Parque Arauco SA

SGO:PARAUCO

Earnings Call Transcript 2024-Q1

[Lauren Brown, executive]

Good morning, and thank you for taking the time to connect the Parque Arauco First Quarter 2024 Earnings Call. I am Lauren Brown, Head of Investor Relations, and I am joined by Francisco Moyano, CFO; and Matias Silva, Director of Finance at Parque Arauco. I would like to mention a few things before we get started. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note that this call is being recorded, and the recording will be used for internal purposes. To start off today's conversation, I'm going to pass the call over to Matias.

[Matias Silva, executive]

Thank you, Lauren, and welcome everyone who joined Parque Arauco's First Quarter of 2023 Earnings Call. So this quarter marked an eventful beginning of the year for us. On the operational front, at a consolidated level, our revenues grew by almost 26%, our EBITDA increased by almost 23%, and our FFO also expanded by about 21%.

This operational growth is both a reflection of in general generally strong performance of our asset portfolio and various circumstances in the 3 countries in which we operate. Later in the earnings call, I will provide more details on this, but as a very brief summary, the main reasons behind the increases compared to the first quarter of 2022 and the expansion of our Colombian portfolio, and the conversion effect to Chilean peso of Peruvian and Colombian operations as our functional currency for accounting purposes is the Chilean peso.

Looking more into the future. On Monday, we announced 2 new projects we believe are fully in line with our growth strategic pillar, and we'll further reassure our investor community of our commitment to value creation. The first one involves incorporating for the first time a multifamily building in one of our shopping centers.

This residential tower in Parque Arauco Kennedy, which we call the Kennedy phase of the Parque Arauco Kennedy master plan will be constructed on top of the Northeast corner store. It resulted from intense analysis where financial responsibility and value creation were paramount. This project will require an investment of about $60 million and will result in 414 residential units access to our future metro station currently under construction and the realization of the work, live and play concept in our most iconic asset.

The second project involves the execution of the first phase of MegaPlaza Ica master plan. This shopping mall located in the city of Ica, Peru, is the second largest asset in terms of GLA for Parque Arauco in that country and the third most important in terms of EBITDA. This space with a total investment of approximately $17 million, mainly consists of expanding 6,500 square meters of leasable area and includes the construction of a new open air plaza in a boulevard format.

Turning to the right side of the balance sheet. In March, we accessed the capital markets and issued new bonds with durations 5 and 10 years, raising a total of approximately $110 million, equally split between these 2 bonds. We paid UF plus 3.64% and UF plus 3.74% for the short term and long-term bonds, respectively.

We believe the confidence shown by the fixed income investors who trusted us stems from the quality of our assets, the strength of our balance sheet and the reputation we have built over the years as a financially conservative company.

Some other highlights of this quarter include finishing with a comfortable net debt to EBITDA of 5.3x, the opening of Tesla's first store in Latin America at Parque Arauco Kennedy. I will discuss more on this new addition to our tenant roster later. Being rated as low risk by Morningstar sustainalytics in its ESG risk rating with a score of 11.5. We see this as a recognition of our high degree of accountability to investors and the public regarding sustainability issues and places Parque Arauco as the company with the lowest ESG risk among the 30 companies that comprised the main Chilean stock index dates.

On the environmental front, achieving an upgrade from F to C by the Carbon Disclosure Project. As the only Chilean shopping company evaluated by CDP, we believe this is both a recognition for our work well done and an opportunity to continue our efforts towards decarbonization.

And finally, being ranked 12 among the best companies to work for in Chile according to Great Place to Work. This is something we, the Parque Arauco team, feel particularly proud as this recognition reflects the continued effort we make every day to make this company a place where everyone can strive to creating value to our shareholders.

We can go to the next one, Lauren, please. Thank you. This quarter, tenant sales increased by 17.6% on a consolidated level. This increase can be attributed mainly to 2 factors. First, we have 2 new assets, both in Colombia that were not present in 2022, Parque Fabricato and Titán Plaza.

Second, the relative depreciation of the Chilean peso against the Peruvian sol and the Colombian peso resulted in larger growth for our -- of our non-Chilean operations when expressed in Chilean peso. And well, since our accounting is done in Chilean peso, this depreciation translated into higher general growth at a consolidated level.

At the country level, sales in Chile grew almost 7%, explained mainly by growth in our main asset, Parque Arauco Kennedy and an almost 20% growth in our Premium Outlet portfolio, which has shown a remarkable performance as of lately.

