IRSA Propiedades Comerciales S.A. (IRCP) 2021 Q2 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 second quarter of fiscal year 2021 results conference call.

First of all, I want 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. After management remarks, there will be a question-and-answer session for analysts and investors. (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, our CEO.

Thank you, Santiago. Welcome, everyone, to our second Q conference call.

We're going to start on Page #2. Our EBITDA for the 6-month period achieved ARS 8,883 million, mainly explained by the Sales and Developments segment. We see an increase of 90% compared to the 6 months of 2020, as I said, mainly explained by the Sales and Developments. We see a small decrease on the Office segment, mainly explained for the reduction on the sales we did on -- during this year. And we see a quite big decrease on the segment of Shopping Center because of the pandemic and the perfect storm that we lived through during this year.

Regarding net income, we achieved ARS 5,285 million during the 6-month period compared to a loss of ARS 341 million last year 6 months and attributable to the controlling shareholder is ARS 4,761 million. This is mainly explained by higher results from changes in fair value of investment properties and higher net financial results.

If we see to the shopping sales, the same shopping sales real terms compared to the previous Q, we see a reduction of 35%. This is a big reduction. But if we see the comparison with the first Q, we see a big increase in terms of sales of 277% compared to the first Q of 2021. And it's a little bit better than we expected when we did -- when we started this quarter.

In the Office portfolio, the average rent is $25.70 per square meter per month. It's in line with previous quarters. The occupancy of the Shopping Center is 88%. There is a big drop. I mean we're going to discuss about this. The Office portfolio occupancy is at the level of 80% on the Class A and Class A+ kind of offices. And we make the -- we put also the Class B segment, achieves a 75%, and I'll give you more colors in the next slides.

And the main events for the 6 months of 2021, the malls finally reopened, all of them, and -- in October 2020. We have sales of office buildings for $170 million approximately. We were able to distribute a cash dividend of ARS 9,700 million.

On Page #3, we can see first how we were affected of COVID. From March to September, we had shopping malls closed. We had a -- we can see the time line how we were reopening our shopping centers, and we were able to reopen the majority of them in Buenos Aires City after October.

During this period, the company has decided to waive the billing and collection of the base rent and the commercial fund. This was in line to support our tenants and the relationship, and they were having very bad time. And we didn't see any other alternative of doing. We -- as we mentioned, we opened in October in Buenos Aires City with strict safety and hygiene measures, with reduced hours and traffic, with social distancing, and we have a lot of communication for -- and training and incentives for people to come to the centers and to grow efficient shops at the shopping centers.

Since the reopening of the malls, we have demonstrated that the whole mall industry is, in many ways, more controlled than the street and the competitions that we have because we measure temperature to each person that gets into the shopping, we make people to sanitize their hands, and that is not the case on the street. And people is learning and -- that this is the case, and it's safer -- it's a more safety space, the shopping center than the street.

On Page #4, we will see some numbers on shopping centers. As I mentioned, we see a drop in occupancy from 95% that we were to 88%. This is mainly explained by Falabella, the department store, that is the only department store that we have in Argentina leaving the country. It already left 2 of our shopping centers, DOT and Alto Avellaneda. We still have it -- Falabella in Mendoza, and they made announcement they're going to leave. So this is the main effect of the vacancy in our shopping center.

If we exclude the Falabella event, we are running at 94% occupancy. And the good news here is -- for us is that in the beginning of the pandemic, our discussions with tenants was, here are the keys, we are leaving no matter what you collect, what you want to bill us. I mean we are leaving. There's no way we're going to survive. And the discussions today are completely different. Now it's a discussion of pride. But we are signing contracts. We have signed till February, 148 new contracts in the shopping centers, also have changed the composition of those new leases. Remember, we used to have 80% of fashion and apparel. And now it's -- of the new leases, it's only 60% fashion and apparels. We're bringing services, cars, new industries, restaurants, different things that are coming into the shopping centers. And we are very enthusiastic that this is a new trend all over the world.

