Earnings Call Transcript - IRS Q2 2022

Santiago Donato, Investor Relations Officer

Good morning, everyone. I’m Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the Second Quarter of Fiscal Year 2022 Results Conference Call. First of all, I would like to remind you that both audio and a slide show may be accessed through the company’s Investor Relations website at www.irsa.com.ar by clicking on the banner webcast link. The following presentation and the earnings release are also available for download on the company website. After management remarks, there will be a question-and-answer session for analysts and investors. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company’s financial and operating performance. All projections are subject to risks and uncertainties and actual results may differ materially. Please refer to the detailed note in the company’s earnings release regarding forward-looking statements. I will now turn the call over to Mr. Eduardo Elsztain, CEO.

Eduardo Elsztain, CEO

Welcome to the Second Quarter of the Financial Results of Year 2022 Results Conference Call. I am very glad to be hosting this webcast and sharing with you all our investors and the analysts, the main highlights of IRSA for the period. A new IRSA merged with IRCP and consolidated into only one real estate company, which brings me closer to the operation again, and with the satisfaction of having the approval of the Costa Urbana project. This combination is incredible. The company consolidation of both entities will save a lot of costs, operational costs, and tax costs. We think it’s an incredible achievement, and the fact that we got, after 20 years, the approval of a project that came to the legislation more than 5 times is an incredible achievement of the group that shows resilience, patience, and persistence in pursuing the project. I also believe that this year is going to be a very special year. Even though it’s not common for all investors in Argentina, I see that this cycle of liquidity in the world going into commodities will really affect our market positively. I want to pass this now to Matías, our CFO, who will go through the details. Thank you very much again for joining us today for the IRSA webcast.

