Earnings Call Transcript - IRS Q2 2024

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 of Fiscal Year 2024 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. If you want to make 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

Good morning, everybody. We are finishing the first half of our fiscal year 2024 with very good results operationally and financially. We will see the numbers later. During the first half, tenant sales were very good and occupancy was higher than the year before. Also, the hotels maintained very strong and high occupancy. Our premium offices also improved occupancy. Additionally, during the first half, we were very active in real estate transactions, selling two floors of the Della Paolera building, and we signed a new barter agreement on one plot of land that, of course, we will explain later. We also finished setting up a new trust for a very important building in downtown Buenos Aires. We have completed our dividend distribution, but there was some delay in the payment to our GDS holders because of regulations. Now we have finished everything and already distributed that. So now, Santiago will answer in more detail about our operational performance.

Santiago Donato, Investor Relations Officer

Thank you, Matias. Here, we see the figures from the shopping malls. Occupancy has increased to levels of 98%. This is a maximum historical level after all the impact of the pandemic. We finally reached our maximum levels, the same as the previous quarter and the first quarter of 2023. Sales grew 8% in real terms in the second quarter compared to the same quarter of 2023. We are about 30% higher when we compare to pre-pandemic levels. This shows really good performance of our tenant sales in malls that surpassed inflation as of the first half of the year. The second half, which we are going to present in the future, is going to be a challenge to maintain these sales levels, given the acceleration of inflation due to the first measures of the new government after December and its impact on real wages and consumption. Therefore, we expect a slowdown in sales and visitation in the next quarter. However, we trust in the quality of the portfolio, and we hope this will be a short-term impact from which we will soon recover our growth trend. Moving to the office portfolio, we can see that we continued selling some floors, as Matias mentioned. We sold the entire building in the Suipacha building and two floors of the Della Paolera at very good prices. We have a portfolio of around 60,000 square meters, mostly A+ and A. We have only one B category building, which is Philips. The plan is in the future to recycle and position it as a premium building in all that area, together with the shopping interests and another building and some other projects that the company owns there. In terms of occupancy, we have seen an increase to levels of almost 93% in the second quarter, and trends remain stable. The devaluation has had a positive impact on the offices as this involves dollar-linked contracts. The devaluation of the official FX to levels of ARS850 per dollar acts as a natural hedge against the official devaluation. As for the hotels, which are also linked to our hedge against devaluation, they are performing very well, with occupancy rates approaching 72% across the three hotels. Remember that we own the Llao Llao resort in Bariloche and two hotels in Buenos Aires, Libertador and InterContinental. The average rent per room is at levels of $240 per room, with good performance both in the Buenos Aires hotels and in Llao Llao. Tourism remains strong for both domestic and international visitors. Regarding the Della Paolera, we sold two floors during the last quarter. We have presented this in some conference calls in the past. This was a great investment, and we sold 86% of the building that we opened in December 2020. We bought it at that time for long-term lease, but ultimately we saw a great opportunity to sell floors due to high demand. This is a premium building, and we sold 86%, obtaining profits from sales of around $200 million in excess of our investment of around $112 million between the land and construction costs. We are keeping some floors there for a valuation of $32 million, so the profit over investment is expected to exceed 200% — a great case. The plan now is to replace these with new square meters and develop mixed-use projects in the near future.

Jorge Cruces, CIO

Thank you, Santiago. Good morning, everybody. In December, we signed a barter agreement transferring ownership of land in Ezpeleta to a well-known land developer in the Quilmes district. We have successfully developed Quilmes Nuevo, and they have named this new development Quilmes Nuevo 2. We will receive 40% of the development, which means 125 single-family lots and 40% of the buildable square meters of the multifamily lots. Banco Hipotecario had acquired the main office building of the city’s administration to build its headquarters but did not proceed for various reasons and the building was on sale. Currently, there is a reconversion program from commercial to residential with tax benefits. We gathered a pool of companies willing to take advantage of this program and invest with us in this premium residential development. Our stake in the investment will be 20.5% of the reconversion cost, obtaining 14.7% of the square meters of the project. We estimate a total investment of approximately $50 million net. The development has 720 apartments, including studio apartments, one-bedroom, and two-bedroom units, along with 220 car spaces and various amenities like a rooftop, gym, and co-working spaces. It's a great development, and it occupies a whole city block, just one block away from the Obelisk on the main avenues of Argentina. We are very proud to announce this development. As for Costa Urbana, on November 15, notarial deeds were signed transferring ownership to the city of four plots of land and creating the 61 lots for development. We fulfilled the second step in the process of creating land registrations in the industrial database of the city for issuing ownership titles and enabling IRSA to transfer the plots. The third and final step will be accomplished when we finish the road works and infrastructure for each block, allowing IRSA to officially transfer the ownership of the plots to third parties. By the end of January, we completed the submission of all additional information and documents requested by City Hall for granting project approval regarding infrastructures and road works that configure the master plan of the development and updated assessments requested by environmental authorities. We are looking forward to the public hearing, expected to be held by the end of March.

