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Edited Transcript of PARAUCO.SN earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 Parque Arauco SA Earnings Call

Santiago Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Parque Arauco SA earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Claudio Humberto Chamorro Carrizo

Parque Arauco S.A. - Corporate Manager of Administration & Finance

* Francisco Moyano

Parque Arauco S.A. - Corporate Finance Manager

* Tori Creighton

Parque Arauco S.A. - Head of IR

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Conference Call Participants

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* Jorel Guilloty

Morgan Stanley, Research Division - Equity Analyst

* Marcelo Garaldi Motta

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Parque Arauco S.A. Second Quarter 2019 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tori Creighton. Please go ahead.

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Tori Creighton, Parque Arauco S.A. - Head of IR [2]

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Good morning, everyone, and thank you for taking the time to connect to the Parque Arauco's Second Quarter 2019 Earnings Call. Presenting on our call today will be Claudio Chamorro, CFO; and Francisco Moyano, our Corporate Finance Manager.

To start off the discussion of the quarterly results, I'm going to pass the call over to Claudio.

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Claudio Humberto Chamorro Carrizo, Parque Arauco S.A. - Corporate Manager of Administration & Finance [3]

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Thank you very much, Tori, and good morning to everyone. And we are pleased to announce another good quarter with a solid operational result at Parque Arauco, similar to those reported in the first quarter of the year with double-digit revenue and EBITDA growth. Additionally, we have had another quarter full of exciting announcements of new projects, transactions and company recognition.

To begin with our financial results, we saw revenues increasing considerably by 10.9%, which was driven principally by new incorporation to our portfolio in Chile, an improvement in occupancy level in all 3 countries, above all Peru, which increased from 89.7% to 95% occupancy and Colombia, which increased from 88.5% to 92% compared to 2018. In line with our revenue growth, EBITDA also recorded year-over-year growth of 13.2%, reaching almost CLP 36 billion. As such, our consolidated EBITDA margin improved 145 basis points to 72.8%.

As I mentioned earlier, one of the important driver of our year-over-year growth was incorporation of new assets to our portfolio in the last 12 months. In addition to our Arauco El Bosque, Parque Angamos and Arauco Express Coquimbo, this quarter, we acquired asset center in Santiago, Arauco Express El Peñón, bringing us to a consolidated GLA of 1,061,500 square meters, a 4.3% increase from our second quarter of 2018.

As I said -- what I want to point out for this quarter is in terms of portfolio management in this quarter. We announced the savings of 49% of the company that owns Arauco Chillán to Ameris Parque Arauco investment fund through 2 transactions for approximately $54 million. This continues to be part of our strategy to diversify our financing sources. While we have been now sold participation in several of our mature malls in Chile. We are open to selling minority participation in other malls in Peru and Colombia, but we have been very disciplined, and the price has to be right. Though we don't expect to -- for this to happen in the short term.

Lastly, we've finalized the purchase of minority interest in our MegaPlaza malls for $174 million, increasing our own GLA by 126,000 square meters. We expect the new project Parque Arauco announced during this quarter, the acquisition of 52.5% of the regional shopping center project in Barranquilla, Colombia for approximately $36 million, with an option for the project of the remaining participation at the start of its fifth year of operation. We expect this project, called Parque Alegra, to be the leading shopping center in southern Barranquilla, and it should open its doors by the end of 2021.

Another update that is relevant to mention here is in July, following the quarter close, we received upgraded AA risk rating from Feller Rate and ICR risk rating agencies. Both agencies highlight Parque Arauco sales of minority interest in its shopping center as a driver for this upgrade since the sale allows Parque Arauco another avenue for funding that seems to reduce pressure on this leverage ratios. We shall always highlight our low financial cost as one of the key to our success and competitiveness in this industry. And this risk rating improvement helps to reinforce our position.

This concludes, I think, the overview portion of our presentation. So I will pass the call over to Francisco who will review our results in more detail.

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Francisco Moyano, Parque Arauco S.A. - Corporate Finance Manager [4]

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Well, thank you, Claudio. And hello to everybody. To start with the presentation, I would like also to highlight that for the second consecutive year, Parque Arauco was included in the FTSE4Good Emerging Market Index. This is something very important for us since we are trying to find ways to improve in ESG practices. And also, we were honored by Institutional Investor's Latin America where we received -- we were included in the ranking of the categories of Best CFO, Best Investor Relations Program, Best ESG and Best Website. So we were very honored. And also, we were very happy of having Claudio Chamorro with us as the Best CFO for Latin America.

