Parque Arauco SA

SGO:PARAUCO

Earnings Call Transcript 2024-Q3

[Lauren Brown, executive]

Good morning and thank you for taking the time to connect to the Parque Arauco Third Quarter 2024 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. [Operator Instructions] Please note that this call is being recorded and the recording will be used for internal purposes.

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

[Francisco Moyano, executive]

Thanks, Lauren, and good morning, everyone. We are presenting today a very positive quarter in which we continue to show a strong growth in sales, revenues and EBITDA across the board. The EBITDA is showing a 20.4% growth with increases in all three countries. This growth comes from the high commercial activity that is driving positive sales figures, especially in Chile and Peru. It is also a result of a detailed work that we have been doing in revenues where renegotiations of contracts are coming with increases in rents, a complete review of our costs and also the efforts of the incorporation of new assets in Colombia.

This scenario is well reflected in our revenue figures with increases in Chile by 10.6%, in Peru by 7% and Colombia by 38.1%. Regarding our growth pillar, we are having exciting news this quarter. First, we announced an agreement for the acquisition of Open Plaza Kennedy for $200 million. Open Plaza Kennedy is a mall that is located crossing the street in Parque Arauco Kennedy. So from the strategic point of view, with this transaction, we are taking advantage of this prime location in Santiago by increasing our GLA from 120,000 square meters of Parque Arauco Kennedy to 174,000 square meters of commercial real estate in this exclusive location when we will be taking control of the asset, plus 15,000 square meters of hotel real estate.

This is an A Class asset that is coming to strengthen our portfolio in Santiago. It's important to mention though that this agreement is subject to the fulfillment of the customary conditions for this type of transactions. For us, it's important to advance in this growth strategy, maintaining a sound balance sheet. In order to do that, we have been planning this transaction for a long time, and we are starting to show the results of that planning in figures by presenting the lowest level of leverage in the last 5 years of 4.9x net-debt-to-EBITDA. This ratio will be also positively impacted by the recently announced sale of minority interest of our Outlet portfolio in Chile to [indiscernible], a local pension fund.

Thus, we are making room in this ratio to receive the Open Kennedy transaction and continuing our strategy of moving around 5x to 6x net-debt-to-EBITDA, where we see that the most value is created for shareholders while maintaining a conservative financial ratios. In the growth pillar, I would also like to mention that Parque La Molina is in line to open in December. With this strategic location in Lima and its 16,000 square meters, we are -- we expect that it will be an important asset for our Peruvian portfolio and will add relevant value for the next year. In other relevant news, we published our second TCFD climate management report in our website, which I invite you all to review.

We want to continue working in this aspect, which is part of our sustainability pillar by continuously advancing in the improvement of our procedures, controls and goals in order to decrease our impact to the environment, but also prepare the company for the impact of the climate change. Finally, I would like to mention the awards received by institutional investors in which we were awarded as Most Honored Company, receiving top rankings in Best Company Board, Best CEO, Best CFO, Best Head of IR, among other awards in the real estate small cap category. Thanks to all for your support. With that, I would like to pass to Page 6 to analyze our sales figures.

Regarding sales, we are presenting an increase in this quarter of 16% that we can break down in Chile with an increase of 9.5% in Peru, 19.3%; Colombia, 33.7%. This is a very positive scenario. But in the case of Peru, we need to take into account the exchange rates, which without that effect the growth would be 11.5%. In the case of Colombia, the 33.7% will decrease to 23.6% without the exchange rate effects and to 1.3% without the impact of the new asset that we incorporated in the company at the end of last year. Colombia is presenting sales levels that are flat for Parque Arauco. But at the same time are better growth than what we are seeing in the whole industry.

This is the result, we believe, of the impact of the tax reforms that are happening in that country. However, in the next page in the following -- in this presentation, we will be seeing that revenues even with this scenario is doing very well in Colombia. In the case of Chile, the positive figure of 9.5% comes -- impact from the anchor stores that are -- in which we are seeing positive figures for -- especially for department stores. Peru has also very positive figures, not only for department stores, but also for supermarkets and home improvement stores.

So with that, we are seeing an improvement of the scenario of sales in Chile and Peru and Colombia, as I said, more flat. However, for the whole portfolio, as you can see in the chart of the same area sales, we have positive figures for -- very positive figure for Chile of 8.1%; for Peru, 10.4%, and then Colombia, around zero because of the scenario that I was explaining. This decrease in sales with the improvement in revenues is putting some pressure on the occupancy cost in Colombia, which is increasing from 11.4% to 12.1%. However, we are seeing that this level are still sound for this -- for the business, and we feel comfortable with the occupancy cost that we are seeing in Chile, Peru and Colombia.

