Earnings Call Transcript - IRS Q4 2023

Santiago Donato, Investor Relations Officer

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the Fiscal Year '23 Results Conference Call. First of all, I would like to remind you that both audio and slideshow 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, for his opening remarks.

Eduardo Elsztain, CEO

Thank you very much, Santi. Welcome to our annual year 2023 results conference call. I am very glad to be closing another great year for IRSA, one of the historic ones. The rental business had a great performance, mainly in shopping malls and hotels. They both increased sales. In terms of assets, we sold office assets at very good prices in terms of pesos and in dollars. We made progress to launch our most ambitious project, Costa Urbana, which is a project that we have had in the portfolio for more than two and a half decades, and we achieved permits after long patience. We successfully concluded a debt refinancing process, which positions us favorably for a new phase of growth in the coming years. I would say that the level of reducing debt has been one of the most impressive in three and a half years that we have been running the company. In terms of revenues, we increased revenues and occupancy in the three rental segments: in the malls, in the offices, and in the hotels. We have been very active in real estate transactions. We acquired assets, including a building in an auction on Paseo Colon property for $7.8 million, at a price which is really liquidation price. And we have been selling more than $161 million, including nine floors of the tower of the building we built in Catalinas. After the fiscal year finished, we sold the first building we bought in IRSA, Suipacha building to the University of CEMA and sold 50% shares of Quality, which owns the warehouses in San Martin plot. As mentioned before, we have been very active in the financial front as well. We concluded the refinancing debt process, including the exchange of the Series II notes for $360 million and reduced our net debt by 67% since year 2020. Today, net debt is $247 million, which will be explained in more detail by Mati later. We also lowered our average financing cost of all the bonds, which has been incredible. Not only did we reduce costs, but we also received an upgrade in credit ratings. Additionally, we showed value to our shareholders by distributing dividends twice this fiscal year for a total amount of $124 million. We repurchased our own shares, acquiring approximately 1.7% of the capital stock in buyback programs. In our last Board meeting, we called for a shareholder meeting to distribute up to ARS65,000 million in a new dividend and distribute the treasury shares that we bought back in the program. After mentioning all the main highlights, I want to emphasize that IRSA has a long-term management team that operates in an environment of inflation and a currency-printing economy. I repeat what I always say: real assets, such as real estate and farms, are the best way to defend against an economy that keeps printing money. We have shown the real value of the assets in this challenging period, as we were able to grow operationally, increase sales, maintain value, and leverage the company as we never did before. I hope you continue to support the Company in the future as you have done until now. I will now turn it over to the rest of the team, including Mati, Santi, and Jorge, to see the details of all the annual results. Thank you very much for joining us today in the morning.