Parting now to Page 5, we can review our key performance indicators. And I would like to highlight the EBITDA margin that improved 145 basis points. This is related with the ability of the company, that is continue improving the efficiency in the company. And also, you can translate that improvement to the adjusted FFO that improved 407 basis points. Regarding the NOI, we can see that our owned mall NOI is improving 13.1%, and also the NOI of the company is improving 13%. So they are both in line with the EBITDA that is also growing 13.2%. We are also -- it's very important to highlight that our controlling adjusted FFO is improving 24.6%.

Now parting to the GLA, you can see that our consolidated GLA is increasing, 4.3%. That is due to our new projects that we are including in our portfolio: Arauco El Bosque, Parque Angamos, AEx Coquimbo and AEx El Peñón. And with those new incorporations, we also were able to increase our tenant sales by 4.1%. That increase happened in all 3 countries, with Chile increasing the tenant sales, 3.2%; Peru, 3.3%; and Colombia in double-digit with 12.2%.

Now parting to the Page 6., regarding our tenant sales. We are showing, in this page, the evolution of the same-store sales and same-store rent for all 3 countries, starting from Chile. With Chile, we can see that we had a quarter with our same-store sales of minus 2.2%. We are facing a challenging consumption scenario in Chile that we perceive is still weak in the country. You can see the several indicators of the commerce in Chile, and they are flat or -- and showing weak consumption performance. But with this scenario, we were able to increase our rents, and we have a same-store rent of 3.8%.

In Peru, we had several rent contract adjustments that increased our same-store rent to 7% in a quarter where the same-store sales were 0.7%. This increase in same-store rent is due to a catch-up on several contracts that had some renegotiation, but we don't think that, that is something that we can repeat every quarter. So we feel that in the future, it's going to be around -- this figure is going to be around inflation. Regarding Colombia, we had a very good quarter. The figures are more stable since La Colina is maturing, but still we have very strong same-store sales and same-store rent figures, both of them above inflation.

Now parting to Page 7, we have the occupancy cost of the company. And all 3 occupancy costs for all 3 countries, you can see they are very stable. In Chile, we are increasing the occupancy cost to 11%. We still feel that those are reasonable levels for the company. And also, they were protected in some way because of the increase in sales in all 3 countries. The difference between the figures of Chile, Peru and Colombia is more related with a proportion of anchor stores that we have in all 3 markets.

Now parting to revenues in Page 8. We can see that the revenue is increasing 10.9%. The reason for that increase is mainly 3 factors. We had the new assets that we are adding to our portfolio. We also have increases in our occupancy, and we have currency appreciation mainly in Peru. All these 3 reasons accounts for approximately 1/3 of the increase of the revenues that we perceived this quarter. Now if you see the diversification of the revenue, we can see that our diversification is similar in 2019 as it was in 2018, although the base is growing in all 3 countries. So I would like to highlight that we are increasing our base in all 3 countries and maintaining this diversification but having a more strong portfolio.

In Page 9, we have the operational result. The EBITDA margin in consolidated figures is increasing, this 145 basis points I mentioned before. Those improvements, you can see that are -- were more in Chile and Peru, with Colombia decreasing a little bit for this quarter. As happened in previous quarters, the decrease in Colombia is related with the consolidation process that we are having with the teams in Colombia and preparing the company to continue growing in that country. The diversification of EBITDA is also very stable if you compare the figures with the previous year. Although it's relevant to say that even when in Chile we have less than 50% of our GLA, it accounts for more than 60% of our EBITDA.

In the following page, we can find the nonoperational results. Starting with the line of operational results, we have an increase of 9.8%. And then the financial income, almost double from the figure that we have in 2018. That is related with the amount of cash that we have in the company. That is almost also the double of what we had in average in 2018. The financial expenses increased a little bit from the figures of 2018. We think that, that is stable. And that increase is related with the bond that we issued in August 2018. We -- in this quarter also, we have an important effect on the share of profit of associated accounting that is related with Marina. That decreased the results due to the higher inflation that we had in 2019. That higher inflation affected Marina but also by Parque Arauco. And you can see that in the income or loss from indexed asset and liability, we had almost CLP 9 billion in 2019 from that effect.