Regarding revenues in the next page, we can see that the increase in the quarter of 18%, with Chile growing 11%; Peru, 14.6%, which without the effect of the exchange rate would decrease to 7.2% and Colombia, 47.9%, which without the exchange rate effect would be 37.3% and without taking into consideration the new assets would be 8.3%. That growth in Colombia of 8.3% is above inflation, which in this last 12 months would be around 6%. So as I said, we are seeing still positive scenario for Colombia. In the Same Area Rent, this situation is also showed by having figures of 9.5% for Chile, 13.7% for Peru and 5.6% for Colombia.

Regarding the occupancy, we have been seeing historic highs in this aspect with a consolidated figure of occupancy of 96.4%, which then we can see by country with levels also around 96%, 97%. Regarding the EBITDA in Page 9, we are seeing a very positive quarter with an important increase of 20% which is also seen in all three countries. Chile is growing 16.3%, Peru 10% and Peru around 50%. Cost of sales and the administrative expenses are growing in part because of the new assets that we add in Colombia. Also, the -- those costs are also impacted by the exchange rate that in average is around 7% and the inflation.

Without taking into consideration the exchange rate and the new assets, the increases of cost of sales and administrative expenses will be around zero with low single digit of increases, which then is translated in the improvement of the EBITDA margin. We have been making a lot of efforts of controlling costs. And with that, from last year, we had an EBITDA margin of 70.5%, which is growing -- is increasing today to 71.7%. In our strategy of growth, our idea is to take advantage of the effects of the economies of scale. So when we incorporate new assets, what we want is to control -- make efforts to control costs in order to increase revenues, but maintaining the cost levels of the company.

In the next page, regarding the nonoperational results, I would like to mention the variations that we see in financial income first, where we are seeing lower returns of our financial investment in line with the financial markets. We have a very strong cash position in order to plan for the new transactions coming in the following months. But at the same time, we are very conservative in our policy of how we invest those cash positions. And with that, we are seeing a decrease of our financial income this quarter.

Regarding the financial expense, rates of debt are decreasing in all three countries in Chile, Peru and Colombia, and we have been seeing then financial costs in all three countries decreasing. However, the amount of debt with the new investment is growing, especially in Colombia. And with that, it is impacted this line with an increase of 8% this quarter. Besides that, we have a very important impact in the line of income for indexed assets and liabilities. This line reflects the effect of the U.S. in the debt that we have in Chile that is -- that has this relationship with the U.S., the currency that is linked to inflation.

And this quarter, we see a negative impact of around CLP 10 billion. This is a result of the change of the inflation in Chile. Last year, the U.S. changed CLP 100, while this year, in this quarter, the U.S. is changing CLP 300. So it tripled the variation this year against last year. However, if you see the last 12 months, you can see that this line is much in line with last year with an increase of 10%, much more correlated with the amount of debt that we maintain in U.S. in the company. Also to mention that this is the impact of the U.S. that we have in the liabilities, while the impact of the U.S. in our assets is added to the financial income by the fair value valuation that we account at the end of the year.

So at the end of the year in December, we will be adding the effect of the U.S. in the fair value valuation. And with that, we will be compensated in part the effect of the U.S. that we are seeing today in the liabilities. In the next page, we have the results of Marina. We have been seeing a similar scenario of our Chilean portfolio in Marina with an increase of the EBITDA, which is this quarter increasing 13%, while the profit is decreasing because of the impact of the U.S. that I just mentioned. But also, I would like to highlight in Marina that we have been working on -- the company have been working on reorganizing its debt.

At the beginning of this year, they issued their first bond in the market successfully. And this quarter, we received a dividend of CLP 7 billion from Marina since they were reaching the objective net-debt-to-EBITDA of around 5x. Finally, in the next page, regarding the funds from operations, the FFO is growing around 20% with the positive effects of the EBITDA and the associated accounted FFO that is coming from Marina. We have some negative effects from the financial expenses and financial income. But in all, we are increasing the FFO in 20% with a very positive trend that we can see in the charts below.

With that, I would like to pass the call to Lauren to continue with the presentation.

[Lauren Brown, executive]

Thank you, Francisco. Now I would like to highlight some of our asset level milestones. Sales at Parque Arauco Kennedy grew over 14% as a result of positive sales this quarter in department stores, sports and outdoor stores, apparel and restaurants. Higher sales can also be attributed to an increase in foot traffic, which improved over 14% compared to the same quarter last year, still positively affected by increased tourism and the continued consolidation of its area of influence. Rents at Parque Arauco Kennedy also have been growing above inflation, resulting in an increase of revenue by 9% this quarter compared to the same period last year.