Following with Peru, we observed a decrease in sales of our 2% in Peruvian sol, primarily due to low same-area rent growth of 1.4% and an almost 5% reduction in MegaPlaza Independencia of GLA. This effect should be temporary as most of the GLA will reopen once this phase of the master plan is ready.

On a positive note, Larcomar's sales growth reached about 25%, as recent openings and marketing efforts in Larcomar have started to pay off.

Next with Colombia, we saw an increase in sales of about 25% in Colombian peso, with the main contributing factors being the incorporation of the 2 new assets I mentioned earlier and to a lesser extent, the maturation process of Parque Alegra. Overall, our occupation -- occupancy cost remained stable at around prepandemic levels, reaching almost 11%, a level we consider normal. We can go to the next one. Thank you, Lauren.

First quarter consolidated revenues increased by 25.8%. Similar to sales, this increase is mainly explained by both the addition of 2 new assets in Colombia and the depreciation of the Chilean peso. In Chile, revenues grew almost 9%, driven by a fairly across-the-board growth. In Peru, revenues remained almost flat in Peruvian sol due to small growth on [indiscernible] and to temporary closures in our main asset, MegaPlaza Independencia, which I mentioned earlier.

This was partially offset by the good performance of Larcomar where revenues grew in line with sales. As you can imagine, Colombia's growth of almost 50% in Colombian peso is mainly explained by the addition of Parque Fabricato and Titán Plaza as well as the maturation of Parque Alegra and the strong performance of Parque Arboleda.

Regarding occupancy levels, they have remained strong at 96.4%, supported by the quality of our portfolio, the natural maturation of our newest assets and the absence of very recently opened assets.

Regarding leasing activity, this quarter saw 5.6% of our GLA involved in negotiations, meaning changes in tariffs, terms, tenants or a combination of this. We consider this level normal and expect it to continue as such. Definitely, this quarter's highlight was the opening in Parque Arauco Kennedy of the first Tesla store, not only in Chile but in Latin America. Visitors to our mall can now buy Tesla cars at the store, book a test drive and pick up one of the cars parked in the mall. This is a great match to our Green Park, the largest charging center for electric cars in Latin America.

Consistent with the revenue growth, our EBITDA grew almost 23%, driven mainly by the factors I mentioned earlier, but partially compensated by growth in costs and SG&A expenses. Consolidated costs grew about 22%, mainly due to the recent additions to our portfolio and the Chilean peso depreciation, but also due to energy-related factors. In Chile, regulated prices per megawatt have increased significantly.

Most of the energy we buy in this geography is under contracts that are linked to regulated tariffs. So although movements in regulated tariffs do not translate directly into the price we actually pay, they do have an impact. Also in Colombia, particularly in Parque Alegra, air conditioning equipment has required higher energy consumption, which combined with higher prices, has had a negative impact as well.

SG&A expenses increased by 60% compared to the first quarter of 2022. Again, this is partially explained by the Chilean peso depreciation, but it is mainly due to the fact that we, management, decided to stay on the conservative side and increased bad debt provisions.

This had a large impact vis-a-vis the first quarter of last year as while in third quarter 2022, we released bad debt provisions. On this quarter, we did the opposite and took more provisions in the order of CLP 1.8 billion. I would like to highlight here that this expense is not due to a general deterioration of our collectibles but due to the challenges that some very specific tenants are facing.

Moving to nonoperational territory. Financial expenses grew by about 32% due to CLP depreciation effect on non-CLP interest expenses and increased debt taken by the company. This new debt carries higher interest, particularly the debt taken in Colombian peso.

Nonetheless, we believe this is a financially sound decision as debt denominated in the currencies on which we operate helps us reduce the company's exposure to foreign exchange risk. Financial income increased as well by almost 25%, mainly due to an increase in cash, which will be used mostly to pay off short-term debt.

Regarding FFO and following the same reason as revenues and EBITDA, this quarter saw growth of 21.3%, primarily explained by the 2 factors I have mentioned a few times already. As for the increase in associates accounted FFO, which amounted to 36%, this growth was driven by strong operational performance and a decrease in bad debt provisions. This led to an EBITDA expansion of about 13%. Also very relevant were better nonoperational results, mostly attributable to lower financial expenses. Although -- and related to this quarter's FFO, I would like to highlight Grupo Marina's first bond issuance.

