IRSA Propiedades Comerciales S.A. (IRCP) 2022 Q1 法說會逐字稿

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA Commercial Properties, and I welcome you to the first quarter of fiscal year 2022 results conference call.

First of all, I would like to remind you that both audio and slide show may be accessed through company's Investor Relations website at www.irsacp.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. (Operator Instructions)

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. Daniel Elsztain, CEO. Please go ahead, sir.

Good morning, everyone, to our first call of the first Q 2022. We're going to see on Page #2, our main highlights and subsequent main events for this quarter. Starting with the shopping centers, we see an interesting recovery in terms of sales and traffic, that this recovery is getting even better after the ending of this quarter. The team is focused on occupying the vacant area that was created due to the COVID situation. And then we see better performance in terms of increasing occupancy. We see a slight decrease in the office rents and occupancy. Nevertheless, the companies are returning back to the offices in a hybrid model. And also, we see more activity in terms of companies looking for new space or renewing their space.

In terms of the EBITDA of this quarter, we see that it’s basically the full rental operation with no asset sales. Last quarter -- last year at the same quarter, we had a lot of asset sales. Nevertheless, rental EBITDA still 36% below pre-pandemic levels. We are getting better in the operation, but still we are not yet there of pre-pandemic numbers. The net loss is mainly explained by the change of the fair value of our investment properties. $1.7 billion is attributable to this controlling company. There is a merged proposal with this approved by the Board of Directors, still pending for the shareholders' meeting to be approved. And subsequent event, we sold 3 floors at the 200 Della Paolera building, and this reflects the strong liquidity that we see in the premium office buildings and at a very low cap rate, maybe the lowest that we have seen in many, many years.

So now going to the details on Page 3. We're going to see some shopping mall figures. First of all, we see a small increase in our GLA. This is mainly the first stage of expansion of Alto Palermo shopping. Remember, we were under construction, expanding the shopping center. We finally finished the first stage. The second stage will be for next year, the beginning of 2022 in this same fiscal year. The increase take us to 335,000 square meters of GLA. And occupation, we see that we see a small reduction getting to an 89.6% but this is mainly explained by the exit of Falabella. Remember, we have Falabella in some of our shopping centers. The last exit was in the shopping in Mendoza Plaza shopping. And if we would exclude this effect of this Falabella, occupancy would be 94.3%, which is reflecting more activity, more people wanting to open stores in the shoppings. And at the same time, the store of Falabella, we're going to talk later, is being occupied. So we project for the next quarter, better occupancy also including this store of Falabella.

When we look at the right side of the page, we see the sales of our tenants. The bottom graphic is now -- it's very difficult to compare because the last 2 quarters, we are comparing with last year that the shopping centers -- that most of the shopping centers were closed. So we see these high and ridiculous figures of growth, 570% and 322%. So we consider it's better to understand the situation that we focus on the top right chart here and where we compare our sales of this quarter with the previous quarter that we had regular sales. This is the fourth quarter of 2019 -- of fiscal year 2019 and the first quarter of 2020, just to measure apples-with-apples. And what we see is that the last quarter of '21 compared to the last quarter of '19, we had a 55% reduction in real terms of sales.

This is just the beginning when we were reopening the shopping centers. And on this quarter, we see a very good increase in terms of sales of our tenants that put us in only 10% compared to real term sales of a quarter where the shopping was completely open.

And since then, I mean, what I can tell you that the sales at shopping centers and traffic in shopping center is still growing. We are projecting better numbers for -- by the end of the second quarter of this fiscal year.

On Page #4, here we can see something because if you look at the occupancy, it looks like it's similar to the previous quarter. But here is to show the effect of what happened. It's 10% when we had last year -- last quarter and 10% also vacancy at the end of this quarter. But what happened, we had a 1.5% increase of the Falabella exit and Mendoza, as we mentioned. We had a lot of occupation in terms of the other stores, see that from having 4.6% of small other stores, vacancy now is only 3.7%. So the team is really working in bringing new tenants. As you can see on the top pie charter, you see that now we have only [52%] of apparel, and we are bringing services and others, home and design, restaurants, electronics, -- so -- and also on the pictures, we opened at the Dot shopping center, where we had a lot of vacancies. Remember, the space of Falabella, now it's almost fully occupied. We opened a home design. We opened soccer field complex. The first we have indoor soccer field complex in Dot. We also opened some banks, services, pharmacies, pharmaceutical.

So there is new activity and not only in apparel. So we are very optimistic in terms of being able to occupy the empty space that Falabella left us and also those tenants that were not able to stay during the COVID period of time. The team is really occupied. We are signing more than 100 leases per month. So we are very optimistic in terms of occupancy and in terms of recovery of the shopping centers.

On Page #5, we see the office building portfolio compared to the first quarter of '21, we see a slight increase. That's because of the incorporation of the 200 Della Paolera building, which we are right now, and it's our head office -- our headquarter here. Nevertheless, we see a small decrease in terms of occupancy. Now we have -- we show 78.9% of occupancy.