Arauco Chillan saw its third quarter '24 revenues and sales grow by 26% and 5.9%, respectively. This is primarily explained by the conversion process of large anchor store spaces into over 20 smaller stores, including the new tenants, Andesgear and Victoria's Secret. The appealing new mix also resulted in foot traffic increasing by 30%. Additionally, the EBITDA rose over 29%, benefiting from a releasing of bad debt provisions. Arauco Premium Outlets continued to perform exceptionally well with sales growing by 19.2%. The overall format has shown an increase in sales driven by the strong performance of its stores.

The Outlets reported over 20% foot traffic and over 50% vehicle traffic, many of which may be tourists who find the premium brands with good discounts, particularly attractive. Strong performance was also seen at various other malls in Chile, including Arauco San Antonio, Arauco Quilicura, Arauco Coronel, Parque Angamos and Puerto Nuevo, all of which experienced increases in revenues and in many cases, due to new tenants and increases in EBITDA as a result of decreases in bad debt provisions. In Peru, overall, Peru experienced a positive quarter in tenant sales and revenues.

Higher sales can be attributed to the fact that winter was stronger in Peru this year, driving winter clothing sales. Additionally, withdrawals from pension funds and unemployment insurance continued through September. Despite positive sales numbers in Peru, various malls see a decrease in EBITDA due to an increase in bad debt provisions after adjusting our model. This quarter, MegaPlaza Independencia increased its sales by 8.2% despite ongoing interventions related to its master plan. Thanks to the entry of Promart into MegaPlaza Huaral, the asset has seen 72.6% increase in sales and a 56.9% growth in revenues compared to third quarter of '23.

This mall is the only mall located close to the new Chancay port, which has influenced growth in its surrounding areas. The Promart home improvement store that has over 5,000 square meters took the place of what used to be a lower-paying kids entertainment area. Lastly, in line with our brand changing strategy in Peru, we are pleased to announce the rebranding of shopping centers in our portfolio, introducing Parque Pisco, Parque Canete, and Parque Chincha. In Colombia, where most of our recent development announces have been concentrated, we have our newest additions, Parque Fabricato and Titan Plaza, which now represent approximately one-fifth of net income and sales of the Colombian portfolio.

Parque Caracoli showed solid performance following the entry of H&M, Starbucks and other tenants, resulting in sales revenue and NOI growth of 10.9%, 10% and 9.2%, respectively. Outlet Arauco Sopo increased its occupancy with the entry of Antony Morato, Dhouse, and Samsung. These new tenants contributed to an occupancy rise of 680 basis points and to the 18.3% increase in revenue compared to the same quarter last year. At Parque Arboleda and Parque La Colina sales decreased compared to the same quarter of the previous year.

This is mainly due to the sales declining in anchor stores and intermediate stores, particularly in clothing and footwear. The decrease of sales in Colombia can be attributed to a perfect storm of factors. At the end of last year, personal income taxes increased, especially for individuals in the middle- to high-income brackets that surround the area of La Colina. Additionally, over the last three months, an increase in import taxes began to be passed on to the consumers at stores such as the Inditex brands.

Therefore, while personal liquidity was decreasing, prices have been increasing, resulting in friction for consumer behavior. Another reason relates to the fact that 2023 was a particularly good year for Colombia, and therefore, 2023 is a high comparison base. Let's move over to development. And if you passed by the Parque Arauco Kennedy recently, you can see that the Cerro Colorado main entrance and retail sector is really beginning to take shape, and it's set to open at the end of 2025.

We also announced at the Annual Shareholders Meeting last April that the Kennedy Phase of Parque Arauco Kennedy master plan will be strengthening our value proposition of being an urban center where people can live, work and play at the same location as we introduced our new multifamily residential tower. That will be the first tower to be incorporated into the mall, and we will have -- and it will have 24 floors and 414 apartment units. This phase of the expansion is set to open in 2028. In MegaPlaza Independencia, this quarter, the master plan did not negatively impact the tenant sales of the mall.

It is likely we will not see a negative impact until next year when we begin other phases, including the renovation of the Central Plaza. As Francisco mentioned, Parque La Molina Shopping Center is already 90% leased, reflecting a successful commercial process. Parque La Molina will feature a lifestyle concept offering more than 60 retail stores, three anchor tenants and a variety of dining options. We are scheduling the opening of this new asset for early December, accompanied by several promotional events to celebrate the launch.

On Page 31, I would like to highlight our CapEx table. This new CapEx table includes the future acquisition of Open Kennedy that will take place towards the middle of 2025, subject to conditions precedent. On the top right-hand side of the slide, you can see a pie chart showing the breakdown of our total CapEx investments by type of project, expansions, new malls and multifamily. This includes projects recently incorporated and to be incorporated in the 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.

