Consorcio Ara SAB de CV

BMV:ARA

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to today's Fourth Quarter 2023 Results Conference Call and Webcast. My name is Leslie, and I will be your event specialist today. [Operator Instructions] Please note that today's conference call and webcast are being recorded. 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 fourth quarter 2023 results of Consorcio ARA. This call will be also transmitted via webcast, accompanied 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 those discussed today.

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 queue for questions.

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

[Miguel Lozano Pardinas, executive]

Good morning, everyone, and thank you for joining us. Results for years 2023 compared to 2022.

In 2023, our company brought in revenues of MXN 6.75 billion, 3% less than 2022. Our housing revenues, which accounted for 95.5% of this total, amounted to MXN 6.44 billion, a decline of 2.7%. These revenues came from the sale of 5,573 homes at an average price of MXN 1,156,300, an increase of 9.8% over the previous year.

At the close of 2023, we also had MXN 132.3 million in homes titled through the build in Infonavit credits or Line 3, primarily in the Affordable Entry-Level segment. These revenues will be recognized as the homes are completed and delivered to customers, which should be a maximum period of 6 months.

As I mentioned in our previous call, with this type of loans, beneficiaries can build their home either on their own or through a developer in an authorized housing complex, comprehensive model. It offers a number of benefits to the borrower, including a qualification score of just 880 points which is lower than 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.

Breaking down our revenues for 2023 by housing segment. The Affordable Entry-Level segment generated MXN 1.99 billion, 10.2% lower. Middle-Income sales totaled MXN 2.51 billion, a 9.4% increase. And Residential income came to MXN 1.94 billion, a decrease of 8.1% from the previous year. These reductions were the result of lower sales in our developments in Acapulco, the city that suffer devastating damage from Hurricane Otis as well as delays in obtaining permits and the completion of some developments.

Revenues from other real estate projects in 2023 amounted to MXN 305.2 billion, 7.2% lower than in 2022 due to lower sales of commercial line. As for the mix of revenues in 2023, the Affordable Entry-Level segment accounted for 29.5%; the Middle-Income segment, 37.2%; the Residential segment, 28.8%; and other real estate projects is at remaining 4.5%.

Operating income in 2023 totaled MXN 729.0 billion, 4.7% higher than in 2022. Net income came to MXN 669.3 million, up 3.6%. And EBITDA was MXN 985.5 million, rising 4.2%.

As we mentioned at various moments in 2023, our profitability improved due to the absence of nonrecurring expenses that affected us in 2022. Our operating margin was 10.8%, an advance of 80 basis points. The net margin was 9.9%, rising 60 basis points. And the EBITDA margin was 14.6%, a growth of 100 basis points, mainly due to higher investments in our real estate inventories.

In 2023, we generated negative free cash flow to the firm, amounting to MXN 309.7 million.

One of our main goals for this year is to return to the positive cash flow generation, we have always been known for, so that we can resume our dividend payment policy, as stipulated. For 2023, in yesterday's Board meeting, our directors agreed not to bring a dividend payment proposal for the shareholders meeting.

Results for the fourth quarter of 2023 compared to the fourth quarter of 2022. In the fourth quarter of 2023, we faced very significant challenges that brought us further away from the goals we have set. The first of this was Hurricane Otis, a category 5 storm that made landfall on October 25, raking unprecedented destruction and widespread human tragedy in the city of Acapulco.

In the first 9 months of 2023, this market accounted for 18% of our housing revenues, which came from the developments Punta Mar serving the Middle-Income segment; Puerta al Sol, Middle-Income and Residential housing; and Dream Diamante with Residential level homes.

ARA acted strictly to extend support to both our employees and the community in our development, delivering supplies, maintaining prompt and effective communication with our customers to provide information about the status of their homes and immediately beginning clean-up efforts.

I wanted to reassure you that the damage to our developments in Acapulco was not significant. It was mainly confined to warehouses, certain common areas near the beachfront and some homes with damaged the window frame from broken windows. This is a clear demonstration of the high quality we are known for, and which also sets us apart in 2013 during Hurricane Manuel and Ingrid.