The current taxes, we had an increased amount in 2019. That is regular business for us. We had a recognition of higher tax payments from previous years, but it's nothing that's outside the regular business for Parque Arauco. In deferred taxes, we almost have no effect this quarter, which was related with the impact of the same inflation in the valuation of our assets that had an impact from deferred taxes. Adding everything, we had a net profit decreasing 3%. And as I explained, this is basically due to the higher inflation that we had in 2019 in comparison with the inflation that we had in 2018.

In the following page, we find the result that we perceive from the equity investments. From this quarter, we are adding another company. In this part, we have Inmobiliaria Viña del Mar, which is Marina, which is the company with -- more important in this part of our financial statements, but we are also adding Desarrollos Panamericana. Desarrollos Panamericana is related with MegaPlaza. Those are the projects that we have in joint venture with the Wiese family, and they are mainly lands that need to be developed or sold in the future.

As you can remember, the purchase that we do of the 50% in MegaPlaza included all operating assets of that company. And we had -- and we pull aside all the projects, and we are still in our joint venture with the Wiese family to complete those projects or sold them in the future. The transaction with Wiese family, also I want to mention that the transaction was totally finished in July 2019, so the financial statement will include all the 50% of the operating assets of MegaPlaza from the third quarter of this year.

If you review the detail of the financial statement for Marina, you can see that the proportional revenue and the proportional EBITDA is increasing in double-digit from 2018, and that is due to the incorporation of the expansion that we had in Mall Marina, in which we added 13,000 square meters of the Mall in Viña del Mar. Although we are having this increase in revenue and EBITDA, the proportional profit is decreasing 17.6%. And as I mentioned, that is due to the higher inflation that we had in 2019 and also because we have -- we increased our debt in this company to almost USD 5 million, which is more than CLP 77 million in a proportional level of what we perceive from that CapEx.

The next page, we have the full consolidated income statement with a summary of all of what I have explained in the previous slides. Adding everything, as I mentioned, we have a net profit of 3% -- decreasing 3%, although we have an operational result increasing in 9.8%, with a gross profit also increasing 14.1%. The EBITDA is increasing 13.2% from an increase in revenues and less the important cost of sales and a minor -- and an increase of administrative expenses.

In this EBITDA, which have the effect of IFRS 16, which is making the cost of sales less comparable with the previous year since it doesn't have some of the leases that we perceived in 2018. And the other effect that we have is that our amortization and depreciation is increasing in CLP 160 million in 2019 due to this effect of IFRS 16. In amortization and depreciation, we are also adding more amortization from software that is coming from new initiatives that we are starting this year. So we're adding around CLP 300 million of amortization from software. Adding everything, we have a very positive quarter with EBITDA increasing 13.2%.

In the next page, we have the NOI and FFO reconciliation. The NOI accounts for the EBITDA of all the -- of our malls and also adds the NOI that is coming from the associates accounted, which is Marina and Desarrollos Panamericana. With that, as I mentioned also, we have the 13% increase in NOI. And from the last 12 months, we can see that the NOI is also increasing 10.4%. The FFO is flat, 0.8%, although this FFO has the effect of the inflation that I mentioned before. So if you review -- if we review the adjusted FFO, it doesn't have that effect and represents better the cash flow of the company. You can find that the adjusted FFO is increasing 19.4% from the increase in EBITDA and financial income, although compensated with the current taxes that is also increasing. The adjusted FFO attributable to the equity holders of the company is increasing 24.6%.

Now parting to Page 17. We can find the main financial indicators update for the company. And in this quarter, I would like to highlight that our net financial debt-to-EBITDA is 5.04% -- 5.04x, sorry. It's decreasing from 5.19x. That is due to the increase in cash that we have in the company from the sales of minority interest that we had in this year. And with that, also, we can perceive that there's less pressure on this ratio since we are making these type of transactions. The other ratio that I would like to highlight is the net financial debt to equity, which is 0.69x. Very much lower than the covenant limit that we have, 1.5x. This is the only covenant that we have in our debt currently for the company.

And with that, I would like to pass the call to Tori that is going to explain the results at asset level.