By the time all of these projects are completed, we will have expanded our total GLA to over 250,000 square meters and our own GLA over 225,000 square meters with a total investment of about USD 700 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 480 million in the pie chart on the left-hand side. Our CapEx strategy has always been to invest approximately USD 200 million per year. Some years, we may invest less. However, in 2025, we will be investing more in order to acquire Open Plaza Kennedy.

This increase in investment means that we will pause plans for announcing some other future investments until our leverage returns to our optimal levels of between 5x to 5.5x. However, all of the projects that have previously been announced will continue. Jumping now to Page 37; last quarter, we rebranded Parque Lambramani in Arequipa to Outlet Arequipa. And this quarter, we rebranded the MegaPlaza Malls in Chincha, Canete, and Pisco to Parque. This is part of a comprehensive renewal strategy aimed at offering customers in these cities a more modern accessible experience tailored to their needs.

It is also aligned with the reorganization of Parque Arauco's brand portfolio in Peru within the retail segment, a process that has been underway in recent years for shopping centers in this region. The new Parque's brand identity envisions its malls becoming essential gathering spaces for the communities of Chincha, Canete, and Pisco, maintaining their status as key hubs for the everyday lives of their visitors. This year, new tenants have joined these shopping centers, enriching the commercial offering with brands such as Dollarcity, HiperAsia, Fantasy Park and others.

In the coming months, more stores are expected to open, aligning with the goal of strengthening the mix of brands and products available to local customers. Undoubtedly, this rebranding will allow for better differentiation and positioning of the shopping centers in the market, offering unique experiences that resonate with the expectations and desires of local consumers. Positive results from similar transformations in other company assets suggest increased visitor traffic, higher sales and improved perception of the shopping experience to come.

Client experience is a strategic pillar and core value at Parque Arauco. We are focused on improving the experience for both our tenant clients and our end clients. On Page 38, you can read about the launch of our new ticketless parking system in Larcomar that streamlines entry, reduces ticket loss and increases client satisfaction by more than 30 points since being implemented. In alignment with our omni-channel strategy, we expanded our pickup and delivery service to Arauco Outlet Faucett, adding three pickup points in Peru and seven regionally.

Compared to the third quarter of 2023, we achieved a significant 46% increase in the number of orders processed through our seven delivery, pickup and drop-off services. As Francisco mentioned Parque Arauco has presented its latest Climate Change Management Report following the recommendations of the Task Force on Climate Related Financial Disclosures, TCFD. This release reflects the company's commitment to transparency and sustainability in its operations. And for the second year, Parque Arauco continues to gather the work done by various teams to understand, analyze, identify and manage the implications, risks and opportunities related to climate change. You can find this report on the Parque Arauco website.

I will now pass our call over to our CEO, Eduardo Perez, who will be going over our case study located on Page 33.

[Eduardo Marchant, executive]

Good morning, everybody. Several years ago, we started to publish this case study. Basically, when we realize that there are some questions that are between investors or potential investors, we normally take a step back and think inside the team how to give investors more information and more transparency regarding their main questions. And in that sense, we have done two relevant balance sheet movements in the last few months. We sold a minority stake in our portfolio of Outlets in Chile last month.

And we also acquired a relevant asset for the company, which is Open Plaza Kennedy. And we wanted to give you more color related to the rationale of both balance sheet movements and also more color related to the valuation. Regarding the rationale of this balance sheet movements basically, we have been very consistent in doing this strategy of selling minority stake in mature assets and investing these resources in a further expansion and growth of the company, convinced that the risk return balance is very attractive for shareholders. We have done three processes.

We did one in Chile back in 2019, one in Colombia back in 2021. And now in 2024, we are doing the third process in the last five years. So starting by the case of Chile, one slide forward, please. What we did was selling minority stakes in mature assets. And basically, we did these processes at an EBITDA multiple of approximately 20x. Basically, we did a first process in selling 49% of four regional assets in Chile. Then we incorporated or added a new asset at Arauco Chillan into that portfolio, where we partnered with Ameris, a local investment fund in Chile.

And behind that fund, there are the main insurance and pension funds investors in the country. If you see what we have done with that resources in the last years, the main source of growth in the last year has been the expansion of Parque Arauco Kennedy and the yield to cost or cap rate related to that expansion is approximately 10%. So it's a 10x EBITDA, clearly creating value in the process, basically with a clear difference between the prices at which we sell the stakes and the prices and the value at which we invest those resources.

