Parque Arauco SA

SGO:PARAUCO

Earnings Call Analysis

Robust Revenue and EBITDA Growth Despite Challenges

The company experienced a strong quarter with a 10.5% increase in revenue and 6.8% in EBITDA, marking its highest occupancy level in a decade at 86.1%, outpacing inflation rates in Chile, Peru, and Colombia. Tenant sales fell 1.6%, with anchor stores declining significantly, although the impact varied by country. Two new expansion and acquisition projects in Peru and Colombia were announced to bolster the company's asset portfolio. Challenges included increased pressure on margins from rising real estate taxes and insurance costs. A one-time bad debt provision was made, primarily affecting Chile, but it’s not expected to recur. The company also highlighted the implementation of a zero-based budget approach to optimize costs. The earnings call suggested a cautious but optimistic outlook with strong financial discipline and strategic expansion.

Positive Performance and Strong Growth

The company experienced a robust quarter with revenue growth of 10.5% and an impressive EBITDA increase of 6.8%. This notable financial performance eclipses the inflation rates in the respective countries of operation: 5% in Chile and Peru and 11% in Colombia, highlighting the strength and resilience of the business amid economic challenges.

Record-Breaking Occupancy Rates

Occupancy rates have soared to the highest levels in the past decade, reaching an overall 86.1%, with specific mentions of 97% in Chile, nearly 96% in Peru, and 94% in Colombia. Even when considering the new Alegra addition in Colombia, which currently has an 81.1% occupancy rate, the figure for Colombia excluding Alegra would be an impressive 96.5%.

Strategic Expansions and Investments

There have been key developments such as the expansion of Megaplaza Independencia in Peru and the exciting acquisition of two assets in Colombia - Titan Plaza in Bogota and Parque Fabricato in Medellin. These new investments are expected to consolidate additional EBITDA, strengthening the company's position in these markets.

Outstanding ESG Performance

The company has been recognized for its environmental, social, and governance efforts with a AA rating in MSCI ESG and an A rating in GRESB, securing the top position in South America compared to its peers—a testament to the company's commitment to sustainable practices.

Challenges with Tenant Sales and Anchor Stores

Tenant sales have seen a decrease of 1.6%, heavily influenced by anchor stores which experienced a double-digit decline, although the majority of the mall saw sales movements around inflation rates. Anchor stores account for a substantial 40% of the company's sales and G&A but contribute to only 18% of revenues.

Financial Prudence amid Nonrecurring Costs

The company has taken a proactive approach by adding a bad debt provision of around CLP 1.1 billion, mainly concentrated in Chile, to strengthen its financial position. This significant provision is deemed nonrecurring, with management not expecting to repeat such a provision in the future.

Revenue Increase and New Store Openings

Revenue has increased significantly, with Parque Arauco premium outlet in Chile growing by 17%, and in Peru, openings such as Salazar food hall in Larcomar have led to a 20% revenue increase. In Colombia, the introduction of three new H&M stores has favorably impacted sales.

Maintaining Strong Accounts Receivable

The company has maintained a robust position with low outstanding days of accounts receivable, which stand at 30 days in Chile, 35 days in Peru, and 15 days in Colombia. The provisions have been conservative, covering 100% of the debts above 120 days, indicating healthy cash flow management.

Navigating Cost Pressures

Operational costs have been under scrutiny, with the organization working on a zero-based budgeting approach to optimize expenditures. Property taxes have increased, thereby affecting the net operating income (NOI) margins, especially in Chile. Nonetheless, the company is engaging in a comprehensive analysis to mitigate these pressures through strategic cost management over the coming years.

Earnings Call Transcript 2023-Q3

[Lauren Brown, executive]

Good morning, and thank you for taking the time to connect to the Parque Arauco Third Quarter 2023 Earnings Call. I'm Lauren Brown, Head of Investor Relations, and I am joined by Francisco Moyano, CFO; and Eduardo Perez, CEO of Parque Arauco. I would like to mention a few things before we get started. At this time, all participants are in 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 Francisco.

