Consorcio Ara SAB de CV

BMV:ARA

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to today's second quarter 2022 Results Conference Call and Webcast. My name is Leslie, and I will be your events specialist today. [Operator Instructions]

Please note that today's conference call and webcast are being recorded. During the presentation, we will have a question-and-answer session. To follow the conference online, please visit https://consorcioara.transmision.com.mx. The word transmission is with 1 s only. [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 second quarter 2022 report of Consorcio ARA. This call will be also transmitted via webcast, as combined by a slide show for visual support.

With me on the call to discuss the results are German Ahumada Russek, Chief Executive Officer and Chairman of the Board; Luis Felipe Ahumada Russek, Vice Chairman of the Board; and Miguel Lozano, co-Chief Executive Operating officer.

I want to alert everyone that certain statements and comments made during the course of this call mostly consider forward-looking statements are defined by the Securities Litigation Reform Act of 1995. Consorcio ARA believes that certain statements are based on reasonable assumptions, but there are no assurances that current outcomes will not be substantially different from what we discuss today.

All forward-looking statements are based on 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 on the event to open the queue for questions.

I will now turn over the call to German Ahumada Russek, Consorcio ARA's Chief Executive Officer for this morning's meeting.

[Germán Ahumada Russek, executive]

Good morning, and thank you all for joining us this morning. Results for the second quarter of 2022 compared to the second quarter of 2021. Total revenues, meaning the sum of housing revenues versus revenues from other real estate projects came to MXN 1.77 billion in the second quarter of 2022, a double-digit growth of 16.5% compared to the same period of the preceding year. This marks the highest amount on record for the past 11 quarters.

Housing revenue totaled MXN 1.69 billion versus a double-digit advance of 16.3% compared to the second quarter of 2021. These revenues came from the sale of 1,596 homes, 2.9% more than in the second quarter of last year with an average price of MXN 1,059,000, a 13% increase.

Breaking down our second quarter 2022 revenues by segment, Affordable Entry-Level homes dropped MXN 544.6 million and remain practically stable year-over-year. Middle-Income home sales reached MXN 625.2 million, a significant 44.6% year-over-year increase, and Residential homes sales reached MXN 520.1 million, a 9.3% growth over the same period of last year.

Revenues from Other Real-Estate Projects, mainly from sales of land and shopping center leases, totaled MXN 77.8 million, with a 20.5% increase attributable to higher revenues of both plans.

Looking at the revenue mix in the second quarter of 2022, Affordable Entry-Level homes contributed 30.8%; Middle-Income homes, 35.4%; Residential, 29.4%; and Other Real Estate Projects, 4.4%. Between April and June of this year, operating income totaled MXN 164.3 million, an 8.9% growth over the same period of last year.

Excluding non-recurring expenses relating to tax in prior years, which was credited at the time and not being entered on their expenses, operating income was MXN 192.2 million, a 27.4% advance. EBITDA total MXN 246.9 million, 12.7% higher and excluding the non-recurring expenses, as just mentioned, EBITDA was MXN 274.8 million, a year-to-year growth of 25.5%.

In the second quarter of 2022, net income came to MXN 159.4 million, 14.3% more than in the same period of 2021. And excluding one-off expenses, it was MXN 178.9 million, a 28.3% increase.

Between April and June of this year, the operating margin was 9.3%, the EBITDA margin 14% and the net margin 9%. Excluding non-recurring expenses, the operating margin grew 100 basis points over the second quarter of 2021, reaching 10.9%. The EBITDA margin rose 110 basis points to 15.5%, and the net margin grew 90 basis points to 10.1%.

In the second quarter of 2022 and on the ninth quarter in a row, we generated positive free cash flow to the firm. This time for MXN 81.6 million, which is impressive considering the investment required to offer the developments we have announced for this year.

Results for the first half of 2022 compared to the first half of 2021. In the first 6 months of 2022, common revenues achieved some of housing revenues and revenues from Other Real-Estate Projects came to MXN 3.41 billion, 10% higher than in the same period of last year. Housing revenue totaled MXN 3.28 billion, 9.7% higher than in the first half of last year and corresponding to the sale of 3,126 homes with an average price of MXN 1,050,000, a 15.7% increase compared to the first half of last year.

Looking at the sales in each housing segment in January -- June 2022, Affordable Entry-Level homes totaled MXN 1.1 billion, a slight 1.9% reduction from the year earlier period. Middle-Income home sales totaled MXN 1.6 billion, 15.7% higher. And Residential home sales reached $1.04 billion year-over-year, an increase of 15.3%.

