Earnings Call Transcript - IRS Q1 2024

Santiago Donato, Investor Relations Officer

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the First Quarter of Fiscal Year 2024 Results Conference Call. First of all, I would like to remind you that both audio and slide show can 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 ask 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, Santi. Good morning, everybody. So we are starting our fiscal year 2024 with very good results. Our shopping malls keep surpassing inflation and occupancy keeps improving. Regarding our hotels, we have a very strong EBITDA during the quarter and very good occupancy. Offices also have a slight recovery in occupancy. Additionally, our real estate activity was very strong during the quarter, with the disposals of three floors of the 200 Della Paolera building, the Suipacha building, the first office building of IRSA, and Quality, which was the owner of a plot of land in San Martin in the province of Buenos Aires. During the quarter and after the quarter in October, our shareholders' meeting approved a dividend payment that represented around 12% yield. That dividend was paid in Argentina in the last days, and there is still pending distribution to our GDS holders that we will see later. So, I introduce Santiago Donato, our IRO, to follow the presentation.

Santiago Donato, Investor Relations Officer

Thank you. Well, here, we can see the evolution of the quarter of the shopping malls. We can see portfolio occupancy increased to levels of 98%. Remember that during the pandemic, we had some vacant spaces from big tenants like Falabella, Garbarino, and Walmart, mainly because they left Argentina. It took us some time to recover that, but we are now at our historical highest levels of occupancy, which has been very, very stable at levels of 97% to 98%. We are very glad about that. In terms of sales, we kept growing in real terms. We are up 10% in the quarter compared to the same quarter of last year and 34% above the pre-pandemic levels of 2020. This is explained mainly by the April segment, the ticket of April and more visitors in our malls. We are seeing very good levels of consumption, the same trend as we saw in fiscal year 2023. On the next page. In the office segment, we sold during the quarter; we continued selling some floors of the Suipacha building and one floor of Della Paolera building. We subsequently sold two additional floors. We currently manage approximately 62,000 square meters of GLA, mostly A+ and A; the only building of B category is the Philips building in the Polo Dot complex. The rest are all premium buildings, with occupancy increasing to almost 89% and an average rent in dollars per square meter of 26, which is quite stable compared to previous quarters. Finally, in the hotel rental segment, occupancy is very high at levels of 66% across the three hotels. Remember that we own two hotels in Buenos Aires, Libertador and Intercontinental, and we own 50% of the exclusive resorts in the south of Argentina and Bariloche, the LlaoLlao Resort. The average occupancy is very high, with rates per room growing to almost $270 per room across the portfolio. Then we have a breakdown between Buenos Aires hotels that recovered from previous figures, both in rates and occupancy, and the LlaoLlao, which is doing great, is almost fully booked. It's a great place for local high-income tourism and also international tourism, with rates reaching almost $530 per room. So all three rental segments are doing very well. We hope to sustain these indicators in the next quarters. For the sales and development segment, I will turn to Jorge Cruces, our CIO.

Jorge Cruces, CIO

Good morning, everybody. When we sold the building at $6.75 million MEP, it had a gross leasable area of 11,465 square meters, and it was a significant experience to sell because it was our first office building that we had acquired in 1991. It was a Class B building, vacant at the moment, and we are continuing with our strategy of flight to quality. So, it was good for us to sell it now while it was vacant; otherwise, it's much, much more difficult to sell if it's half rented. We also sold Quality Invest. We had 50% of the stock capital, sold at $20.9 million. This used to be from British American Tobacco, and it was a land plot in San Martin for a very big development, about 16 hectares, and half the plot was constructed. We prefer to concentrate on Costa Urbana, which is now approved, and with today's economy, it’s better to focus on something premium and significant like Costa Urbana. We also sold three floors in 261 Della Paolera. One floor was sold in August for $12.1 million, the ninth floor. Then we sold two floors, 28 and 29, for $14.9 million MEP. In both cases, they were big companies that are even our tenants in the shopping malls, and we were all very happy. We still have four floors left that we might sell in the next year looking forward. Last but not least, regarding the Costa Urbana master plan development, we have submitted the final approval of infrastructural projects for roadworks fulfilling legal requirements. As soon as the authorities grant approval, we will file working permits with the town hall and utility companies. About the master plan for the public park, the architectural and landscape draft has been submitted for approval. Previously, the principals of the site team of West A and PALO Architecture held a meeting with the authorities and presented the master plan for the public park. Regarding the sale of plots, we have submitted the final draft of the notarial deeds for transferring ownership to the city of 38 hectares of the Poly Park and free lots along Espana Avenue. This is the process of creating land registrations in the industrial database of the city for issuing ownership titles to sell and transfer the plots. Regarding environmental public hearings, we are working on updating studies to submit as requested by environmental authorities, and we are looking forward to the public hearing convened by the Environmental Protection Agency. So let me turn it over once again to Matias, our CFO.