[Francisco Moyano, executive]

Okay. Thanks, Lauren, and Good morning, everyone. We had a very positive quarter this quarter with several important news. First, regarding our quarterly results, our EBITDA revenue continues to show a good trend with growth over the last year above in factor showing a 10.5% for the revenues and a 6.8% growth for the EBITDA. We have been seeing inflation decreasing in all 3 countries, but still is an important level, especially in Colombia. So growing above those figures is a result of a strong business, sound commercial relationships and a strong portfolio. Also, I would like to highlight that our occupancy level is in its highest level for the last 10 years, reaching 86.1%.

All of our malls are almost at 100% and Parque Alegra, which is in its ramp-up process is also growing in occupancy every month. Another important point to mention is that we are working on our zero-based budget. We have been seeing pressure on our margins, mainly coming from accounts such as real estate taxes and insurance costs. So in this scenario, it's important to maintain the most competitive level in all other cost of operations. A zero-based budget is a methodology that aims to analyze in our bottom up process or costs with detail, understanding the possible levers that one might have to optimize it.

Regarding projects. In this quarter, we announced 2 important projects, including the expansion of our main asset in Peru, Megaplaza Independencia that with its current square meters in the first phase with its fan to add new economic options and a larger common space. Besides that, in Colombia, we were excited to announce 2 investments in multi-property assets. The first was Titan Plaza in Bogota and then Parque Fabricato in Medellin. Lauren will expand on this important investment afterwards in the presentation.

Finally, to highlight our AA rating in MSCI ESG and A rating in Resti. These recognitions are important to us since it represents our work in the ASG area, one of our trade pillars. Now passing to Page 6. Regarding tenant sales, -- the tenant sales decreased 1.6% when we compare the third quarter of 2023 with the third quarter of 2022. The exchange rate did not play an important role this quarter since without this effect, the decrease would have been 0.5%. However, we are still seeing 2 different scenarios within these figures. In one side, we have the anchor stores decreasing double digits while the rest of the mall is moving around inflation. Also, it's important to mention that the anchor stores represent around 40% of our sales and G&A but only 18% of revenues. And this decrease in sales in the anchor stores, you can see it also represented in the figures that we are showing in the country-by-country breakout.

Chile is increasing 1.3%, while Peru is decreasing and Colombia is growing 6.8%. This is the result of the different composition that the mix have -- that we have in each country, where Peru has a larger portion of anchor stores. The difference in results in sales in anchor stores and the rest of the mall is also shown in the occupancy cost, which is increasing in all 3 countries. However, if we, again, separate the results of the anchor stores and the rest of the mall, the occupancy cost for the rest of the mall today is around the same levels that were in 2019. So showing good figures for the stores that represent more than 80% of the revenue.

Now passing to the next page. Regarding revenue. The revenues of the company are growing 10.5%. This is a very positive figure and also is shown in the -- not only in the consolidated [indiscernible] but also in the country-by-country breakup, where Chile is increasing 10.3%, Peru 6. 4% and Colombia 18.1%. All these 3 figures are a above inflation. Chile and Peru had inflation around 5%, and Colombia, 11%. The occupancy is also, as I said, reaching its highest value since the last 10 years. You can see in the country by country that Chile is 97%. Peru, almost 96% and Colombia that is showing 94% also is good Alegra, which is in the ramp-up and today is at 81.1%. The figure for Colombia without Alegra would be 96.5% also in a very positive level. Also to mention that our new acquisitions, Parque Fabricato is being added to the portfolio with very good occupancies. Titan is at 95%, Fabricato is at 97%.

The same area rent is also showing positive figures, and I would like to highlight the figure for Chile, which is growing 6.8% in the same area rent when you compare the third quarter for 2022 and 2023.