Revenues from Other Real-Estate Projects mainly from the sales of land and shopping center leases totaled MXN 127.9 million, a 17.9% year-over-year increase, which were primarily to higher revenues from shopping center leases.

Breaking down our revenue mix in the first half of 2022, Affordable Entry-Level homes contributed 31.9%; Middle-Income homes, 34%; and Residential, 30.4%; while Other Real-Estate Projects accounted for the remaining 3.7%.

In the first 6 months of this year, operating income totaled MXN 317.1 million, with a margin of 9.3%. EBITDA was MXN 465.6 million, a margin of 13.6% and net income totaled MXN 298.3 million, which resulted in a net margin of 8.7%. Compared on the same terms as the second quarter results, that is excluding one-off expenses, operating income in the first half of the year totaled MXN 360.7 million, with a margin of 10.6%.

EBITDA was MXN 509.1 million, with a margin of 14.9%, while net income was MXN 330.3 million, a margin of 9.7%. In the first 6 months of the year, we generated positive free cash flow to the firm, doubling MXN 176.4 million.

Financial position as of June 30, 2022. As of June 30, 2022, cash and cash equivalents totaled MXN 3.33 billion, a slight 1.9% decline compared to the balance at the close of the previous year. Accounts receivable ended the second quarter of the year at MXN 697.2 million, 6.9% above the balance is registered as of December 31, 2021. Accounts receivable turnover was 1.3 months, practically stable against the turnover reported at the close of last year.

Total inventories as of June 30, 2022 amounted to MXN 15.1 billion, a slight 1.3% increase over the balance reported on December 31, 2021. The close of the second quarter of 2022, cost-bearing debt came in MXN 1.98 billion, a 3.4% reduction compared to balance as of December 31, 2021, due mainly to the repayment of simple unsecured loans.

Short-term maturities, meaning debt coming due in the next 15 months, made up 9.5% of cost-bearing debt and long-term debt is 90.5%. As of June 30, 2022, 75% of our cost bearing debt was in the form of ARA 21X and ARA 21-2X notes, 21.3% were simple unsecured loans for our shopping sectors, 3.1% were lease liabilities, liabilities and the remaining 0.6% were simple unsecured bank loans without real estate [Indiscernible].

At the close of this year -- second quarter, net debt remain negative because the balance of cash and cash equivalents exceeded our cost-bearing debt, resulting in a net debt position of negative MXN 1.35 billion. Our leverage ratios remain at optimum level, cost-bearing debt EBITDA was 2.07x. Net debt-to-EBITDA ratio was minus 1.41 -- negative 1.41x, while the interest coverage leverage ratio was 5.18x. And if we make this ratio of coverage of net interest -- interest expense, less interest income, it would be 41.6x.

Consorcio ARA credit ratings. On May 30 of this year, S&P Global ratings upgraded its credit rating of Consorcio ARA as a long-term issuer on the national scale from mxA+ to mxAA-, with a stable outlook. This is the highest rate ARA has received in the 16 years of being rated by this agent. This rating reflects S&P's Global ratings of premiums that ARA can be expected to maintain a prudent financial policy in the next few years, while preserving key factors of its credit profile, like very low leverage and strong liquidity position.

On July 7, Fitch ratings ratified its long-term national scale rating of A+(mex) for ARA, also with a stable outlook. At the same time, it reiterated its AA-(mex) rating of ARA 21X and ARA 21 2x notes. According to the agency, ARA's ratings recognized the diversification of its revenues by market segment. Its focus on maintaining a solid financial profile with high balances of cash and short-term investments and a capacity for generating positive free cash flow, even during the low end of the business cycle. These reports can be viewed at www.consorcioara.com.mx.

Housing industry performance. According to Mexico's National Institute of Statistics and Geography in making this during January and May 2022, industrial activity in general grew by 31% compared to the same period of last year. The construction industry saw a slight 0.3% increase, while the building subsector, which includes housing, declined by 1.4%.

According to the data from the Unified Housing Registry, growth in the first half of the year totaling 2,966 homes were registered, a 36% decline from the same period of last year, and 66,859 homes were produced, 21% lower. Regarding mortgage lending in the first 6 months of this year, based on data from the National Housing Commission, CONAVI granted 67,778 loans for the purchase of new homes, a decrease of 16.9% compared to the same period of 2021. These loans represented an investments of MXN 36.7 billion, a 6% decline. The average size of home loan between January and June 2022 was MXN 542,000, a 13.2% increase compared to the same period of 2021.

