Earnings Call Transcript - IRS Q3 2024

Matias Ivan Gaivironsky, CFO

So good morning, everybody. Today, we will review the results of our Nine Months Period of our Fiscal Year 2024. This was a special quarter with a big change on the political side, with the assumption of the new administration, a big change also on the economic side, with the first measures of the new administration that tend to stabilize the economy and reduce the deficit and inflation. So, so far, there were good results. This is too early to see results on our industry. But we have a strong hope in the new administration to obtain and achieve stabilization of the economy, which will be very good for our industry. When we review the results of the nine-month period, we will see a loss on the net income of around ARS111 billion, that is explained mainly by a noncash effect on the fair value of investment properties that I will explain later. Also, we see good results when we consider the adjusted EBITDA with a 9% increase against the same period of the last year. During the quarter, there was a slowdown in consumption, and our EBITDA, mainly in the malls, decreased compared with the same period of the last year, that also we will review later. Regarding tenant sales, there was a slowdown in consumption, so we will see a drop. Occupancies are at very good levels, both in malls and in offices. On the financial side, we decided to launch a new buyback program. So far, we acquired around 1.7% of our own stock. And also, 10 days ago, we decided to pay a new dividend that we will start the distribution tomorrow for our local shareholders. The dividend is for ARS55 billion. So now I will turn the call over to Santiago Donato, our IRO.

Santiago Donato, IRO

Thank you, Matias. Well, here, we can see the shopping malls operating figures, our tenant sales on the quarter and on the accumulated nine-month period. On the quarter, as Matias mentioned, we have seen a decrease, a drop of 18.5%. This is the third quarter of 2024 compared to the third quarter of 2023 due to the acceleration of inflation and its impact on consumption during the third quarter of the fiscal year 2024. Occupancy remained very, very high at levels of 98% in our malls. And when we look at the accumulated sales, we are up almost 1% in the year compared to the same period of last year. So in the nine-month period, we cover inflation. We're a little bit above inflation because until December, the first semester of this fiscal year was really good. Sales were up like 10% in real terms. When we see the breakdown by type of business, we see that apparel is, on average, 19% down on the quarter. Services and miscellaneous are a little bit up as expected on the distribution. And then restaurant, home and electronics, and entertainment are showing decreases at levels of 25% to 30% on the quarter. The next quarter is going to be a challenge as well to sustain tenant sales and activity and visitor flows in the malls. But we trust that in fiscal year 2025, which starts in July '25, activity in the malls should recover in line with the recomposition of salaries and the economic activity. Regarding the office segment, after selling assets during the last three to four years, we currently manage about 59,000 square meters, mostly A-plus and A buildings, and occupancy remains very high at levels of 93%. This is above the average of the industry in Buenos Aires, while rents remain stable at levels of $26 per square meter per month. Finally, regarding the rental segment for hotels, the three hotels have shown very good performance during the quarter, reaching an average occupancy of almost 69% and a rate per room of almost $260. The Buenos Aires hotels we own, the Libertador and the InterContinental, recovered strongly in occupancy and rates due to the recovery of corporate events and an increase in tourism. An additional hotel reached a peak occupancy of 83% last year, now maintaining very high levels at 76% occupancy and charging rates of approximately $470 per room. So despite the shopping centers showing a drop this quarter, in general terms, the rental segment is doing very well and closing the year with good performance. I will now turn it over to Jorge Cruces. Jorge is the CIO of the company, to show the status of the upcoming projects of the company.

Jorge Cruces, CIO

Thank you, Santiago. Good morning, everybody. Regarding the Costa Urbana project, we have completed the submission of all additional information and documents requested by City Hall for granting the approval of the project for the infrastructure and road works. In respect to the public park project, our design team is working with City Hall on the architectural and landscape design of the public park across all three phases. As for the environmental approval, having completed the submission of all assessments requested by environmental authorities, we expect the environmental public hearing to be held in June or July. Regarding the La Plata development project, the land is a huge block of about 8 hectares in the north end of La Plata City. In their surroundings, there are two supermarkets and a home center, making it by far the most important supply center of the city. It's a mixed-use master plan. The huge block has been subdivided into 18 lots, two of which will become public squares to be transferred to the city, the largest one for a shopping center and the other plots for developing residential and commercial buildings. The shopping center will be a two-level open-air facility, with 22,000 square meters of gross leasable area and 720 parking spaces. The residential and commercial buildings will have approximately 78,000 salable square meters. Today's status: The town council has approved the project and issued the construction permit. In April, the industrial survey plan and proposal for creating the new plots were filed and registered, enabling the lots to be sold. Project and bidding documents were already completed and are ready for the tender process. Regarding the La Plata Building, in late December, Banco Hipotecario, in its capacity as owner and trustee of the land, transferred the fiduciary domain of the property in favor of TMF Trust Company as trustee. In January, City Hall approved the construction license for the project, allowing us to start the construction works. The first meeting of the Trust Executive Committee was held in March, and authorities were designated. Most importantly, a closure regarding the final list of money transfers and the percentage of participation of the investment has been established. Nowadays, the architects are working on the final technical augmentations, which are expected to be completed by June. In the meantime, we are signing the contract with the construction manager and beginning some minor demolitions. Big numbers of the development include a total surface area of 60,000 square meters, 35,000 salable square meters, 15 floors, and four parking floors in the basements, alongside 721 apartments and eight shops with 224 parking lots. Last but not least, there has been a game changer regarding mortgages. Just in the last couple of weeks, several banks, starting with Banco Hipotecario, announced that they will begin offering mortgages in the next couple of months. This is a game changer for us, not only because of our 30% stake in Banco Hipotecario, but regarding all our projects in our portfolio. We're really anxious to see how this plays out, but we are confident that it will be very important for the next two to three years for the company. Now I'll hand it back to Matias, our CFO.

