Earnings Call Transcript - IRS Q2 2026

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 2026 Results Conference Call. First of all, I would like to remind you that both audio and a slide show 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 Gaivironski, CFO.

Matias Gaivironsky, CFO

Good morning, everybody. So we are finishing this semester with a net gain of ARS 248.8 billion compared with a loss during the same period last year that was mainly driven by a gain in fair value of our investment properties. About the operational side, we have good numbers in Malls, in Offices, and Hotels. Malls have grown in terms of revenues and EBITDA. Offices also remain fully occupied with an increase in the EBITDA. And we have a recovery in the Hotels rates and margins. At Ramblas del Plata, we will see later with deeper analysis, and we have very good progress in development and in commercialization. We signed during the period 2 additional swaps agreements with different developers. So Eduardo will enter in more details later. Also during the quarter, we issued an additional $180 million in the existing notes maturing 2035. So the company today has a strong cash position to take advantage of opportunities and also to finance our growth. Finally, during the quarter, also, we finished the payment of our dividends of the year. We paid a dividend yield of 10% during 2025. So with this, let me introduce Santiago Donato, our IRO, to follow the presentation.

Santiago Donato, Investor Relations Officer

Thank you, Matias. Moving to Page 3 to discuss the Shopping Malls segment. Our GLA has slightly increased this quarter due to some minor expansions in recent developments. Last year, we acquired Terrazas de Mayo, which resulted in a significant increase. We are also working on new developments in La Plata and Oeste Shopping, where we will be closing the mall for construction. Our Shopping Malls have experienced growth in recent years, and occupancy is currently around 98%, which indicates very strong demand. However, over the past two quarters, there has been a decline in our tenants' real sales, with a decrease of 7% last quarter and 9% this quarter. This downturn has been influenced by the electoral context in September and October, alongside some current pricing pressures. Prices are slightly decreasing even as volumes continue to rise, and we are seeing robust consumer traffic in our malls. We anticipate that economic activity will pick up. Generally, our shopping sales align with inflation and GDP growth, and we expect the Argentine economy to grow in 2026. Despite the lower real sales, our revenues and EBITDA have seen an increase of 4% in revenues over the past 6 months and a 2% rise in adjusted EBITDA for the same period. This is mainly due to our inflation-linked fixed lease structure. Almost 84% of our mall revenues are fixed, which includes monthly base rent and other components that are typically adjusted for inflation, leaving just 16% as variable. On the next page, we will see the evolution of our Office segment. We currently manage a small portfolio of 58,000 square meters, primarily A and A+ classified buildings, with only one B category building, Philips, that is being converted into a coworking space managed by IRSA. Our occupancy rate is at 100%, and rents remain stable at $25 to $26 per square meter per month. In the Hotels sector, we have observed a gradual recovery this quarter, with occupancy rates reaching 69% across our three hotels and average room rates at $227, along with a slight increase in margins. This improvement is mostly attributed to strong performance at our Buenos Aires hotels, which have benefited from increased activity in sports and corporate events. The Llao Llao hotel experienced some occupancy impacts due to renovation works in one section, but excluding the rooms under construction, the occupancy trend is stable. This concludes the overview of the rental portfolio across the three segments that have shown strong results. I will now introduce Jorge Cruces, our CIO, to discuss our CapEx and development projects.