Furthermore, these developments are insured and we have already begun to the claims process to recover some of the losses. I should also comment that these 3 developments continue to operate. That is we have kept up sales activities and consortium at the pace they require.

To a large extent, the homes we offer in Acapulco are an excellent second home or weekend getaway option. Depending on the segment they serve, they feature pools, private beach clubs, extensive green areas, sports and recreational areas among other amenities. We're pleased and heartened to see families back during the past holiday season.

Although sales have still not returned to where they were before Hurricane Otis, we have seen a gradual recovery and stronger than we have projected. More than ever, we must be supporting and investing in Acapulco, a place of such immense personal and professional significance to all of us.

Another challenge we faced was the delay impairments for 2 of ARA's most significant developments. This has been obtained by January of this year. So we are now in the process of titling the homes.

As a result, in the fourth quarter of 2023, we generated revenues of MXN 1.3 [ million ] to MXN 1 billion, which is 18.6% less than in the same quarter of 2022. Housing revenues, which accounted for 93.3% of total revenues totaled MXN 1.41 billion, 19.7% lower and came from the sales of 1,248 homes at an average price of MXN 1,127,900, an increase of 5.2%.

Revenues in the Affordable Entry-Level housing segment came to MXN 486.4 million, 19.3% reduction from the fourth quarter of 2022. Middle-Income home sales totaled MXN 542.3 million, a 4.8% growth. The Residential segment revenues came to MXN 378.9 million, and decreased by 40%. Revenues from other real estate projects, mainly from the sales of land and shopping center leases totaled MXN 101.9 million, practically stable compared to the previous year.

As for the mix of revenues in the fourth quarter of 2023, sales of Affordable Entry-Level homes accounted for 32.3%; Middle-Income homes, 35.9%; and Residential homes, 25.1%; while the remaining 6.7% came from other real estate projects.

The trend in our revenues affected our net income and, therefore, our profitability. The last quarter of 2023, we reported operating income of MXN 144.1 million, with margin of 9.5%. Net income amounted to MXN 144 million, with a margin of 9.5%. And EBITDA was MXN 203.5 million, with a margin of 13.5%.

The fourth quarter of 2023, we generated negative free cash flow to the firm amounting to MXN 455.5 million, mainly to the increase in investment in our real estate developments.

Financial position as of December 31, 2023. The balance of cash and cash equivalents closed 2023 at MXN 2.3 billion, a 26.9% reduction from the balance on hand as of December 31, 2022, which, as I just mentioned, was primarily due to our investment in real estate developments.

As of December 31, 2023, the balance of accounts receivable stood at MXN 721.7 million, an increase of 9.4% compared to the balance at the end of the previous year, resulting from a higher volume of titling in the last weeks of the quarter. However, accounts receivable of turnover remained at a fairly healthy level of 1.3 months.

Total inventories as of December 31, 2023, amounted to MXN 16.76 billion, 7.7% higher than at the close of the previous year. This increase is attributable to various costs, the opening of new developments that initially were quite significant investment in urbanization and infrastructure.

Second, homes built in developments where we have some delays in obtaining permits. Although these permits are now in hand, we are in the titling process. Acquisition of parts of plots of land, the rest of which we will be titling this year in Tijuana, a city where we believe it is crucial to continue operations.

And four, increasing our vertical production. Meaning, developments with buildings. In 2023, 60% of our titled homes were in vertical developments.

The close of the fourth quarter of 2023, cost-bearing debt came to MXN 2.46 billion, a 6% increase compared to the close of the previous year. On November 29, 2023, ARA issued MXN 1.2 billion in sustainable unsecured bond certificates, with a ticker symbol ARA 23X, with a term of 3 years and an annual gross interest rate of 1.70% over TIIE and up to 28 days. This bond certificates received a credit rating of HR AA+ from HR Ratings and mxAA- minus from S&P Global Ratings. They also have a sustainable impact rating of HR XB 1+ from HR Ratings.

