Earnings Call Transcript - IRS Q2 2023

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 2023 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. If you want to make a question, please click the button labeled 'raise hand' or use the tap. 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.

Matias Gaivironsky, CFO

To start, I would like to summarize the main events of the period of the second quarter of 2023 and subsequent events. The company closed a very good quarter with strong financial and operational figures. Shopping malls continued to grow in terms of sales, visitors, and margins, despite December being partially affected by the World Cup. In January and February, we observed very good figures. Importantly, after the closing of the period, we reached 100% occupancy in our latest development in Catalinas. Remember that we opened a building in the middle of the pandemic, and we sold approximately half of the building at very high prices. Now approximately 48% of the building is fully leased. The hotel segment is booming and showing record occupancy and EBITDA, mainly at Llao Llao. We've observed a very strong recovery in Buenos Aires hotels, driven by corporate events and growing international tourism flows to Argentina. So, all three segments are performing quite well. However, in offices, we are showing slightly lower results due to the assets sold last year. On the financial side, after the closing, IRSA issued Series XV and XVI notes for a total amount of $90 million to cancel short-term liabilities. The company redeemed Series II and IX and continued deleveraging, which has resulted in a very low net debt and a very conservative capital structure and debt ratios today. On November 22 last year, IRSA declared a dividend of ARS 4.3 billion, which represented a dividend yield of 4.5%. We have also seen a recovery in our share price during the second quarter, and we are optimistic about this. We believe there is significant value to unlock in our shares, and we anticipate a strong year ahead in terms of share performance. Moving to the next page, we can see the operational figures for shopping malls. Stock increased slightly to 336,000 square meters of gross leasable area, while occupancy reached nearly 94%. We are still replacing vacant services that big tenants left at Llao Llao and Garbarino during the pandemic. This takes some time as we are replacing them with smaller stores. Sales continue to rise, reaching 20.9% compared to pre-pandemic levels in the second quarter of 2023 and 12.4% compared to the same quarter last year. The office portfolio figures are quite stable when compared to the previous quarter, but show improvement compared to the second quarter of fiscal year '22. After having sold buildings and floors in previous years, we currently manage an office portfolio of 82,000 square meters, primarily premium office space, mostly A+ and A buildings. Out of the six, we have just two classified as B category. When you consider occupancy, the premium buildings are demonstrating much better occupancy rates. Currently, we have occupancy levels of 84%, and we expect to increase this figure in the next quarter when the impact of full-year occupancy from Central Della Paolera is reflected. In the B category, we have a building that is currently empty and another, the Philips building, in the northern area of Buenos Aires City that is half occupied. So, this demonstrates the impact of just 20% of that category having lower occupancy. Lease rates remain relatively stable at around $25 per square meter across our portfolio, reflecting the stability of the segment, with a slight increase in occupancy in the premium class. Here, you can see the lease agreements signed after the closing of the period at Central Della Paolera building, where IRSA has its headquarters. We have leased five floors, and with the remaining vacant space totaling nearly 6,000 square meters, we reached 100% occupancy. With this, we conclude a process that we began in December 2020 when we opened the building during the pandemic with nearly 75% occupancy. Throughout this period, we have sold some floors that were occupied; this is why you see some reduction in occupancy between the second quarter of '22 and this last quarter. Now, with these five floors, in the pro forma or forecast for the third quarter, we have again reached 100% occupancy. The building comprises around 30 floors, and we currently own 14 floors, which account for nearly 17,000 square meters of gross leasable area and 47% ownership, with the average rent of our owned floors at $28 per square meter per month. In the hotel segment, we can see significant improvement, reaching 71.4% occupancy at an average rate of $208 per room, marking historical records. This segment was significantly impacted during the pandemic, with nearly a year of hotel closures. However, we observed a strong recovery at our exclusive resort, Llao Llao, in Patagonia, attributable to both domestic and international tourism, with Argentina now being very attractive in terms of pricing and hotel offerings. Llao Llao leads the results in Latin America and is certainly the top performer in South America. Other hotels in Buenos Aires are also recovering steadily, boosted by the resurgence of corporate events and international tourism. We are currently seeing rates at $135 per room in the Buenos Aires hotels and nearly $400 in Llao Llao, which have increased compared to previous years. Now I will turn it over to myself for the financial results. Thank