In a similar level, we sold minority stakes of two mature regional properties in Colombia. Basically, we sold those properties at above 15x EBITDA. And we invested those resources in the last years, basically in a greenfield, which is called Parque Alegra, our first regional mall in the city of Barranquilla and two acquisitions, Titan Plaza in Bogota and Parque Fabricato in Medellin. And the average EBITDA multiple of those investments is 11.7%, again, clearly adding value in the process between the selling process and the investment process.

Regarding the last deals we have done in this 2024, we are very happy about the acquisition of Open Plaza Kennedy basically because it's a very strategic asset since the asset is located just across the street from our main property, Parque Arauco Kennedy in a premium location, very well connected and where we see some synergies in having the management of both properties in one hand and eventually some synergies related to improving the connectivity of both assets. We also did -- we sold a minority stake in our portfolio of Outlets in Chile. We do think that the Outlets are strategic for Parque Arauco.

We have 8 outlets in Chile, Peru and Colombia; four in Chile, three in Peru and one in Colombia. But we think that the acquisition of Open Plaza Kennedy is even more strategic for the reasons I just mentioned. Regarding the selling of minority stakes of the Outlet portfolio, we are very happy about that deal also, not only because of the resources that will help us finance the acquisition of Open Plaza Kennedy, but also because of the partner.

We consider the partner as a strategic partner. We believe that [indiscernible], one of the main pension funds in Chile can become a strategic partner of Parque Arauco. And of course, we are also happy about the deal because of the resources that again will help us finance in a responsible way that decision of Open Plaza Kennedy. The selling of the 49% of our outage in Chile was done at a cap rate of approximately 7%. Let me remember that this is a high-quality portfolio of outlets. When you compare this portfolio of outlets with other portfolios of outlets in Chile, this portfolio has the best unit KPIs, for example, in sales per square meter or NOI per square meter.

So it's a high-quality portfolio of assets. And we acquired Open Plaza Kennedy at a similar cap rate of around 7%, including some synergies related to managing both properties in one hand. So in this last case, the balance sheet movements we did are at a similar cap rate, but we believe that this trades at a similar cap rate makes sense and add value to the shareholders of the company because of the very strategic value of Open Plaza Kennedy. So again, we wanted to give you some color regarding the rationale, some color regarding the economics behind.

And of course, we are open to questions. Thank you, Eduardo.

[Lauren Brown, executive]

Before we jump over to questions, I would like to talk about another aspect we are working on here at Parque Arauco. Over the last few quarters, we have been experimenting with ways to implement AI at Parque Arauco. For example, we incorporated the ChatGPT into our chatbot Ema, improving the chatbot feature for our customers. In this process, we have also come across other tools that we are testing. One of them is Google -- is the Google AI feature called NotebookLM, which we used to create a podcast about our third quarter results. You can find the full podcast on our website. But now I would like to play a short clip of this AI-generated podcast.

[Presentation]

So that was a short clip. And this tool, all we did to generate this whole podcast that you can find on the website is we just uploaded this very same earnings release to the platform. So we did not write any of the scripts of this podcast. We just uploaded the release and it generated -- it automatically generated this podcast format. So you can check it out on the website.

And now we can move over to our question-and-answer section.

[Lauren Brown, executive]

[Operator Instructions] And to start off today's discussion, I will pass the call back over to our CEO, Eduardo Perez. So, let me see if anyone has questions here. Okay. I see that we have Igor from Goldman Sachs.

[Unknown Analyst]

Two quick ones here about Chile. How do you see occupancy cost trends, as this quarter, we saw same store rents at 9.5%, more than same store sales, right, at 8.1%? And the second one would be, how do you see the consolidation in the sector going forward? Can you provide more color regarding your appetite for M&A and/or selling assets? And if you can comment to -- if you are focusing on a particular country or asset class, it would be great, too.

[Eduardo Marchant, executive]

So, regarding occupancy cost, let me mention that in the case of minor stores that those are the contracts that are expiring and that we renew year after year. We have approximately 15% of our GLA expiring each year. It's normally between 12% and 16%. The 15% I mentioned is an approximation. And in those contracts of minor stores, we are still below the pre-pandemic levels in the occupancy cost of minor stores. So we still see some room for increasing occupancy cost gradually. And so far, in this year, we have been able to renegotiate our contract -- minor store contracts at inflation plus 1%, 2% at compound annual growth rate. So our minor store contracts, they have step-up clauses, and those step-up clauses imply a rent growth of inflation plus 1%, 2%. Of course, we have another gain if the sales perform strongly once we renegotiate that contract. And eventually, that renegotiation can create another positive impact in our revenues. So I would say as a color that I do think that there's still a little more room for increasing occupancy cost in Chile and taking it back to the levels we had before the start of the pandemic.