Receipts of bonds will go towards financing future or existing projects with a requirement, they focus on promote social and environmental development in the communities where ARA operates. The issue was underwritten by the brokerage firms of [ RT Invest ] and [ GBM ].

To keep our leverage ratio's healthy, on the same day, November 29, we redeemed all the outstanding at ARA 21X bonds certificates in advance, in the amount of MXN 1 billion. The issuance of the ARA 23X certificates and the redemption of the ARA 21X bonds significantly improved our maturity profile.

At the end of 2023, short-term debts within the next 15 months, made up only 10.2% of the total and the remaining 89.8% was long term. At the end of 2023, 68.4% of our cost-bearing debt was in the form of ARA [ 22 ]X and ARA 23X notes. 16% were simple secured loans for our shopping centers, 8% were simple unsecured bank loans, without real estate collateral; and the remaining 7.4% were leased prior periods.

Net debt at the close of the year was positive by MXN 165.1 million. Our leverage ratios remain at optimum levels at the close of 2023. Cost-bearing debt-to-EBITDA was 2.5x. The net debt-to-EBITDA ratio was just 0.17x, while the interest coverage ratio was 3.15x. We raised this ratio on coverage of net interest, meaning interest expense less interest income would be 4.9x.

Housing industry performance in 2023 and outlook for 2024. According to Mexico's National Institute for Statistics and Geography, NISG. Industrial activities in general grew by 1.2% in 2023 compared to the previous year. Construction industry growth was 15.5%, mainly from construction of civil engineering works and the building subsector, which includes housing and industrial base, grew by 7.4%.

According to that data from the unified housing registry group, in 2023, 162,712 homes were registered, a 12.3% increase compared to 2022. And 131,048 homes were produced, the lowest level in record since 2013, and a 3.3% decline compared to number of homes produced in 2022.

Based on data from the Ministry of Agrarian, Territorial and Urban Development, or SEDATU, in January and November of 2023, Infonavit rented 136,692 loans for the acquisition of new homes, a [ 49.9% ] increase over the same period of the previous year. These loans require an investment of MXN 87.4 billion, a 24.5% higher. The average size of home loans in the first 11 months of 2023 was MXN 640,000, a year-over-year growth of 18.7%.

Fovissste, for its part, granted 15,020 loans for new homes between January and November of 2023, 21.3% decline from same period of 2022, and the investment in this totaled MXN 11.9 billion, 14% lower. The average size of the loans granted in the first 11 months of 2023 was MXN 790,000, a 9.2% advance over the same period of the year before.

As for commercial plans to the home financing, between January and November of 2023, 90,419 mortgages were granted for the acquisition of new and existing comps, a 16.4% reduction compared to the same period of last year. And the investment in this totaled MXN 199.1 billion, 16% lower, the average price of loan lended in the year.

In the first 11 months of 2023 was MXN 2.2 million, a 12.4% growth compared to the same period of the previous year. In 2023, 49.4% of our revenues came from homes finance by Infonavit, 13.6% from Fovissste, and the remaining 37% from commercial banks and homes purchased without financing.

For 2024, according to its [ base ] case scenario, Infonavit expects to grant 299,579 loans to buyers of new and existing homes, with a total investment of MXN 200 billion. For Fovissste, for its part, they expect to raise 38,225 mortgage loans in 2024 with, and investments of MXN 43.7 billion.

With regard to commercial bank mortgage lending, there is no official plan for 2024, but we expect it to remain at the solid levels we have been seeing in recent years. Shopping center. In the fourth quarter of 2023, revenues totaled MXN 113.7 million, 10.3% growth over the same period of last year, while net operating income was MXN 83.3 million, 15.7% higher.

In 2023, revenues totaled MXN 430.6 million, a 7.8% increase over 2022 while net operating income was MXN 302.5 million, a 10.5% increase. These results respond -- to response 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 shopping centers 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 center is 205,318 square meters. The occupancy rate as of December 31, 2023, remained at 95%, a very competitive level.