you, Santiago. Good morning, everyone. To understand our financial results during the semester, it is first important to account for inflation and currency devaluation. In the center of the graph, we can see that inflation during the semester was at 43%, and the devaluation was at 41%, meaning that the real FX evolution was a 1% appreciation of the peso. Over the last year, inflation was at 20%, and devaluation was at 7%, resulting in an 11% real appreciation. Related to the blue-chip swap and dollar map, devaluation was at 31%. Hence, appreciating the peso by 8%. The previous year was almost flat at a 1% change. However, remember that our liabilities expressed in dollars lead to gains if we experience an appreciation of the peso; conversely, our dollar-denominated assets generate losses under the same appreciation. This situation partially explains our results for the semester. Moving to the next page, we can observe what happened with our adjusted EBITDA. We achieved excellent results throughout the semester: shopping malls grew by 50%, hotels surged by 150%, and the office segment decreased by 14%, primarily due to the asset disposals made during the year. We are thrilled with this performance, as it reflects the efforts we made before and during the pandemic that are now generating successful outcomes expressed through increased margins. Shopping malls have improved significantly with margins of 78.6%, compared to 70.7% last year. The office segment is also aiming higher, achieving 81.2% versus 65.7% last year, and hotels showed a margin increase of 34.7%, compared to 25.8% last year. If we jump to the next page, we see that operating income was up 53%, excluding the effects of fair valuations. However, as we analyze the main impacts of this semester—more accounting than actual—the fair value of our investment properties generated a gain of ARS 43.7 billion. This year, we faced a loss of ARS 29.5 billion. When we assess these numbers in dollars, property valuation remains stable, but expressed in real pesos, it led to losses due to the appreciation of the peso during this semester. Now shifting to page 11, the net financial results during the semester produced a smaller gain than last year, down 26.8%, but still yielded a positive outcome. Here, I’d highlight the net interest, which showed a reduction of around 50%, dropping from ARS 4.4 billion to ARS 6.4 billion last year due to the company’s deleveraging progress throughout the year. Last year, the net FX concerning liabilities resulted in a substantial gain of ARS 11.7 billion; in contrast, this semester only yielded ARS 1.8 billion, related once again to the peso's appreciation. Consequently, we ended this semester with a gain of ARS 15.4 billion compared to ARS 49.7 billion last year. Moving on to page 12, we are proud to showcase the growth in our EBITDA, demonstrating consistent recovery post-pandemic, with good occupancy rates and flourishing sales from our tenants which have positively impacted our rental income. We posted an EBITDA of $51 million during the last quarter, thereby exceeding levels from pre-pandemic 2019, reaching a total of $156 million EBITDA over the last twelve months. On page 13, we discuss the last issuance of bonds in the local market. In June of last year, we executed an exchange offer for our main liability, an international bond valued at $360 million. At that time, 66% of investors accepted the exchange, with $121 million opting out. Consequently, we faced the challenge of paying that debt amid constraints imposed by the Central Bank, which only permits selling 40% of the duplicated dollars and requires companies to refinance the remainder. We have engaged with the Central Bank to seek permission for this new issuance in the local market, which turned out very successful. We offered two classes of bonds—one in dollar maps and another in blue-chip swap dollars—and received offers totaling $114 million. Ultimately, we decided to accept $90 million in two classes. One bond incurred an 8% interest rate, while the other incurred a 7% interest rate, both maturing in 2025. This issuance mitigated our financing costs in dollar terms and also resolved the challenge of lacking sufficient dollars to service our debt. Following this, we redeemed the total amount of our Class II bonds, the remaining $121 million, thus fully repaying it. We have also decided to call on Series IX, which expires in March, totaling $80.7 million, and we plan to execute that payment next week. Thus far, we have resolved all concerns about debt and fully complied with the Central Bank’s regulations. We are pleased with our performance and the continued support from our bondholders who continue to invest in our bonds in the local market. On page 14, we highlight our debt amortization schedule before the recent issuance compared to after. The remaining debt for this year is $100 million, and we possess sufficient cash to meet that obligation. Therefore, the debt is evenly collapsed over the next years, significantly reducing liquidity risk as it aligns with our annual cash generation. The debt amortization has been structured effectively. On page 15, we observe impressive evolution concerning our leverage. Since 2020, we have implemented a deleveraging plan, resulting in our net debt now at $285 million, a reduction of 62.2%. Our current ratios reflect this conservative approach: the net debt to EBITDA stands at 1.8x, the Loan-to-Value (LTV) ratio is very low at 12%, and the coverage ratio exceeds 8 times.