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Tori Creighton, Parque Arauco S.A. - Head of IR [5]

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Thank you, Francisco. So now we're turning to Page 19 for an overall look at our portfolio. And here, you see several differences compared to last year and even the last quarter. Notably, our total GLA has increased to 1,061,500 square meters, as Claudio mentioned earlier, with recent incorporation of several assets in Chile. Changes at the ownership -- percent ownership level, this quarter, we have the sale of Arauco Chillán, so we now have 51% ownership as opposed to 100%, which we currently -- or we had before. That brings our total Chile ownership to 77%.

And the other change that is important to mention is at MegaPlaza assets that we have, which represents about half of our portfolio. And there, the big difference is that we used to have 50% there. And with the purchase of the 50% interest in MegaPlaza assets, we've now increased that to 92% this quarter. But that should increase to 100% again by the third quarter of this year. That was due to several shares that were -- that needed an approval of a foundation's council.

And lastly, again, as a result of this transaction of the purchase of minority interest in MegaPlaza, we increased to 900 -- about 970,000 square meters of owned GLA, which is partially compensated by some of the sales of minority interest that we've had in our assets in Chile but still an increase of about 9% compared to last year.

Moving on to Page 20. We have a look at the asset level of all of our malls in Chile, Peru and Colombia. So in Chile overall this quarter, we had GLAs increasing by 10% due to the incorporation of new assets, as previously mentioned. We also have sales, revenues and EBITDA growing this quarter. In Parque Arauco Kennedy, we continue to see weak sales figures impacted both by the expansion project that is underway there as well as the lack of consumption at a national level that we've mentioned and have seen in our same-store sales figures. However, we do see traffic flow increasing to the mall this quarter, which signals a continued interest in coming to shop at our mall and therefore also continued interest on tenants' behalf as well. In turn, we see revenue increasing at Kennedy by 4.8% this quarter due to an increase in fixed rent revenue from tenants. One example of this is from our new food hall project that we opened in December of the past year called Bazar Gourmet that was not considered in the same quarter of 2018.

In Arauco Maipu, despite a decrease in sales, the mall had strong growth this quarter of 6.9% in revenues and 8.3% NOI due largely to an increase in occupancy, which increased from 96% to 99.6% in Arauco Maipu.

In Arauco Express, our strip center business, despite its small size in our portfolio, continues to grow rapidly. GLA increased by almost 20% year-over-year due to the incorporation of Arauco Express Coquimbo, an expansion that we had, as well as the newly acquired Arauco Express El Peñón, which is located in the Southeast sector of Santiago. In addition to this GLA increase, we see the strip center as our largest increase in occupancy this quarter. We grew 733 basis points, reaching 92%. That's contributing to large increases in sales, revenues and NOI.

Another line that I'd like to point out in Chile is our Arauco Premium Outlets, which is one of our other diverse -- or reformats that we have in Chile. And it also had a very successful quarter with growth across the board driven by increases in sales in almost all of those outlets.

And finally, in Chile, we have Arauco Coronel, which we note an increase above inflation in tenant sales of 11.4%, largely concentrated in small retailers which grew 17% year-over-year and entertainment which grew 60% year-over-year. Again, as a whole, a successful quarter in Chile. And as we mentioned in our results last quarter, there is an impact from IFRS 16 that we do see in EBITDA on a mall-by-mall level. So we see that in some of those where the mall is on leased properties.

Continuing to Peru. Our GLA remains largely unchanged, with the only change occurring in our owned GLA because of the incorporation of MegaPlaza assets. This year, we had year-over-year growth in sales of 3.3%, and revenue is growing solidly by 7.1% and NOI growing 12.9%.

In MegaPlaza Norte, due to an increase in occupancy levels which reached 98.7% this quarter, we see sales growing by 1.6%. But in particular, note the solid growth in revenue and NOI that's notable.

Another asset I'd like to point out is Larcomar. This quarter was a very good one for Larcomar. Revenues increased by 16.7% and NOI by 15.2%. And here, it's important to note that we have been working on a change in tenant mix, and we're starting to see the fruits of that. We've gotten several new tenants in which we've been able to increase rents for those new leases.

And then other large changes that we have in our Peru assets are in MegaPlaza Huaral and MegaPlaza Villa El Salvador II which, during the last 12 months, we've added an entertainment section called MegaPlaza in there, which has increased their GLA by about 5,000 square meters in those cases and also contributes to the increase in sales, revenue and NOI.

