Earnings Call Transcript - IRS Q2 2021

Santiago Donato, Investor Relations Officer

Good afternoon, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the Second Quarter of Fiscal Year 2021 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 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. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

Alejandro Elsztain, Second Vice President

Good afternoon, everybody. We begin on Page #2, the main events for these 2 quarters of fiscal 2021 results. We can see that regarding the net results, there is a drop in these 6 months for 2021, having lost ARS1.2 billion compared to a gain of ARS6.6 billion last year. And when we see that related to attributable to the controlling company, we see a better number. This year, we have a negative number of ARS0.6 billion compared to last year’s loss of ARS1.9 billion. When we compare our rental segments and the adjusted EBITDA of the real estate activity this year, we can see growth from ARS4.5 billion last year to almost ARS8 billion this year. This is a growth of 77%. However, in the rental segments, particularly for the office and shopping areas, we see a significant drop, almost 75% year-on-year. There is a sizable figure related to sales and development at ARS6.7 billion for the company's sales this semester. The hotels were almost closed, leading to a drastic drop of 170%. We will delve into more details shortly, but the main driver of this growth is related to the season and the pandemic situation. Regarding the maintenance of the 6 months, the shopping malls reopened in October. We have completed the building of 200 Della Paolera, a nice office building that was opened in December, and we currently occupy it as the first tenant. We had sales of offices during these 6 months totaling over $170 million. The hotels reopened in December, and while one performed well, the other two did not fare as well. The successful hotel, Llao Llao, has had a strong rebound. We exchanged our debt, with an acceptance rate of 98%. Matias will explain it later. Additionally, we distributed a dividend in kind of IRSA Commercial Property shares in November for ARS484 million. Now let’s move to Page #3, where we provide a summary of shopping, office, and hotel segments. In the case of shopping, maintaining the same size, occupation decreased to 88%. This is mainly affected by Falabella’s decision to leave the country. This deal does not include Mendoza Plaza, which will likely occur next quarter. Nevertheless, we had a notable drop in tenants. They only occupy three locations across our 14 shopping centers, yet these three locations should maintain their business. The top-performing center is the Della location that we occupy, while Mendoza has not yet participated. The shopping centers are now under strict protocols and are functioning well, despite the occupancy issues related to the large spaces. The rest are well occupied, and sales are expected to align with our budgets. With the office buildings, we increased our stake due to the opening of the new building at Catalinas Della Paolera, bringing us to 114,000 square meters. Occupancy in Quarter 2 is nearing 80%, with the average rent slightly lower than last year, close to $26 per square meter. The operation and rent collection remain normal. However, with shopping malls, the collection faced challenges, and after implementing various management measures, we saw a significant improvement in shopping center collection compared to last year. Regarding office vacancy, some effects were due to Falabella's exit and others connected to the Catalinas project. Today, we rent only 75% of that building, which depressed the average rental for the whole segment. In hotels, we maintain the same number of rooms with only 8% occupancy. This is a modest increase from last quarter, with an average rate of $175 per room. The shutdown significantly impacted hotels, but Llao Llao is currently benefitting, and this month it reached occupancy levels around 80%. The others, including the Libertador and International, have suffered more. Moving to Page #4, we highlight 2 major transactions: the sale of Bouchard 710, which represented an $87 million sale at a return rate of 16%, selling at $5,800 per square meter. Additionally, we have some remaining floors on the Boston Tower, representing $42 million, sold at $5,710 per square meter. The cap rates during these transactions approached 6%. Thus, we deemed it financially prudent to liquidate rather than retain these assets. On Page #5, we see images of our newly completed headquarters building. We are currently utilizing 2 floors, down from 4 floors in our previous location on Moreno, achieving substantial overhead reductions. Now we occupy only the 8th and 9th floors in a 35,000 square meter building. Of that, 28,000 square meters remain, with 75% occupancy, and we are currently the only tenants there. This premium location building is sustainable, and we seek classifications for lease. It features modern designs with open spaces. Now I will introduce Mr. Matias Gaivironsky, our CFO.