Santiago Donato, Investor Relations Officer

Thank you, Eduardo. Moving to the rental segment and operations, we can see here the evolution of tenant sales in real terms for shopping centers, which represent approximately 70% of our EBITDA. This grew 16% in real terms over the year, marking a great performance driven by more visitors and higher apparel inflation. Remember, apparel represents about 50% of our tenant mix and the strong recovery of entertainment and food court sales. When we compare to pre-pandemic levels, we're about 27% in real terms, so our business is very healthy, and we hope to maintain these levels of sales, visitors, and occupancy in our shopping malls portfolio. Here, we can see the evolution of occupancy. Recall that during the pandemic, when Walmart exited first, followed by Falabella from Argentina, our minimum occupancy during that time was approximately 89%. We have recovered substantially. Over the last year, we grew around 4 percentage points in occupancy across our malls. We expect to continue this growth trajectory. This is a very good occupancy level, similar to pre-pandemic and historical levels for IRSA. In the office market, as Eduardo mentioned, we have sold more during the year. We sold eight floors of Santo Della Paolera building, our latest development here in Buenos Aires. After the end of the quarter, we sold the Suipacha and one additional floor of Santo Della Paolera. Today, we have a total stock of around 72,000 square meters post these sales, consolidating a premium portfolio after the sale of Suipacha, which is a B-class category. Now we only have one B-class building, the Philips Building. In terms of occupancy and rents, we have just A+ and A buildings, which represent 90% and 95% of our total portfolio, and both are showing good levels of occupancy, even above the market average in Buenos Aires, which stands at 87% with a vacancy of 17%. Further, we have stable rent levels compared to last year at rates of $26 per square meter per month. The hotels had a record year, showing strong recovery after many years of operations closed during 2020, with gradual recovery throughout the pandemic. Now we have very good levels of occupancy, almost 65% at our peak hotels. Remember that we own 50% of Llao Llao in Bariloche, one of the most exclusive resorts in the region, while we also own two hotels: Libertador and Intercontinental in Buenos Aires, both of which have recovered strongly this year, showing excellent figures in terms of room rates and occupancy. Regarding ESG progress, we have made significant advances in our commitments on environmental, social, and governance fronts. Recently, we achieved LEED certification for Santo Della Paolera, meaning now both Santo Della Paolera and Santo buildings—the two most modern developments of our premium offices—are LEED certified. This constitutes 74% of our premium office portfolio in Buenos Aires, which is great news. We have also been active on the social front directly and through Fundacion IRSA, conducting over 200 social actions that benefited more than 100,000 people and investing significantly more than last year, a 21% increase in real terms for our social investment efforts. On the governance side, we celebrate the 75th anniversary of BYMA, one of the first companies in real estate listed on the local stock exchange. We have a long-term relationship with BYMA and hope to maintain a strong relationship moving forward. We also integrated into its sustainability index, which is a great recognition for IRSA as we are among the in the top 20 companies performing well in ESG in the country. On the digitalization front, we have been developing ¡appa!, our loyalty app, which enhances the shopping experience for our visitors by offering benefits and discounts tailored to their preferences. It continues to grow, achieving over 3.5 million accumulated transactions, with 1.8 million users in the last month, denoting a 39% year-over-year growth. We believe that in this age of technology and digitalization, we need to complement physical retail with digital solutions to offer comprehensive options to our visitors in the mall through this app. I will now pass it over to Jorge Cruces for insights into our real estate transactions and business developments.

Jorge Cruces, Real Estate Officer

Thank you, Santiago. Good morning, everybody. Regarding real estate acquisitions, we purchased a building in an auction a block and a half away from Casa Rosada, the national government headquarters. We acquired it at an impressive price of less than $600 official dollars for each square meter, and it provides a beautiful view of the park and to Puerto Madero. This area of the city is rapidly changing due to the nearby underground highway construction, alongside two premium residential development projects currently underway. Concerning our investment in 200 Della Paolera, we have continued the sales process, with total investments amounting to $112 million and revenue from sales reaching $259 million, for a remaining stock evaluation of $88 million. This translates to a profit of $235 million, resulting in a whopping 210% gain. We are proud of this investment. Regarding sales, we have sold the Maipu building, which was vacant. This provided us with the opportunity to sell it as a block rather than one floor at a time. It's a beautiful structure located in a downtown area that hasn't uniformly recovered following COVID and may take time to stabilize. After all, this was our first office building acquisition, and while there's an emotional tie, business is business. This building is now set to be a pivotal part of one of the most important universities in Argentina. We are also pleased to have sold our stake in Quality, as Eduardo mentioned; this is a significant plot of land with warehouses. Our focus now lies in developing other types of operations with better margins, such as Costa Urbana, which we will discuss further. In March, the cadastral authorities approved the cadastral survey plan for Costa Urbana, and the court issued a ruling on the collective legal action. In April, we received the first drafts of the notarial deeds intended to transfer ownership of the land plot designated for the 37.9 hectares public park and three lots to the government's clerk's office. This step is crucial for including land in the cadastral database of the city, allowing us to issue ownership titles and enabling the user to sell and transfer plots. We are currently working on the environmental impact assessment submitted to the Environmental Protection Agency, and we will hold a public hearing for its approval at the beginning of December. We are fine-tuning the architectural and engineering documents for the infrastructure and public space project for submission to city authorities by early October. We also continued with the residential swaps this fiscal year, translating to close to 3,900 square meters. The cumulative total of square meters to be received now stands at approximately 8,900 square meters. Now, Mati, our CFO, will continue with our financial results.