Regarding the second question, Igor, you asked for consolidation plans, I understood. Do you mean consolidations regarding having less players having a higher market share?

[Unknown Analyst]

Yes, I did.

[Eduardo Marchant, executive]

Okay. Yes. So, yes, this is a very interesting question because this is a trend that has clearly happened in the last years in the 3 countries: in Chile, in Peru and in Colombia. And in my opinion, this will continue to happen going forward. This is a market where you see the largest players becoming more sophisticated in the management in general. Also, this is a market and a sector with clear economies of scale. And these largest players normally have access to capital at a lower cost of capital. Normally, these largest companies are able to attract more talent also. So these largest players are becoming stronger. And normally, because of that, there's a clear trend of consolidation that I believe will continue to happen in the future. We have business in relatively small markets. So this is a trend that happens at a slow pace, very gradually. But I am convinced that in 10 more years, you will see more consolidation in the industry, yes.

[Unknown Analyst]

Okay. Great. Just a quick follow-up here. And when we think about Parque Arauco consolidation, do you prefer a specific country? Are you focused on consolidation in Peru or Chile or Colombia?

[Eduardo Marchant, executive]

We analyzed our potential M&As in -- by a bottom-up strategy, Igor, not a top-down strategy. So we analyze each opportunity case by case. Of course, in the analysis of each opportunity, you do consider the country context. But we have a limited capital, and we like the countries to compete for that limited capital and to invest that capital in the best opportunities. So I think the consolidation, depending on the opportunities, may happen in any of the countries. We do have, however, a high -- very high focus on high-quality assets. So currently, for example, we do see some opportunities in these 3 countries, but not all of them are high-quality assets. And we have a very important focus toward quality assets because -- basically because we are convinced that high-quality assets have a higher medium, long-term growth of the free cash flows.

[Lauren Brown, executive]

I will now pass the question over to Joel Lederman [ de ] Itau. Can you hear me? You can now ask your question. Well, since I can't hear you, I'm going to pass the question on to Felipe from Santander.

[Felipe Ballevona, analyst]

So, we saw some assets with tenant sales [ over-performing ] rents this quarter. Could this point to better contract negotiations in some assets such as MegaPlaza Independencia, which grew like 2-point-something in rent and like over -- in double digits in sales? And also, which tenants are you seeing that are doing better? Because the recovery was significantly better this quarter compared to the previous ones.

[Eduardo Marchant, executive]

So, your question is very related to occupancy cost, and the last question was focused on the occupancy cost in Chile. But in the case of Peru and Colombia, we also see room for a higher occupancy cost because the occupancy costs of the minor stores are at lower levels than before the start of the pandemic. So the case in Peru and Colombia is the same than the case of Chile. And this is why you see that in Colombia, even though the tenant sales are relatively flat, our revenues are increasing much more. And the reason behind is that in the last years, and by years, I mean in the last 5 years, the sales in Colombia increased very importantly, much more than the rents. So this year, where you see the opposite happening, basically, we are taking back the occupancy cost to levels that are reaching gradually the levels we had before the start of the pandemic, but we are still below.

And regarding MegaPlaza Independencia, we believe this asset has still much more to offer, both in terms of integrating new property, other property uses different than retail in the medium term, and also regarding expansion of the retail space and a higher productivity, I would say, of the retail space. This is a shopping center that has all or most of the anchor stores in Peru. This is a great property of above 100,000 square meters of GLA. Many of these anchors has the highest selling per square meter KPIs in Peru. For example, the Tottus Supermarket is one of the highest selling or the highest selling supermarket in Peru. And we believe that there's space for more intermediate and minor stores. And as you know, we are currently working in a very important master plan that improves the connectivity of the second floor and improves, importantly, the central area, which is currently a square that soon will become really something more similar to a park and not only a square. So we believe that this will be a very iconic property in the north part of the city of Peru. We're also moving the food court that was located in the first floor, just across -- just in the square I'm mentioning, and moving it to the second floor, a more traditional retail configuration, and bringing high-quality retail to the place where the food court was previously located. So we're doing several movements.

I would say that the improvements we have done in other assets, for example, in Parque Caracoli and Parque Arboleda in Colombia, they have had a very, very positive return rate. And same happens with the improvements we have done in Chile, for example, in Arauco Chillan. That reconversion has also very positive return rates. And in the case of MegaPlaza Independencia, the asset is suffering in the short term because of the construction happening in the property. But we are convinced that in 2 years or 3 years, we will be very thankful of having done this reconversion because we will have a much stronger asset in the future.