Matias Gaivironsky, CFO

Thank you, Jorge. Moving to Page 9, it’s important to look at our financial results through the lens of inflation and the changes in the official exchange rate and dollar MEP. In the center of the page, we see that inflation for the quarter was 35%, up from last year's 22%. This indicates a slight devaluation of the peso in real terms. On the left, there’s a 1% real devaluation compared to a 4% appreciation last year. The dollar MEP saw a real devaluation of 21%, moving from 650 to 789, whereas it appreciated last year. This impacts two key areas: the fair value of our investment properties and the FX differences affecting our debt. On Page 10, analyzing our adjusted EBITDA reveals strong real-term results. Shopping malls increased by 22%, offices saw a decrease of 4% due to lower square meter availability, and hotels experienced a 34% increase compared to last year. Consequently, our rental EBITDA increased by 21% year-over-year. We’ve also seen improved margins, especially in shopping malls and hotels, achieving margins of 77.7% and 35.2%, respectively, up from last year, while the office segment experienced a slight decline due to lower stock levels. On Page 11, our operating income was up 44%, excluding fair value impacts. When examining the fair value of our investment properties, we report a significant increase of ARS102 billion, primarily linked to the dollar MEP’s fluctuations, as we value all properties using the dollar MEP for converting dollars to pesos. For shopping malls, we apply the official exchange rate. In dollar terms, our property values have remained stable, showing no substantial gain or loss compared to last June. However, the conversion of pesos at a higher exchange rate accounts for the recorded gain of ARS102 billion. Moving to Page 12, we note another significant element concerning net financial results. Last year, we linked this to net FX results due to peso depreciation, but this year features a slight peso depreciation as well. Consequently, we incurred losses in the first quarter. In terms of net interest, we paid reduced interest due to lower debt levels, leading that line to decrease compared to last year. We also encountered the effect of inflation adjustment, which was more significant last year. Regarding income tax, we reported a notable loss of ARS41 billion. It’s important to remember that each time we acknowledge an appreciation in the value of our investment properties, we must also recognize a potential tax loss, which is deferred tax. If we sell an asset, we incur taxes, recognizing a loss alongside the acknowledgment of appreciation, and similarly, we acknowledge a gain when impairments are recognized. With these various factors, we ended the first quarter of the fiscal year with a profit of ARS81 billion, compared to a profit of ARS3.1 billion the previous year. It’s essential to note that the figures for fiscal year '22 and fiscal year '23 contained an error; they should reflect the first quarter of fiscal year '23 against the first quarter of fiscal year '24. Looking at our rental EBITDA in dollar terms, calculated at the official exchange rate, we observe substantial growth compared to pre-pandemic levels and last year. The final column indicates our growth over the last 12 months, including the first quarter of '24, reaching an EBITDA of $176 million at the official exchange rate. Notably, hotels have once again outperformed the office portfolio. Regarding our debt, we are monitoring our leverage trend. Over recent quarters, we’ve successfully achieved strong deleveraging, reducing our debt by 61%. After paying dividends, we now hold a conservative net debt of $296 million by any measure, without factoring in coverage ratios, LTV, or net debt to EBITDA. We maintain a conservative capital structure. Our debt amortization schedule shows a gross debt of $383 million, distributed over the coming years. This year, we have $123 million due, which we can manage with our current cash levels while potentially executing market transactions. Regarding dividends, as indicated earlier, our shareholder meeting approved a dividend of ARS64 billion, yielding 12%. We made this payment in Argentina on October 12, using the Contado con Liqui or blue-chip swap exchange rate, which translates to about $67 million, up from $64 million last year. On Page 17, addressing GDS holders' payment status, we faced some challenges after approving the dividend on October 5 and deciding on a payment methodology on October 6. On October 10, the government introduced new restrictions regarding what the Bank of New York can do as our GDS representative. Currently, they face limitations in converting pesos to dollars. We are collaborating with them to find a resolution. Meanwhile, we announced our decision not to transfer the pesos to them. Although we are obligated to transfer the money, doing so would leave them with pesos that they cannot invest. Therefore, we opted to withhold the transfer and temporarily invest those funds in a money market fund managed by Santander Asset Management called Super Ahorro pesos. This allows us to mitigate the inflation impact while we continue working to resolve the issue with our GDS holders. Unfortunately, we cannot predict a timeline for this resolution, as it is beyond our control. We are seeking exceptions from the CMB and exploring alternative solutions, but as of now, we cannot provide guarantees regarding timing. Consequently, due to inflation considerations, we've opted not to transfer the funds and will temporarily invest in that fund. Regarding our share repurchase program, we decided to extend it for an additional 180 days. The program is set for ARS5 billion, and we have already repurchased 42% of that amount. There remains opportunity for more repurchases, which we plan to execute in the coming months. This concludes the formal presentation. We now welcome any questions you may have.

