Earnings Call Transcript - IRS Q4 2024

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 2024 Results Conference Call. First of all, I would like to remind you that both audio and a 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. If you want to make a question, please use the chat. Before we begin, I would like to remind you that this call is being recorded and the 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. Matias Gaivironsky, CFO.

Matias Gaivironsky, CFO

Thank you, Sandy. Good morning everyone and thank you for joining us today. This was a special year with two very different moments. The first one was from July to December, characterized by very high levels of consumption and accelerated inflation. The second, since Milei took office, involved a radical change in all government policies that affected consumption levels. Although the year was volatile, we were able to achieve very good numbers, particularly in our rental adjusted EBITDA, reaching ARS171 billion, which was 8.8% above the same numbers from the previous year. Regarding our net income, we posted a loss of ARS23 billion, which I will explain later, but it is mainly related to the impact of the fair value adjustments of our investment properties — a non-cash effect due to changes in the macroeconomic environment. Despite the volatility and losses in that line, we saw good levels of occupancy across our offices, malls, and hotels. There was strong activity in real estate projects, including both sales and new launches, which Jorge will explain later. Additionally, during the year, we aggressively distributed dividends and repurchased shares, totaling ARS119 billion across two tranches, yielding 13% and 7% respectively. Now, let me introduce Santiago Donato, our IRO, to continue with the presentation.

Santiago Donato, Investor Relations Officer

Thank you, Matias. Here we can see some figures, indicators for the shopping malls over the past year, and an evolution of our tenants' real sales and occupancy as well. The fiscal year 2024 ended slightly below 2023 in local currency, adjusted for inflation, just 4.5% less, mainly due to robust consumption growth in the first half, followed by a contraction in the second half due to accelerating inflation's impact on real wages and economic activity. The change of government in December influenced this contraction. However, we are closing the year on a good note, especially as last year was a record in sales. Remember, the inflation generated an acceleration in consumption. So, 2023 was a record year, and we are nearly at the same levels adjusted for inflation. We are beginning to see signs of slight recovery in recent months, particularly in August, so we hope that in 2025 we can continue to grow in sales in shopping malls, capturing inflation, maintaining occupancy, and increasing visitor flow. A 98% occupancy rate is historically high for us. Even in these six months marked by a contraction of consumption in Argentina, our malls were fully occupied with all brands present. Moving to offices, we continued to sell additional assets throughout the last fiscal year — just as we have been doing since 2020. This year we sold the Suipacha building in the first quarter and three floors of 200 Della Paolera. Currently, we manage nearly 59,000 square meters, having sold 15 in this period, consolidating mostly in A+ and A category buildings. The occupancy increased to nearly 96% in premium buildings, which is above the Buenos Aires average, while the average rent of our portfolio remained stable at ARS25 per square meter per month. In the hotels sector, we maintained good rates and occupancy levels throughout the year. During fiscal 2024, although we noticed a decline in international tourism in the last quarter, mainly due to decreased exchange rate competitiveness in Argentina, this is a challenge for the coming year to maintain those occupancy levels and rates. However, the Llao Llao hotel has been a major draw for high-income clients in Argentina, and the two hotels in Buenos Aires — Libertador and Intercontinental — are working on new proposals while we await the full recovery of the corporate event sector, which is still not up to pre-pandemic levels. Average annual occupancy was stable at 64%, with rates increasing from ARS217 to ARS243 per room, influenced mainly by the increase at Shao Shao which charges about $450 per room. We also have entertainment exposure through our indirect stake in La Rural and the Convention Centers of Buenos Aires and Punta del Este, approximately 35%. This sector took longer to recover from the pandemic; it was fully shut down for a year in 2020. It took several years to recover to historical occupancy levels. At La Rural, we maintained our fair and event calendar this year, but investments from exhibitors were reduced, and public consumption for stands and services contracted due to increased activity in the second half. For Buenos Aires' convention center, occupancy has increased to 36%, yet it is still in the process of fully recovering. We hope Argentina can become a favorable location for both international and local congresses and corporate events now that we are entering a new economic cycle, allowing for more openness to the world in the upcoming years. Importantly, in relation to La Rural, we have obtained an extension of the concession until 2037, with an option to extend it for an additional four years, until 2041. This is good news for this investment, which has been generating substantial EBITDA in the past years as well. Regarding ESG, we have made progress this year in three areas: environmental, social, and governance. We have been included again in the sustainability index of the Buenos Aires stock market of BYMA, which highlights the top 20 performing listed Argentine companies in terms of ESG. We obtained the LEED Gold certification for Docento Della Paolera, our latest development, and many of our tenants are certifying their interiors as well, adding to Zetta building, which got its certification in 2019. Currently, 72% of our premium buildings are LEED certified. Additionally, we have implemented a green seal program for waste management practices in our shopping centers in Buenos Aires City. This program from BACT has successfully landed the green seal for Alto Palermo, Patio Bullrich, and Alcorta. On the social side, we have engaged in many volunteer programs and social initiatives in our malls and offices, with over 100 million visitors passing through our shopping centers annually. Thus, they serve as excellent venues for these types of outreach and activities. We invested around ARS500 million into various activities with our assets. Last year marked our 75th anniversary of being listed in Buenos Aires, and in December we are set to celebrate our 30th anniversary on the New York Stock Exchange. The company continues to adhere to high standards of corporate governance, maintaining listings on both markets, Buenos Aires and New York. Lastly, I’d like to discuss our investment in ¡appa!, where we hold nearly a 99% stake. ¡appa! is our loyalty app designed to enhance the shopping experience for our visitors, providing discounts and benefits tailored to their preferences. The figures are showing growth in registered users and accumulated transactions. We plan to continue expanding ¡appa! and aim for a seamless integration of physical retail with digitized services, enhancing the shopping experience through this app.