Recognitions for Consorcio ARA in the fourth quarter of 2023. I am very proud to announce a number of recognitions we received during the last quarter of 2023. [ Niche ] champion, the International Finance Corporation, the private arm of the World Bank recognized as a niche champion, [ citing ] its commitment to the design and construction of projects that make the efficient use of our planet's resources and for having built more than 200,000 square meters of [ edge ] certified space.

Great Place To Work. We received this notification for the seventh year in a row because we strive to make our employees feel part of an organization that encourages teamwork, trust, leadership, commitment, respect and camaraderie.

2022 National Housing Price. We received this award in the category of dignified housing promotion for our Colinas de San José II, development in Mexico State, completed projects with 424 apartments. The recognition came from SEDATU, in coordination with the National Housing Organization, CONAVI, Fovissste, CONAVI and SHS as well as the National Sustainable Land Institution.

Conclusions. While we face some daunting challenges at the close of 2023, we expect 2024 to be a good year for ARA, and we are working tirelessly to ensure that it is. We have 40 developments in operation, the geographic diversification that will allow us to mitigate the impact. While the Acapulco market recovers and we have a portfolio to serve all 3 market segments: Affordable Entry-Level, Middle-Income, and Residential.

Likewise, we have a large and high-quality land reserve, experienced financial strength and undoubtably our greatest assets, great team of dedicated employees, it is to them that we owe thanks for having recently celebrated 47 years of ARA's existence.

We made significant investment in our developments last year. So in 2024, we will focus closely on generating positive free cash flow for the firm we have always been known for, should allow us to resume our dividend payment policy. The prospects for Mexico's housing industry are good, both in the short and long term. We have a demographic bonus that will drive attractive housing demand. Inflation was slowed both from its levels in 2021 and 2022. Interest rates have been steady for almost a year, and they are expected to decline in 2024.

2023, housing production reached record loss, which represents a great opportunity for us. In addition, we have solid institutions providing mortgage financing, such as Infonavit, Fovissste, and commercial banks.

For another year, I once again want to express my thanks to our investors for their trust, our clients for their preference, our suppliers for their support and all the employees of ARA for their dedication.

Thank you, and we will now move on to the question and answer.

[Operator]

[Operator Instructions] The first question is from the audio line from [ Juan Marcelo ] from [ TDM ].

[Unknown Analyst]

[indiscernible], you increased the land bank in [indiscernible]. So just wanted to confirm [indiscernible] related to the land from [indiscernible], that you were previously in the future [indiscernible]?

[Alicia Enriquez Pimentel, executive]

Yes, that's correct, Juan. We bought -- well, last year in the fourth quarter, we bought a part of this land that you mentioned is located in Tijuana. It's a very good market for ARA, with a very high demand. As you know, [indiscernible] sample in terms of housing. So we need to be [indiscernible] there. So we bought around MXN 80 million in the fourth quarter and in this quarter, we are going to pay around MXN 120 million. So this project could serve to the Affordable Entry-Level segment.

So finally, we would do it because it was very difficult to find a good piece of land in Tijuana.

[Unknown Analyst]

Yes, that makes sense. So if I get right, it's going to be a total MXN 200 million for the land plot. And could you give us detail on how much meters does the land plot have?

[Alicia Enriquez Pimentel, executive]

The -- square meters, Juan?

[Unknown Analyst]

Yes, no, the square meters.

[Alicia Enriquez Pimentel, executive]

The total amount is around 500,000 square meters.

[Operator]

Our next question is from Ms. [ Isabela Salazar ] from [ GPN ].

[Unknown Analyst]

We understand that you didn't propose a dividend given the cash flow burn this quarter. However, as cash flows begin to grow in 2024, how big could we expect to buy back program to be in this coming quarter?