Basically, all those buildings we sold were fully occupied. This new building is not fully occupied. Also we had -- remember, Falabella not only left us the shopping center space, but also a big space of office at the setup building in the Polo Dot office park. But the good story here is that we are starting to see, again, companies looking for space. There will be some pressure on price, and we see that during this quarter, we now have a small decrease. Now it's $25.1 per month per square meter. We believe there will be pressure on pricing, but the good news is that we see more activity in terms of leasing and companies looking for space. After the quarter closed, we signed 1 more floor at this building and 1 floor at the Zetta building. So we are now a little bit more confident on the office market.

Also, what we have noticed is that the companies are not more looking for reduction in space. This is a trend that we saw first in New York. There, of course, because the economy is growing and their business is growing. Actually, they are looking for increasing the space. But the thing is because now they know that their team, their workforce is going to be at the office at least 2 or 3 days a week and nobody is willing to share a desk. The size of the offices are not forecast to be reduced. At least this is what we are talking with the companies here. That's what we are hearing on the market. So yes, there will be a pressure on price, but we do not expect to lose much more space in terms of occupancy in the offices. And maybe we are lucky, and we keep doing some leasing.

On Page #6, we can see that we sold in November 2021, 3 floors of the 200 Della Paolera building, 3,500 square meters of GLA for a total price of $32 million, which -- it's almost 9,000 -- it's $8,950 per square meter on this building, which is an incredible sale. It's an incredible price cap rate of 3%, which is really low. And we still have, at this building 20 more floors that represent 24,000 square meters. And as I mentioned, one of those floors that we had empty was we are -- we signed a lease, and we have another prospect to sign on this building.

So that's mainly the main activity on the real estate. Now for the financial results, Matias Gaivironsky, our CFO.

Thank you, Daniel. Good morning, everybody. If we move to Page 8, we can see the breakdown of our P&L. We are finishing the first quarter of 2022 with a loss of ARS 1.8 billion compared with a gain last year of ARS 20.2 billion. We started to show in this fiscal year information compared with the fiscal year 2020 to have a reference of a normal year comparing with the previous year, sometimes it will not make sense because it was a year very affected by the pandemic. So here, we can see the revenues that are, of course, growing with -- compared with the previous year in comparing with 2020, it's still 31% below. We believe the first quarter was open 100% for our shopping malls, but we also -- we implemented some rules and some politics with our tenants that affected our revenues that we believe that in the next quarters, that effect will be reduced. So we will start to recovery faster than in this quarter.

No doubt that the main effect on this quarter was in the line 4, the change in fair value. We can see a drop of ARS 5.6 billion. Last year, we recognized this an important gain in this line. Basically, here, what happened is that the inflation in Argentina was higher than the devaluation and the evolution of the blue chip swap, the 2 variables has an effect on our valuation in the -- of the malls and the offices and the land bank. So while the inflation is higher, we will keep showing losses. And if we see an evolution of the different -- the other variables, the FX and the blue chip swap that, for instance, in this quarter we have -- after this quarter, we have an increase, a significant increase, we will see gains going forward.

If we move to the next page, we have the breakdown of our EBITDA in the different segments. The shopping malls, the adjusted EBITDA totaled ARS 1.5 billion. In the previous year, we have a loss was -- we have losses in 2 quarters of the previous year. The first Q was 1. And when we compare with the previous year, first Q 2020, we see a gain of ARS 2.3 billion. So we have a decrease of 35% at the adjusted EBITDA. The offices, we have also a drop that I will explain in the next page. Compared with the previous year, we have only 4.3% below and compared with the 2020, 37.4% below. Sales and development, we don't have a significant development during this quarter. As Daniel mentioned, the disposal of the 3 floors in this building in Della Paolera building will be reflected in the next quarter.

If we move to Page 10, we can see the part of the evolution of the malls. EBITDA and the line of the graph, it reflects the percentage of the operation open in each quarter. So we can see the different stages of the pandemic. But the good news here is that we see a first Q with an EBITDA of $15.5 million, that is above all the previous quarters of -- since the beginning of the pandemic. And compared with the previous quarter, before the pandemic is closed, the level was $16.3 million.

So this is good news that the shopping malls started to generate cash again, a good levels of cash. And in the offices, we can see here the evolution that compared with the previous quarter was similar. The levels was previous quarter was $6.6 million, now it's $6.3 million. But we see a drop that came from the square on meters that we sold during the previous year, that was the Bouchard 710 and the Boston Tower, Also, we incremented by [2.2%] with the opening of 200 Della Paolera building. We have a negative effect of the increase in the vacancy of $1 million and the price -- the change in the rent price is almost flat, only $0.1 million.

