknown Analyst]

Hello, Alicia. Thank you very much for receiving my questions and congratulations. I believe that we are actually very excited about this new line where you are developing. I have, well, some -- not concerns for -- more about questions on how will you report this information? For example, I believe that this first quarter results that you reported to us, the amount that is not reflected on your statements, I believe is the amount that you have been requested by clients to build, I believe. So, you're telling this request as something that you are financially going to adjust maybe next quarter or maybe on the third. So will we have like a clarification on when were these projects will request it or start to build? And will this be reflected on your affordable entrants balance, or will we see a different category for this specific demand?

[Alicia Enriquez Pimentel, executive]

Okay. So if I understood correctly, you would like to have more information about the projects that have this new scheme?

[Unknown Analyst]

More likely it is just to clarify so we can adjust our models and [indiscernible] it is going on.

[Alicia Enriquez Pimentel, executive]

Yes, your model. In fact, we are expecting to grow in 1-digit height, I think, for this year. But as I mentioned, it will be something revolving because we started to register some projects. So little-by-little now we have more projects registered to this new scheme. And in this second half, also, there will be probably a negative effect, I would say, in our report, but it will be something revolving in the second half of the year. And in the time, you won't realize -- well, obviously, we are going to release this information. But in time, it won't be a significant effect because it will be something revolving. I mean the homes that aren't title or the amount of these houses, it would be the same amount of the houses that we will deliver. So it will be something revolving.

[Unknown Analyst]

Great. It's very clear. One more question. Second, for the same or turning more in demand. Has it permitted you to maybe reallocate where you are developing projects because you are not the owners of land, instead it's the clients. How have you seen demand? Has it been from places where you were not constructing before? Or would you see it coming from areas where you were already located?

[Alicia Enriquez Pimentel, executive]

Well, as you know, we operate in 15 states in the north part of Mexico, housing demand is doing very, very well. We know near shoring is helping a lot. And in the center part of Mexico, I would say that housing demand is stable. Well, an important place for us, as we mentioned in the call, in Acapulco and is recovering. So -- and in the south also, as I mentioned, they have an excellent quarter -- first quarter. So I could tell you that a housing demand is strong. And we would like to look for have more participation in the north part of Mexico. And we are open, not just to buy land. We are hoping to participate like in a joint venture or other scheme that let us enter to new markets. It's something that we are going to explore in the short term, I would say.

[Unknown Analyst]

Those were all my questions. And again, congratulations on the results.

[Operator]

Thank you very much for your question. We have finished with the conference call questions and we'll now continue with the webcast questions. [Operator Instructions]

[Alicia Enriquez Pimentel, executive]

Thank you, Leslie. Well, now we have some questions in the webcast. The first question is from Fernando from Dollar Capital. "Can you provide clarity on what percentage of the company's land bank is within the limits to receive credit financing from government institutions like Infonavit?" Well, all our land is suitable for house. So I would say that it depends of the demand, it depends on our clients. You don't receive the permit directly from Infonavit. The second question from Fernando. "Is the company planning to open new developments this year?" It's probably in Puebla, we can open a new project and other projects for residential segment in Morelos, but it will depend on Well, the second one on our free cash flow generation. The first one, we are just here to start this project, well, in the second half of the year. And question number three is "what is the company position on share repurchases this year?" Well, we expect to -- or we have a budget of MXN 50 million. It can go to MXN 100 million, and we will follow the strategy to cancel this share every year. As we mentioned, we canceled 1.1% of our capital stock, yesterday. And the following question is, "what is the company's position on share --sorry, what do you register of --" This question is from Pedro Antonio Milan. "Where do you register income from commercial or commercial centers? Well, it's in the other real estate projects, and represents around 3% of our total revenues. And well, as we mentioned, it's just the -- or corresponds to the 4 shopping centers that are consolidated into our financial statements because as we mentioned, we have 2 very successfully -- mainly one, Central Latin America is success. But this is registered by the equity method in our income statement. The following question, "can you provide clarity on the excess real estate that the company has, particularly the property in the Rivera Maja and Baja California?" Well, we're exploring different options. One is to get a partner to develop this project or do it by ourselves. We are -- or even sell them. We are exploring in some options that we have. The following questions [indiscernible] and that's -- that's it. Well, thank you very much for your interest in ConsorcioARA. Have a great day. Thank you, Leslie, and thank you, everyone. Leslie, can we finish the call, please?

[Operator]

Yes. We have a few more questions from the audio line.

[Alicia Enriquez Pimentel, executive]

Okay. Go ahead, please.

[Operator]

They have disconnected [indiscernible] from the call.

[Alicia Enriquez Pimentel, executive]

Okay, thank you very much.

[Operator]

This concludes the question-and-answer session for today. ConsorcioARA would like to thank you for participating in today's conference call and webcast. You may now disconnect. All conference hosts have hung up. This conference is over. Thank you.