Santiago Donato, Investor Relations Officer

Okay. Well, now it's time for the Q&A session. If you have a question, you can use the chat, and we will take them in the order we receive them. Okay, we have some questions related to the dividend. I guess Matias has already answered this. If there are particular questions, please write them in the chat. There is a question here about the development of Costa Urbana and whether we are going to take on new leverage for this development and how we will finance the project.

Matias Gaivironsky, CFO

Well, we mentioned at some point that it's not uncertainty; we haven't defined yet how we're going to develop. There are many different ways we can develop that land. Remember, it’s a huge project. Typically in Argentina, developers finance projects by preselling units from the start, which is something IRSA can do. Alternatively, we've engaged in barter agreements or swap transactions, where we provide the land, and someone else develops and pays us with square meters. In that manner, we do not need to invest upfront money. The developer will invest and pay us with square meters, and then we sell those. Or we may directly develop without preselling and finance the operations ourselves. We don’t plan to do everything with financing, possibly utilizing various alternatives. Also, we don’t feel rushed to develop; we will launch each of the buildings only if we observe demand. Therefore, the capital or working capital required for each building will be limited.

Santiago Donato, Investor Relations Officer

There is another question on timing. When do we expect to launch the development of the first towers of the projects?

Jorge Cruces, CIO

Regarding infrastructure, we plan to begin next year, 2024. From then on, we can start building the buildings. The infrastructure will unfold in various stages and will progress quite swiftly. The buildings will require approximately two to three years at least. Most likely, by the end of next year, we could start constructing or initiating the presales for the buildings.

Santiago Donato, Investor Relations Officer

We have another question. Is the trend of sales growth in the malls, which we experienced during the quarter, still continuing into October?

Matias Gaivironsky, CFO

Yes, the trend is positive. We still see good levels of consumption in October and November. So yes.

Santiago Donato, Investor Relations Officer

We have a question about whether there is a project to expand Alto Rosario. We have the capacity for expansion in our malls, including Alto Rosario and recent projects. Generally, the Company announces all projects at the time of launch, not before. There is also a question about the vacancies at the Children's Museum and whether we are working on a project to reopen that.

Matias Gaivironsky, CFO

Yes, we will replace the museum with new proposals. So yes, we are working on that.

Jorge Cruces, CIO

We consider it beneficial to provide more entertainment options. So it’s going to be replaced with more entertainment facilities. Regarding if we were to do something in Alto Rosario, as Santiago mentioned, it would be announced at the right time, but we still have the possibility to include mixed-use; therefore, it’s very possible for different kinds of malls to comprise a mixed-use structure, including Alto Rosario, not just retail.

Santiago Donato, Investor Relations Officer

I will give you a few more minutes for any additional questions. Use the chat, and we will take them in the order we receive them. Again, there's a question related to the consumer environment post-elections. What are your expectations for the malls business?

Matias Gaivironsky, CFO

It's a tough question to know what the new administration will bring; there is uncertainty about what the new policies in Argentina will be. We are confident in the quality of our portfolio. However, we will be affected by the macroeconomic environment in Argentina. If there is a significant recession, we will observe that in consumption. However, I think it's still early to know what's really going to happen.

Santiago Donato, Investor Relations Officer

One more question. Are there any plans to trace financing in local or international markets for your projects?

Matias Gaivironsky, CFO

Yes, definitely. We've utilized the local capital market in the past few years; however, the international market is much more complex due to Argentina's soaring debt. Nonetheless, we saw recently some companies entering international markets. I believe for strong firms, the market remains open. Regarding the upcoming amortizations, we will also use the local capital market. For the international capital markets, size is always essential; it’s not efficient to issue less than $100 million or $150 million in debt. We don't require such an amount, so our next transactions will be much smaller. We will seek the most efficient structure to finance our operations.

Santiago Donato, Investor Relations Officer

Well, with this, we conclude the presentation and the Q&A. Thank you for participating, and I will turn back to Matias Gaivironsky for his closing remarks.

Matias Gaivironsky, CFO

Thank you, Santi. We are very happy. We saw a very good quarter. We achieved good numbers in all segments: malls, offices, hotels, sales, and development. We are very optimistic regarding the rest of the year. As I mentioned, although elections always bring uncertainty, we trust in the quality of our portfolio. We believe we are very well prepared in terms of our corporate capital structure to face any scenario that may present itself in Argentina. Thank you very much for your participation, and I hope to see you in the next quarter.