Jorge Cruces, CIO

Thank you, Santiago. Good morning. Distrito Diagonal; in the city of La Plata, construction works are gaining momentum. Overall progress currently stands at around 23% and close to 78% of the contracts have already been awarded. We remain on track to open in May 2027, and it will become a milestone for being La Plata's first and only shopping mall. This new project will add 22,000 square meters of GLA to our shopping portfolio. Including the acquisitions of additional shopping centers and expansion projects we have mentioned lately, our GLA is expected to reach 458,000 square meters over the next years. Ramblas del Plata; recently, we added several new plots to our commercialization pipeline. So now we have a total of 26 plots, representing almost 207,000 sellable square meters. We signed swaps for plots L-1 and J-1 for a total amount of $11.7 million. These 2 transactions represent almost 4,000 sellable square meters for IRSA. To date, we've sold 2 lots and swapped another 13 and the combined value of these deals stands at $93 million, covering over 124,000 sellable square meters to be developed. Looking ahead, we are planning to implement early activation programs in the future development of area of Phase 3. These initiatives may include a golf driving range and practice areas, paddle courts, a gym, driving test circuits, as well as food trucks. To support these temporary uses up to 20 parcels scheduled for development in the final phase may be leased on a short-term basis. This approach will allow us to create an on-site destination, encouraging the public to discover Ramblas del Plata. Construction is progressing in line with schedule currently at 20%. The consolidation works of the Central Bay and the riverfront along the future access to boulevard have been completed totally. We have nearly finished the planting of the buffer forest of Phase 1, along with its irrigation system. To date, more than 1,900 trees have been planted. At the same time, construction of road works, sewers, and drainage infrastructure for Phase 1 is progressing well and has now reached 60%. Through a public auction, we acquired the former Israelita Hospital on the property located in the Flores neighborhood of the city of Buenos Aires. Our plan is to transform this iconic asset into a mixed-use development. The property sits on land of approximately 8,850 square meters and includes an existing developed area of about 17,000 square meters. The acquisition was completed for a total purchase price of $6.8 million, which has been fully paid. In Uruguay, Distrito Calcagno, is a unique urban development located along the shores of Lake Calcagno. Another swap agreement was signed in October at $9.3 million. Back in Argentina, in the province of Córdoba last week, we signed a new swap for Tower 3 at Córdoba Shopping. IRSA will receive around 1,000 square meters of GLA, the whole third floor and 146 parking spaces. The agreement also includes an option for the fourth floor at a cost price plus a 12.5% of development fee. Well, now I'll give the floor back to our CFO, Mr. Matias Gaivironski. Thank you.

Matias Gaivironsky, CFO

Thank you, Jorge. Regarding our semester results, we need to consider the impacts of foreign exchange and inflation. This semester, the peso has depreciated significantly compared to its appreciation last year. This change resulted in significant gains this semester after we experienced losses in our investment properties last year, primarily denominated in dollars. Additionally, the peso's devaluation this year has led to negative debt results, contrasting with a positive outcome last year. We will discuss this further in the following slides. Operationally, on Page 12, we noted promising results in our Rental segment, with a 4.9% rise in real peso terms compared to the previous year. We reported a 2% increase in Shopping Malls, a 15% rise in Offices, and a remarkable 44.8% growth in Hotels. While we experienced a slight decrease in margins for Shopping Malls due to an isolated incident this quarter, we anticipate recovery in the upcoming quarters. Office margins stayed consistent with the previous year, while Hotels showed an increase as previously mentioned. The fair value of our investment properties saw the most significant change. We recorded a substantial loss of ARS 306 billion last year, contrasting with an ARS 185 billion gain this year. When analyzing our figures in dollar terms, property values have remained stable. The peso's devaluation affected our dollar values, leading to greater gains than inflation's impact. Regarding net financial results, as shown in the table below, we reported a net foreign exchange loss of ARS 15.9 billion this year, compared to a gain of ARS 28 billion last year, which is the main consequence we observed. Net interest remained steady from the previous year but is expected to increase slightly as we have raised our debt level, which we will address later. In terms of income tax, we are reflecting the deferred tax impacts from our investment properties. Whenever we record a gain in these properties, it requires us to account for deferred tax. Last year’s losses led to gains this year in income tax, and the company has resumed paying income tax. After utilizing our tax credits, we will continue to pay taxes going forward. We concluded the semester with a net income of ARS 248 billion, a shift from last year’s loss. The rental segment showed a positive growth trajectory in both EBITDA and adjusted EBITDA, finishing the semester at $102 million. If this trend continues, we expect strong results compared to last year, confirming our solid cash generation. On the debt front, the company accessed the international market in December, reopening a bond we issued in March 2025, raising an additional $180 million at an 8.25% yield, while the bond's coupon stands at 8%. Our debt amortization schedule shows minimal short-term debt. With the proceeds and our cash position, we will cover the $226 million amortizations, with the majority of our debt maturing in 2033, 2034, and 2035. Consequently, our ratios remain conservative, with a net debt to rental EBITDA of 1.6x, a loan-to-value of only 13%, and a coverage ratio of almost 7x. It's essential to note that only 60% of our assets are currently generating EBITDA, while 40% are land reserves or non-EBITDA-generating assets. We consider our debt structure to be quite conservative. We also completed the dividend payment for the year, yielding 10% with a total of $116 million paid in November and October. That concludes the update, and now we welcome any questions you may have.

Santiago Donato, Investor Relations Officer

Well, now is the time for the Q&A session. If you have a question, please click the button labeled Raise Hand or use the chat. We'll take the questions in the order we receive them. Okay, here we have the first question regarding tenant sales that were impacted by softer consumption in the second half of the year. What are your expectations for consumption trends this year?