Finally, in Colombia, we've seen very strong results, just as we have in 2018. We're still growing in double digits. And again, this growth is largely driven by Parque La Colina, which is now in the third year of operation. In Parque La Colina, we see sales and revenue increasing by mid-single digits due to increases in those sales, largely in the department stores and entertainment sections. And in Parque La Colina, we reached 97% occupancy and just continues to show double-digit growth across the board, hasn't seem to slow down very much.

And finally, we have Premium Arauco -- or Premium Outlet Arauco in Sopó. And here, we see notable improvements in occupancy. Last year, in this quarter, it was 42.9%. In this quarter, we reached 57.1%. It's still a bit of a slower maturation process, but we're seeing significant sales and revenue growth improvement in high double digits. There is the one-time effect on NOIs, however, due to accumulated expenses that were paid during this quarter, but we should not continue to see this have an impact in the future quarters of this year.

Moving on to Page 21, we see the different occupancies by country. And as Claudio had mentioned, one of the drivers for our overall success this quarter was due to an increase in occupancy across the board. In Chile, it's a very slight change. But in Peru, it was significant of 525 basis points. And in Colombia as well, 355 basis points of an increase.

The other thing I'd like to mention here is that -- and just to reiterate this, and we mentioned last quarter as well, is that in our monthly tenant sales per square meter and monthly revenues per square meter calculations, we do have a change in how we were calculating this, making it more accurate. We improved that calculation for this quarter as well as last quarter so that you can see the difference as being a real comparison. Now how we calculate it is taking the total sales for each mall during the quarter divided by the total square meters that are generating sales or revenue during that quarter as well. That way, we're not comparing square meters that -- sorry, therefore, common spaces are not generating income or sales.

I'd like to continue now to Page 24, skipping those of our last 12 months' results and going to our future development pipeline. Just to mention here, again reiterating that we had a few changes in this quarter that from -- compared to the first quarter of 2019, which is the incorporation of Parque Alegra, which is the acquisition of a commercial shopping center, a large commercial shopping center in Barranquilla that is currently under construction and set to open by the end of 2021. But this is a 50,000 square meter mall which will have several large anchor stores, movie theater. And we do expect it to be a leader in the southern Barranquilla center of the city.

Another incorporation or small change is in Puerto Nuevo Antofagasta, which we announced last quarter as being incorporated for the second quarter. That was delayed a bit, and we will have -- we'll see the first incorporation of Puerto Nuevo in the third quarter of 2019, which will be approximately 2,200 square meters. This project, in case you don't remember, is a strip center format, the mix use development of 4 towers and we have purchased during our acquiring the first 3 floors of each of those towers. And so as the towers are built, we will acquire those. That's why it says there in estimated date, it has various dates between 2019 and 2022.

And finally, projects incorporated in 2019. We have, again, the acquisition of MegaPlaza and as well as Arauco Express El Peñón.

With that, I'll move on to Page 27, where we have some of our updates of the quarter in -- across Chile, Peru and Colombia and at a consolidated level. Francisco already mentioned -- Francisco and Claudio mentioned several of the recognitions that we've had. But one of the commercial achievements that's worth mentioning is that in June we celebrated the reopening of Victoria's Secret in Parque Arauco Kennedy. They previously had a store there and was reopening with a large increase in GLA. This is the brand's only store carrying their full product line in Chile and is the largest store in Latin America. So this is a big commercial success and has generated a lot of interest in the local market.

And Page 28, just in terms of 2 sustainability initiatives that we have this quarter, one of which is in Colombia where we created an organic waste management plan for compost that will be donated to a local university in Pereira. It will be used for their greenhouses and gardens to produce organic foods and creating a circular economy system that is actually pioneered to the region in Colombia. This project has the potential to produce almost 2 tons of compost each month, and we're looking for ways to increase this as time goes by.

And finally, one of the other initiatives was the development of a design and -- sustainable design and construction manual in Chile but essentially design and construction. When you're in those processes, it's really important to have the vision, a sustainable vision from the start of those projects, and we have established metrics now and practices that will be incorporated in our future projects in Chile.