Matías Gaivironsky, CFO

Thank you, Eduardo. Good morning, everybody. We start the presentation on Page 3 with our merger process. The merger, as you know, was approved in December at our shareholders meeting with the approval of 99.88% in IRSA and 94.57% in IRCP. The process is ongoing, and we are surprised by the speed of the process so far. In January, we presented the Definitive Merger Agreement and all the necessary information to the SEC and the CNV locally. We are awaiting final approval that will take place in the coming months to exchange the shares of IRCP for IRSA shares. We expect that to happen probably in the next 2 to 3 months. Regarding the outstanding shares post-merger of IRSA, currently, we have 658 million shares outstanding. We will issue 152 million new shares because of this exchange, and after the merger, the outstanding shares will be 810.1 million shares of IRSA. Remember that ADRs trade at 10 common shares per ADR. The company structure after this merger and how IRSA will look going forward includes the rental segment that we used to have at the IRCP level with shopping malls and offices, now we include hotels as well. We will have a development segment that will be driven basically by Costa Urbana and other mixed-use land banks that we used to have in IRCP and IRSA. Finally, we will have the financial segment with our stake in Banco Hipotecario, with a 30% stake. We used to have the international segment, but in December, we concluded the disposal of our shares in Condor. Condor sold all of their hotel portfolio and distributed a dividend; IRSA collected $25.3 million from that dividend, along with some loans that IRSA had extended to Condor. Now, we essentially don’t have any international assets except for minor assets or one project abroad. If we move to Page 5, we can see the evolution on the operational side of our shopping malls. Regarding our stock, we’ve finished the expansion of Alto Palermo, now we have 335,000 square meters of GLA. The occupancy remained stable compared to the previous quarter; when we analyze it against pre-pandemic levels, we are below 95%. We did experience the departure of some major tenants like Falabella, Walmart, and a new home appliance store that closed their operations. If we eliminate the weak spaces, the occupancy will be around 95%. So, we will be working on replacing the large spaces with probably smaller proposals to recover the occupancy going forward. If we look at same-store sales in real terms, we are very happy that for the first time in many quarters, we surpassed inflation, concluding the quarter with a real increase of 7.6% above pre-pandemic levels. Here, we are not comparing with the previous year because the operations were almost closed at that time. So all these comparisons are against pre-pandemic levels, and we are very encouraged by that. We see that visitor numbers are recovering, although we still lag behind pre-pandemic levels, so that gives us more room to grow as we move forward. Next page, we see here the expansion of Alto Palermo; we finished it and opened the new spaces. We are pleased with the progress, as we have fully occupied all the available spaces with world-class tenants and important local tenants. The total investment in the expansion was around $23.5 million. There is still $3 million pending, but we are also expanding the movement of the food court into a new food hall and replacing the older food court with new stores. If we move to Page 7, we can monitor the evolution of our office buildings. Over the past years, we have been striving for quality improvements, and currently, we have approximately 109,000 square meters in our portfolio, which is consistent with previous quarters. We have been selling some floors, most recently the Boston Tower and the Bouchard Tower, and we have opened the 200 Della Paolera building, where we have begun selling some floors as well. Now we hold 109,000 square meters. In examining lease rates, they remained stable at $25 per square meter. However, the occupancy is lower than the previous year at 76.7%. This drop in occupancy is due to the fact that the two buildings sold last year were fully occupied, which has impacted the vacancies we are currently facing due to the incorporation of the Della Paolera building, which is not fully occupied. Regarding the B buildings, specifically the Suipacha building, it is completely empty, and we are working on trying to sell that building in the coming months. On Page 8, we can see the disposals we completed during November and December; we sold four floors of the 200 Della Paolera building at excellent prices, receiving $1.2 million for an average of $8,600 per square meter using the official exchange rate. We still have 20 floors with 24,000 square meters available in this building, which we consider to be one of the best in Buenos Aires. On Page 9, regarding hotels, our industry was significantly affected by the pandemic. While there have been some openings in tourism in Argentina at the end of last year, the occupancy rate in Buenos Aires hotels remains low at 36%, though we are optimistic about future recovery. In the Llao Llao hotel, we have seen a large evolution and considerable recovery compared to pre-pandemic occupancy levels; however, our operations have been affected by closures of some rooms for development. Yet, we anticipate significant recovery for the Llao Llao hotel. One of the most significant events in the past 20 years for the company is the approval of the Costa Urbana project. We are extremely pleased with this approval. It is a major advancement in the company's history and we expect this project to drive future growth for our company. Costa Urbana covers 70 hectares adjacent to Puerto Madero in Buenos Aires. On the right side of the graph, you can see this area as a natural expansion of Puerto Madero, one of the best neighborhoods in the city. The City Congress has finally approved the project, and in the agreement reached with the city, IRSA will donate approximately two-thirds of the land for public use, such as parks and other public spaces, in exchange for a construction capacity of nearly 900,000 square meters that will involve various types of usage including homes, offices, shops, services, education, and entertainment, effectively creating a new neighborhood in the city. We have also committed to contributing around $5 million in cash and bonds—$2 million in cash and $3 million in bonds—in the coming months, along with an investment of approximately $40 million in infrastructure and roadworks for the project over the next few years. The project's location is premium, and it represents one of the few plots of land available in Buenos Aires with such potential. We are very excited about this new development. On the current stage of the land, as shown in the accompanying images, it had remained empty for nearly 20 years. The renderings illustrate the scale of the project, which will require many years to develop. We will be working in the near future to finalize and structure the project as we move forward. Now, regarding the financial results, we are presenting our first six months of results since merging with IRCP. Essentially, the primary change is that previously we eliminated the non-controlling interests in IRCP, which are now fully consolidated under IRSA. For the six-month period, we finished with a gain of ARS 25.5 billion compared to a loss of ARS 1.7 billion in the previous year. This change stems from various impacts, the most significant being the change in fair value with a gain of ARS 22.4 billion compared to almost ARS 14 billion last year, primarily related to the approval of Costa Urbana. After this approval, we reevaluated the land value to $360 million compared to the previous valuation of $210 million. Beyond fair value changes, we also experienced a gain of ARS 4.3 billion in net financial results, which I will elaborate on later. The income tax reflects a deferred tax of ARS 4.5 billion related to fair value changes; whenever we reevaluate land, we recognize a deferred tax that indicates potential tax liability upon the sale of the land. In last year’s financials, we also had a significant impact from the deconsolidation of an investment in Israel, leading to a loss of ARS 10.7 billion. This is no longer applicable to our current results. If we move to Page 15, we see the adjusted EBITDA by segment. The shopping malls saw a significant recovery, with a 227% increase, reaching ARS 4.3 billion for the six-month period, although it's still below pre-pandemic levels of ARS 5.5 billion. In contrast, results from the offices have declined in peso terms due to revenues being tied to dollars at the official exchange rate. The devaluation of the official rate was lower than inflation, resulting in substantial impacts in peso terms. However, in dollar terms, the difference is notable. The hotel segment is showing recovery compared to last year, but remains significantly impacted when viewed against pre-pandemic standards. In terms of dispositions, we've sold only 4 floors of office buildings compared to the previous year when we sold one entire building and half of another. On Page 16, we detail the financial results in dollar terms. The shopping malls show significant recovery, reaching $25.1 million in the last quarter, approaching satisfactory EBITDA levels once again post-COVID. For the office segment, results are more or less consistent with last year. This stems from the sale of certain square meters generating $1.6 million of EBITDA while new developments produced $2.9 million. However, vacancies accounted for a $1.6 million difference, and rental price fluctuations led to a $0.5 million decrease in EBITDA. Moving to Page 17, we can track our net financial results; we finished the six-month period with a financial gain of ARS 4.3 billion. This is primarily related to the evolution of the exchange rate in Argentina, where the devaluation was only 7%, while inflation for that semester reached 20%, indicating a real appreciation of the pesos at 11%. This resulted in gains of ARS 6 billion from net foreign exchange differences. We also saw a decrease of 25% in net interest losses, which is attributable to reductions in our debt as well as the benefits from lower devaluation rates compared with deflation. On Page 18, we present our net asset value at the official exchange rate; here we categorize effects of discrepancies between the blue chip swap and the official exchange rate. Certain portions of our portfolio are recognized in pesos according to the blue chip swap, while others are at the official exchange rate. Thus, for some figures, if you wish to equate them using blue chip swaps, you must divide by two. For the office and land banks, differences occur as the valuation from the approval of Costa Urbana generated an additional $150 million compared to the official exchange rate; equivalently, that's near $300 million. We've successfully reduced net debt to $501 million and aim to decrease it further, remaining committed to a target of $470 million. Lastly, regarding our debt profile, we observe a devaluation of net debt on a consolidated basis between IRSA and IRSA commercial properties, resulting in a significant reduction of debt from $755 million pre-pandemic to $501 million, representing a 34% reduction. We are pleased with this outcome. Debt amortization is primarily scheduled within the 2023 fiscal year, and we are working on extending debt tenures while maintaining conservative levels concerning LTV at 21%. We expect to see improvements in EBITDA numbers moving forward. With that, we conclude the formal presentation and now open the floor to receive your questions.

