Earnings Call Transcript - IRS Q1 2023

Santiago Donato, Investor Relations Officer

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the First Quarter 2023 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. Matías Gaivironsky, CFO. Please go ahead, sir.

Matías Gaivironsky, CFO

Good morning, everybody. We finished our first quarter 2023 with excellent results. We are very happy with the operational performance across all lines. Our multi-tenant sales are growing, we are achieving higher margins comparable to pre-pandemic levels. We are very happy with that. Regarding our hotels, we posted during the quarter a record EBITDA, mainly driven by the Llao Llao hotel, which we will discuss later. Additionally, we continue selling office floors at very attractive prices. We sold one floor in the 200 Della Paolera building, the details of which we will discuss later. We are using those funds to deleverage the company, and we will show the reduction in our debt during the last two years. As we mentioned before, we finished the exchange offer of our 2023 notes with around 67% acceptance. That was a major event for the company. Also, during the quarter, we finished our share buyback program and announced the dividend payment that we paid starting yesterday. So, with this, I will turn the call back to Santiago Donato, our IRO, to discuss the operating performance of the company.

Santiago Donato, Investor Relations Officer

Thank you, Matías. Starting with shopping malls, we had a great quarter with strong performance during the first quarter of 2023. The portfolio increased slightly in the last two years, as you can see in the graph, reaching 336,000 square meters of gross leasable area, mainly due to Alto Palermo and Alto expansions, which are fully operational today. Occupancy increased to almost 94%, as we continue moving towards pre-pandemic levels during the entire year, with vacant areas mainly liberated by the Falabella exit during the pandemic. A very good figure is the tenant sales in real terms, which increased by 22% compared to the first quarter of 2020, a time undisturbed by the pandemic. The EBITDA and EBITDA margins of this segment have also recovered to pre-pandemic levels. In the office segment, the portfolio stock reduced by 30,000 square meters when comparing the first quarter of 2022 and the first quarter of 2023, mainly due to some sales of floors of the central Della Paolera building that was sold this quarter and the República building that was sold in previous quarters. Portfolio occupancy decreased slightly this year and quarter, primarily explained by the B class alongside A plus and A, which reached 82%, while the average rental price stood at $25 per square meter per month. We are optimistic about the evolution of this segment in the future, having observed a greater return to the office from companies in recent months, along with an increase in demand for our rental spaces. The third segment, our rental segment of hotels, had an excellent quarter as well. We are reaching record EBITDA in the hotels, bolstered by Llao Llao, as Matías mentioned previously. The hotel segment continues to recover strongly with higher rates and occupancy, capitalizing on the post-pandemic tourism boom and the advantages of the country, alongside the favorable FX impact. The Exclusive Resorts Llao Llao in Bariloche continues to reduce historic record incomes and occupancy levels. The hotels in Buenos Aires had a really good quarter, evolving favorably, but we still anticipate a greater influx of international tourism and a full recovery of conventions and corporate events to recoup their pre-pandemic income and occupancy levels. We are very happy with the evolution of our rental segment this quarter, and we are optimistic about its future progress this year. I will now give the floor to Jorge Cruces, our Chief Investment Officer, to explain some real estate transactions we conducted during the quarter.

Jorge Cruces, Chief Investment Officer

Thank you, Santiago. Good morning, everybody. The most significant sale during the quarter, as already mentioned, was in the 200 Della Paolera building, where we sold the fifth floor for $12.6 million. That's a very good sale for us, at $10,600 per square meter, and there remains strong demand for more floors in this building, with 14 floors still available. Regarding Costa Urbana, our main project that we're developing since December 21, 2021, we've been working on approving new zoning regulations with everything we need to do. Over the last month, we completed the preliminary design phase and are currently awaiting the city's response regarding the design. Additionally, we successfully paid $2 million in cash and $3 million in surveying bonds, completing that process. At this moment, we are submitted to a cadastral survey plan that will allow us, having already been approved by the government, to become owners of each of the plots, which will enable us to pay for the three plots we owe the government based on the law. As mentioned earlier, we needed to pay $2 million in cash and $3 million in surveying bonds. We are currently waiting for the government to approve the survey plan. Lastly, with respect to the collective legal protection action we received, which began on October 29, 2021, the court is currently analyzing the parties' arguments, and a decision is expected soon. In Córdoba, next to our Shopping Córdoba, we made a barter agreement valued at $2 million, and we expect to receive a 16% share of the sales from the departments in the building over the next 36 months. This will be a high-end residential development, adding value even for the adjacent shopping mall.