[Felipe Ballevona, analyst]

That's very helpful. Very good color. And following back on the first one, which tenants are you seeing that are performing better compared to the previous quarters?

[Eduardo Marchant, executive]

Okay. So this is, again, a very interesting question because during the pandemic, we saw different performance of the different categories. So during the start of the pandemic, the supermarkets, the home improvement stores had a very, very positive performance between others because they sell durable goods, and those durable goods had a great performance in the start of the pandemic because of the liquidity shock. However, afterwards, there was an adjustment in those same categories and there was a much better performance of other categories that were coming back such as gastronomy.

I would say that in this last year, we are seeing a much normal behavior between the different categories, which is what we saw before the start of the pandemic, really. And we see the different categories growing at similar levels. We don't see huge differences between the sales performance of different categories as we saw during the pandemic. I would say that especially in this last quarter, the categories of department stores and [indiscernible] and apparel had a very, very strong performance, but again, not much above the other categories. I would say, just a little bit above other categories.

[Lauren Brown, executive]

Thank you, Felipe. I will now open the mic for Marco from LarrainVial and after that for Jonathan from JPMorgan.

[Unknown Analyst]

Congratulations for the results. I have 2 questions. First, we've seen a steep increase in the revenues per square meter, especially in Chile. I would like to understand how much of those -- of that increase was driven for one side on better sales, on better contracts, and how much of that were increased by the new negotiation of contracts, because if I take a look on the revenues per square meter, for instance, in Peru and Colombia, the increases were not as steep as in Chile. That's the first one.

And the second one, I would like to understand what happened with the FFO without the index -- the adjusted [indiscernible] in the FFO because the FFO decreased if you take aside the index regulations, and increased 15% if you consider them. So I'd like to understand if that's going to be something -- it's going to be a trend that will persist in the coming quarters or it's something that's just a one-off for this quarter.

[Eduardo Marchant, executive]

I'll take the first question, and Francisco Moyano will take the second. Regarding the first question, it's a mix of 2 effects, I would say. First of all, we are being able -- we have been able to renegotiate the contracts at inflation plus 1%, 2% in Chile in the margins. Again, these are compound annual growth rates, and these are rates that we expect then going forward because of the step-ups we have in the contracts we sign. However, we are also changing the structure of our contracts, and we are negotiating a simpler contract that we call tarifa simplificada, where we have in one contract, one item only that we charge.

Basically, the older contracts, they had a rent revenue, they had a marketing fee, and they had a common expense. And the rent revenue was accounted as an income in the income statement. And the marketing fee and the common expense was a positive effect on the cost of sale of goods sold, so was not part of the income. However, with the new contract, 100% of this positive, let's say, altogether fee is accounted as revenue. And because of that, you have a higher revenue growth and also a higher growth of cost of sales because you don't have that positive effect of the marketing fee and the common expense. So that's the reason it's a mix of both; the fact that we are changing contracts into this tarifa simplificada contract and the fact that we are being able to renew those contracts at inflation-plus levels.

[Unknown Analyst]

One quick follow-up regarding the UF plus 1%, the negotiation of the tariffs. Are you considering this tarifa simplificada in this UF plus 1%, or that's aside of this tarifa simplificada? I'd like to compare apples with apples.

[Eduardo Marchant, executive]

Yes. That's a very good question. It's apples-to-apples. It's leaving that effect aside. So again, our commercial strategy is not having a large jump in terms of commercial conditions once we renew the contract. Our commercial strategy is to incorporate step-up clauses that year after year. And those step-up clauses are the clauses I mentioned that are being able -- we are being able to renegotiate those at inflation plus 1%, 2% at a compound annual growth rate basis, plus, again, the possible or potential positive impact you have once you renegotiate each contract.

[Francisco Moyano, executive]

And regarding the FFO, maybe Lauren, if you can pass to Page 12. In my presentation, I was talking about the FFO that is growing 20%, right? This calculation of the FFO takes into account several lines of the income statement, the EBITDA, the financial income, financial expense, current taxes and the associated accounted FFO. The idea of the FFO is trying to reflect the funds that are coming from operations. So one question that is usually in the industry, in fact, is whether in the case of Chile, you need to add the income for indexed assets and liability. If you can remember, that line is the adjustment of the debt that we have in UF in our liabilities. So this is not actually funds from operations, but it's part of how we change our liabilities in the balance sheet. If you consider the debt in the future, you will have to pay that debt at an increased level, then you need to account for this adjustment in the calculation of the FFO.