In terms of sales -- sorry, one mention -- one more mention about the occupancy. One of the Falabella stores, the one at the top shopping centers, more than 2/3 are already signed or to-be-signed contracts to occupy those spaces. So we are living a good moment relatively in terms of leasing and much better than we had a few months ago.

In terms of sales, as I mentioned, we are down 35% in real terms compared to the previous year, but we can see the trend is really going up, and it was better than we expected. Remember that we opened in October. In the beginning, people was afraid -- were afraid of going to shopping centers. Now people is losing that fear, and we're seeing more people coming to the center, more effective buys. The people comes, buys and leaves the center. So we see the sales going up.

December was better than expected and the same for the month of January, and we are living in February. And remember that these sales have -- we have no cut here, all the entertainment component, cinemas are closed. The entertainment parks are closed. So we expect that with the vaccine and people losing fear, we will be able to get permission to make that reopenings, and also we will increase the traffic in our shopping centers.

In the case of office buildings, we see that the stock remains very similar. But reality, the portfolio is very different. We are running now 114,000 square meters of GLA -- real GLA, no loss factor. There was big changes. First of all, we incorporated the new building we were developing. It's now open and tenants are in place of 200 Della Paolera. And we sold Bouchard 710, the whole building. And we sold our stake at the Boston Tower. I will give you more details in a few more slides. But the stock remains very good, but it's newer, better, with better tenants. So we are very happy of this trade we did and the quality of our portfolio.

In the occupancy, we see a small drop. This is mainly explained because we -- what we sold was fully occupied, and the new building is running at 75% occupied space. It's lower than the 100%. But remember, this is a new building that is opening the doors in maybe the worst scenario for offices in the world. Most of the world is working in home office form. But nevertheless, we were able to open with 75% occupancy on the building -- I mean occupancy in terms of tenants that signed the contracts and will pay. People is not yet coming to the building. We are the only ones that we moved to the new building, and we'll show you a little bit later in the next slides.

And the B class, we see a 56% occupancy, which is similar of what we have in the past, and mainly this is the one building that we want to sell. One more thing I didn't mention is we had also Falabella as -- is leaving the country as a department store. We have the offices of Falabella at the Zetta building in the DOT shopping center. And so we lost also Falabella as a tenant in the office at the Zetta building.

Leases are running at $25.70 per square meter, a small drop in price of what we had. And we see some pressure from tenants in terms of pricing, not very much, but we will see some pressure on that aspect. And we're also seeing some people trying to reduce their footprint, not going away from the space, they started reducing footprint, not very big as of today in our portfolio, but this is a new trend that I'm seeing in the market. And as you know, we are all working in the home office modality, a new work of modality.

As I mentioned, on Page #6, we can see some of the sales. As I mentioned, we sold 15,000 square meters of GLA of the building at Bouchard 710 for $87 million, approximately 55 -- sorry, $5,800 per square meters. We also sold in 2 tranches what we had at the Boston Tower Building. It was -- the 2 come -- together, they're around 14,500 square meters of GLA in 2 different sales, one of $41 million and the other one of $42 million, and an average cap rate of 6%. These were very good sales for us. And as I mentioned, we replaced these very good buildings, rather older with a new one in a very same location with better views, with better quality of building and very good quality of tenants, too. We have no remaining floors at the Boston Tower, and also we sold completely the other building.

As I mentioned, we opened 200 Della Paolera. It was opened in December, and we moved our new headquarters that are based on 2 floors on this building. We've reduced our footprint as a corporate office. And we are running more efficient in this building. It's a wonderful building, wonderful quality. We have 28,000 square meters of GLA on this building. As I mentioned, we are running at a 75% occupancy. And now we have some tenants that are working on the premises to prepare their office to be occupied very soon. Premium location, sustainable, new technologies, modern design. We are very, very happy with the conclusion of this building and came up lower to our budget in terms of cost. So we are happy, and we expect to keep bringing new tenants to this building.

So now for our financial results, we'll turn the microphone to Matias Gaivironsky, our CFO.