Jorge Cruces, CIO

Well, good morning, everybody. It's been an intensive year regarding acquisitions, swaps, and sales. In July 2024, we sold the Maple building, which was vacant at the time. It’s a Class B building acquired by IRSA in 1991 with seven office floors and 62 parking spaces, totaling around 11,500 square meters. The price was ARS6,750,000, with ARS3 million paid in cash and ARS750,000 in office units in a nearby building on Cordoba Avenue, right in front of our hotel. The gross leasable area of what we received is around 150 square meters. We sold on August 31, our 50% shareholding in Quality Invest, owning a property in San Martin, formerly the site of the American British Tobacco industrial plant, with a total area of 160,000 square meters and around 80,000 square meters built. The transaction total was ARS22,900,000, of which ARS21.5 million was collected upon share transfer, and the balance, ARS1.4 million, will be paid in three years. Now, regarding the land acquisition in Ezpeleta, we obtained that land for ARS60 million after selling the Republic building. We established a barter agreement for ARS16.4 million with those who developed Quilmes, which will now become Nuevo Quilmes 2. Through this barter, we acquired 125 single-family lots and 40% of the multi-family lots. Construction has begun, and the trust has sold most of these single-family lots, with sales commencing next October. For the La Plata building, IRSA is part of a group of investors forming a trust to acquire the building that once belonged to MultipliDAR. Banco Hipotecario is to receive 28.5% of the selling meters of the property, while we serve as developers for the trust. We just completed an acquisition in Alto Avellaneda, adjacent to our shopping mall. We acquired most of the property, leaving only a small part pending acquisition, with a total investment of ARS12.2 million — of which ARS9.2 million has been paid, while the remaining ARS3 million will be settled with a deed transfer. The acquisition includes existing LEED contracts for the space, and we will lease it back to the supermarket for the next three years. We are looking at a total square area of almost 87,000 square meters, from which we acquired over 32,000 built square meters. This acquisition is significant as it allows us to make strategic decisions regarding parking and potentially develop the two lots into one for substantial development, given their available square meters. Regarding Ramblas, we held an event at the Hilton, where we rebranded what was formerly named differently. We now call it Ramblas del Plata. We have already signed notarial deeds transferring ownership to the city of four plots of land, comprising three lots along Avellaneda, which will allow IRSA to sell 61 lots. This step has us updating land registrations in the city’s industrial database. An environmental public hearing process started today and will last three days, featuring 128 registered speakers. As soon as we receive the green light through environmental permits, we will break ground for development. As I mentioned earlier, this project is known as Ramblas del Plata, having previously been called Costa Urbana, and we have many residential projects slated for launch in the near future. One of our new initiatives is a project in La Plata, which features a shopping mall, alongside 15 lots for sale. The block is situated on approximately eight hectares, positioned within a prominent supply center in La Plata city. Within this area are two large supermarkets and a home center. The layout has the block subdivided into 18 lots, of which two will be public squares, with the majority of the remaining 15 lots targeted for residential development, but it will also accommodate hotels, office buildings, and medical facilities. Additionally, we are proceeding with Monsanto, Trente Cinco and Santa Trenco, which encompass three towers with a total of 500 apartments, covering around 31,500 square meters for sale. We have completed the concrete work for Tower 3 and are continuing construction.