And finally, the revenue composition only to highlight that we are maintaining our revenues more fixed than variable, which is important also in a scenario where sales are in challenging are more challenged.

Now passing to Page 9. Regarding the EBITDA, the EBITDA is flowing also above inflation at 6.8%. But we are aware that we are having a quarter that has a pressure from costs. And as I said, first coming from real estate taxes and insurance. But also in this quarter, we have an impact of bad debt provisions. The bad debt provision, as you might know, during the pandemic, we increased the bad debt provision in an important level, since we wanted to have a very conservative position around the bad debt provision. So we increased it from year 2020 and then in 2021. But then as the company started to show more normalized levels of operations.

We're starting releasing some parts of that provision. The release of that provision took place in the last portion of 2021 and 2022, and the beginning of 2023. But today, we think that we are more reaching a reasonable level for this bad debt provision.

And in the last quarter, we wanted to strengthen our position by adding this provision of around CLP 1.1 billion. We are seeing mainly in Chile, a specific tenant are having control with their accounts. And because of that, we wanted to strengthen our position in this provision. I also wanted to mention that the large portion of our accounts receivable are in good shape and the receivable and all the receivables and the amount that we have every month is in good behavior.

However, when we compare the third quarter of 2023 or 2022, the last year, the bad debt provision, we released CLP 270 million bad debt provision. But this year, we are provisioning CLP 1.1 billion.

So in total, the difference against last year is CLP 1.4 billion, which is impacting our EBITDA level this quarter. Around this factor, it's also important to mention that then we have some costs that are recurring and versus others that are nonrecurring. We think that the bad debt provision is a part of the nonrecurring type of cost. So we think that the -- the amount that we provisioned this quarter, we are not seeing that we will repeat this type of provision in the future. So we consider that as a nonrecurring cost for the covering.

However, more recurring would be real estate taxes and probably insurance how even when we are working or trying to see levers to decrease those costs as well. Again, we are working in this zero-based budget. We are assigning a lot of time and important cost in this scenario in which we are seeing an increase of pressure. In the EBITDA in the country-by-country breakdown, we can see that the EBITDA in Peru and Colombia is global. Well, Chile is mostly flat when we compare to last year. This is because the -- again, this bad debt provision, which was concentrated in Chile this quarter. With that, I would like to pass the call to Lauren.

[Lauren Brown, executive]

Thank you, Francisco. As Francisco mentioned, we had experienced higher revenues in the 3 countries this quarter. To expand on that, Chile revenues grew at Parque Arauco premium outlet, Buenaventura by 17% and 63% at Puerto Nuevo compared to the same quarter of the previous year due to new tenant openings. Additionally, in Peru, Salazar food hall opened in Larcomar, increasing revenues by 20% and while revenues increased by 35% at MegaPlaza Ica after the opening of Dollarcity and Diverticentre. Colombia also welcomed 3 new H&M stores at Parque Alegra, Parque Caracoli and Parque Arboleda. Alegra's occupancy sales and revenue increased as a result. Additionally, at La Colina, revenue grew by 14% as a result of the expansion of La Social Food Hall. Passing to the mall by mall pages. You will see that in this quarter, as Francisco mentioned, Chile NOI margins were effective negatively because of an increase in nonrecurring expenses, including the bad debt provisions which Francisco explained and the additional property taxes.

This quarter, we announced various development projects, including an expansion in MegaPlaza independent in Peru as part of its master plan and 2 acquisitions of malls in Colombia, which I will expand up. Parque Fabricato, is a multi-property asset with approximately 57,000 square meters of GLA, and is one of the most iconic shopping centers in the metropolitan area of Medellin. This shopping center has been managed by Parque Arauco since its inauguration in November 2021 and has important anchor stores such as Exito supermarket, H&M and Decathlon.