Thank you very much, Danny. Good morning, everybody. So going to Page 9, we have the breakdown of our financial results. You can see that we finished the 6-month period with a gain of ARS 5,285 million compared with ARS 341 million loss in the previous year. During the quarter, we generated a loss of ARS 9.5 billion compared with ARS 3.7 billion -- or ARS 3.8 billion of the previous year.

The main effect here is in the line 4, the change in the fair value. You can see that during the 6-month period, we posted a gain of ARS 3.2 billion, and during the quarter, we posted a loss of ARS 14.9 billion. You remember that during the previous quarter, we started to recognize, basically, in pesos term, our Office portfolio and our land bank in pesos at the rate that is the blue chip swap considering that all the transactions that we are doing in the Offices are in dollars and the leases' exchange rate is in real dollars.

The rest of the portfolio, the shopping malls remain at a, it's an DCF model, in pesos term. And there, we consider the official exchange rate, since the currency effect is in pesos terms, we don't have that distortion.

The second most important effect is in the line 7 in the net financial results that I will explain later with a deeper analysis. Also, it is important to see the line 8, the income tax that always reflect the deferred tax on the -- on what happened in the line 4 and the change in the fair value. So every time that we have an appreciation of our properties, we recognize a loss. And if we have a loss, we recognize a gain here in this line. So line 10, you can see the ARS 3 billion that is related to the ARS 14 billion in the line 4.

So going with -- something else before the next page is in the bottom of the slide. You can see the sum of our costs and expenses. This is something that we always monitor, that is, what happened with our cost in terms of inflation. You can see that we have more or less our costs controlled. We have a reduction of 20% over the last year, considering that some part of our costs that are fixed. This was a big effort for us to reduce against inflation.

If we move to Page 10, here, we can see more breakdown on our operational side, what happened with our shopping malls and offices in depth. Of course, we are comparing this year with the previous year that was normal. We -- during the last year, we don't have the effect of the pandemic. So in the comparison, of course, all the metrics are below previous year. We can see a start -- a recovery, of course, quarter-by-quarter.

And as Danny mentioned, the sales started to grow. At the beginning, our commercial policy was aggressive, supporting our tenants. During the first quarter of operation, we decided to waive most part of our rent. Now we've started to collect again. So we will see that recovery going forward. Reality is that when we measure 6 months' revenues for our -- 6 months EBITDA for our malls, we have an increase of 76% in terms of EBITDA, 60% in terms of revenue. And the number in the second quarter is better, 47% and 42%. So we expect that numbers to start to recover going forward. But of course, we see a normal year, and this definitely was not a normal year.

In terms of the Offices, the main effect, you can see it in revenues that we have a decrease in the 6 months of 25%, in the 3 months of almost 28%. So there is a reduction on our portfolio. We sold, as Danny mentioned, the 2 buildings than were -- was replaced for the new building that we just opened. So the revenue of the new building will came (sic) [come] in the following quarters. But in this comparison, we see the drop. If we leave aside the effect of the disposals, the revenues will grow at the level of -- will decrease at the level of 6.8%, and this is basically related to the increase in the vacancy that Danny mentioned.

In terms of Sales and Developments, in the adjusted EBITDA, we can see the effect of the 2 asset sales, the 2 office buildings. So that is the sum in the adjusted EBITDA during this year is related to our assets disposals.

If we move to Page 11, we can see the breakdown of our net financial results. We have an important event during September that we can sell one of our bonds for $140 million, that will generate lower interest rate going forward. Also in the line 1, the net interest, loss, we can see a decrease of 30% during the 6 months. Also, it's related to the investment of our liquidity, our liquidity generating interest and that compensates the expenses that we have and that is the effect why we decreased by 30%.

The other important line is the line 3, the fair value gains on -- of financial assets, also is the investment of our cash and our liquidity that generated a profit to the 6 months' period of ARS 3.2 billion -- or ARS 3.3 billion, and during the quarter, of ARS 1.7 billion.