Matias Gaivironsky, CFO

Thank you, Alejandro. Good afternoon, everybody. If we move to the next page, we will explain our investment in Banco Hipotecario. The main focus during the last semester was on restructuring the debt. Banco Hipotecario refinanced the notes that expired in November 2020, and this exchange was highly successful. As a result, we achieved a reduction of $200 million in debt and approximately $20 million in interest savings, which will benefit our ROI going forward. The current strategy for the bank emphasizes maintaining liquidity and solvency, achieving good ratios in liquidity coverage and other metrics. We notice that stock prices remain low compared to the previous year, consistent with other banks in Argentina. If we turn to Page 8, we can see the breakdown of our P&L. As Alejandro mentioned, we conclude the first semester with a loss of ARS1.2 billion compared to a gain of ARS6.6 billion last year. Excluding the results from discontinued operations from our investments in IDB, our performance was nearly ARS6 billion positive compared to a loss of ARS3.5 billion last year. The main driver of this gain is illustrated in line 4, reflecting changes in the fair value of our investment properties. During the quarter, we posted a loss of almost ARS17.5 billion, while the total gain for the semester was ARS9.2 billion. This indicates that we recorded an important gain in the first quarter, but due to shifts in macroeconomic conditions, we recognized this loss afterward. We continuously perform DCF for shoppings, and for the offices and land bank, we use comparables. Variations in inflation and the exchange rate will generate some volatility in our evaluations. Another significant factor is highlighted in line 9, where we see that during the past semester, we recovered with a gain of ARS1.2 billion, compared to last year's loss of ARS9.2 billion, which I will detail in subsequent pages. Income tax is closely associated with changes in fair values of our investment properties, leading to current taxes being almost zero, making it a non-cash effect. As we analyze our costs, at the bottom of the page, we observe that total costs and expenses remained below inflation, reflecting our effort to control expenses. Alejandro mentioned reductions in our workforce. Consequently, the inflation-adjusted decrease was 22% for the semester and 27% for this quarter. On Page 10, we present the breakdown of our net financial results. As stated, we recorded a gain of ARS1.2 billion compared to a loss from the previous year, primarily related to exchange rate fluctuations that resulted in a loss of ARS5.5 billion last year. You can observe that last year, devaluation stood at 12% in real terms, while this year almost approached 0, significantly affecting our dollar-denominated debt. The net interest loss during the semester also fell by 17.1% in half 1, and 27.3% for the quarter. This reflects changes in our leverage composition, where part of the leverage was tied to our commercial properties. Consolidating this, we have effectively addressed interest burdens. These represent the primary variables at play. Sorry, I skipped Page 9, which details the adjusted EBITDA by segment. The drop in shopping malls as compared to last year was 76.2%, while for the quarter, the figure is 47.1%. In this case, we're comparing with last year's normal conditions. This year saw our shopping malls reopen in September/October, causing significant discrepancies in initial numbers. Fortunately, we recently posted our first-ever positive EBITDA in this segment, and we're optimistic about recovering further. Our offices segment similarly experienced a downturn, partly due to the disposal of two buildings Alejandro mentioned, leaving us with fewer square meters compared to last year. In terms of rate, it’s comparatively flat. Increased vacancy rates have also impacted our overall performance. Looking ahead, with the incorporation of Della Paolera, the square meterage will stabilize. The hotel segment has been similarly affected by the pandemic conditions. The disposal of the two buildings, particularly in the first quarter of the fiscal year, also ties to sales and developments. If we turn to Page 11, we illustrate our net asset value breakdown, measuring all assets at the official exchange rate with a gross asset value of $1.4 billion against net debt of $323 million. This positions us with a net asset value of $1.1 billion, showcasing a substantial discount against the market cap company. In terms of leverage, we hold a 22% loan-to-value ratio using all metrics at booked value. On Page 12, we see our endeavors in November. Under the Central Bank Communication 7106, companies with maturities between October and March were mandated to refinance their debts to pay portions using the official exchange rate. So, we launched a refinancing initiative in November that was very successful, achieving an acceptance rate of 98.31%. We are pleased with the refinancing outcome, consolidating through two new bonds with final amortization due in 2023. As we review Page 13, we illustrate our debt status today, with net debt at $323 million, reflecting significant reductions. Our debt amortization schedule is now more diversified over the next 3 years. With that, we'll conclude the formal presentation and open the line for your questions.

Santiago Donato, Investor Relations Officer

We will now open the line for your questions.

Unidentified Analyst, Analyst

Do you hear me?

Santiago Donato, Investor Relations Officer

Yes.

Unidentified Analyst, Analyst

Yes. My main question would be current cash balance in order to face upcoming maturities. And I was wondering also if IRSA Commercial Properties distributed dividends in cash in the second quarter of 2021. Is that correct? And is this kind of cash available for IRSA right now?