Matias Gaivironsky, CFO

Thank you, Jorge. I’m trying to turn on the camera, but I can't. Santiago, if you could enable me to turn it on, I would appreciate it. I will start with the macro situation to help understand some of our results that are impacted by the evolution of the FX and inflation. As you know, during the last quarter, there was a devaluation of the official exchange rate from ARS350 to ARS800, which represents a 131% increase, compared to a 36% increase during the first quarter. When we adjust for real terms, devaluation in the first quarter was almost zero. Then, in the second quarter, it was 51%, which will impact our dollar-denominated debt when we convert it into pesos and also in our ECS model for investment properties, where we must assess the value of our malls, leading to a positive result. Regarding the other part of the portfolio, the offices and the land bank are measured at the dollar MEP or double-check swap. You can see on the bottom right of the slide the real FX-MEP FX evolution; during the first quarter, we had a jump of 21% and now a decrease of 18%. When we convert those properties to pesos, the semester result is almost flat at 0.2%. Looking at the next page, we observe that adjusted EBITDA increased by 54% during the semester. We can see strong results from our malls, which increased by 15%, and hotels increased by 33.7%, while offices decreased by 37%. The decline is mainly due to a lower stock, and the impact of devaluation will have a greater effect next semester since invoices for our offices in December were sent out before the devaluation. The impact will be felt in the next quarter, but in pesos terms, we will receive higher rents because of the devaluation. In terms of EBITDA margin, we remain stable in malls, and the office segment saw a slight decrease due to lower stock, while hotels improved from 35% to 38%. On the next page, operating income, excluding fair value effects, increased by 47% from ARS37.7 billion to ARS55.5 billion. Here, we can observe the significant impact on the semester due to changes in the fair value of our investment properties, moving from a negative result of ARS92 billion last year to ARS137.8 billion this year; based on dollar terms, properties remained mostly flat. There hasn't been a positive evolution; the main influence was due to converting those dollars into real pesos adjusted for inflation. We have a positive result during this quarter; if the crawling peg of FX remains at this pace of 2% and inflation remains at double-digit levels, we expect to lose money in pesos terms during the next quarter, although not in dollar terms. The next page shows the net financial results; we also observed a significant shift from a positive number last year of ARS19 billion to a negative number this year. This is related to devaluation, and you can see in the table below that we incurred a loss this semester of ARS94 billion associated with all our dollar-denominated debt when we converted that debt to pesos at this higher rate. However, this was compensated by our liquidity, which we invested in dollar-denominated securities, leading to a positive result of ARS57 billion. Inflation adjustments also produced a positive effect of ARS32 billion. From the perspective of net interest, we posted lower losses, decreasing from ARS13.8 billion to ARS7.5 billion due to lower leverage compared to last year. Regarding income tax, last year reflected a positive picture due to a recognized loss in the fair value of the investment property. This year, we have to account for a deferred tax of ARS48 billion due to recognizing a deferred tax on rental income from investment properties. With all those effects, the net result for this semester rose to ARS146 billion, compared to ARS48 billion last year. On the next page, we can see the evolution of rental EBITDA in dollar terms; the last 12 months remained stable compared to fiscal year '23, at $166 million, which compared to pre-pandemic levels indicates very good numbers, 26% to 27% higher than 2019 figures. In the following page, we observe the evolution of our leverage. There has been impressive deleveraging of the company since 2020, reaching levels of $240 million. Now, the company is fully leveraged, with an LTV of less than 15%, a coverage ratio of 12 times, and net debt to EBITDA of only 1.4 times, with many properties and a land bank that are not producing EBITDA. The company's financial condition has improved significantly. As for our debt amortization schedule, it is optimized for the coming years, with gross debt at $366 million. Therefore, we are planning to refinance part of the fiscal year '24 in the coming days by issuing a new bond to extend the tenor while ensuring we have enough liquidity to meet our debt obligations. The next page relates to our dividend distribution. Remember that we decided in October to distribute a dividend of ARS64 billion, yielding around 12%. That was ARS67.4 billion, and since we announced the distribution in October, new regulations in Argentina delayed our payment process to our GDS holders. Finally, we decided to maintain our funds, investing that money in a money market fund instead of releasing it to entrepreneurs to protect our investors' funds. We finally received regulatory approval, and the CMB, the local SEC, allowed us to make the payment. Ultimately, we processed this at the beginning of the year, and investors received, in dollar terms, 20% more than the original payment date in Argentina. Regarding the share repurchase program, we executed the first one during fiscal year '23, which we completed in December, investing ARS5 billion. Then in July, we announced a new program of ARS6.5 billion, and from that amount, we have already invested ARS2.9 billion. We will continue to buy back shares throughout the rest of the year. So with that, we finish the formal presentation. Now we open the line to receive your questions.

Santiago Donato, Investor Relations Officer

Well, now is the time for the Q&A session. If you have a question, please use the chat. We will address the questions in the order we receive them. Here, we have a first question: Can you provide more details about your upcoming bond issue?