Matias Gaivironsky, CFO

There is currently a significant discussion in Argentina regarding clothing prices. From what we observed, when compared to other countries, clothing prices seemed high in dollar terms for locals. Over the past year, however, clothing prices have risen much less than inflation when compared to the Consumer Price Index. Our tenant sales analysis shows that the number of transactions and the sales volume in the malls have remained strong compared to last year. Additionally, the foot traffic in the malls has stabilized year over year. The observed reduction in clothing prices compared to the previous year likely contributes to lower overall consumption in pesos. Moving forward, as I've mentioned before, our company's performance will correlate with economic conditions. If Argentina's economy grows, we anticipate an increase in consumption, though we might face volatility tied to economic changes. This trend of declining prices appears to be emerging in Argentina.

Santiago Donato, Investor Relations Officer

There is a question here from Lorena Reich that is in that direction. Given the impact on consumption and crisis in the textile sector in Argentina, do you expect this to impact the rental income? Do you expect more tenants to base rents instead of percentage of sales?

Matias Gaivironsky, CFO

This was also new for the company in recent years. In the past, we were not permitted to adjust rents by CPI. Instead, we always included a step-up clause in our agreements, estimating inflation, but we often misestimated it. Unfortunately, inflation turned out to be much higher than we anticipated. This resulted in base rent being lower than expected, and we compensated our revenues through the variable portion. After the law changed, we began adjusting all agreements by CPI. Now, all agreements are adjusted monthly by CPI, which allows us to capture that aspect. Consequently, today, the base rent is significantly higher and more important than it has been in previous years. This provides a safeguard for the company in case of a consumption slowdown. However, we also need to ensure that this is sustainable for our tenants in the long term, as we can't burden them with occupancy costs that are not viable. This will be evaluated during renovations and negotiations with tenants whenever agreements expire.

Santiago Donato, Investor Relations Officer

I will give the word to Gordon Lee from BTG. He probably wants to ask. Gordon, are you there?

Gordon Lee, Analyst

Yes. Can you hear me?

Matias Gaivironsky, CFO

Yes.

Gordon Lee, Analyst

A couple of questions. The first, I guess, is a follow-up to the previous one, which is more specifically whether you've had requests from tenants to rebalance the structure of the contracts or whether your new contracts are seeing a different balance between base and variable overage? And then just a question on the lease up of the Philips building, which was significant during the quarter. The workspace that you're referring to, just to confirm, that's being leased to a third-party provider of these services. You're not doing the workspace management yourself. And then the second question, if you are leasing it to third parties, does IRSA underwrite any of their re-leasing risk? Or is that completely absorbed by the tenant?

Matias Gaivironsky, CFO

Thank you, Gordon. So the first part of the question. Sorry, I...

Santiago Donato, Investor Relations Officer

Given the weakness in the existing tenants.

Matias Gaivironsky, CFO

Typically, to analyze the shape of the industry, you need to consider a few key drivers: occupancy, delinquency, consumption, and the prices you can negotiate with tenants. Currently, all these variables are performing well. We are experiencing good occupancy rates, high traffic levels, effective renovations, and low delinquency. We have not received any signals suggesting that we need to change our commercialization drivers. All recent renegotiations have been positive. Additionally, there is a new trend towards increased demand for international brands entering Argentina, which likely indicates a sustainable demand for new spaces. Overall, all signals are positive at this time. Regarding workplace management, IRSA is handling everything directly. We control the property and its operations, and we are taking charge of the services. This new office segment is performing exceptionally well, and we are building a strong community there. Comparing our performance in this segment to that of traditional tenants, we are pleased with the results so far and are optimistic about this new business line.

Gordon Lee, Analyst

Is this business line aimed at filling the vacancy created by Philips, or could it potentially extend to B-class properties as well?

Matias Gaivironsky, CFO

Yes, it's something that we will try to replicate in other locations. So we are thinking probably to launch the second workplace soon. So yes, it's something that we will try to replicate.

Santiago Donato, Investor Relations Officer

There is a question related to the sector in general. How do you see the sector? I imagine, in general, real estate sectors going forward from sales, well, the experience across shopping malls, you have talked about retail. So perhaps Jorge can give some color on the real estate sector, how do you see it going forward?

