Earnings Call Transcript - IRS Q3 2022

Santiago Donato, Investor Relations Officer

Good morning, everyone. I’m Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the Third Quarter of Fiscal Year 2022 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. Before we begin, I would like to remind you that this call is being recorded and that 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. Eduardo Elsztain, CEO. Please go ahead, sir.

Eduardo Elsztain, CEO

Good morning. It's a pleasure to share with you the main events of the third quarter of the fiscal year 2022. We are just going ahead with the merger with IRSA CP; it's successfully advanced, and we are very happy with that. It's a transaction that we've been thinking about for years, but after so many years of thought, we implemented it, and after the shareholder meeting, and with no objections from the SEC and the Comisión Nacional de Valores, the next step will be the exchange of shares of the two companies. So, that's a real achievement in every sense: management, directorships, fewer companies listed, rationales in taxes; it brings all the benefits. In terms of rentals, we have been seeing a significant and very good recovery in shopping malls and hotels during this period. With higher revenues and better occupancy, the tenant sales have improved more than 20% in real terms compared to pre-pandemic times. And we are very happy to see the flow of people. I mean, we have to see that in the two years of the pandemic, we had many months when the shopping centers were closed. I think that’s very, very good news. And also to see that we are fully booked; this is a very good feeling. Regarding our assets, I believe it's been a fantastic time in the last quarter. In terms of sales and development, we sold five floors of the Della Paolera building, the new building we developed in the neighborhood of Catalinas, for more than $52 million. Additionally, in April, we also sold 100% of the República building in block for $131 million. I think that comes in the next quarter, but it shows the liquidity of the assets we've been accumulating over the last three decades. On the financial front, we launched a share repurchase plan for up to ARS1 billion in March 2022, and we have already achieved the repurchase of 7.3% of the program. If we compare the price we are selling in the market to the value per square meter in the company, we are really repurchasing at a substantial discount. So, in these first three quarters of the year, we achieved a lot with the merger, Costa Urbana, and the sales of real estate units. I think there is a lot of good news in an environment of shaky markets and a shaky world. My perception of Argentina is very positive for this year to start, especially due to the incredibly low leverage of Argentinean people. I always repeat that we have less than 1% of debt-to-GDP in our entire portfolio of real estate in the country. We achieved a very long-term refinancing at a very low interest rate for the country, which is part of the pandemic's low-interest rates. After the world printed enormous amounts of money, we are now seeing the cycle of inflation. In inflation, the only assets that become highly demanded are real assets. In that context, commodities are number one. Since Argentina is a producer of commodities, especially in agriculture, the cycle is very positive, and Argentina is among the few countries that will benefit from this year's growth in GDP because of this effect. Thank you for joining this conference, and I leave you with Matías, who will provide all the details regarding accounting. Thank you very much for joining us.