On Pages 29 and 30, we have our case study for the quarter, which we decided to do on the growth story of MegaPlaza Norte, which we considered really relevant considering the acquisition of minority interest in our MegaPlaza assets. And of those assets, MegaPlaza Norte continues to be the -- it was the first that was incorporated and arguably the most important in terms of its contribution to GLA, revenue and EBITDA.

So just to give a bit of an overview, obviously, if you are interested in more information, it's there on both of those pages. But essentially, MegaPlaza market, when we, Parque Arauco, incorporated itself into -- expanded into Peru in 2006 with the acquisition of part of Inmuebles Panamericana. And at that time, Inmuebles Panamericana, which was the owner of MegaPlaza, only had MegaPlaza Norte which it opened in 2002 and at that time was a regional mall with less than 60,000 square meters of GLA. But even at that time, due to its prime location in the Independencia District, it had received over 2 million visitors each month.

Then in the next several years, it had 2 major expansions which got its size -- by the end of 2013 got to a size very close to its current size of 112,000 square meters. And currently, MegaPlaza Norte, just to give you an idea of the composition of the mall, it is one of the biggest contributors that we have to our EBITDA. We've seen its growth in EBITDA growing 102% in the past 8 years and revenues growing 88% in the past 8 years. So it's had a very important growth story in terms of GLA but also in terms of its EBITDA and revenues.

Again, right now, it has currently 5 anchor stores. So it is a very large mall with a supermarket, 3 department stores and a home construction store. They represent approximately 50% of the overall mall's GLA. The remainder is distributed with about 25% for smaller retailers, 15% for restaurants and entertainment and 10% for other stores. But again now with full operational control, we're looking to continue to bringing it in line with our other major malls like Parque La Colina and Parque Arauco Kennedy and it can continue to improve the tenant mix so that we see this growth rate continue in the next 5 to 10 years.

And with that, we wrap up the presentation portion of our call, and we turn it over to question and answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jorel Guilloty with Morgan Stanley.

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Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [2]

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I have 2 questions. So my first one is on the sales versus rent growth dynamics, particularly in Chile. It seems like the sales declines are easing up and -- but at the same time you had your rents grow for the past few quarters, which has seemingly driven occupancy cost higher. To a certain degree, that shows quality of assets, pricing power. But how much longer do you think you'll be able to push rent growth if you continue to have another year or so of weak sales growth?

And then the second thing I just wanted to pick up on, on the case study, you speak about MegaPlaza Norte and you talked that -- about the challenges you're facing in improving it. But I just wanted to understand more specifically, what are the plans? I mean you mentioned that there's 5 anchor stores, but is the plan to basically re-tenant those? Is the plan to expand it and go towards more small shops? Just wanted to get more of an idea of your plans for this asset now that you have full control over it.

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Francisco Moyano, Parque Arauco S.A. - Corporate Finance Manager [3]

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Okay. Thank you, Jorel. I'll take the question of sales and rent. So we have in Chile and Peru, this -- more in Chile, all right, the same-store sales negative. Although, this quarter we had a less negative figure. We had 4.2% in first quarter and now 2.2%. We still see a very challenging scenario in Chile, and we still see that the consumption is weak. And all the indicators from analysts in the market are saying that the consumption is flat or decreasing. So although this quarter was less negative than the previous one, we are very cautious about what is going to be happening in the following quarters. And we don't still see a signal to this to change.

Regarding the rents, we have a rent contract that we can have some adjustments. There are set -- adjustments that are set in the contract that happens every -- some months or years. And with that, we haven't experienced much pressure to change our contracts, and we are being able to apply those adjustments. And with that, our rents are growing in Chile and in Peru, 3.8% and 7%. That is a catch-up of -- so as I mentioned, it's a catch-up of rents that are included in our contracts. And we see this more as a regular business more than something exceptional for this quarter. And with that, we cannot say that this is going to be -- that we are going to be able to repeat that on the following quarters. So we are also tracking the sales and we hope this situation in Chile also in Peru.