Santiago Donato, Investor Relations Officer

Now back to our financial numbers. On page eight, we can see the main drivers from the macroeconomic perspective, including inflation and devaluation affecting our financials. During this quarter, inflation accelerated, reaching around 22%, compared to 9% in the previous year. The evolution of the FX was only 18%, compared to 3% last year. This indicates that in real terms, the peso appreciated against the dollar by 4% this year and 6% last year. The blue-chip swap remained stable in real terms, which is essential as this affects several lines in our financial statements concerning the FX evolution impacting our debt. We need to evaluate the dollar-denominated debt in pesos. If we appreciate, we gain; if we depreciate, we incur a loss. This year, we generated a gain due to the appreciation and it also influenced the valuation of our investment properties denominated in pesos. Moving on to each line of our financial statements, we begin with the adjusted EBITDA, which shows an increase of 93.8% this year compared to last. We see an excellent recovery in our shopping malls, although last year was unique as all operations were fully open. Remember, this was the first quarter post-pandemic, so last year's performance was not ideal for us. This year, we are returning to pre-pandemic levels, and we are very pleased with that. Offices suffered by about 50%, partially explained by a decreased stock due to floors sold. The FX impact when comparing previous year numbers adjusted for inflation contributed to around 12% of this decrease. Conversely, our hotels have experienced exceptional recovery, reaching a remarkable level of 659, exceeding our office portfolio for the first time. Furthermore, our sales and development generated around ARS 1.1 billion in profit. Regarding margins, we show on the right side that our shopping malls achieved almost a 76% EBITDA margin, offices achieved 82%, and hotels achieved 33%. These are strong levels compared to our history. In terms of operating income, the recovery resulted in an increase of 88.6% compared to last year, excluding the investment property valuations. On the right side, we see the fair value of the investment properties, which generated a loss of ARS 6.6 billion. In dollar terms, this number has remained stable against the previous quarter. This impact is tied to the macroeconomic conditions alongside devaluation and inflation. Lastly, on page 11, we observe positive net financial results for both years. This year, the FX impact showed a positive net FX result of ARS 2.1 billion, while last year saw a greater appreciation of the peso resulting in a larger debt in dollar terms, yielding 5.2 against 2.1 this year. However, noteworthy is the net interest figure that marked a reduction to ARS 1.6 billion from last year’s ARS 3 billion due to our deleveraging process over the past two years. As a result, our net profit for this quarter shows a gain of ARS 1.3 billion attributable to our controlling shareholders, amounting to ARS 1.2 billion. It’s significant to mention the evolution in dollar terms of our rental EBITDA. On the left, we illustrate the quarter-on-quarter evolution using pre-pandemic quarters, the worst quarter of the pandemic, and the recovery thereafter. The blue line represents shopping malls, followed by offices, and hotels, showcasing a strong recovery where shopping malls reached $31.1 million of EBITDA this quarter, which are excellent levels, even surpassing 2019 numbers. Comparing the last fiscal years with the last 12 months, in the last quarter, we have already surpassed 2019 figures. This has been our target for the year, believing that we can exceed these figures due to the performance of malls and hotels, while our office portfolio should remain stable. We expect to see improved numbers moving forward due to anticipated occupancy gains. The main drivers will continue to be the malls and hotels. Regarding our debt profile, we are proud of this evolution and continue to deleverage. It's currently lower than initial estimates when we merged with IRSA Commercial Properties, where we expected a net debt of around $470 million. Today, we are significantly lower, at $300 million. The company is generating around $134 million over the last 12 months, possibly more as the year progresses. It’s less than two times our EBITDA. Currently, our LTV stands at approximately 12%. We maintain conservative numbers concerning debt. The amortization schedule indicates significant obligations due in the first calendar quarter next year in March, including a $120 million amortization and an $80 million that also expires in March. We already possess cash for $154 million, so liquidity is not an issue. The primary challenge lies in regulatory aspects to determine whether the Central Bank will permit us to proceed with payments or if alternative transactions become necessary. Excluding that, should we successfully manage this debt, the remaining balance should settle around $200 million or $300 million with amortizations over the next five years. Therefore, we are very pleased with this performance as well. We will now begin the Q&A session. If you have a question, you can use the chat or click the button labeled 'raise hand'. We will take the questions as they come in. Here, we have the first question regarding rates at the hotels. Are these official dollars or the dollar market? These are official dollars, and all the information we provided here in the presentation is based on the official FX.