In April, Marina made its debut on the Chilean capital market by issuing approximately $78 million with half having a 5-year duration and the other half having a 10-year duration. These bonds were issued at UF plus 4.08% and UF plus 4.39%, respectively. They will help Marina reduce its cost of funds, increase its profitability and diversify its funding sources.

To the team at Marina, if you're listening to this earnings call, we at Parque Arauco extend our most sincere and absolutely biased congratulations to all of you.

Now I'll pass the call to Laurie.

[Lauren Brown, executive]

Thank you, Matias. Now I would like to talk about some of our asset level milestones. In Chile, this quarter, we opened 1,500 square meters at Arauco Coronel as part of its expansion project. And we welcome brands, including KFC, Maui&Sons and Isadora. As a result of this new GLA, new tenants and an improved performance of department stores and supermarkets, revenues grew by 12% and sales levels increased by 5% compared to the first quarter of 2023.

The Premium Outlet Concepción and Curauma experienced an increase in sales by 18% and 35%, respectively. High sales were seen predominantly at clothing and footwear stores including Nike, Under Armour, Tommy Hilfiger and others. This has translated into a double-digit growth in both revenues and EBITDA for the outlet asset class.

In Peru, MegaPlaza Independencia experienced a decline in revenue of 8.2% due to the closure of some commercial spaces located on the second floor above Ripley, which will be converted to a gourmet food hall as part of the assets master plan expansion process. On the other hand, the traffic and sales at Larcomar did well this quarter, showing robust revenue growth of 18.4% compared to the same quarter of the previous year.

This growth can be attributed to the work that the company began a few years ago to define an [ optimum ] mix at this iconic mall by starting little by little to relocate some stores in order to improve the use of the space and attract new tenants. Additionally, renovations were made to upgrade spaces in addition to creating more ocean views on different floors of the mall. You can find more info about the reconversions and rebranding of Larcomar in the fourth quarter 2022 earnings results.

But here are a few examples of the optimization of Larcomar that has positively affected our results this quarter. For example, Adidas moved location. This allowed us to open the Mango store. The restaurant Pardos Chicken was moved to the minus 3 level, which attracted clients to this area and also made space to bring in the store Miniso to Larcomar. The restaurant Friday was moved to an area that previously had less traffic. But thanks to some remodeling, now Pardos Chicken and Fridays both have ocean views and are attracting clients to new areas of the mall and are performing well.

While these sound like various changes, they were made slowly in over the last few years. And we are now able to see the positive results of these relocations and reconversion. In Colombia, [ Hidden ] Plaza and Parque Picasso were incorporated into the Colombian portfolio and performed very well.

Additionally, other assets in Colombia are maturing and improving their performance. Parque Alegra continues its consolidation with increased occupancy and the implementation of step-ups in its lease contracts, resulting in a 19% increase in sales, 40% increase in revenue and a 113% increase in EBITDA compared to first quarter of '23.

Additionally, Arauco Outlet -- Outlet Arauco Sopó improved its food court and restaurant sales by 45% compared to first quarter of '23. This translates to a 13% increase in total sales, a 23% growth in revenue and illustrates that outlets are an asset class that performs well in each country.

Again, the occupancy continues to maintain a high level of 96.4% due to the consolidation of our portfolio, combined with the asset level milestones that I've mentioned. And now I want to also mention some highlights on this mall-by-mall page. In Chile, you will see that Estación experienced a drop in NOI due to a change in the bad debt provision.

Last year in the same quarter, bad debt provisions were released. While this quarter, they were increased, creating this negative effect in NOI compared to the same quarter of the previous year. Meanwhile, at our outlet, revenues increased almost 20% compared to the same quarter of the previous year and can be attributed to new tenants, including Converse, Pfizer, Puma, SKECHERS and [indiscernible], including the addition to the sales that I mentioned previously.

In Peru, as a reminder, we are continuing with our expansion at MegaPlaza Independencia. And for this reason, you can see a decrease in the sales and revenue this quarter compared to the quarter of the previous year. As I mentioned earlier, due to this ongoing optimization process at Larcomar, the asset increased 25% higher sales and 18% higher revenue.

On the next page, I would like to highlight Titán Plaza, the iconic asset we acquired in the fourth quarter of 2023. Due to the great location of this mall, Titán has high sales per square meter. And in the first quarter of 2024, its sales per square meter were even higher than those of La Colina. This statistic illustrates that Titán Plaza is a mature mall with a good mix and a great location, making it another one of our iconic assets.