Santiago Donato, Investor Relations Officer

Now it’s time for the Q&A session. The first question comes from someone who is hard to identify. Hello, thanks for the call. Can you provide a breakdown in dollars of the last 12 months EBITDA, which amounts to $83.5 million among shopping malls, offices, hotels, and sales?

Matías Gaivironsky, CFO

Yes. Thank you, Huan. The breakdown is we generated around $54.7 million in malls, $18.4 million in offices, $2.5 million in hotels, and $11.6 million in sales and development.

Santiago Donato, Investor Relations Officer

As a follow-up, could you provide more color on the tax impact of the revaluation of Costa Urbana? It creates a deferred tax, but not an immediate cash tax impact?

Matías Gaivironsky, CFO

No. Not at all. All the effects of the revaluation of properties and all the fair value of our investment properties are not generating a tax impact or cash impact—it's solely an accounting rule that necessitates recognizing deferred taxes in the event of sale. However, we also have rollover options; if we sell, we can reinvest that money in a new project, so we can defer tax payments. Therefore, it's more a tax impact than a direct cash impact.

Santiago Donato, Investor Relations Officer

Next question is from Gordon Lee from BTG Pactual.

Gordon Lee, Analyst

Hi, good morning. Can you hear me?

Matías Gaivironsky, CFO

Yes.

Eduardo Elsztain, CEO

Yes. Perfect, Gordon.

Gordon Lee, Analyst

Thank you. Good morning. Thank you very much for the call. Just a question on Costa Urbana, and I know it might be a little bit early to ask this question, but do you have a sense of when we might begin to see capital being deployed towards the development of that project? Do you have a master plan that at some point you will share? Have you selected your partners? How will you finance it? I know it’s early days yet, but I was wondering if you could at least provide us a sense of timing for some of these aspects.

Matías Gaivironsky, CFO

Thank you, Gordon. As you can imagine, we have been working on this approval for 20 years, so all our team's focus was on securing that approval. Since we lacked certainty, there is work to be undertaken moving forward now. The final approach to developing this project is still being defined. It is a massive undertaking, and absorption for a project of this magnitude won't happen in just a year or two. We'll need to develop it in stages. Reflecting on how we've done development at an IRSA level previously—typically, we entered into swap agreements where we provided land and someone else developed it in exchange for square meters. In this instance, we may need to do some of the initial developments ourselves since it’s currently an empty plot and we need to attract interest to the project. This year, we need to pay the city about $3 million, and the infrastructure commitments of around $40 million will likely be spread out over the next 2 to 5 years. We do not need to tackle everything at once, but we will keep you updated as we define the development strategy further.