We can see at the bottom of the page that the previous year, the foreign exchange difference has generated a loss of ARS 4.4 billion that was related to the real devaluation of Argentina in the previous semester. You can see that the real devaluation was 12%. This semester, the real devaluation, or we have a slight appreciation of 1%, the devaluation was by 11% of inflation at the same rate.

If we move to Page 12, we can see the breakdown of our net asset value. This is all related to our books. So Shopping Malls -- and also it's important to mention that all these figures are in dollars, using the official exchange rate. So Shopping Malls are in our books at $600 million of the official exchange rate; Offices are at $700 million of the official exchange rate so that -- with that, the total -- gross asset value of ARS 1.5 billion -- $1.5 billion, sorry, and the net debt of the company is at levels of $260 million. With that, we have a net asset value of $1.284 billion. That compared with the previous year is higher and is related on what happened with the blue chip swap that has a direct impact on the Offices and the land bank.

Well, we see some valuation ratios we are trading. This is all related to the total NOI and total EBITDA. The cap rate we are trending at 27%, EV-to-EBITDA of 4.2x, price-to-FFO is 2.8x and 0.2 related to our net asset value. Of course, all of the EBITDA is not recurrent. During the quarter, we have an important part that was the asset sales. So the rental EBITDA for the last 12 months was $45 million and the rest came from the front-end asset disposal.

If we move to Page 13. Finally, we have the breakdown of our debt. We can see that until 2023, we don't have any major amortization of our debt. So the debt profiles look clear until that date. And in terms of leverage, the company has today a loan-to-value of 17%, and in terms of net debt to a total EBITDA is 1.9, if we consider only the rental EBITDA that is higher. But it's higher not because we increased our debt. In fact, we canceled part of our debt during this period is only related to the decrease on our EBITDA.

So with this, we finish the formal presentation. Now we will open the line to receive your questions.

(Operator Instructions) The first question comes from Marcelo Motta from JPMorgan.

Two quick questions. The first one, we look at the Shopping Mall segment. You commented about having already leased part of the Falabella space in one of the malls. So just wondering if you could provide some details regarding those contracts, how the price compared to the previous one? How is the duration of the contracts? And just some details to see everything is still as it was pre-COVID or there is maybe more flexibility given the situation that we are right now?

And on the Offices portfolio, just also a follow-up on the 200 Paolera, you mentioned that you have 75% of occupancy rate, but that not all the tenants are already paying, right? So just wondering if -- when you look at your financials going forward, I mean there will be some grace period. You're going to do a linearization on the contract. So just wondering when we should see the positive impact of those 75% of tenants already paying the rents on that building?

Thank you, Marcelo, for the question. Let me answer the second one first, which is simpler. What I mentioned is that we don't have yet all the people in the offices, but (technical difficulty).

Danny, I think we have a problem with your line. This is not clear.

You don't hear me, correctly?

No. Can you repeat, please?

Yes. I was saying that we are -- what we saw -- what I mentioned is that we have a difference -- that we don't have all the tenants yet at the building, the people working. But we don't see any difference from what we expected and when we signed with the tenants in terms of coming and taking possession of the offices and the construction for being ready. So we expect that we're going to have those leases, and already those leases are producing income, and they are burning the free rent. And the free rent we gave was completely in line with the previous situation to (technical difficulty)

Let's try again. We lost the final part. We heard perfectly well in the previous one.

So in terms of people coming into the building, we expect that the first tenants will start coming in March. But as I was telling you, I don't see any discrepancy in terms of the rent producing at the 200 Della Paolera. And it's the best building in town, and people want to be in the best and the newest building in town.

I think the first question, Marcelo, we -- I mean, at the top, top burden of the crisis, we had 180-something stores leaving our shopping centers, right? So they were giving back the keys to our teams. And we were able to sign, as I mentioned, like 148, I think, is the number. So we did not completely overcome the exit of tenants of the shoppings, but we're pretty close. And I am very enthusiastic with the progress that we are doing in terms of leasing.