Jumping over to Page 25. At the Annual Shareholders Meeting on Monday, we announced the Kennedy phase of Parque Arauco Kennedy master plan expansion, which aims to strengthen our value proposition of being an urban center where people can live, work and play all at the same location.

This new multifamily residential tower is the first tower to be incorporated into a mall, and we'll have 24 floors and 414 apartments which includes studios, 1-bedroom and 2-bedroom units. The tower will have various amenities such as a pool, a gym, a barbecue area, sports bar, skybar, a co-work. And of course, the most important amenity of all is a very large mall with hundreds of stores right below it.

The total investment of this tower is USD 60 million and will be opening in 2028. Also at the Annual Shareholders Meeting on Monday, we announced the expansion of MegaPlaza Ica, the second largest regional shopping center in Peru with approximately 36,000 square meters of GLA, and it's also the third most important asset in terms of EBITDA, generating $6.6 million a year.

It is the dominant shopping center in the city of Ica and was acquired in 2015 with this original name, El Quinde Ica. Since then, we have made significant improvements in infrastructure and the shopping center mix, currently featuring 3 commercial levels and some of the best brands in the city, including H&M, Falabella and Maestro. In 2023, we also rebranded the mall to MegaPlaza Ica. This new expansion will add an additional 6,600 square meters of retail space, including services, a financial area, gym and a boulevard.

On Page 31, I would like to highlight our CapEx table. On the top right side of the slide, you can see a pie chart showing the breakdown of our total CapEx investment by type of projects, expansions, new malls and multifamily. The USD 504 million CapEx plan that we initiated in 2023 includes projects recently incorporated and to be incorporated in these next coming years.

As you can see in the table, some of these projects were already incorporated in the third quarter of 2023, while others will be incorporated between now and 2028. You can add the total investment column to reach USD 504 million.

While Page 31 highlights total CapEx, on Page 32, we take a look at the remaining CapEx. You can see the breakdown by type of project of the remaining USD 289 million in the pie chart on the left-hand side of the slide. You can also calculate this amount by adding the remaining CapEx column in the previous table on Page 31. I would like to reiterate that our CapEx strategy is to invest approximately USD 200 million per year.

Some years, we may invest less. Some years, we may invest more. It depends on the opportunities. However, this average amount of USD 200 million allows us to grow while maintaining our preferred level of leverage between 5x to 6x. As you can see on the graph on the right-hand side of the table, the allocated CapEx is less than $200 million per year. This means that there is space to announce new projects and CapEx deployments in the upcoming years in order to maintain our goal of consistently investing in growth every year.

Below in the calendar of upcoming openings, you can also see the additional square meters of GLA will be adding to the portfolio over the year. As we have mentioned various times, our main avenue of growth is through current asset expansion. One of the best examples of this is that our flagship asset, Parque Arauco Kennedy, that has basically been expanding ever since it has been built.

On Page 33, you can see the expansions we have incorporated at this asset since 2013. With each expansion, we strengthened the asset value proposition. Client experience is a strategic pillar and core value at Parque Arauco, which is why every quarter, we do various marketing initiatives to attract new clients and create memorable experiences. You can read about them on Page 34 and 35. Additionally, we have been dedicated to improving our Net Promoter Score as a way to measure client satisfaction at our malls.

As Matias mentioned, sustainability is an important pillar for us at Parque Arauco. We became the only Chilean company in the shopping sector to be evaluated by the Carbon Disclosure Project. Additionally, for the fourth consecutive year in a row, we were featured in the S&P Global Sustainability Yearbook.

Now if you are joining our using the link, you can ask a question. That finishes our presentation portion.

[Lauren Brown, executive]

[Operator Instructions] And to start off today's discussion, I will pass the call over to Francisco.

Okay. I see we have a voice question from JPMorgan, Marcelo Motta.

I am going to unmute you. Marcelo, can you hear me today?

[Marcelo Motta, analyst]

Can you hear me?

[Lauren Brown, executive]

Yes, I can hear you.

[Marcelo Motta, analyst]

That's perfect. It's regarding the multifamily, right? If we look at the NOI margin in this quarter, it was down over 7 percentage points. So I was just wondering if there was any one-off there on the multifamily. And also on the Kennedy expansion or, let's say, the new projects that were announced earlier this week, should it have any impact on the ongoing performance of the shopping mall? And do you guys foresee any negative impacting during the construction? That's all.