Matias Gaivironsky, CFO

Thank you, Jorge. Regarding our investment in Banco Hipotecario, keep in mind that we control 29% of the shares, and it has proven to be a very good year. Banco Hipotecario generated results reaching almost ARS30 billion this year, compared to ARS11 billion last year. We observed a great evolution in the market shares, increasing from ARS46.9 last September to the current ARS407. The market cap of Banco Hipotecario is now around $138 million, having recovered significantly compared to last year. Additionally, the bank paid dividends for the first time in several years, saving us ARS13.6 billion, while the total distributed was ARS45.6 billion. The bank is in very good shape, showcasing strong numbers with healthy returns on equity and assets. Its liquidity levels are solid, and non-performing losses are also at very low numbers, so we feel pleased with Banco Hipotecario's operational progress. Moreover, a game changer for real estate this year was the launch of new mortgages; Banco Hipotecario was the first to roll out new lines of credit, spurring other banks to follow suit. While the process is still in its early stages and not yet swift, many banks are now offering mortgages to the public. We believe that, combined with the fiscal amnesty the government is implementing, this could significantly boost the real estate sector. Looking at our financial results, we began to evaluate the main variables. On the macro side, it was a very volatile year characterized by accelerated inflation and currency devaluation. The nominal effects included a devaluation of 255, with inflation around 272, indicating a real appreciation of 4% over the year, after a 5% appreciation last year. However, the quarterly performance varied significantly. Then, when analyzing the blue chip swap and the dollar MEP, there was also a devaluation of 179% against inflation of 272, and the appreciation of 25% this year against the previous year's 10% was evident. Moving to our Adjusted EBITDA, as I mentioned earlier, we have very positive figures, surpassing last year's performance by 8.8%. In our rental sector, this includes 4.6% growth in Shopping Malls, 4.1% in Offices, and 52% in Hotels. Today, hotels have become significantly more profitable in comparison to offices, transitioning to our second segment for cash generation. We are also witnessing an improvement in margins, reaching 76.4% for Shopping Malls, 81.7% for Offices, and 34.4% for Hotels. Our operating income also improved significantly by 97%, and when we analyze the primary driver behind the losses this year, it involves the change in the fair value of our investment properties, which is a non-cash line item recognized under IFRS. In our shopping malls, we apply a DCF model since there are no comparable transactions in the market, while for offices and our land bank, we utilize comparables as transactions exist for our types of assets. The valuation in pesos at the blue chip swap resulted in appreciation that inadvertently created losses as well. In dollar terms, the values appear comparable to the previous year, with no impairments within our other segments. In examining the net financial results, we are posting ARS93 billion versus ARS57.7 billion last year. Referring to the table below, the fair value of financial assets and liabilities is showing significant gains, owing to the liquidity we're investing in securities stocked with improving valuations. Our net interest has reduced — an accounting effect shows comparisons with the previous year indicating that interest payments have lessened. We also have net debt levels similar to the previous year, with a slight reduction in interest because of the impacts of interest rates and inflation, leading to fewer coupon payments. The positive result in net effects occurs as our dollar-denominated debt was converted to pesos, which appreciated during the year, generating additional gains. For the income tax line, we again report non-cash effects. Last year's ruling from the Supreme Court allowed some companies in Argentina to adjust tax credits by inflation, giving rise to significant gains. However, this year the gains stem from the fair value of our investment properties. Each time we incur losses, we reflect those on our deferred taxes, amounting to ARS57 billion, related to those adjustments. Although we have paid income taxes across some subsidiaries this year, IRSA on the whole has not paid income tax, thanks to accrued tax credits. As a result, we finished the year with a net result reflecting a loss of ARS23 billion, with our controlling interest at ARS18.4 billion negative. When analyzing the dollar-denominated rental EBITDA performance, we are proud to report cash generation of $163 million for the year. Our aggressive approach to dividends and stock buybacks has kept us with a conservative debt structure, enabling us to maintain low leverage while generating powerful cash levels. For the year, we were not exceedingly aggressive on our CapEx for new projects, translating to almost all of our free cash flow directed back to the company. In terms of net debt evolution, we’ve noted almost no changes compared to last year, paying out $117 million in dividends, with most cash allocated to dividends while debt levels remain low. Our amortization schedule shows that we expect to handle $184 million in debt this upcoming year confidently, given our strong cash levels and liquidity, alongside low leverage and credit accessibility. IRSA has substantial lines of credit available in the local market, and we are optimistic as international markets are starting to show some activity for major Argentine companies. Throughout the year, we issued bonds in the local market. In June, we issued $42 million in two tranches, one in pesos and the other in dollars at very attractive interest rates of 6%. We will be active in the market moving forward. As for dividends, during fiscal year 2023, we paid out $64 million; this year that figure rose to $117 million, yielding 12% at the beginning of the year and falling to 7% in May. We are likely to announce the dividend proposal at our shareholders meeting next week, where we anticipate continuing our tradition of paying dividends. We plan to suggest an amount at our October meeting. Finally, regarding our share repurchase programs, we implemented three programs this year, collectively buying back 4% of our shares, with an investment totaling $38 million, averaging at $8.88 per GDS. We are excited to allocate part of our liquidity toward share buybacks.