Gordon Lee, Analyst

Perfect. That’s great. And congratulations, by the way; that’s phenomenal news on that approval. Thank you.

Matías Gaivironsky, CFO

Thanks.

Santiago Donato, Investor Relations Officer

Thanks, Gordon. Well, here, Alberto from BTG also is asking, can you give us more color on what exactly drove the revaluation at Costa Urbana to $695 million? It was a $300 million increase at the official rate, but I think you mentioned?

Matías Gaivironsky, CFO

Well, basically, Alberto, I prefer to assess this using the blue chip rate rather than the official one. The land was valued in our books at $210 million and now stands at $360 million. The primary driver behind the change is the project approval; before, we lacked clear directives on what to do with the land. Now, given the construction capacity of nearly 900,000 square meters, we've factored that into the land's valuation. The analysis relies on an average cost related to land norms in the area. Typically, the finished units will dictate the land price—let's assume a finished unit could be valued at $3,000. You analyze the land's incidence, which typically varies around $400 per square meter of land. This pricing reflects both the context and location in the City of Buenos Aires.

Santiago Donato, Investor Relations Officer

The next question I will take is from Matías Castagnino and also from BCP. A follow-up on the performance of shopping malls and office buildings. Have you seen any significant change in sales traffic and occupancy in January and February compared to 2021? Did the Omicron variant have any significant impact on results in January and February?

Matías Gaivironsky, CFO

Well, we saw a remarkable increase in sales for December, an outstanding month. When comparing January and February, however, these months comprise a holiday and vacation period in Argentina, and the Omicron wave certainly had some carryover influence on our sales figures. We'll have clearer insights once we disclose March numbers, but yes, we've noted impacts from these two factors: the holiday season and the Omicron variant, which spiked significantly in January.

Santiago Donato, Investor Relations Officer

Did you use the proceeds from the Condor liquidation to pay down debt using the blue chip swap rate?

Matías Gaivironsky, CFO

Not yet. The figures you see in December do not include that effect; we still have the Condor proceeds in cash.

Santiago Donato, Investor Relations Officer

There is a query regarding which price you would consider when selling the Suipacha building, but we generally do not disclose such price points; we will announce it once a transaction is concretized. Now moving to the next question. Regarding the office segments, what do you anticipate after the COVID-19 pandemic? At the Zetta Building, the occupancy increased by 8.7 points. Could you elaborate on rental activity?

Matías Gaivironsky, CFO

We expect to observe a gradual increase in the office segment, given that certain companies have adjusted their office sizes. As such, we anticipate seeing new activity emerge going forward. A lot of the adjustments have already happened. We hope to report better occupancy rates in the future; premium building prices have remained stable at levels between $25 to $30 per square meter, which aren't being heavily affected by market conditions. However, the lower-tier buildings are facing more concerns—significantly decreasing the price per square meter. That shift may clarify decisions for companies to transition from A-Grade to B-Grade buildings at much lower rates. In the premium segments, we do not anticipate major issues moving forward.

Santiago Donato, Investor Relations Officer

I have one last question from BTG Pactual. Could you comment on expectations for further sales of office floors in upcoming quarters?

Matías Gaivironsky, CFO

Well, Mariana, typically we don’t provide guidance on these kinds of transactions; we announce when we execute them. However, I can mention that our strategy remains unchanged. We believe if we can attain attractive prices per square meter, we will continue selling. There's a genuine opportunity for new construction at lower replacement costs than our current sales prices. Therefore, as long as there is solid demand for offices, we will keep pursuing this pathway.

Santiago Donato, Investor Relations Officer

Are there any additional questions? If there are no more questions, we will conclude the Q&A session. I will now turn back to Matías Gaivironsky, CFO, for his closing remarks.

Matías Gaivironsky, CFO

Well, thank you, Santiago. This was a very exciting quarter marked by two major developments—Santa Maria and Costa Urbana, along with the merger. We are pleased now that the structure is much clearer, which we believe will enhance the liquidity of our shares and also generate operational and tax synergies. We are truly excited about Costa Urbana; this phenomenal news for the company is expected to facilitate growth for the next 10 to 20 years. We believe we are successfully overcoming the pandemic’s impacts, and with a return to normal operations, we will once again achieve robust cash levels in our malls. The hotels are on the mend, so we maintain an optimistic outlook for IRSA’s future. Thank you very much to everyone for participating in this call, and we look forward to seeing you next quarter in May. Thank you very much.