Matías Gaivironsky, CFO

Thank you, Eduardo. Good morning, everybody. So, if we move to page three, we can see the recent developments on the merger approval status. We just finished all the legal steps, so the public register here in Argentina has just inscribed the merger. Now, we are in a position to exchange the shares. We will probably fulfill all the steps in the next two weeks to exchange the shares and delist IRCP from Nasdaq and the Buenos Aires Stock Exchange, making IRSA the only listed company as the main real estate company for Argentina. The total outstanding shares will be 810 million shares plus the warrant, so this will be finalized in the next two weeks. Now, if we move to the operating side, we can see a very good evolution in shopping malls after two years of crisis due to the pandemic. We are starting to see the industry recover. We are happy with the occupancy rates and see much better numbers than previous quarters, and the evolution is very promising. You will remember that we have three significant spaces empty because three companies left Argentina or closed their operations; Falabella, and Walmart. We are currently occupying all those spaces, so we see a very positive evolution in occupancy. In terms of real sales—sales in real terms adjusted for inflation—we are surpassing previous quarters. If we compare with the same quarter in 2019, we see a 21% increase in real terms. This improvement is notable; before the last quarter, we saw only 7.6% above the previous year's performance. So, we are very pleased with this evolution. Next, we can see the expansion of Alto Palermo. We have been disclosing this in previous quarters, and last quarter we opened most of the new spaces. We expect to open the final part, the food hall, in the next quarter, which we have already commercialized. We will be transforming the old food court into a new concept of a food hall with more services. All the new space is fully occupied, and we consider this a very successful expansion of one of our main shopping centers. Looking at the office buildings on the next page, we observe a reduction of the portfolio due to disposals carried out in prior quarters. In this quarter, we sold some floors in the Catalinas building, and we will explain that on the next page, as well as the República building. We expect to finish the fiscal year with 83,000 square meters, and we are pleased with the performance of the disposals. Our strategy is active regarding our portfolio. Our strategy is not to accumulate square meters; if we see good prices, we will sell. In terms of occupancy, we remain stable in the AAA and A categories. However, we are experiencing challenges in the B category due to new trends in certain areas of Buenos Aires. We have one building in Downtown Buenos Aires that is empty, accounting for that 30% reflection, and also our building in Philips, close to the Dot shopping center, where the price per square meter remains stable at $25 per square meter. On page seven, the strategy regarding the offices has been very active. This quarter, we sold five floors of the Della Paolera building at the official exchange rate of $8,800 per square meter. So far, we have sold 11 floors of this building for $110 million. When we analyze the cost of construction plus the land cost, this total is exactly the same—$110 million. We still own 18,000 square meters, and if we evaluate this at the average price per square meter sold, which has been $8,300, this gives us about $150 million more in value above the construction cost. On page eight, we see what we did with the República building. This was an iconic office building in Downtown or the area of Catalinas; we sold the entire building in block for $131.8 million. From this amount, we collected $105 million in cash, with 20% in a plot of land between Buenos Aires and La Plata, which is 20 kilometers from the city of Buenos Aires. We now have this plot of land with a construction capacity of over 500,000 square meters that we can develop into a mixed-use project. This is new for us, and we are studying what to do with this plot. In the next quarters, we will provide more details on our plans. We saw the opportunity to sell this building; it’s iconic and of high quality but somewhat outdated. We believe we can replace that surface with a new building, likely with a construction cost that is lower than the sale. On the next page, we illustrate another recent acquisition. We have been selling significantly over the last two years, and we found an opportunity to acquire a plot of land in front of Alto Palermo, one of our main shopping centers. This was sold by the City of Buenos Aires through an auction. We decided to participate and offered $20 million at the official exchange rate for that plot, which consists of a building with 8,000 square meters. We have the capacity to expand this building, and our idea is to replace it with a mixed-use project, likely including retail in the basement and offices above. This area is familiar to us, so we hope to leverage some synergies with the shopping center. We are happy with the acquisition, and we believe the price per square meter we paid is attractive. However, an important detail to mention is that one of the auction conditions was to provide rent or free use to the City of Buenos Aires for 30 months. Therefore, we will receive the property only after that period, meaning we can't start construction right now. During this time, we will develop our plans and decide on the project. On Page 10, we will summarize our hotel operations. After the pandemic, which was a disaster for us, we are starting to see recovery, primarily at the Llao Llao hotel. The Llao Llao hotel was undergoing some renovations; despite that, we have achieved a 90% occupancy rate, which is very impressive. Overall, the hotel occupancy is around 35%, with business tourism hotels in Buenos Aires lagging more. However, Llao Llao is performing exceptionally well. On the financial side, looking at Page 12, we are finishing a nine-month period as of March with a gain of ARS11 billion compared to a loss of ARS22.8 billion during the prior year. The previous year was impacted by the pandemic, with shopping centers closed for almost six months. This makes it a challenging comparison. If we look back at the nine months of 2020, the loss was ARS9.2 billion. The primary drivers behind the net income gain were the change in fair value of our investment properties, which will be explained further in the following pages. We observed a negative effect of ARS11 billion this fiscal year, with a net negative effect of ARS37 billion during the most recent quarter. Additionally, the net financial results reveal a positive outcome of ARS9.6 billion, which is significant. It's important to note that we are seeing a negative result in current taxes of ARS5.9 billion, primarily due to the inflation adjustment on the tax side that is generating these results. However, we do not foresee this tax being effectively paid in cash. Therefore, we are considering various strategies; we will likely take legal action similar to what we did for IRSA commercial property, which is disclosed in our financial statements. We believe the company has a right to adjust that tax grade for inflation given the high inflation rates we're currently experiencing. Moving to the next page, we need to understand the significance of these figures by analyzing FX and inflation trends. Over the year, the depreciation of the Peso at the official exchange rate was just 16%, while inflation reached 40%. This devaluation means that real terms show a decline in the Peso despite dollar-denominated assets holding stable value. This discrepancy creates a situation where while dollar-denominated debt generates profits, the expressed value of our assets diminishes in Peso terms. Our adjusted EBITDA highlights that the operational driver, especially in the shopping malls sector, saw a robust recovery during the quarter, at 72% for this nine-month period. However, we still lag by 12% in office returns, attributed to the decrease in stock and that segment relying on revenues tied to the official exchange rate and lower inflation levels. In hotels, a recovery is evident for both three-month and nine-month periods, yet still lags the figures from pre-pandemic levels. In the coming pages, we will delve deeper into shoppings and offices by revealing the EBITDA evolution, which indicates a remarkable cash generation recovery throughout the last two quarters, each generating $25 million. We are satisfied with the continued recovery. When examining details concerning offices, we see the comparison between last year and this year showcasing various factors contributing to the decline. We address the factors related to square meters sold, among others. On page 16, we see the net financial results, with ARS9.6 billion profit primarily stemming from currencies related to our dollar-denominated debt, which is articulated in Pesos. Interest losses have decreased concerning leverage reduction. Page 17 shows the net asset value, acknowledging FX distortions that can complicate evaluations. We showcase all the properties in our books divided by the official exchange rate, aiming for clarity in presenting the information. The gross asset value of our company remains at ARS2.3 billion, with net debt decreasing to $445 million at the official exchange rate, leading to a net asset value of $1.8 billion, resulting in a loan-to-value (LTV) of 19.6%. As Eduardo mentioned earlier, we launched a buyback program for ARS1 billion. We do have limitations regarding the size of the program and how quickly we can acquire due to the CMB rules that allow buying up to 25% of the average volume for the last 90 days, yet we believe this is a solid use of cash, given the value we are retrieving at a rate lower than selling prices of our portfolio properties. Finally, in page 19, we present the evolution of the net debt. When we launched the merger, we committed to reducing leverage from $570 million to $470 million, and we have exceeded that. As of March, we stand at a net debt of $447 million, a 40% reduction from 2020 levels. Following the sale of the República building for $100 million in cash, we anticipate further reductions, likely dropping to around $347 million, with continued asset disposals moving forward. Addressing debt amortization schedules will remain challenging; we will work to extend tenure moving ahead. With that, we conclude the formal presentation. We now open the line to receive your questions.