Matias Gaivironsky, CFO

Thank you, Jorge. Good morning, everyone. To understand our figures, let’s jump to page 16 to discuss what happened with the macroeconomy in Argentina. You can see in the center of the graph that inflation accelerated from the previous year, reaching levels of 116% compared with 64%. On the foreign exchange side, regarding the official exchange rate, we have an evaluation of 100%. This means that in real terms, we experienced a 5% appreciation of the pesos, compared to 20% last year. This information is crucial when evaluating our investment properties' values in our books and restating our dollar-denominated debt in pesos. Regarding the MEP FX evolution on blue-chip swap, there was an evaluation of 93%, translating to a 10% real gain compared to the 8% of the previous year. Moving on to adjusted EBITDA, we experienced a decline of 40% from the previous year, moving from ARS59 billion to ARS36 billion. This decline relates to different factors. Firstly, the sales and development segment decreased this year from ARS25.1 billion to a loss of ARS6.5 billion. Last year was extraordinary in terms of sales as we sold more than this year, including the entire Republica building and realized significant gains from that transaction. It’s also pertinent to note that during this year, there were two one-time effects—the first being related to salaries and Board member fees, and the second involves a claim from our investment in Israel, which we discussed in December. We decided to provision around $23 million—initially at $20 million but increased to $23 million during this quarter—thus, it's posted in the other segment. Excluding those effects, our regular rental EBITDA increased by 25%, reaching ARS42.5 billion this fiscal year, and we are pleased with this growth in margins. Shopping malls improved from approximately 70% to 74.5%, while the office segment saw a decline from 80% last year to 75% due to the impact of disposals. Hotels, on the other hand, remained stable at 25%. Regarding our operating income, excluding the impact of the fair value of investment properties, there is a reduction of 15% from ARS26.9 billion to ARS23 billion. Analyzing the fair value of our investment properties, we reported a significant loss of ARS49 billion compared to a gain last year of ARS29 billion. To understand this, we must consider the macroeconomic context in Argentina. We recognize results in pesos, taking inflation into account. In dollar terms, our investment properties have largely remained stable across the segments: malls, offices, and land bank. However, this translates to losses in pesos as the devaluation was lower than inflation, and it is critical to adjust pesos by inflation. Before we discuss net income, we note two significant effects—both are gains. The previous year’s gain was ARS25.5 billion, compared to ARS15.5 billion this year. The main difference arises from net effects; last year, we posted a gain from appreciation of the pesos of ARS31 billion, while this year it was merely ARS6.7 billion. We have also significantly reduced our debt, which plays into the financial results. As reflected, net interest payments decreased from ARS16.6 billion to ARS11 billion. Also, under fair value of financial assets, we noted significant gains this year of ARS7.4 billion, connected to various securities we manage for liquidity. Lastly, the income tax effect recognized in the previous quarters emerged favorably due to a Supreme Court ruling that allowed for inflation adjustments, generating an important gain of ARS66 billion. The final net result stands at ARS58 billion this fiscal year. Analyzing our rental EBITDA brings us great satisfaction. Over the last 12 months, our EBITDA reached about $167 million compared to $131 million pre-pandemic in 2019. Regarding our current debt, it's distributed over the coming years, thus not concentrated in any single year. Today, net debt stands at approximately $247 million. We have made significant reductions, down from $755 million at the height of the pandemic, with all our malls closed, to our current level of $248 million. This translates to a loan-to-value ratio of 10%, with a net debt-to-EBITDA ratio of 1.5 times and a very high coverage ratio. Hence, we believe that this capital structure is conservative and will facilitate further growth. This information reflects the position as of June 30; we subsequently sold Quality. These aforementioned transactions contribute positively to our liquidity, leading to a further decrease in net debt. Following Eduardo's comments regarding the shareholder meeting to approve a new dividend, our liquidity allows such a distribution. However, it will slightly impact net debt due to the enlarged dividend, yet it remains very conservative. As previously mentioned, the dividend payments evolution is illustrated on the graph. During the pandemic, our dividends were drastically reduced. But last year, post refinancing most of our debt, we decided to return to a more aggressive dividend approach, paying out $124 million this fiscal year. For the next fiscal year, we have proposed a significant dividend payment again, about 15% yield which is extraordinary and substantial. We remain active in share buyback programs, completing the first for ARS1,001 billion followed by a new approval for ARS5 billion. From this program, we have already invested nearly ARS2 billion, and we just announced an increase in the maximum price for our shares to ARS720 per share or $9 per ADR. We will continue acquiring shares under this program. An agenda item for the next shareholders meeting is also for distributing our treasury shares, amounting to around 1.7% of our stock. With that, we conclude the formal presentation and now open the floor for questions.