[Francisco Moyano, executive]

Thank you, Marcelo. Yes, regarding the multifamily, we wanted to start adding information about the multifamilies in our earnings report. This is the first quarter that we had information. And as of today, we have 2 buildings open and operating. The one -- the 2 of them are in Chile, is the one that is located in Estación Central and the other one that is located in [ Maipú ].

So with these 2 buildings, one of them -- the one in Estación Central is in the ramp-up process. So I would say that the margins -- as of today, the margins that we are showing are not the margin that we expect for this project. So for me, it's more a one-off than something that we can expect for the future.

And regarding the expansion, as you know, we have been growing these assets for a long time. So we are kind of expert of having a construction and also the retail operating in this asset. The multifamily tower is in one corner of the asset. It has been also a -- well organized the construction and the operation of the asset. So I don't see really an impact -- a negative impact in the operation of the retail side.

[Lauren Brown, executive]

All right. Now I have Felipe from Santander. Felipe, are you there?

You're a little choppy.

[Felipe Ballevona, analyst]

Yes. I'll ask it later. You can go ahead with other questions.

[Francisco Moyano, executive]

No, go ahead, and we'll ask you if we don't understand.

[Lauren Brown, executive]

Do you want to type your question?

[Felipe Ballevona, analyst]

Yes, I'll ask it later. You can go ahead with other questions.

[Lauren Brown, executive]

Okay. All right. I'm going to jump to Javier from Itau Asset Management.

[Javier Toledo Marambio, analyst]

So I have 2 questions. First, in this new multifamily project in Kennedy, do you have more detail on the GLA of that project? And second, looking at salaries and contributions, they continue to put some pressure on expenses. So I just want to know what are you expecting on these 2 lines going forward for the year and if maybe we should think of this first quarter 69% EBITDA margin as the new margin for the rest of the year, of course, excluding fourth quarter because of seasonality, but maybe for second and third quarter. That's it from my side.

[Francisco Moyano, executive]

Yes. Regarding the multifamily, in fact, the multifamily that we are designing has this 414 units, the actual GLA, I don't have the [ figure, ] but we are looking for it. So we can give you this figure. But it will have this 414 units of 1 bedroom and 1 bathroom and 2 bedroom, 2 bathroom. So I'm pending with the GLA.

And regarding the salary and contributions, in fact, more regarding the cost and expenses this quarter were impacted by the exchange rates -- largely by exchange rates, but also impacted by the addition of this new assets of Titán and Fabricato, okay? In the comparison when you compare to 2024 with 2023, you have to take into account these 2 factors.

Salaries and contributions lines are growing by inflation mainly. We don't see those to be -- when you compare against 2023, we don't see a lot of growth in those lines. So the EBITDA margin is today decreasing impact because of the comparison against 2023 doesn't have all the same structure in the sense that, as you know, it depends on the revenue side and the cost side.

And if the mix of contracts that we have in both years are not the same -- has the same structure, the competition is not that real soft. For the first quarter, we reached this margin below 70%. For the next quarter, we are thinking on maintaining levels around this figure.

[Matias Silva, executive]

Matias here. Regarding your question on GLA, you go to Slide 31. There you will see the -- about equivalent GLA for the Kennedy phase expansion. Having said that, to be honest, we focus much more on the number of units. So that number may vary once we actually build the tower.

[Lauren Brown, executive]

The next question I have from Diego Guzman of BCG.

[Diego Guzman, analyst]

My question is also about the Kennedy project. But I have 2 or 3 questions. The first one is what are you targeting in terms of segmentation here in this building. I suppose I know that USD 0.5 per square meter rate is the target that you are aiming or may be lower or higher than that, a read of color would be great.

Also regarding parking spaces, this project is changing from a hotel project to a residential project, which I think -- I suppose that you will need a much more parking space service. So I suppose that here you might need maybe 500 or more spaces exclusively for residential use. So I was wondering where are you going to deploy this and this parking spaces. It will be great if you can mention these.

Maybe I don't know if you will do some other underground label or something like that. And well, you mentioned that the project has 22 house and 800 square meters. I was wondering if here you are considering the ex convention center that I don't know if maybe you can explain us what's going to happen with these spaces and how big is the space for this. That's it.