Santiago Donato, Investor Relations Officer

Well, let's start with the Q&A session. We have some questions here in the chat. Can you please clarify the breakdown of EBITDA in dollar terms for the quarter and the last 12 months? Sorry, I will repeat the question; can you please clarify the breakdown of EBITDA in dollar terms for the quarter and the last 12 months?

Matías Gaivironsky, CFO

Yes, the last 12 months, we saw levels of $110 million in EBITDA. Of that, 61% is related to malls, 16% to offices, 4% to hotels, and 26% to sales and development. Remember that when discussing sales, we are using the adjusted EBITDA, so we adjust for the results in the fair value of investment properties unless sold. In the quarter, the EBITDA of malls was $25 million, offices $5 million, hotels $3 million, and sales and development $19 million.

Unidentified Analyst, Analyst

Hi, Matías, Santiago, hope you're well. One question on the use of proceeds and development. After the República sale, you just mentioned, Matías, you get down to healthier leverage levels. My question really concerns the new plot of land acquired alongside the sale. How should we think about development on that, the mixed-use potential for that plot, and how can we compare it to Costa Urbana from a timing standpoint? Also, on Costa Urbana specifically, have there been any developments that would expedite the timeline compared to what we've seen at Costa Urbana, or will it take a long time? That would be my question. Thank you.

Matías Gaivironsky, CFO

Thank you, Alvaro. In terms of priority, we expect to see faster developments in Costa Urbana rather than the new project. As you know, we received approval for Costa Urbana in December. We're working hard to define the project and determine the stages of commercialization and development. However, these processes are not very rapid. Once we finalize the project and start construction, we expect high levels of CapEx, but that will take time. It's not for the next fiscal year; probably, it will take two years before we see significant CapEx beyond the soft costs of the project. Therefore, we are not anticipating major CapEx for the upcoming year in Costa Urbana or the new land. The new land may allow for various development strategies, so it's not necessarily indicated that the company will only pursue that one project.