But if you think that the company will be refinancing the new debt in the future, then it's not part of the FFO. So since this questioning, what we do in our presentation is that we calculate both figures. First, the FFO that is the direct funds from operation, that is growing 20%, and then, the adjusted FFO that takes into account the adjustment of the liabilities, which are UF and Chile. So taking into account those adjustments, the adjusted FFO is decreasing 1%. But also, we need to remember that this quarter, in 2024, yes, the UF changed CLP 300 in Chile, while last year, changed only CLP 100. So it tripled the variation of the UF this quarter against last year. If you see the figures of the last 12 months, the adjusted FFO is still growing 26%. So I would consider that this quarter, we have a onetime effect of the UF with an increase of inflation in the last month that is hitting this adjusted FFO. But I think that in the future, we'll be seeing this ratio more normalize.

[Lauren Brown, executive]

Okay. Jonathan from JPMorgan.

[Unknown Analyst]

My question is on EBITDA margin. I recall that last quarter, the team mentioned that the gap between EBITDA margin and EBITDA margin excluding the promotion and common expenses was around 2 percentage points. So just wondering if this remains the same for this quarter. So perhaps the consolidated EBITDA margin would have been at 74%, 75%. And is this level, let's say, 74%, achievable in a year from now or maybe 2026, given the simple contract structure being implemented that Eduardo just mentioned, right, in the last question with tenants, mainly in Chile?

[Eduardo Marchant, executive]

Jonathan, thank you for the question. So let me split the answer. The EBITDA margin, of course, incorporates the NOI margin of each of the assets and also incorporates the overhead centralized expenses. And let me split the answer because I believe that from an NOI margin at the property level, we should be able to, gradually and at a slow pace, increase the NOI margin of the properties because of all the efficiency initiatives we are working at. We explained that last year, we started a zero-based budget process. That is a 3-year process. And as a result of this process, we have found some efficiency initiatives and efficiency opportunities that you will gradually see in the figures.

Regarding the centralized expenses, this is a business with very important economies of scale. And if you see the last incorporations or additions to our portfolio, these have been done without an important change in our management team. So when you consider that these new properties have an NOI margin of, let's say, 80% plus and you consider that you are not making important changes to the centralized management team, of course, the EBITDA margin increases. So the addition of these 2 effects are -- mean that we should have higher EBITDA gross margins going forward.

However, as I explained before, we're changing our contracts in Chile only into this tarifa simplificada, or simplified contract, where we account all the -- in all the contracts, we accounted in revenues, only the rent revenues, and marketing fees and common expense was a positive part of the cost of goods sold. So again, because of this, you will see a lower net EBITDA margin trend, and you will see a higher growth of our revenues, but also a higher growth of our cost and expenses with a neutral effect in the total EBITDA. So that being said, if you make a scenario of not changing the contracts in Chile, the net EBITDA margin would be between 1 percentage point and 2 percentage points higher than what you currently see.

[Lauren Brown, executive]

Great. Now I have some written questions from Joel at Itau. The first one is about Alegra. Alegra showed a drop in margin. Can you give some color as to why? Occupation is increasing, yet Alegra's NOI margin is deteriorating. How will the margin movement be in the next 12 months?

[Eduardo Marchant, executive]

Joel, Eduardo here. So Alegra is still in the process of maturing, I would say. We recently acquired the stake of our partner, which will allow us to do some improvement in the asset. So I would say, on one hand, you will see a gradual higher occupancy in the asset until it reaches 90-plus levels. Also, I would say we are working in some CapEx initiatives that will allow us to decrease costs. For example, we are working in a project of -- that we expect to deliver next year, regarding solar panels in the roof of the asset with very attractive return rates because of the conditions in Barranquilla and because Barranquilla is a city with a very high temperature, and therefore, in the asset, we use a lot of air conditioning.

And because of that, the return of that project is very positive. So going forward, I would expect a better EBITDA that continues to mature, both because of occupancy and because of some cost efficiency initiatives. Also, let me remember that the contracts of this asset were negotiated during the pandemic. And because of this, most of the contracts, they have all step-up clauses, but much -- with larger steps than normal, I would say. So several contracts, for example, started with variable only. And after a few years, they start to have a fix. And also, you will see some higher revenues because of that effect. Regarding your question of this quarter, it's mainly related to provision for [Foreign Language] bad debt provisions.

[Lauren Brown, executive]

And the second question is, how much of our total contracts have already changed over to the new tarifa simplificada, the new all-in contracts there?

[Eduardo Marchant, executive]

So it's basically 1/3 of the contracts -- but basically, in the margin, we are being able to renegotiate basically half. So regarding the flow of contracts, half. Regarding the stock of contracts, 1/3 approximately.

[Lauren Brown, executive]

Great. Thank you, everyone, for joining our call today, and we will see you in January for our fourth quarter results. Thank you very much, and have a great day.