Matias Ivan Gaivironsky, CFO

Thank you, Jorge. To reinforce the idea of how the mortgage industry can change real estate, we have to mention that Argentina is an economy with no leverage. Mortgages to GDP in Argentina are only 0.3%. When you compare that with our neighboring countries, that number is significantly higher. So we believe that if the economy stabilizes and we start having this kind of offer on the mortgage side, this will be a very big change for our real estate industry. Now, to go into the financial results, I would like to spend 30 seconds discussing what happened with the main variables, the FX and inflation. As you remember, there was a big devaluation in December. We discussed that in the last conference call, where the official FX went from 350 to 800. During this quarter, the FX remained stable, and as you know, the government is implementing a crawl impact of 2% per month, maintaining that over the last three months as well as in April. This generates volatility in our results. We must put all the numbers in peso terms adjusted by inflation. Such big movements create volatility in the results. On the asset side, we value the malls at the official exchange rate, a fair value at the official exchange rate. For the land bank and office portfolio, we are valuing at the blue chip swap at the dollar MEP, which also remained stable during the quarter. In the last quarter, we finished with 995 and now with 117. When we see the numbers adjusted for inflation, you'll see that on the bottom left, the official exchange rate closed at 858, compared to 1,225 in December. The blue chip swap was 1,800 in the third quarter and we finished at 1,017 in March. So we will see the impact of that in the following pages. First, on the adjusted EBITDA, we still have good numbers. The adjusted EBITDA increased by 6%, and the rental EBITDA rose by 12%. Remember that we finished December with better numbers. In the last three-month period, for instance, the mall EBITDA decreased by 18% compared to the same period of the previous year. This is when we compare numbers in pesos. Going forward, we may not see results in pesos. However, if the dollar remains stable, we might see good results in dollar terms but lower numbers in pesos. When we analyze the margins, they remain stable: shopping malls at levels of 76%, offices at 81%, and hotels at 40%. On the following page, setting aside the effect of the change in fair value, the numbers were good. Operating income increased by 40%. However, when we consider the loss generated by the change in value of the investment properties, there was an important loss of ARS385 billion. Essentially, this effect is what I described initially—the effect of the FX and inflation. If we review the numbers in dollar terms, our malls remain at the same value, the offices and land bank also remain stable—the only major changes are the effects of posting the results in peso terms. The next page shows the net financial results. Here, we have good numbers, including significant results from the fair value of our assets and liquidity invested in securities. Additionally, the impact of devaluation reflects an ARS81 billion appreciation in pesos. Regarding income tax, it is unusual to see a gain in income tax, but this is related to every time we post a loss in the fair value of the investment properties, we report a gain in deferred tax. Conversely, if we post a gain, we record a loss on deferred tax that we could potentially pay if we sell the property. An important note is that probably during the last years, we exhausted the tax credits we had. Therefore, starting this year, we will likely begin paying income tax again. Finally, regarding the net results, as I mentioned at the beginning, there was a loss of ARS111 billion compared to a gain last year of ARS123 billion. Moving to the next page, we see the evolution of our rental EBITDA in dollar terms during the last year. The last 12 months in dollar terms amounted to $161 million, which is a slight decrease compared to the previous year, but a significant increase when we compare it to pre-pandemic levels. Regarding our debt, there were two new issuances in the local capital market during the quarter, with around $52 million issued in two tranches—one in dollars at a 7% coupon and the other in peso Class 1, raising around ARS31 billion. Total gross debt today is around $357 million as of this March and is diversified across the following years, not concentrated in any specific year. As I said before, we've announced a new dividend starting tomorrow, which amounts to ARS55 billion or about ARS76 per share. This represents a dividend yield of 7%, and when combined with the previous dividend distributed in October, we reach an amount of nearly $120 million in dividends. This is an extraordinary dividend. We feel comfortable with our financial situation, liquidity, and low leverage, which leads us to be more aggressive regarding the dividend. For our ADR holders, we don't anticipate delays like last time, and we expect to fix a record date for the ADRs in the next ten days. Our ADR holders should soon collect their dividends in dollars, using the blue chip swap FX instead of the official FX. The following page shows the evolution of the debt. On a pro forma basis, including the dividend distribution, we will be at very conservative levels for debt. We feel very comfortable with these numbers. Regarding the share repurchase programs, as you know, we launched two programs—one that was completed in March and another in April. Together, we acquired about 1.7% of the shares, and along with the last program we completed a year ago, we hold approximately 2.2% of the shares in treasury. With this, we finished the formal presentation. Now we open the line to receive your questions.