[indiscernible] part ramped [ 20,161 ] loans for new homes in the first 5 months of the year, a 14.3% decline from the same period of 2021 and the investments in this totaled [ MXN 7.26 billion ], 14.3% lower. The average size of the loan granted between January and between of this year was MXN 724,000, a slight 0.7% reduction from the same period of last year.

As for Commercial Bank home financing in the first 5 months of 2022, [ 26,270 ] mortgages were granted for the acquisition of new and used homes, a 5% growth compared to the same period of 2021, and the investment will be totaled MXN 86.4 billion, a 14.4% increase. The average size of a commercial mortgage loan ranked in January, May 2022 was MXN 1.87 million, a 9% growth over the same period of last year.

In the first half of 2022, 39.9% of our revenues came from homes financed by Infonavit. 19.2% from Fovissste and the remaining [ 40.9% ] from commercial banks and homes purchased without financing.

Shopping centers. The results of our shopping centers continue to show a solid recovery with double-digit growth. In the second quarter of 2022, revenues totaled MXN 102 million, a 29.6% growth over the same period of last year, while net operating income was MXN 69.1 million, a 44.5% higher. Revenues in the first months of 2022 totaled MXN 193.9 million, a 36.6% increase over the same period of last year, while net operating income in the first half was MXN 131.1 million, a growth of 63.8%.

These results correspond 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 Centro las Américas and Paseo Ventura, according to our stake in those properties, which are entered under the equity method.

Total Gross Leasable Area in our 6 shopping centers and in uni and mini shopping centers is 205,043 square meters. The occupancy rate as of June 30, 2022, was 92%, a very competitive level. As of June 30, 2022, the expansion of our Plaza Centella shopping center was 90% complete. This expansion will add 3,600 square meters of growth leasable area, with a total estimated investment of MXN 178 million.

EBITDA. As we announced in our previous conference call in the Ordinary Annual Meeting held in past April 21, ARA shareholders have approved a dividend of MXN 290 million or almost 50% of our net earnings in 2021 and 45% higher than the last dividend date. The dividend yield was an attractive 7.2% based on the share price as of the close of the dividend payment date, which was MXN 3.24. The dividend, which was paid on July 14 of this year, was drawn from the net fiscal earnings account, earnings account as of December 31, 2021, which means it was not subject to tax withholding.

Purchase of ARA stock. As we announced in the official release, sent to the Mexican Stock Exchange on June 9, Luis Felipe Ahumada Russek, one of Consorcio ARA's shareholders acquired 30 million shares or 2.38% of this company's outstanding stock. At the same time, ARA also purchased 20 million shares, 1.59% of the outstanding capital stock under the share buyback program. Both sanctions were possible because we were advised that an investor who have maintained a position in ARA stock for 10 years intended to sell his shares.

Additionally, in April, we canceled 22 million repurchased shares equivalent to 1.72% of our outstanding capital stock. This was approved in the most recent General Extraordinary Shareholders Meeting.

This demonstrates our firm conviction that the current price of ARA's stock does not truly reflect its value. ARA's financial position is solid. Our strategy has proven appropriate for both taking advantage of favorable moments in the market and for weathering challenging or even crisis situation.

We have a high-quality land bank that will enable us to maintain operations in states with strong prospects for housing demand. We have a supply of homes to serve the various segments of the market, and which in turn means a mix of revenues balanced between Affordable Entry-Level, Middle Income and Residential category homes. We also have a considerable source of value in our shopping centers.

Another aspect to consider is that despite operating in the construction industry, which is capital-intensive in long cycles, ARA has always focused on generating positive free cash flow to the firm from 2014 through June of this year, we generated MXN 6.77 billion in free cash flow. This capacity has been fundamental in maintaining our policy of steady dividend payment.

Having said that, we consider this stock purchase to have been a great opportunity.

Renewal of market maker contract. On June 27, we announced the extension of a contract for the provision of market maker services, which we signed in June 2019 with BTG Pactual. This contract will help continue supporting the market liquidity of ARA's shares. The contract extension began on June 28, 2022, and it will remain in effect for 12 months following that date.

Conclusions. We believe the results for the first half of the year were good overall and in line with our plans. As we all know, we have major challenges ahead like -- there are still major challenges ahead like inflation and rising interest rate. But so far, we have not seen a significant impact on housing demand, and mortgage lending continues to flow.