Matias Gaivironsky, CFO

We have some concentration of amortizations during the coming months, so we are planning to tap the local market with a structure that we haven't defined yet, and we will announce probably in the coming days. It will be similar to what we did at the beginning of the year.

Santiago Donato, Investor Relations Officer

A new question: Do you expect that access to international markets will improve as the new government seeks to cut the fiscal deficit and return the economy to growth?

Matias Gaivironsky, CFO

We hope so. We believe that Argentina was somewhat disconnected from the world in the past three years. We anticipate that with the normalization of the economy, companies are in very good shape in Argentina. The issue remains the sovereign ceiling concerning the cost of Argentine debt. We believe that if this starts to normalize, opportunities for corporates will appear. An example is YPF, which tapped the international market earlier this year. So we see that surely happening when Argentina normalizes. In the case of IRSA, with the current status of our projects, we don’t need to access the international market for funding. Our amortizations are limited with the level of CapEx we announced, and we have the liquidity and cash generation to finance the process. While if the cost of capital starts reducing, we may accelerate our investment process and tap the market in the future, we don't have that planned in the short term.

Santiago Donato, Investor Relations Officer

We have two more questions on the financial side. One is if the net debt position that we showed accounts for the dividend payment?

Matias Gaivironsky, CFO

Yes, yes. That is as of December — at the end of December, so it already deducts the payment. The part that remains at the company level has been taken out of our cash position in our disclosures. So yes, it was net debt after the distribution.

Santiago Donato, Investor Relations Officer

Another question: What influences do you see from FX liberalization or the valuation of pesos properties in general, and how does this impact IRSA specifically?

Matias Gaivironsky, CFO

Let me say something, and then Jorge can add whatever he wants. Real estate in Argentina has traditionally been a safe haven against devaluation and inflation. Real estate prices were always quoted in dollars. So all properties are valued in dollars, not pesos. You need to analyze construction costs, as inflation in dollar terms may increase those costs. This could lead to a subsequent rise in real estate prices. During the last two years, we've seen some price declines due to decreased construction costs. I believe this devaluation won't have a short-term impact on real estate prices; office prices remain stable. I don't foresee a significant impact on our portfolio, and I know Jorge might want to add something.

Jorge Cruces, CIO

Yes. I believe that in the short term, it will not have much influence, as Argentina may recover soon, which will aid the entire real estate market in Buenos Aires. Salaries will improve. The cost of development might increase slightly, but subsequently, people will have better wages to afford real estate. It should lead to a steady upward trend in real estate, maybe a bit soon, but not immediately.

Santiago Donato, Investor Relations Officer

Next question: Can you provide more details on the Del Plata building project?

Jorge Cruces, CIO

Certainly, I'm glad you asked about that project. The Del Plata project covers a whole city block, just a block away from the Obelisk. The area is like Times Square in New York; you're close to everything — theaters, subways, buses — with fantastic infrastructure. It will make a significant impact in the city. Behind that image, there will be a pedestrian street. We plan to develop the entire ground floor with restaurants and beautiful spaces. It will be appealing for a lot of tourism because it’s near everything. The building is geared mainly for young professionals; there are a lot of studios. We expect not only youngsters studying in universities in this area but also a significant number of tourists. We estimate many foreigners may use the building for short stays. There’s a great rooftop pool, gym facilities available, co-working spaces, and amenities for social activities. We’re designing it to be inviting to young individuals working globally. Buenos Aires is a highly loved city, so we perceive this project will attract a diverse pool of renters, including locals and potentially overseas buyers. Aisenson is the architect, well-known for their large-scale projects in Argentina, and we’re in the process of selecting a construction company. We expect to break ground on this building within four to five months. I am very enthusiastic about this project.

Santiago Donato, Investor Relations Officer

Thank you, Jorge. If there are any additional questions, we will take a few more minutes. During the presentation, someone asked if we can make the presentation available by e-mail; it’s going to be uploaded to the website. It’s already there, so you can check it or contact the IR team directly. If there are no more questions, we will conclude the Q&A session and the presentation. Thank you for joining. I will turn back to Matias for his closing remarks.

Matias Gaivironsky, CFO

Thank you very much, Santi. Thank you, everybody, for participating in the call. I believe we have stunning numbers and performance during the first semester. We expect that the second half will be more challenging because of the new administration's measures to normalize the economy, which will slow consumption. This has resulted in accelerated inflation, impacting real wages, hence affecting consumption, which we likely will see reflected in our malls. Although in dollar terms, this situation might yield better numbers based on inflation relative to devaluation, we may observe lower figures in pesos terms. The next quarter or the second half of the year will provide clarity about this. IRSA is exceptionally prepared to navigate this new phase in Argentina, as we've been focusing on optimizing our capital structure while deleveraging the company, making us poised for a renewed stage in Argentina. As normalization occurs, we are ready to fast-track many of the projects we have lined up. We remain confident in our financial situation, while we expect weak consumption levels in the coming months, we still anticipate very strong outcomes in our financial conditions. Thank you very much for your participation, and we hope to see you next quarter.