Operator, Operator

Here we have some questions in the chat. The first one is from Martina Mertens of Latin Securities.

Santiago Donato, Investor Relations Officer

The Urban Planning Code in the city of Buenos Aires is currently being reviewed. How do you think this situation will develop and what impact could it have on your projects? I think this is for you, Jorge.

Jorge Cruces, CIO

Well, the mayor, during his election campaign, discussed this extensively. I believe there will be some changes in the future. The changes mentioned in the drafts pertain mainly to areas of the city where we don't have projects, so it shouldn’t be a problem for us. Most of our projects are already approved; the adjustments will affect future projects.

Martina Mertens, Analyst

Here we have another question regarding Costa Urbana. Will IRSA partner with national or foreign investors, or will you seek financing for the development alone?

Matias Gaivironsky, CFO

First of all, we need to change the name. We used to call it Costa Urbana, but today it's known as Ramblas. We are thrilled to announce the new name and kick off the commercialization. This is a substantial project — it’s not just a single project, but, as Jorge mentioned, consists of 61 different plots of land, allowing for various transaction types, be they developments by ourselves or through swaps with developers. We don’t necessarily need upfront financing from a project finance standpoint; instead, we will look for combinations of financing options, focusing more towards land swaps with developers over significant cash commitments. We plan to maintain our infrastructure investment commitment of around $40 million for initial development infrastructure, but the resources for actual development will likely be secured at the IRSA level, not project-based, especially early on.

Jorge Cruces, CIO

From a commercial standpoint, at the real estate expo held at the Hilton, we launched the project and received positive reception. Many local developers showed keen interest, and we are in contact with several Argentine developers at this stage. We anticipate that the first phase will see great success, and we might attract regional investors in the near future as well.

Santiago Donato, Investor Relations Officer

There were further questions about Rambla del Plata. Could you repeat the amount of infrastructure investment in the short term? I think Mat mentioned $40 million.

Matias Gaivironsky, CFO

The total investment for the project is $40 million, but it's not just in the near term. This overall investment is divided across three major development stages.

Santiago Donato, Investor Relations Officer

Here's a question from George Borman regarding how much overall capital will be required for the Ramblas del Plata project and how long that will take to complete.

Jorge Cruces, CIO

That's a challenging question to answer; costs and construction in Argentina have fluctuated significantly. Ultimately, this project will take over 15 years to complete. Hence, estimating investment in infrastructure will be complex, as we will be utilizing several developers who will help with various parts of the project. Consequently, we can’t provide an exact figure at this point.