Additionally, it has LEED Silver certification and is considered a sustainable project due to its good energy saving practices. An agreement was reached for the acquisition of a 51% stake in the fund INMOVAL, which owns 56% of the trust rights of PAL investment vehicle that owns several stores that amount to 39,700 square meters of GLS, which is approximately 70% of the multi-owner property. Parque Arauco will pay INMOVAL an advance of about USD 17 million. And in 2026, it will pay a price adjustment based on the EBITDA of that year as per the original call auction agreement. In our accounting, you will see that we own 100% of our share and not 70% of the whole shopping mall as you would see if this were a single ownership property. With this, we will consolidate the EBITDA generated by PAL amounting to approximately USD 5.5 million per year.

In Bogota, we acquired a stake in the vehicle that owns several stores and offices in Titan Plaza, which is one of the most iconic shopping centers in Bogota, and this acquisition was $443 million. Titan Plaza is well located in one of the city's most consolidated neighborhood. This shopping at Plaza includes retail spaces such as Falabella, Jumbo, Zara and Cine Colombia, and it also has AA office spaces. The EBITDA per metro per square meter of the retail area owned by the vehicle is very similar to that of Parque La Colina, which is our main asset in Colombia. Additionally, the vehicle had USD 6.4 million of EBITDA in the last 12 months.

The offices at Titan Plaza will not be consolidated as we will not have the control nor the management of them. We will use the equity method approach for accounting of these offices. This is the same method we use for Marina. For the retail space, we will consolidate about 14,000 square meters, of which we will own 57%. On Page 37, you will find a case study about these multi-owner properties in Colombia, a format that is different from what we find here in Chile. Today, 65% of the mall in Colombia have this multi-owner format and could make attractive investments. Now jumping over to ESG. We have various lamina -- various slides on ESG, but one of the most important that I would like to highlight are the awards that we received. We obtained a AA rating in the MSCI ESG rating, along with the A rating from GRESB in 2023.

The prestigious MSCI rating has granted us a AA rating and recognizes the integration of environmental, social and governance criteria in the company's risk management. Similarly, GRESB assesses the environmental, social and governance performance of multiple companies in the real estate industry worldwide. Recently, we improved our score compared to the previous year in this prestigious ranking. Maintaining the highest A ranking and additionally ranking first in South America compared to our peers. We are very proud to receive these prestigious ESG ranking. And here is where you can find the case study on the Colombian shopping mall.

With that, I would like to turn this over to questions. If you are joining our call using the link, you can ask a question by clicking the button ask a voice question or by submitting a [indiscernible] question.

[Operator Instructions]

And to start off today's discussion, I'm going to pass the call over to Eduardo.

[Lauren Brown, executive]

Okay. I see we have a question from Marcelo Motta from JPMorgan. So Marcelo, I'm going to unmute you.

[Marcelo Motta, analyst]

Hi, everyone. Can you guys hear me?

[Lauren Brown, executive]

Yes, we can. Hi Marcelo, how are you today?

[Marcelo Motta, analyst]

My question is regarding -- I mean, actually there are 2 questions. The first is regarding the performance of the anchor stores. When do you think we're going to see a light in the end of the tunnel, what is the end game? They have been underperforming for a while, I mean, do you think once rates in Chile it starts to decline even more and credit starts to flow. I mean, this is something that could be reversed? Or do you think this is like a structural underperformed. So how should we think about that? And the second question is regarding Francisco's comments that the level of provision right now is health, and we should see this like CLP 1 billion in provisions during the third quarter, more than nonrecurring, which are, let's say, the lead indicators that would make us feel comfortable that there are no additional provisions to be made with the help of the anchor, the satellites and how to think about it?

[Eduardo Marchant, executive]

Thank you, Marcelo, for your question, and good morning. So regarding your question about our department stores, I would say that part of the decline in sales is because of fundamental conditions and part is more contingent. I believe that the part that is more contingent is related to the fact that the department stores share durable goods. And the purchases of durable goods were very strong during the pandemic. So naturally, after the pandemic, the pace of these durable goods are lower. Second, I would say the quality of the credit that the same department stores yield have been decreasing. And because of that, they have been restricting the credit -- and because of that restriction of credit, that has affected also sales.