Santiago Donato, Investor Relations Officer

With that, we conclude the formal presentation. We now invite you to ask questions. Thank you very much.

Luciano Boselli, Analyst

Is the $50 million quarterly EBITDA level sustainable?

Matias Gaivironsky, CFO

Thank you, Luciano. Well, this will depend on different variables. I think regarding operations, we are seeing a good trend with strong sales from our tenants. Our budget is consistent with last quarter. So, the answer is yes, this will depend on the evolution of the FX as well. If there is a larger trend in recent events, I believe that this won't negatively influence EBITDA in dollar terms, but if we see greater devaluation, the immediate effect will be a reduction in dollar terms, primarily in malls and offices. However, for hotels, as tariffs are related to dollar rates, the impact will be less significant. Overall, our budget aligns with the previous forecasts.

Santiago Donato, Investor Relations Officer

The next question is regarding how to address holdouts due to access to the official FX markets.

Matias Gaivironsky, CFO

Yes. All the cancellations that we did during the last years were executed at the official FX, fulfilling the regulations outlined by the Central Bank. There are restrictions established by the rule that the company must refinance 60% of the principal amount, while 40% is allowed to be paid. Last year, at the time of the negotiations with the Central Bank to conduct the exchange in advance, we had access to pay only up to 30% of the principal, while the remainder had to be refinanced. We have structured our approach to provide bond options, with some bondholders receiving cash and others receiving bonds only, maximizing the benefits to those wanting cash. The positive news is that after the recent redemptions conducted, we no longer have restrictions concerning our debt. The principal amount due for hard-dollar notes will mature next year, and we anticipate a different regulatory framework concerning cancellations at that time, but for the immediate future, we don’t foresee any restrictions to settle our debt.

Santiago Donato, Investor Relations Officer

Could you provide more details on the sales and development during the quarter? EBITDA for the quarter and the six-month period were just $11.1 million. Together with a rental of $87.3 million, we reached an adjusted EBITDA close to $80 million, in comparison to last year, which was much higher because we had sales amounting to nearly $100 million or $95 million due to asset sales. The next question is about the operating results for the first half of 2023. The recent operating expense for legal matters was recorded at ARS 3.7 billion; could you provide more details on that?

Matias Gaivironsky, CFO

Yes. This is related to a claim involving our investment in Israel. We received a legal demand a couple of weeks ago in Argentina concerning potential exposure up to ILS 140 million. The company has decided to establish a provision of 50% for this, ensuring we approach this conservatively while we await our legal advisers to defend our position.

Santiago Donato, Investor Relations Officer

The next question is from a representative at Latin Securities. Can you provide an update on the company's plans for its office portfolio, including any upcoming changes? Additionally, what is the current status of the Costa Urbana development, and when can we expect more information about it?

Jorge Cruces, CIO

Good morning, everyone. First of all, regarding the office space, we have a substantial piece of land adjacent to our shopping mall that we are currently assessing. This property will feature a mixed-use, incorporating both residential and office space. I can confirm that we indeed have that property, and there will be an increase in square meters shortly. Concerning Costa Urbana, we have received approval for the project’s preliminary design and are completing it, along with the necessary utilities where we are collaborating with engineers at present. The only aspect pending is the electrical connections. All other utilities are compliant and ready. Currently, we are dealing with a legal situation that has a favorable ruling for the city of Buenos Aires, which aligns with the position we presented on February 8. We are waiting for the court's final decree, which is beneficial for us.

Santiago Donato, Investor Relations Officer

Thank you, Jorge. I will allow one more minute for any additional questions you may have. Okay. If there are no more questions, we will conclude the presentation and the Q&A session. I will return to Mr. Matias Gaivironsky, CFO, for his closing remarks.

Matias Gaivironsky, CFO

Thank you, Santiago. I see one more question here regarding the short-term debt related to amortizations totaling $99 million. This is primarily short-term debt. You can see that the company's cash position exceeds $160 million, while we have $99 million in short-term debt. This reflects liquidity management concerning cancellations. The $99 million figure is only a pro forma number from February. We aim to enhance liquidity management in the near future to address most of that amount. In closing, I want to express gratitude for your participation. We are highly pleased with the results, and the company is generating good outcomes across all business lines. Last year, we resolved all liquidity risks, and short-term debt was canceled. We are now well-positioned for a new growth phase, with ample projects queued for launch shortly, and our cash generation across all business lines remains robust. We are excited about the future. Thank you very much, and have a great day.