Matias Gaivironsky, CFO

The IRSA Commercial Properties, in fact, distributed dividends during November. That was a dividend of ARS9.7 billion that we finally paid in dollars. What we did with the proceeds from IRSA was to cancel the intercompany loan. Instead of paying interest to IRSA Commercial Properties, we canceled the debt. So we used all the cash to reduce exposure. There is still an exposure, around $60 million of intercompany loan, and the rest we canceled. Regarding available cash, IRSA still maintains a credit line with IRSA Commercial Properties for up to $180 million. Therefore, pertaining to amortizations, IRSA will address liabilities expiring this year, but we have the backing of the credit line with IRSA Commercial Properties.

Unidentified Analyst, Analyst

Okay. So in case of need, you would use again the intercompany credit line with IRSA Commercial Properties?

Matias Gaivironsky, CFO

You know that our strategy is always to finance each vehicle at its level directly, but one of the alternatives could indeed be to use the credit line.

Unidentified Analyst, Analyst

Okay. And at best case scenario, you would try to roll over upcoming debt maturities, is that correct?

Matias Gaivironsky, CFO

Yes, and similar to what we did last year, we also have ongoing sales. If we sell some of our assets, that would also yield cash. Additionally, it's important to note that IRSA Commercial Properties has maintained a strategy of consistent dividend distribution. If permitted, IRSA Commercial Properties will continue to do so.

Unidentified Analyst, Analyst

I don't want to monopolize the conversation. I will wait to see if anyone else has any questions.

Santiago Donato, Investor Relations Officer

The next question comes from Gordon Lee from BTG Pactual.

Gordon Lee, Analyst

Well, two questions. I guess one is a bit of a follow-up to the previous one regarding sources of liquidity. I was wondering if you could tell us what, if anything, in the portfolio you are actively looking to sell to monetize at the moment? Or if the transactions you did at IRSA Commercial Properties were sufficient for divesting assets? Additionally, I was wondering, Matias, if you could elaborate on the revaluation in the first quarter and the markdown in the second quarter, specifically what variables were affected and which parts of the portfolio were impacted. We would like a clearer sense of potential ongoing volatility.

Matias Gaivironsky, CFO

Regarding realizations, there are certain assets at IRSA level that could be up for sale. As you are aware, Gordon, our investment in the U.S. was completed, but we still see opportunities for realization internationally. Locally, some hotels could be of interest to buyers, but certainly not Llao Llao. Additionally, certain land banks are attracting interest for swaps due to heightened activity in residential markets. Hence, I believe those represent three avenues for potential realizations.

Alejandro Elsztain, Second Vice President

Gordon, regarding the second part of your question, different assets experienced various impacts. In shopping malls, we apply a DCF model, which primarily sees volatility from changes in the macroeconomic variables we forecast. This variability isn't as pronounced compared to the rest of the portfolio. The significant gain we observed during the quarter arose from employing the blue-chip swap to value the offices and land bank. Given that all sold real estate assets in Argentina trade in real dollars, we assess value in pesos. What transpired next was that the blue-chip swap remained stable throughout the quarter. The exchange rate was ARS138 at the end of September and increased to ARS180 by December. Consider that we had an inflation rate of 11% during that timeframe. Thus, to maintain parity, we would need to elevate our portfolio's value by 11%, which unfortunately did not occur. In dollar terms, the portfolio's value remained relatively stable, with only a 1% fluctuation in the exchange rate instead of 11%. I hope that clarifies your inquiry.

Gordon Lee, Analyst

Yes, that's perfectly clear. If I could just follow up to confirm. Moving forward, you will adjust the value of the office portfolio utilizing the blue-chip exchange rate but will continue translating the NOI on your P&L using the official rate, correct?

Matias Gaivironsky, CFO

Yes, that’s correct. And remember, Gordon, that we accrue our revenues based on the official exchange rate now. The rates are in dollars, but tenants pay at the official exchange rate in all transactions involving blue-chip.

Santiago Donato, Investor Relations Officer

If there are no more questions, we conclude the question-and-answer session. At this time, I would like to turn back to Mr. Alejandro Elsztain for any closing remarks.

Alejandro Elsztain, Second Vice President

To conclude, sales in the shopping centers post-lockdown have exceeded expectations, and we are observing some shop incentives outpacing inflation year-on-year. We're pleased with how the shopping centers are performing. Regarding the office sector, we opened Della Paolera in December, but rental collections will take time to reflect in our numbers. With hotels, witnessing several properties achieving 80% or more occupancy suggests a positive trend as the country begins to open up. Overall, our assets are performing well, and we have improved our financial position relative to last year. We concluded the six-month period with satisfactory results, and we hope COVID will not adversely impact operations again. In summary, the company is significantly better positioned than it was six months ago. Thank you very much, and have a very good day.