Santiago Donato, IRO

Now is the time for the Q&A session. If you have a question, you can use the chat; we will take the questions in the order we receive them. Well, here, we have a first question regarding the timeline expected for the Costa Urbana project. Can you provide some additional color on the timing?

Jorge Cruces, CIO

The timing is, as I said before, we need the environmental hearing that should be in June or July. From then, we can start the construction. As we start the construction, we'll also begin selling the lands. We need to start infrastructure to begin selling land. So, I suppose that in the second semester of this year, all that will take place. We'll start with the works and with all the commercial and other plans, potentially even starting a building of our own in the first semester of '25.

Matias Ivan Gaivironsky, CFO

Also, Jorge, it's important to mention that the environmental hearing is not binding. So we don't need that to start the project; it’s an additional step, but it is important to have it as a prior requirement before construction.

Santiago Donato, IRO

Thank you, Jorge. The next question comes from our balance sheet. What are your expectations for the office segment in fiscal year '25? Do you plan to continue divesting from the office segment? There is another question regarding your expectations for maintenance and expansion CapEx for the last quarter of fiscal year '24 and fiscal year '25. Would any expansion efforts be allocated to your mixed-use projects only?

Matias Ivan Gaivironsky, CFO

Regarding the first part about the office segment. Operationally, we don't expect a major change. Prices are stable in dollar terms. Of course, in pesos, we are now receiving amounts closer to real dollars than before. Remember that the gap between the official FX and the blue chip was about 300 in December, and now it’s only a 20% difference. So now we are getting much closer to the real value of the dollars. Regarding the divesting process, as we have always stated, we do not anticipate transactions, but if we see good prices, we are not just accumulators of square meters. Therefore, if we identify good opportunities, we will continue with our strategy to rotate the portfolio. As for expectations on maintenance CapEx and expansion in the next year, it's not a significant CapEx. We announced we will deploy around $40 million in the infrastructure of Costa Urbana, probably during 2025. The La Plata projects will require about $10 million in 2025. Maintenance CapEx in our existing malls is not significant—probably around 2% of our EBITDA. Jorge, do you want to add anything else?

Jorge Cruces, CIO

No, I think that's about right.

Matias Ivan Gaivironsky, CFO

Regarding the Edificio Plaza, remember that IRSA is the developer and also the investor. We will invest around 20% of the construction costs, although the construction will span two to three years, so it's not a significant amount. We are also seeking opportunities to acquire existing land bank or buildings, making us potentially more aggressive on the acquisition side. However, for now, our development side announcements are as described.

Santiago Donato, IRO

Next question: how long do you think it will take for tenant sales to recover? Are wage indexes being followed to predict this?

Matias Ivan Gaivironsky, CFO

That’s not an easy question to answer. This will depend on the evolution of the macro side. With the acceleration of inflation, wages were not adjusted at the same pace. We need to see a recovery in wages. Moreover, with the normalization of prices associated with tariffs in general, including transportation and utilities, people will experience increases in costs, and the government is also trying to cut subsidies, which will affect purchasing power. Therefore, predicting how fast the economy will recover is difficult. There is significant debate among economists about whether the recovery will be swift or gradual. However, we anticipated in December that we wouldn't see increases in real terms in our tenant sales at least for the next few months. We expect to start seeing some recovery around July, although in pesos terms, we may see weaker results. Conversely, in dollar terms, we may see higher numbers if the dollar remains stable while inflation components in pesos continue to rise. This could yield better results.

Santiago Donato, IRO

Yes, by the end of the year, it might not end too badly, since we had a very strong first semester for the fiscal year, which compensates for a weaker second semester on an annual basis.

Matias Ivan Gaivironsky, CFO

Having said that, when we observe the levels of cash generation on the EBITDA side, they remain very strong. The majority of our agreements today are indexed to the CPI, although we experience some lag—usually one or two months for adjustments—but most are protected by inflation. This will provide a buffer during this consumption slowdown.

Santiago Donato, IRO

We'll give two more minutes. If there are any additional questions, please use the chat. If there are no more questions, we conclude the session and turn it back to Matias for his closing remarks.

Matias Ivan Gaivironsky, CFO

Thank you very much, Santi. So as I said, we are very confident about the normalization of the economy. We believe that this will create many opportunities for IRSA to be more aggressive regarding expansion. As you know, during the last three years, we concentrated on preserving liquidity and focusing on our own capital structure rather than launching new projects. However, we hope to see IRSA leading the real estate industry in Argentina. We expect to be much more aggressive in expansion, especially if the new administration achieves economic stabilization. With reduced capital costs, we can pursue more aggressive growth strategies. As we have plenty of land to expand our portfolio, we hope to see IRSA enter a new growth stage moving forward. So thank you very much, and see you on the next call.