Unidentified Analyst, Analyst

Super clear. Additionally, you mentioned that we should expect more asset sales. I know you can’t disclose much, but could you indicate whether it will be more focused on offices or might it also involve retail or hotel portions of the portfolio? Anything you can mention would be helpful. Thank you.

Matías Gaivironsky, CFO

Alvaro, it's difficult to say. You know our strategy is to disclose when we take actions and not before. We have been quite adept in doing things; we've had substantial levels of disposal in the past year. I prefer to announce disposals when they occur. Our strategy is not to accumulate real estate assets. Given the high costs of capital in Argentina, we need to remain active. Therefore, if we receive good offers for any of our assets, we will evaluate them. We are not emotionally attached to any particular asset.

Unidentified Analyst, Analyst

Great. Many thanks.

Santiago Donato, Investor Relations Officer

Thank you, Alvaro. Here is a question also related to CapEx. I think Matías answered what we expect for the rest of 2021. Why was the CapEx $27 million in this quarter?

Matías Gaivironsky, CFO

The $27 million is primarily related to the acquisition of the new plot of land in front of Alto Palermo, which cost us $20 million, constituting the majority of that CapEx. The remaining amount was for finalizing the expansion of Alto Palermo, contributing to the total $7 million.

Santiago Donato, Investor Relations Officer

Next question comes from Augustine. Has the company made any recommendations to the Board concerning refinancing next year's debt? Do you plan to enter the international market, make an exchange offer, or explore other options?

Matías Gaivironsky, CFO

Thank you, Augustine. We are indeed working on that. As you know, there is a rule from the Central Bank in place until December this year. It allows companies with dollar obligations to refinance up to 60% of their size. Unfortunately, that rule dictates that companies can only access these funds 45 days before expiration. For us, that's March next year. Therefore, we are likely to have access in February. We hope to have findings or some news to share soon.

Santiago Donato, Investor Relations Officer

Next question. Are you considering a dividend for shareholders this year?

Matías Gaivironsky, CFO

We will assess this at year-end. This has been a year with challenges concerning debt refinancing. As of now, the company's liquidity is solid. Historically, our strategy with IRCP has been to pay dividends, so that serves as a guiding principle. However, we will make decisions once we view the end-of-year results, liquidity, and debt refinancing landscape.

Santiago Donato, Investor Relations Officer

One more question from Mariana Cruz from BTG Pactual. Can you please provide more insight into the expected recovery for Class B offices occupancy?

Jorge Cruces, CIO

Good morning. We are somewhat surprised with the Class B office buildings situated within residential neighborhoods. Those Class B offices near residences are performing very well, sometimes even better than pre-COVID levels. However, Downtown Class B offices are not performing as strongly. We will need to observe how that landscape changes over the coming months.

Santiago Donato, Investor Relations Officer

Okay, good. We move to the next question; they ask here for more details on the prospects of Costa Urbana?

Jorge Cruces, CIO

For Costa Urbana, we are advancing according to our timeline established after the December law's enactment. Next week, we will present the first project that we planned. We are also analyzing the stages of future development and the necessary infrastructure. Everything is on track, and while it's still early, we are maintaining our schedule.

Santiago Donato, Investor Relations Officer

Related to the approval, there was a legal proceeding from some organization trying to halt the approval, arguing that the City of Buenos Aires dealt with the approval process incorrectly. The company and the city appealed against that action. We are confident in our process and do not expect that this action will heavily impact the approval.

Operator, Operator

That's all the questions that we see here in the chat or from those who raised their hands. If there are any additional questions, we will wait a few minutes for more. Okay, if there are no further questions, we conclude the Q&A session and turn back to Matías Gaivironsky, our CFO, for his closing remarks.

Matías Gaivironsky, CFO

Thank you. We have had a very good quarter, being active on all fronts—operationally, in buying and selling, and in financial dealings. The company is recovering well from the pandemic. We see increasing EBITDA levels and strong cash generation while deleveraging the company. We are optimistic about rental recovery in the upcoming quarter, especially in shopping malls, and we anticipate improvements in hotel performance as the pandemic effects diminish. In the coming days, we will probably finalize the merger. Everything is looking positive as we head towards the end of this fiscal year with promising results. Thank you very much for your participation. We will stay in touch.