What kind of concessions we gave? Basically, it's the key money in the shopping -- in the weaker shopping centers. In the shopping centers that we have the most exits was very difficult to collect key money. So we waived or we reduced a lot of the key money. But as you remember, our tenants are really attached to sales. There was not a difficulty to put the number where we reach the percent forward -- looking forward in terms of rent. So we expect, as we see sales going up, we're going to follow that trend in our (technical difficulty) key money. The duration of the leases is a very short-term duration. Our typical contract is a 3-year term. We are doing some pop-ups, not that many. I mean in the beginning of the pandemic, we had all pop-ups, and now I see the ratio is going back to a 3-year normal term of the leases. So I think considering the situation, the discounts we had to make and the concessions we had to give are relatively low. And we expect that as we see the sales going up, we're going to see also our rent going up and as we did in December, and we're going to keep closing on these new months.

Thank you. Next question comes from (inaudible).

I have a couple of questions in relation to the Offices, and if you can comment on any increase in delinquency? And you mentioned that tenants are not leaving but reducing the space. So just if you can comment on that? And whether that contributed also to the drop in occupancy? And any delinquency if different for the best offices versus the B class?

And then on the shopping malls, related to the previous question, so I understand that you waived or reduced the key money, but the rest of the terms remain unchanged or -- wondering because you said there was some discussion on prices with the new tenants. So wondering if the composition of base rent versus the variable part remained unchanged? And how do you expect that to go -- to improve going forward as sales are increasing?

Okay. Thank you, [Mariana]. First of all, delinquency in the Office segment is very, very low on the systems. Sometimes, it's because there is a problem with a system that could match us, but it's really very, very low in the Class A.

In the Class B, we sometimes -- we have one tenant that is complicated, but I don't see any difference from the COVID momentum to previous COVID. I think that's all.

What we expect and what I mentioned of downsizing, I mean, for example, we used to have 4,000 square meters and now we have 2,400 square meters, right? It's easier to downsize when you were with home office. And I see that, that is the case that happened with some of -- for example, one tenant that we moved from another building to Catalinas is also taking less space than they had in the previous building. We had 2 tenants, one at the office -- at the building -- office building and the other one at the said -- at the free lease building that they reduced because they can work from home. So they're reducing for some, one in 1/2 and the other one 1/3, I think. So that's the trend that I see. It's not massive. We haven't seen this all across our portfolio, and we do not expect that. But we are seeing that. That's what I mentioned.

And in terms of pricing on the Office segment, I think vacancy will push a little bit prices down, right? But I don't see owners very willing to accept very reduction -- more -- big reductions on price, because remember, we have the official exchange rate. So that is a big discount also for tenants. I mean we expect some reduction, but I don't see a very big drop.

Regarding your question on the Shopping Centers, there was no concession on the minimum negotiation forward. I mean as we negotiate on the new contract, it was very difficult to set up the new minimum rental. Remember, we have a minimum on percentage. It was very difficult because people didn't know what they're going to sell. It was all speculations. We will have the shopping center closed. So if you say, okay, let's -- same minimal rent you had in the past? No, no, there's no way. I will not sell this. I will sell at minimal half what I used to sell. So it was very tough, I mean.

So we had some reductions (technical difficulty) we can recover by our percentage of sales. Remember that we have our percentage of sales, it's monthly, it's not yearly. So we will recover that difference very, very, very fast. And as time passes, we'll see sales going up (technical difficulty) closer of what they were in the previous contract. And I expect that trend for the near future as long as we have the shopping centers open, as long as we see the vaccination going more and more to the population in the country.

Thank you. Next question comes from Gordon Lee from BTG Pactual.

Two quick questions, both of them in a way follow-ups to questions that have already been made. The first, I was wondering if you could just remind us on the shopping center exposure to Falabella. How many of your properties had exposure to Falabella? And if so, as you bring in new tenants, is it safe to assume that these will be more satellite type of tenants as opposed to anchors so you'll have to reconfigure that space a little bit?