Jorge Cruces, Chief Investment Officer

Regarding the hotels, it looks promising for the rest of the fiscal year. Not only is Argentina an attractive place to visit, but it's also quite affordable in dollar terms currently. The government is working on new regulations that will make it easier for tourists to visit the country. With this new law, we may anticipate more flights to Argentina, which would significantly benefit our five-star hotels.

Matías Gaivironsky, CFO

Also, there was a positive development regarding the regulation that money collected from Argentina is no longer required to be entered at the official exchange rate by booking companies operating abroad. This is also beneficial for the hotels.

Santiago Donato, Investor Relations Officer

We have another question: What is your targeted net debt level going forward? Today, we don't have a specific target. If I put a target, I would say it might be higher than what we have now, but we see opportunities to continue reducing that. If the Central Bank allows us to settle in March, we will likely pursue that. Possibly we could further decrease debt, but it's not out of concern regarding leverage. When compared to other real estate companies globally in terms of LTV, we are much higher than that.

Eduardo Elsztain, Analyst

Is there any additional question?

Santiago Donato, Investor Relations Officer

Yes, we have one more question. Do you have plans to refinance the short-term maturities? We have $121 million due from the holdouts of the exchange offer we conducted, which includes our international notes. According to current regulations, the Central Bank will only sell about 40% of that amount, which is approximately $88 million. Therefore, we will need to find additional funds to cover the remaining $70 million. Due to regulations, we cannot simply engage in a blue-chip swap. This situation involves regulatory challenges rather than just price or foreign exchange issues. We will do everything necessary to comply with the regulations while trying to facilitate payment, but unfortunately, the situation is not entirely under our control. The next question pertains to the cash level shown in the presentation—this $150 million is mostly in pesos, correct? Could you provide insights on how you intend to manage this cash position? Will you strive to avoid default at all costs, even if the Central Bank does not allow you to purchase official dollars? Our cash position consists of various securities, and it is indeed predominantly in pesos. Since we ultimately need to settle debts in dollars, we endeavor to hedge part of that peso exposure by buying dollar-linked notes or futures. We also retain securities within our liquidity portfolio. On the second part of your question: regrettably, as I mentioned, it's not wholly manageable. While I wish to say that we will avoid default at any cost, the reality requires compliance with existing regulations, which dictates our actions.

Jorge Cruces, Chief Investment Officer

Regarding the La Plata building, we might have addressed this in the last quarter, but are there any updates this quarter? At this point, we are considering making apartments and potentially converting the office building since it is currently vacant. We are analyzing the numbers, and we have the costs for the reconversion, facilitated by local regulation that supports this investment. However, we are still studying whether to move forward with development.

Santiago Donato, Investor Relations Officer

To wrap up, regarding the level of mall occupancy expected throughout the year, we typically do not provide guidance for the future. However, we are maintaining closer discussions and hope to elevate occupancy levels throughout 2023 towards pre-pandemic numbers.

Matías Gaivironsky, CFO

Yes, we addressed the vacancy in June. Small spaces are already achieving historical occupancy levels of around 98%. The significant vacancy we experienced during the pandemic was primarily due to two tenants, Walmart and Falabella, exiting the country, leaving us with substantial storefronts. Unfortunately, these large spaces are not easily re-rented. Our response involves dividing those spaces into smaller segments to address this rental issue effectively. Overall, we are pleased with the evolution in this area.

Santiago Donato, Investor Relations Officer

I will give one more minute if there are any additional questions. Okay. We conclude with this presentation and the Q&A. I will now turn it back to Matías Gaivironsky for his closing remarks.

Matías Gaivironsky, CFO

Thank you very much for participating in this call. We are very happy with the progress of all our business lines, operationally, financially, and within real estate. The company will remain active moving forward, focusing on strengthening operations in our malls, hotels, and office buildings. We are working on Costa Urbana and ensuring it is prepared to commence the project. We will also need to work this quarter on refinancing or settling our outstanding debt. We possess the cash for payments, but we require the necessary tools to proceed. Thank you very much for joining this conference, and I look forward to seeing you at the next one.

Santiago Donato, Investor Relations Officer

Thank you.