Jorge Cruces, CIO

Going forward, we're very optimistic. It's about timing and when the current circumstances in the country will enable the middle class to secure credit to purchase apartments. Eventually, that will happen. The demand is strong and should be substantial. It will come down to pricing, and we have ample land reserves and a variety of products. I'm very hopeful. It's just a matter of time, which may take a while, but we'll reach that point. Regarding residential real estate, we also have a positive outlook on mixed-use developments near our shopping malls, including residential office buildings. We've been selling office buildings in recent years and are looking to develop more office spaces in prime locations. Overall, we're optimistic. We're also exploring opportunities in logistics and warehouses. We've been scouting for these, and soon enough, we'll make progress there as well. We're very positive about the real estate market in general, especially here in Argentina.

Matias Gaivironsky, CFO

There is a question here regarding Ramblas, Jorge. How much is already sold of the total project? I think it's around 20% approximately.

Jorge Cruces, CIO

We had that in the presentation.

Matias Gaivironsky, CFO

Yes. I think it's approximately 20% that is the big part of the Stage 1 over the total project. And if prices are ahead of expectation compared to your initial plans, prices of the land and what the prices of the residential apartments that you could sell if they are ahead of the first plans.

Jorge Cruces, CIO

Our balance sheet is very conservative, as we have mentioned before. In our balance sheet, you'll observe that all the swaps are priced at $3,000 for each square meter, which I believe is quite inexpensive. I think residential prices should already be around $4,500 and will likely exceed $5,000 per square meter once the buildings are completed. We also have a significant amount of commercial space, which will be somewhat cheaper but should still be over $4,000. Overall, I anticipate that residential prices will average higher than $5,000 when the buildings are finished.

Santiago Donato, Investor Relations Officer

I have 2 questions on the financial front. With the deterioration of the net leverage from 1.2x to 1.6x, what is the maximum level of net leverage that you feel confident? Any targets?

Matias Gaivironsky, CFO

Well, I don't see this as a deterioration of the leverage broadly. As we increased a little, the debt was very low during the last year. Remember that the company was not executing any CapEx during the last year. So we feel very, very comfortable with the cash position before. And now that the company is entering a more aggressive expansion plan, we decided to increase a little the debt. But remember that this company with an EBITDA margin of around 80% is a cash machine. So after you open the properties that we are developing, then the leverage will go down very fast if we don't execute new CapEx or pay dividends. So with the plans that we have going forward, we believe that we have enough cash to finance all the expansions and acquisitions. So the company is not expecting to raise more debt. Probably the net debt will increase because we will use the cash. So we will use part of the cash. Today, the company has more than $300 million in cash. So part of that, definitely, we will use it in the expansion. So for that reason, the leverage will go up. But I would say that, I don't know, 2x EBITDA is probably the possible outcome during the year. But I feel comfortable with probably less than 3x EBITDA. I feel very comfortable. But it will be tough to see the company with that leverage because we should increase significantly the acquisitions or the development. So take into consideration that any development for real estate will take like 3 years. So if we, I don't know, launch $100 million projects, the cash that we will need per year is $30 million per year. And the free cash flow of the company today is more than $100 million. So we have enough cash generation to finance in the future the expansion. So we don't expect to see much more leverage going forward.

Unknown Executive, Unknown

And also all those projects that we are putting into production will bring additional EBITDA, of course, in the next years.

Matias Gaivironsky, CFO

Regarding the dividend we paid to ADR holders in December, it was indeed net of the 7% Argentine tax retention. I believe we have answered all the questions, but I will allow a few more minutes. There was a question about the Golden Juniors Segregated Portfolio. This fund was established last year to allocate some of our liquidity for diversification purposes. Most of our liquidity is in dollars or dollar-related instruments, so this was a strategy to diversify. The company has strong liquidity, currently at $300 million, and we invested $6.5 million in the fund, which primarily invests in gold and silver companies. The fund performed very well over the last six months, although it represents a small portion of the company's total liquidity.

Santiago Donato, Investor Relations Officer

Thank you, Matias. Well, if there are no more questions, we conclude the session and the presentation. We thank you all. I would like to turn back to Matias for his ending or final remarks.

Matias Gaivironsky, CFO

Thank you, Santi. We are entering a new expansion phase for IRSA. We adopted a more conservative approach to growth in previous years, but we've shifted our strategy recently, and the company is actively pursuing numerous projects moving forward. We plan to launch new initiatives in the upcoming quarter and throughout the rest of the year, with announcements regarding new developments on the horizon. Additionally, we are engaged in various mergers and acquisitions, and we hope to announce some acquisitions soon. The company is focused on accelerating its growth process, and we anticipate seeing progress in the coming months. Our operational segments continue to perform well, generating strong cash flow and maintaining positive drivers. We are very optimistic about the remainder of the year. Thank you, and we look forward to seeing you next quarter.