And I think that's also contingent and not a fundamental change. That said, I do believe that a part of the decline is more fundamental. And because of that, we have said in the last calls that we believe that the space of department stores will decrease going forward. But we believe that this will be a gradual process. And in this process, it's very important to understand the quality of the portfolio because, of course, if some square meters are closed, they will close the less profitable square meters.

And because of that, the quality of the portfolio is very important. And as we have mentioned before, [indiscernible] has the highest EBITDA per square meter in each of the countries where we operate. And because of that, also revenues and sales are among the highest or the highest in the country. So we believe that we can face some few closures going forward, but we believe that they will not be very important and because of that manageable. Also, I would like to mention that in average, we see that as an opportunity because again of the quality of the assets and the reconversion of those spaces can be accretive and very profitable for the shareholders of the company. Regarding the second question about the bad debt provision, let me give you, Marcelo some perspectives about the big picture here.

So basically, the bad debt provisions -- first of all, let me mention that the outstanding days are in the lower levels of the last year. This is 30 days in Chile, 35 days in Peru and 15 days in Colombia. So the sales of the uncollectibles are strong, I would say. And let me give you a couple of KPIs there. So the level of provision that we have is equivalent to 100% of the debt, about 120 days. That level was 70% between the start of the pandemic. A second KPI that I think is important to mention is that the level of provision is equivalent to 39% of accounts receivables. That level was close to 20% between the start of the pandemic.

So in summary, we are being more conservative than the start of the pandemic. And the reason is that -- as I mentioned before, the sales of the uncollectible is good, strong. However, there are some few cases very correlated to the gastronomic category that started to struggle during the pandemic.

Most of cases end up in strong results after and they are now in good shape. But some few cases didn't make it until now. So they have been struggling. But again, I would like to mention that in average, the sales of the uncollectibles is very strong. And second, we are being more conservative than what we were before the start of the pandemic.

[Lauren Brown, executive]

Thank you, Marcelo. I will now unmute Javier Toledo from Itau.

[Javier Toledo Marambio, analyst]

Maybe a follow-up question on Marcelo's comments, but I just want to know how should we think on the evolution of the additional bad debt expenses and increasing property taxes for the following quarters?

[Eduardo Marchant, executive]

Yes. So the property taxes have been increasing importantly in the last years, both because of the increase in the base in the fiscal valuation of our assets, but also because of increased rate, especially in Chile. I don't see that changing going forward, and I believe that will be a cost pressure going forward regarding bad debt provisions, as I mentioned before, we see this as a onetime event of a nonrecurring event. And I would expect good performance of the -- of this going forward. So I don't think you will see more pressures about uncollectibles and about bad debt provisions going forward.

Let me mention also briefly about what Francisco explained about the zero-based budget we are making a large effort as a company in this process of zero-based bad debt. This is the process in which all the companies participating. We are analyzing in detail each of the cost accounts of the company -- and in a detail that we have not done in the past. And I do expect positive news regarding this going forward. This is a process that will take 3 years in this -- because it implies a large effort from the company.

In this first year, we will review the cost account equivalent to 40% of the cost and expenses of the company. And from that review, I would expect, again, positive news going forward that will compensate or more than compensate the cost pressures we are facing, mainly from territory of taxes and issuers.

[Lauren Brown, executive]

Thank you, Javier. Next, I will go to [ Felipe ] from Santander. How are you today? Can you hear me?

[Unknown Analyst]

Great. Well, [ Fritz ], thanks for the call. I just wanted to follow up on what Eduardo said on the first question. This reduction in space going forward, do you think will be explained by less durable goods being sold in the stores? Or do you also see a shift on the square meters of the apparel side of department stores?