In the second half of the year, we will continue to work on the openings we have planned. And as always, we will maintain our strategy of closely synchronizing sales and construction in each of our projects. Thank you, and we will now move on to the question and answers.

[Operator]

[Operator Instructions] The first question from the audio line is from Anton Mortenkotter from GBM.

[Unknown Analyst]

Congrats on great results. I have just a couple of questions. The first one regarding performance and the pricing dynamics that you're seeing. I mean, overall, we saw that sale prices per unit significantly outgrew the cost per journey. Do you expect this to sustain, to maintain in the future? Or do you see any construction from inflation catching up with the price increment?

[Alicia Enriquez Pimentel, executive]

Sorry, Anton. Well, we think that at the end of the [indiscernible] the price will remain very similar to the average price that we have in the second half. I mean, [indiscernible] and obviously, the increases that we are having in the cost as having -- [Indiscernible] we have been increasing our prices. So that is the dynamic that we are expecting for the second half.

[Unknown Analyst]

Just a follow-up on that. So I mean, do you expect to maintain current EBITDA margins or maybe to witness a little bit of traction going forward?

[Alicia Enriquez Pimentel, executive]

It will be around 14.5% at the end of the year.

[Unknown Analyst]

Perfect. And also, I have -- sorry, if I may add another question regarding the VAT expense that you had during this quarter, do you -- I mean, do you also had an unexpected expense on this front during last quarter? Are you currently seeing anything else that could be similar to this? Or did you expect something like this to happen in the future?

[Alicia Enriquez Pimentel, executive]

It will be less on the second half, [indiscernible] it will be MXN 15 million in the second half. We are analyzing that of maximum MXN 15 million. It wouldn't be significant as it was in the first half.

[Unknown Analyst]

Okay. And sorry, another question. Just a quick one regarding the buybacks. You booked about a lot of shares during the quarter. What are your plans for this? I don't know if you mentioned it during the additional remarks.

[Germán Ahumada Russek, executive]

No, I think we will keep the shares and probably at the end of the year, we may cancel them.

[Operator]

[Operator Instructions].

[Alicia Enriquez Pimentel, executive]

Leslie, we don't have questions in the webcast? I thought its working well. But no, there are no any questions. Do you have another question, please, on the line? Leslie?

[Operator]

Our next question is from Mr. Anton Mortenkotter from GBM.

[Unknown Analyst]

Another question from me. This one is a little bit more related to the values. I mean, I've seen that prices have increased roughly 15% from pandemic levels and the value of your land has remained unchanged at around MXN 140 per square meter because, I mean, I understand that you do not revalue the land bank. But if you were to revalue the landlord bank, will you expect to see similar increments to the lands as seen in housing prices? Or should this increase in the value of the land then it would be even higher?

[Alicia Enriquez Pimentel, executive]

Well, the [ average assumption ] is that we have in the balance is around MXN 140. If you've been -- regarding the amount of our land consider 3.6 million square meters. And German mentioned, in [ expenditure ] acquisition costs. And well, first, we have -- it cannot last as enough plan to continue our operations. And to give you -- we are expecting to invest around a total of MXN 300 million, but always focused in our strategy that is to buy a house, a land well located and in a good price. So we are focused on that. I don't know if I answered your question.

[Unknown Analyst]

Yes. I mean, I understand that. But if you were to look at the land bank, again, and I know it's a book value. But if you were to compare the value today at market prices of that land bank that you mentioned that is at around MXN 140, would that revaluation give you an increase in value of around -- of beyond 50%, that means the increase that we saw during [ both ] prices? Or how could that be seen?

[Alicia Enriquez Pimentel, executive]

Well, on the -- yes, I got it, I got it. Yes, we consider the -- to establish the prices of the count, we consider a higher value of our land to do that [ exercise ]. So we established the prices of the house. We can either -- normally like the real value, let's say, or the market value, sorry, but let's say, a value considering [Indiscernible] inflation.

[Operator]

Thank you very much for your questions.

[Alicia Enriquez Pimentel, executive]

Leslie, we don't have questions in the webcast. I don't know if you have another question?

[Operator]

There are no more questions from the audio lines at this time.

[Alicia Enriquez Pimentel, executive]

Okay. So I think we can end the call, please, Leslie.

[Operator]

Understood. That was the last question. This concludes the question-and-answer session for today. Consorcio ARA would like to thank you for participating in today's conference call, and you may now disconnect.