[Francisco Moyano, executive]

Yes. Okay. Yes, regarding targeting segmentation, we are -- this -- for Kennedy, I would say that the location is the most important factor of the asset, right? And so the segmentation is people that want to be in the center of the city that also that value being very close to offices sector here in Las Condes and the retail space, right? So that is why also probably that we're designing this with 1 bedroom and 2 bedroom units. We think that there is people that want to live within the center of the city in this segment.

Regarding the parking spaces, we already built all the parking spaces. When we started the construction of these phases, as you know, we built parking spaces below the old Falabella store and below the current Falabella store. So that was a space that wasn't -- that didn't have parking spaces. And we build parking spaces thinking on the future. So we build more parking spaces that's needed, and some of the spaces also have double [ height ] in order to also grow in the future if it is necessary.

So we are not seeing, in fact, a problem to deploy the multifamily project for the needs of parking spaces. We don't see an issue there.

And regarding the convention center, we are -- today, we are working on -- as you know, the tower -- the multifamily tower was aimed to be a hotel tower in the past. With the pandemic, we decided to stop that construction because the hotel industry was that would be impact by the pandemic. So we stopped the convention center and the hotel tower.

And we have been deciding how to advance with the project with the most strategic and profitable mix for the Kennedy project. We already -- we decided in the past to build the office tower and now we are deciding about the multifamily tower. The space of the convention center in [indiscernible]. And we will decide in the following months about that.

[Diego Guzman, analyst]

And is this included in the 22,000 square meters?

[Francisco Moyano, executive]

No, it's not included.

[Diego Guzman, analyst]

Okay. One last question. Do you -- maybe I -- if I'm not wrong, do you have a CapEx that should come in a couple of more years regarding the Fabricato auction? Do you have an estimate of how much money that could be in natural terms?

[Matias Silva, executive]

Diego, Matias here. Not really, sorry, no, because that money that we would have to pay because it's not for certain, it will depend of [ multiple of ] EBITDA. And no, we're not disclosing at this point, our estimates also at this point, not very accurate because we are doing some changes in [indiscernible].

[Lauren Brown, executive]

Okay. I'm going to try Felipe, again, and then we'll go to Carolina [indiscernible] and then [ Alan ] of Bank of America. So let me just see Felipe.

[Felipe Ballevona, analyst]

I was wondering if you could give us more color about the additional provisions for bad debt. Is this related to the increased yield recorded in the past 2 quarters? And should this affect be over after the next quarter? Or do you think you could continue to increase these provisions afterwards? And last, have you seen a recovery from these tenants? Or are they doing worse like -- and also where are they located?

[Francisco Moyano, executive]

Perfect. Yes, our strategy with the bad debt provision has been always trying to be very conservative in this site, okay? So from the pandemic, we started increasing the bad debt provision in order to be ready to -- for the effects of the pandemic and for the -- for this cost of bad debt.

So with the pandemic, some of our tenants had these loans from the government or from the states that were more flexible. And those -- what we have been seeing is that those loans ended at half of last year. And so for the second part of 2023, we saw some tenants that had no financing and we're struggling. They were still struggling with the effects of the pandemic. And so we had to increase the bad debt provision for those tenants. Those were specific tenant, it's not the majority of our accounts receivables, mainly in the [indiscernible] side.

We have seen those also related with the Arauco Estacion mall, and that is why in the first quarter, you can see that the NOI is impacted in Arauco Estacion, but it's very allocated in few tenants that is important to know. In fact, probably 90% to 95% of our tenants have very good health, but still, we need to increase -- we wanted to increase this -- the bad debt provision for these tenants in order to be ready to have the effects if we -- if it happens that those tenants can continue paying the rent. Some of those tenants in the [indiscernible] side, you have -- probably you can see in the news that are in renegotiation processes.

And they are -- some of them are being able to pass the storm, but some probably will not pass, but we wanted to be -- have the financial statement very, very sound. And that is why we are increasing that bad debt provision. As of today, in the first quarter of 2024, we have all the bad debt provision that we wanted to have in the balance sheet. So if we don't see the scenario worsening in the following quarters, we should have more -- much more reasonable budget provision in the following quarters.

[Lauren Brown, executive]

Felipe?

Okay. passing it on to Carolina...