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Claudio Humberto Chamorro Carrizo, Parque Arauco S.A. - Corporate Manager of Administration & Finance [4]

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And regarding the second question, this is Claudio Chamorro, about MegaPlaza Norte. As you know, we are now controlling those assets, and we are in the process. And what would happen during the third quarter of 2019 is we are merging -- we are in the middle of merging of the 2 companies and that is a process that is going to happen. And this is the focus of the company today is try to do that good or great in that part of the area. We still don't have a plan, a business plan asset-by-asset in the new asset. So we don't have any further news about what is the plan with MegaPlaza Norte. We really believe it's a great asset. It is doing well in the Peruvian environment. But again, still we are now setting up our development team in Peru and one of the main mandate that they have is to have a plan for every asset that we have there. So still, we don't have news for what is going to happen with MegaPlaza and what is the real plan. Probably, in the further quarters, we will have something, a more clear answer for you.

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Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [5]

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A follow-up, if I may. So the rent increases for Chilean portfolio seems to be a result of rental step-ups. But at some point, I would think if you have occupancy costs growing because sales are going down, I mean would you still have that pricing power going forward, do you think?

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Claudio Humberto Chamorro Carrizo, Parque Arauco S.A. - Corporate Manager of Administration & Finance [6]

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We believe -- I mean today, is a scenario where when you have -- the relationship with the tenant is very good, is in very good shape. I know that the situation because the more -- it's not -- I mean part of the scenario is when you heard people from Central Bank, they said that the consumption is strong compared -- and that is what they report in their last report in June 2019. However, when you see the sales of the retailers, this is a kind of a different story. And -- but even in that scenario, we do see, I mean, a good relationship with our tenants, and we don't see a strong complain from them. We are more in the regular business relationship. So this is part of -- so in that regard, increases in rent, is more like what the contract says, it's more on a regular basis. We are not seeing something very different from that.

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Francisco Moyano, Parque Arauco S.A. - Corporate Finance Manager [7]

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And also maybe I can add to that answer is that we have seen the traffic in our malls increasing. And we also have our occupancy levels high and strong. So we have a good relationship with our tenants, and probably the strength of our malls is what is, we think, driving our rent growth. And with that, we think that this situation is not a risk today in our operation.

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Operator [8]

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Our next question comes from Marcelo Motta with JPMorgan.

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Marcelo Garaldi Motta, JP Morgan Chase & Co, Research Division - Research Analyst [9]

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Two questions as well. Just a follow-up on Jorel's questions. I mean do you see a level for occupancy cost in Chile where you think that the tenants will start to be concerned about rental prices? I know that probably when you look at your portfolio, you have tenants paying higher than the reported occupancy cost and other tenants paying lower than that. So when you look at those top contracts, I mean, do you think that there is a certain level where tenants start to complain? And the second question is regarding the G&A, the administrative expenses for the company during this quarter. I mean they were growing above the level of net revenues, pressuring a little bit the margin. So just wondering if there was any type of one-off here or if we should expect this level to remain during the year.

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Francisco Moyano, Parque Arauco S.A. - Corporate Finance Manager [10]

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The occupancy rate for us is in -- also in reasonable level. We are not having any complaints from the tenants, as I said before. We are having the occupancy rates calculated with all the tenants. And our -- and there are several tenants that are included this quarter and were not included in the previous quarter, they are doing very good in our malls. So with that, we have our sales increasing for those tenants. And today, we are not having the pressure to decrease our rents or to renegotiate our contracts. We understand the point that you are raising and what Jorel said also. But today, we are not having any indicator or signals from the market or our relationship with the tenants that is saying that this is going to be a risk in our operations.

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Claudio Humberto Chamorro Carrizo, Parque Arauco S.A. - Corporate Manager of Administration & Finance [11]

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Regarding to your second question, Marcelo, the growth in the SG&A is 35% in this quarter compared to the second quarter of '18, and 62% of that increase is explained by an increase in amortization and depreciation. And part of that is because of the new accounting rule, which is the IFRS 16, which according to that we need to -- and we explained it, I think, in a little bit more detail in the last call, in the first quarter call. And basically, this is the change on how we account for the land that we'll rent. And we have had now a new asset in our balance sheet, which is our right-of-use of that land, and the amortization of that right-of-use is in the depreciation and amortization. So -- and that is, I think, as I told you, is explaining pretty much of 53% of the total of this 34% increase in the SG&A.

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Operator [12]

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(Operator Instructions) Okay. If there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Tori Creighton for any closing remarks.

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Tori Creighton, Parque Arauco S.A. - Head of IR [13]

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I just want to thank everyone for joining us on the call today, and wish everyone a happy Friday. Thank you.

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Operator [14]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.