[Alicia Enriquez Pimentel, executive]

Well, for the second half -- sorry, for the first half of the year, it could be -- it couldn't be significant. But as we resume our free cash flow generation that we expect to have it in a strong way in the second half of the year. I'm going to reactivate or -- yes, my buyback program like around MXN 50 million in the second half.

[Operator]

Our next question is from Mr. [ Andres ] [indiscernible] from GBM.

[Unknown Analyst]

I was wondering if you could shed more light on the Acapulco dynamics post hurricane? And how are the sales dynamics looking?

[Alicia Enriquez Pimentel, executive]

Okay. Well, and I will tell you that now we are selling around 40% of the houses that we sold in 2023. So gradually, we expect to recover maybe not the same level that we have pre-hurricane, but for the second half of the year, we expect it to be at 80% of -- in terms of the units that we sold in the hurricane.

For this, it could be significant in terms of revenues. I mean, in the full year, we expect these revenues represent around 5% of our revenues. And as we mentioned in the last year, represented 18% in the first 9 months of 2023. But in the full year, these revenues represented around 15%. As for this year, would represent 5%. And in fact, it is doing well, better than we expected after the hurricane. So as we mentioned, our [indiscernible] financial condition.

[Operator]

Our next question is from Mr. [ Felipe Vera ] from [indiscernible].

[Unknown Analyst]

My question is on the industrial real estate development that you guys are considering. Is that still on the table? What's the discussion there?

[Germán Ahumada Russek, executive]

Well, we don't have it yet, but we are looking into 2 of our own land bank, one in [indiscernible] and the other one is in [indiscernible]. So of course, we will have to change the -- [indiscernible] the zoning, yes. But I think both projects could be a very good operation.

[Alicia Enriquez Pimentel, executive]

And also, we are not experts in the industrial area. We are looking to have a partner in order to develop these projects that Mr. German mentioned. So we are looking for a partner.

[Unknown Analyst]

Yes. Just a quick follow-up on that. Is there any expected time line that we could foresee for this? Or is it still [ through ]?

[Germán Ahumada Russek, executive]

[indiscernible] end of the year.

[Operator]

We have finished with the conference call questions and we'll now continue with the webcast questions. [Operator Instructions]

[Alicia Enriquez Pimentel, executive]

Okay. Well, thank you. We have one question from Carlos [indiscernible].

Congratulations for the results. I have 2 questions. The first one is related to what is your revenue expectation for 2024? And the second one regarding the permit delays, how many units were affected by these delays?

Well, regarding your first question, obviously, we expect to grow for this year, we are not providing more than guidance, but obviously, we're expected to grow. And the positive thing is that we already have the projects in operations. So it all depend on new projects. So at this moment, there are no red light. We are working very hard to grow for this year.

And the second one, well, I don't have a certain amount in terms of units, but in -- amount in millions. These 2 projects represented a little more than MXN 200 million in the fourth quarter. And the positive news is that we already have the permits so we've been titling the houses in this first half -- this quarter, sorry.

The second is from Benjamin [indiscernible] from [ Signum Research ].

I have 2 questions today. First, considering that the net profits for the period were positive with the management consider the possibility of paying dividends during the second half of the year, assuming it generates the necessary cash flow.

And the second is, what is your perspective for the distribution of income price size of development in 2024?

Well, regarding your first question, no, it is -- still we are not going to pay dividends. One requirement is a positive generation of free cash flow for the full year. So we expect to resume our dividend policy in 2025.

And regarding your second question, well, the mix of revenues could be very similar to the revenue mix that we already have been last year or I would say that in the last 2 or 3 years.

In general sense, I would tell you that 30% would be in Affordable Entry-Level segment, other 30% from Middle-Income and other 30% from Residential, and while maybe talking about Middle-Income, it could be 35%. And the rest is from other real estate projects that are land sales or revenues from our shopping mall and [indiscernible].

And there are no more questions in the webcast. So Leslie, please, if we can end the call. And thank you very much again for your interest in Consorcio ARA.

[Operator]

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 webcast. You may now disconnect.