[Eduardo Marchant, executive]

No. Felipe, first of all. So the comment is basically in the sense that we have been seeing a decrease in sales of department stores, not only in the last year but for several years now, especially in Chile. Because of that, we do expect that as a category of department stores, the surface will be lower going forward in order to reach similar levels of sales per square meters than what they have some years ago. It's just an adjustment that you need in order to reach the same productivity levels of sales per square meters that you have 5 years ago or more. And in that sense, we don't know how the adjustment will be made, or each of the brands closing some few stores, the less profitable ones. Or some companies merging or some companies going out of the market. However, we do have a strong position in expecting reduced space going forward in the department stores, especially in Chile.

[Lauren Brown, executive]

Additionally, we have a written question from [ Ladin Viel ]. Two questions actually. The first is with respect of the FFO that decreased from Panamericana, can you please explain what happened to have this negative effect? And the second question is if you can comment on how the ramp-up is going Alegra.

[Eduardo Marchant, executive]

Okay. Let me make a general comment about the FFO, and then I will hand the question to Francisco. So it's important to remember that the FFO does not include the loss for index liabilities. And let me make a remind me here that in Chile, we use the UF app, which is this inflation adjust index highly used in the country. Most of the credits in the country are taking in U.S. denominated currency. And because of that, the financial cost of the company are both in the financial expenses account and in the loss for index liabilities account. When you analyze both accounts together, again, financial expenses for [indiscernible] and loss for index liabilities, we have [Foreign Language] in Spanish, you will see that the addition of the both have decreased 50% in the third quarter compared to the third quarter of last year.

More specifically, the addition of the 2 accounts in the third quarter of '23 is equivalent to [ CLP 18,248 million ] -- and in the same quarter of '22 was [ CLP 30,571 million]. So we have a 50% lower financial costs, which is a very large figure. This said, how we measure FFO does not include the loss for index liabilities. Basically because it's not cash, but it is a payment that you will make when you pay your liabilities going forward. So I believe it's a great area where it should be part of the index of FFO or not. But it is very important to mention that in the big picture, the financial cost of the company is decreasing 50% compared to the same quarter of last year.

[Francisco Moyano, executive]

Yes. And regarding the FFO the specific question about Desarrollos PanAmericana, right? We have in the FFO, when [indiscernible] FFO -- in that line, we add the FFO from Desarrollos PanAmericana and Grupo Marina. Desarrollos PanAmericana is a serial land bank that we had in Peru, when we acquired the 50% of MegaPlaza from the Wiese family. So we acquired the 50% of MegaPlaza, but we ended up with this land bank, maintaining the partnership with family Wiese of the 50%. This Desarrollos PanAmericana as an asset value of around $35 million, and the impact that we have this quarter is related with the value of those assets. We some sort of cleanup of the value of the asset. So this impact that we are seeing in the quarter, we are not expecting to repeat it in the future as well.

And regarding the question about Parque Alegra, we are very happy and optimistic about Parque Alegra -- and as a reminder, this is what we expect to do with this asset is to be the best asset in the south part of the city of Barranquilla, which is the fourth largest city in Colombia. In the -- we have now commercialized 80% of the GLA, and we expect to close the next year 2024 in higher -- more than 90% of the GLA. The most important openings in the last months have been H&M we have had a very positive impact in the shopping center. We are now having -- before the start of the Christmas season, [indiscernible] of [ 700,000 to 800,000 ] each month, which is a very strong figure. And you see the performance of the shopping center better month after month. So we are very happy about the performance and optimistic about the future.

[Lauren Brown, executive]

Great. Thank you, everyone, for your questions. I saw a question and then it disappeared. So maybe phone retracted their written question. But does anyone else have any additional question today. All right. Well, thank you very much, everyone, for joining us today on our third quarter earnings results call. And we will be in touch please feel free to reach out if you have any additional questions or comments, you can reach me via e-mail, and we can have another call, if you would like. Have a great day. Thank you very much for joining us today.

[Francisco Moyano, executive]

Thank you. Have a good day. Bye-bye.