Matias Gaivironsky, CFO

To give you a rough idea, this 900,000 square meter construction project will approximately cost $1,500 per square meter. This provides insight into the overall project size; however, as mentioned, we won’t foot the entire bill — it will be shared across different stakeholders. The entire project's rough estimate exceeds $1.3 billion to $1.4 billion.

Santiago Donato, Investor Relations Officer

One more question regarding the timeline for beginning construction on Manzana Torre 3.

Jorge Cruces, CIO

Concerning the construction, we have already laid the foundation for Tower 3 and are actively continuing work there. The other two towers, however, have not yet commenced construction.

Santiago Donato, Investor Relations Officer

There’s another question related to whether the company intends to continue reducing the office portfolio, along with intentions regarding our stake in Banco Hipotecario.

Jorge Cruces, CIO

In terms of office buildings, we are developing office spaces in Zetta. Although we plan to continue with new constructions, we intend to sell empty space that we currently possess in Intercontinental and Catalinas — we don’t see the benefit of retaining only a few floors. However, we don’t have plans to sell Zetta at this time, as we control the entire building.

Matias Gaivironsky, CFO

I can provide some insight regarding our intentions regarding the Banco Hipotecario stake.

Santiago Donato, Investor Relations Officer

We’d like to know if we plan to retain our investment stake in Banco Hipotecario?

Matias Gaivironsky, CFO

Yes, we plan to maintain our stake. We've had it since 1997.

Santiago Donato, Investor Relations Officer

We appreciate all questions from attendees, and they mainly focus on capital allocation. Perhaps Matias could elaborate on what our future dividend expectations are along with buyback programs and how the company plans to allocate those.

Matias Gaivironsky, CFO

The capital allocation strategy over the past three years has been quite extraordinary. If we analyze it, we haven’t launched new projects during this period, instead using our resources to tighten our capital structure by allocating significant cash toward debt reduction, which we pursued aggressively since 2020. Currently, we're positioned favorably with very low leverage ratio. Looking forward, we might expect a slight uptick in debt levels, alongside sustaining our tradition of dividends and stock buybacks, limited by legal parameters which restrict our buyback activities relative to liquidity in the market. We typically expect to pay dividends annually at levels carefully reflective of our performance, distributing both liquidity and returns effectively for shareholder benefits in situations of share price discount against our NAV. I don’t anticipate engaging the international capital markets soon, as our immediate financing needs don’t align with those requirements — typically, you need to issue a minimum of $300 million in debt, for which our needs are lower, focusing instead on financing transactions worth $30 million to $40 million, manageable through local banks. Despite our structure generally involving international markets, we plan to stick with local options at this moment as we see favorable interest rates here compared to those internationally for our necessary volume.

Santiago Donato, Investor Relations Officer

There are also questions regarding the connection with Cresud. Cresud, which controls IRSA, currently holds a stake of 55.4%. It's an agribusiness conducting operations in the region and remains the controlling shareholder of IRSA. Lastly, we have a question from George Borman relating to the political outlook — how do we see the government led by Milei and its ability to bring Argentina back to the economic forefront?

Matias Gaivironsky, CFO

This question is more subjective, reflecting personal opinion rather than a corporate perspective. Personally, I hold hope for a favorable environment in Argentina, looking forward to a situation where they attract investment and a more stable macroeconomic scenario. Recent years have been marked by volatility and chaos, complicating long-term investment decisions. This is precisely why we have taken a cautious approach to launching new projects as the leading real estate company in Argentina. I am optimistic about the new administration's efforts — they appear to be focused on restoring some order to the economy, reducing inflation, and the budget deficit, which are substantial steps towards growing investment appeal. I have considerable faith in our trajectory under the new leadership.

Santiago Donato, Investor Relations Officer

Thank you, Matias, and thank you all for joining and posing your questions. We appreciate the engagement from the investment and analyst community. We conclude this fiscal year presentation, and we look forward to seeing you next quarter. I'll now give the floor back to Matias for his final remarks.

Matias Gaivironsky, CFO

Thank you. There isn't much more to add. We are very pleased with the results achieved — strong numbers in all operations and real estate transactions, along with healthy financial standing. We look to maintain this momentum and see Argentina trends positively. Thank you again for your participation, and I hope to see you soon.

Santiago Donato, Investor Relations Officer

See you all. Bye.