Santiago Donato, Investor Relations Officer

Okay. We start with the Q&A session. So, the first question comes from an analyst asking about whether a potential dollarization of the currency is likely and how that could work in the country.

Matias Gaivironsky, CFO

I would prefer to answer the business side of the question rather than the country’s economic policies. For the company, we will have to adjust our agreements accordingly. Historically, real estate in Argentina has always been quoted in dollars, and transactions have been conducted in dollars. Therefore, I do not foresee a major shift. Our revenues based on offices and hotels are already governed by agreements in dollars, leading to dollar receipts at the official exchange rate. On the cash generation side, most of our agreements today are linked to inflation in pesos, blending a fixed amount with a percentage of tenant sales. If there is a currency change, I assume inflation will likely not be a significant issue, leading to increases in tenant sales aligned with economic growth. Hence, we aren’t overly concerned about potential disruptions from a change in monetary regime.

Santiago Donato, Investor Relations Officer

Next question. Can you provide more detail on the extraordinary compensation for the Board this fiscal year?

Matias Gaivironsky, CFO

Certainly. This is a one-time effect not merely linked to this fiscal year. We can characterize it as a three-year cycle where the company was very active in various transactions, selling more than $500 million in assets. We also simplified our corporate structure by merging IRSA and IRSA Commercial Properties, generating significant synergies across costs, payments, and taxes. Additionally, we engaged in substantial debt restructuring and cancellations, which added considerable value along with share acquisitions and distribution efforts totaling over $150 million. Thus, the increase in fees reflects the culmination of this three-year journey.

Santiago Donato, Investor Relations Officer

Here, there is a question related to the rationale behind the share distribution vs. cancellation.

Matias Gaivironsky, CFO

Well, Alvaro, this is more technical rather than a substantive differentiation. Distributing or canceling shares yields the same ultimate consequences. Historically, we have opted to distribute what we acquire, which we have done in the past. It’s more about continuity in approach than a necessity to prefer one method over the other.

Santiago Donato, Investor Relations Officer

The last inquiry regards net debt after disposals and dividends, particularly the target-level related to leverage.

Matias Gaivironsky, CFO

Currently, our debt remains less than optimal levels. Following the announced dividend of around $85 million and properties sold after the close of the quarter for an amount of $25 million, we anticipate an increase in debt of approximately $60 million, excluding cash generation considerations. At present, we generate around $10 million monthly. Therefore, we are well-positioned with ample liquidity to pay the dividend without major concerns for leverage.

Santiago Donato, Investor Relations Officer

With that, I believe we've addressed all inquiries. We will conclude this Q&A session and presentation. We appreciate your time. I will turn it back to Matias for his closing remarks.

Matias Gaivironsky, CFO

Thank you, Santi. Thank you, everyone, for your participation and support. We are very pleased with our performance in recent years and are encouraged by our ability to execute across financial and real estate sectors. We look forward to a return to a stronger economy, propelling IRSA towards growth in new projects. Thank you very much, and have a good day. Goodbye.