And then the second question is on the Office portfolio. With the sales that you've done and the additions that you've done, should we now expect the portfolio to remain stable? Or should we expect additional sales going forward?

Thank you, Gordon, for the question. First of all, exposure to Falabella, we had it in 3 centers: Alto Avellaneda, DOT Baires and in Mendoza Plaza. Falabella already left 2 of those, and we still have them in Mendoza. And we expect they are going to leave some time during March, April, not completely sure, but we expect that.

So -- and the reconfiguration of that space, it depends on (technical difficulty). As I mentioned, it was not very easy, but it was quite simple. We are doing some decoration -- one of the floors is fully dedicated to a decoration store. Another floor is going to be the (technical difficulty) vaccination center most probably, we're in negotiation, and we expect that will bring a lot of foot traffic to the shopping center because we expect thousand -- hundreds of thousands of people getting the vaccine.

And the other space and the other floor was half converted into a beauty salon, not beauty salon, like perfumes and all health and kind of things. So it was an easy conversion. The one in Alto Avellaneda, it's more challenging because the whole shopping center is in 1 floor, and Falabella has 2 floors, right? So I expect one of the floors is going to be easily converted. The second one is going to be a little bit more challenging. We have to try and estimate for that floor.

And in the case of Mendoza, it's going to be an interesting challenge. It's in the middle of the shopping center. It's very big. It was really the anchor of the shopping center. And we are looking for alternatives in different segments, not only on retail. We are looking for alternatives, and we expect to come up with something interesting soon. I mean the announcement was really this week that Falabella is leaving. We were thinking that, that was a possibility. So we already started to do some thinking, and we expect to -- but it's going to be challenged. It's not -- there's no other department store in the country.

Perfect. That's very clear. And on the Offices, should we assume a constant portfolio going forward? Did you expect to do a little bit more asset sales?

Well, it depends on the opportunity. When we see that we have good prices, we always take the opportunity, that is, if we see there's a good moment to sell, we sell; and if we see there's a good moment to build, we build or we buy. And that's what we did in the past. I mean we were building new office buildings because we saw it's a good opportunity to replace, to renew our portfolio. And now I will tell you, prices are still interesting.

If there is something interesting to sell and to replace for a new construction or better, I mean, we're open to it. I mean it's part of the balance here. When we see the good opportunity to sell, we sell, we buy or we build. We have nothing that we have to announce, and really, we are very comfortable with the portfolio that we have now. I mean there's only one small piece that we still have for sale in the intercontinental building. Remember that we used to have the whole building, and we only keep now 3 floors. That's the only piece that I would say that is not part of the new portfolio.

Perfect. So just to clarify, going forward, if we were to see asset sales, it would be in an attempt to sort of optimize the portfolio with the recycling of assets. It wouldn't be balance sheet or liquidity driven. It would be strategic?

Correct.

(Operator Instructions) There are no further questions. We conclude the question-and-answer session. At this time, I would like to turn back to Mr. Daniel Elsztain, CEO, for any closing remarks.

Well, thank you all for participating in this call. It really has been a challenging year, maybe the most difficult year I saw in the industry. And with the perfect storm, it was hitting us. We had the shopping centers closed for such a long period, no tenants coming -- no people coming to our office buildings, really. But unfortunately, or luckily, in Argentina, we are used to this -- to navigate these rough waters. And our team remained very calm. We did a great job trying -- they did a real great job trying to reducing costs, procuring safety to -- measures to our clients, replacing the tenants that were leaving our shopping centers.

So now as we see sales going up, we expect to see our revenues going up and following that trend, hopefully, and -- as well as the deployment of the vaccine will bring more calm to the society and people will behave more in the way they used to. And with that and without any debt expiration in the short term, we are in a process of taking good care of our assets, our clients, exploring opportunities to keep our growth and producing good results from our shareholders.

So with that, we conclude our second Q conference call. We thank you all, and we expect to see each other again for the next Q. Thank you very much.