Going to Page 11, we see the evolution of the net financial results. Here, the main driver is reflected in the graph below. We can see that in the previous year, we have a devaluation and real devaluation of 0.4% and a nominal devaluation of 8.1%. During this quarter, we have a real devaluation negative and in fact, it was an appreciation of the currency by 5.6% and nominal 3.2%. So that effect is reflected in the line 2, the foreign exchange differences that the last year was negative by ARS 139 billion. And in this year, we have a gain of ARS 2.1 million. This is the effect to value in pesos. The -- our exposure basically of our debt in dollars. In terms of the net interest losses is similar than the 2020 numbers against 2021. Here, we reduced a little the credit line with IRSA that generated positive interest. So the net effect today is a little higher because of the reduction on the collection of interest that we received from IRSA. And the rest of the lines are not significant differences.

If we go to Page 12, we have the evolution of our net asset values. This is how we value all our properties in our books. Last year, we used to value at $1.5 billion at the official exchange rate and now is $1.8 billion. If we see that compared with the valuation of our -- in the market of our shares, the price to NAV, it's only 0.3x. And also considering that we are using, for instance, in the shopping malls since we don't have comparables to use other valuation method that we are using DCF. So the $513 million for our total portfolio of shopping malls, we believe that is very conservative. In terms of the implicit cap rate that we are trying is 15.7%; enterprise value to EBITDA, 7.7x; and price to FFO, 13.5x.

Finally, in Page 13, we have the evolution of our debt profile. Net debt of IRCP is stable at levels of $259 million. We can see the debt amortization scale that during this fiscal year, we don't have a significant amortizations. The main amortizations will be in next fiscal year related to our international loan, the 2023 notes. The LTV of the company remain very, very low at levels of 16.9%. And regarding the ratios, we have a net debt to EBITDA of 2.9x and 4.2x net debt to rental EBITDA.

So with this, we finished the -- sorry, sorry, I -- one more in Page 14. Regarding the merger proposal, we announced it in September -- by the end of September, the intention of the Board of Directors to merge IRSA commercial properties with IRSA, where IRSA will be the absorbing company and that IRCP will be the absorbed company. And then we will be sold and liquidate -- without being liquidated, IRCP now will be incorporated inside IRSA. We already started all the process of the merge. We filed it with the SEC, the F-4. We filed it with the CNV prospectus.

So the next step is to call a shareholders' meeting to approve all the processes subset to the approval of our shareholders' meeting. We expect to have our shareholders meeting in December. So before what we anticipated at the beginning that could last until February. Now we believe that during December, we can have the shareholders' meeting to approve the merge. And after that, there is a time frame that we need to fulfill. But the next main event is the approval. After that, the merge is effective if our shareholders approve and will be effective with the date that is July 1, 2021.

So now, yes, we finish the presentation and open the line for a Q&A session.

(Operator Instructions) Here, we have the first one from Álvaro García from BTG Pactual.

Just on margins, actually. I think it's -- you did a great job of explaining sort of sequentially what's going on your top line, but how should we expect margins both in offices and especially shopping to normalize throughout this fiscal year as activity comes back, given they're still sort of well below pre-COVID levels?

It's tough to show the results when you have all the variables that were affected by the pandemic and many things happen. Now we have to change some of our commercial policies. We have to change our revenue collection. But we have been working very, very tough in order to reduce cost. That part, you can see when you compare the cost against 2020 that we see a drop in the sum of all the costs. We reduced like 200 employees during the last 2 years. That will be reflected in our margins. So our target is to recover margins pre pandemic, we see these numbers in the offices. We have already around 80% margins in the office. And you know that before the pandemic, the target in shopping malls was around 75%. So we hope that after we see full activity and no concessions on revenues, we will -- we can recover again to those levels.

And I guess sort of selling, especially in the office space, selling those properties and then the entrance of Della Paolera, there's probably some natural sort of margin impact there, right, as you're not sort of 100% productive yet on the new GLA?

Yes. In the office, yes, but you know that the margin on the office is higher than in the malls because basically, you have the allocation of our headquarters to that segment. But in terms of the amount of people that works directly on the operational side is much lower in the offices than in the malls. So yes, has an impact the disposal of some of our office space, but it's not significant.

(Operator Instructions) Okay. Thank you. If there are no more questions, we return back to Mr. Daniel Elsztain, CEO, for his closing remarks.

So the world is coming back to normality as well as Argentina, thank God. Tourism is restarting all around the world and Argentina reopen frontiers. We expect there will be a flood of tourism coming to Argentina because Argentina now is really cheap -- really, really cheap for tourism, everything is really an opportunity for our country neighbors. People is coming back to the offices and malls, stronger than we expected. And as we finish the 2 big projects we have, now we are building liquidity to put in work for our future projects. Real estate is showing some recovery. There are more transactions in the market, and it's a clear way to save money and protect wealth in the country. This is established, and we see that trend moving forward.

As Matias mentioned, we reduced cost and got rid of a lot of fat that we have at the structure of our company. And we had incorporated a lot of technology, digitalization and to face these new times. We took opportunity of this year that we were not so active to really make that transformation. And now we are working on the merge, as Matias said, to keep reducing costs, to produce tax efficiencies, to focus the company in working and not having friction. So we expect that we are getting again as we were for a long time, some company producing a lot of cash and having a lot of projects to keep growing the company. So thank you everybody, for participating on this call. We expect to see you on our next quarter. Thank you very much.