[Unknown Analyst]

Yes. So actually, my question was also on bad debt, and I think that you already answered. But I would take the chance and maybe talk a little bit about [indiscernible] Colombia. I was amazed about the performance of the existing malls in Colombia, considering that tenants are still suffering in the case of Colombia because of consumption environment.

So I would like to see how do you see your opportunities for higher M&A in Colombia in terms of prices and rates, or you are going to focus, of course, in the new acquisitions, and we will not see further acquisitions really in the next couple of years? Or how do you stand on Colombia? Because I think that it has been a quite successful country for you.

[Francisco Moyano, executive]

Yes. Well, thanks, Carolina. And yes, absolutely. In fact, Colombia has been one of -- it's a good part of our diversification. It helped us during the pandemic because we had a less to pandemic in Colombia than we had in Chile and Peru. And as you mentioned, we have been seeing very good opportunities of growth in this country.

As you know, probably there are several part of the industry in Colombia is [indiscernible] owners for assets. So it's difficult to go through M&A for those assets. Titán Plaza and Fabricato were 2 where we were able to enter to those assets, but it's a slow process of negotiation in the future.

I can say that we -- absolutely, we are trying to continue growing in Colombia. We see a lot of opportunity and option for differentiating from our operation with the industry that we see in this country. So a lot of opportunities. But with that said, it's a slow process. It's not that simple to go through M&A, but we continuously analyze new opportunities there.

[Unknown Analyst]

In terms of pricing and rates, because Colombia continues to be impacted by high interest rates as well. Do you see that prices are still attractive in the case of Colombia?

[Francisco Moyano, executive]

Yes. Well, in Colombia -- the inflation went down in Chile and in Peru, also is already down in prepandemic levels in some way. In Colombia, it is still in this process. So the short-term interest rate is very high because of inflation, but we expect that to decrease in the future if they are able to control inflation. The long-term interest rate in Colombia is higher than in prepandemic level, but it's not that higher.

And so we -- today, we see a space for new transactions. But absolutely, it will have to be with coverage that are correlated with this interest rates. We -- for all the transactions, we take into consideration the current interest rate.

And above that, we look for spreads that makes those transactions accretive for the company.

[Matias Silva, executive]

Matias here. Sorry, just to add to Francisco's answer. We have had this discussion many times with our development team and as challenging as finding the right prices, which of course, are related to rates is to find the correct assets as well. I mean the Colombian market, not -- unlike Chile and the Chilean market and the Peruvian one is very liquid in terms of real estate assets. So it's challenging both to find correct prices and to find the actual assets.

[Lauren Brown, executive]

Great. And now we have Matias -- I'm sorry, [ Alan ] from Bank of America.

[Unknown Analyst]

Just my question is on Cerro Colorado. If you can remind us the percentage of GLA that's in retail and office, I guess, also if you can tell us if you've done any pre-leasing, especially if you have all the permits in order to open the project once it's completed.

[Lauren Brown, executive]

Sure. So [ Alan ] to go back to the Cerro Colorado phase on -- if you have the earnings in front of you on Page 28, we -- you can find those figures there. So the retail section will be 12,000 square meters of retail and the office tower will be 23,400 square meters of retail. And the Cerro Colorado phase, this is $111 million remaining investment. And the retail is set to open in 2025 and the office tower is set to open in 2026. It was a little bit low. I think you had another question about office...

[Francisco Moyano, executive]

Yes. It was about permits on construction process because we at [indiscernible] -- the same as in the budget provision of our financial statement, we also want to be very conservative on projects in order to announce it to the market once we have the main permits in place. Obviously, during the construction, we need to have all the permits and we advance with the construction, but we are confident that we can finish the projects.

[Unknown Analyst]

And just on -- have you done any pre-leasing from the office?

[Francisco Moyano, executive]

Not yet. No, not yet. We will start -- we have a whole schedule for commercializing this space, but it has not started yet.

[Lauren Brown, executive]

And it looks like that has wrapped up the question portion of our call. Thank you, everyone, for joining today. And we will see you back here in -- at the end of July when we present our second quarter results.

Until then, please feel free to reach out via phone call or via e-mail if you have any additional follow-up questions that you would like to ask. And hopefully, we will see you at a future conference NDR or here in our offices if you would like to visit. Have a great day, and thank you very much for joining our call.

[Francisco Moyano, executive]

Thank you. Bye.

[Matias Silva, executive]

Thank you. Bye-bye.