IRSA Inversiones y Representaciones SA (IRS) 2022 Q2 法說會逐字稿

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the second quarter of fiscal year 2022 results conference call. First of all, I would like to remind you that both audio and a slide show may be accessed through 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. (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. Eduardo Elsztain, CEO.

Welcome to the second quarter of the financial results of year '22 results conference call. I am very glad to be hosting this webcast and sharing with you, all our investors and the analysts, the main highlights of IRSA for the period. A new IRSA merged with IRSA CP and consolidated in only one real estate vehicle that brings it closer to the operation again and with the satisfaction of having the approval of Costa Urbana project. This combination, it's incredible. The company consolidation, the 2 of them in 2, will save a lot of cost, will save a lot of operational cost, tax cost.

We think it's an incredible achievement. And the fact that we got after 20 years the approval of a project that came to the legislation more than 5 times, it's an incredible achievement of the group that show resilience, patience and persistence to go in the project. I also believe that this year is going to be a very special year. Even though it's not all common share by all the investors in Argentina, I see that this cycle of liquidity in the world going to commodity will really affect our market in a very good way.

I want to pass this now to Matias, our CFO, who will get with you onto the details, and thank you. Thank you very much again for joining us today to the webcast of IRSA.

Thank you, Eduardo. Good morning, everybody. So we start the presentation in Page 3, with our merger process. The merger, as you know, was approved in December with our shareholders' meeting with approval of 99.88% in IRCP and 94.57% in -- sorry, 99.88% in IRSA and 94.57% in IRCP. The process is ongoing. We are surprised with the speed of the process so far. In January, we presented the definitive merger agreement and all the information to the SEC and to the CNV locally. And we are waiting for the final approval that will take place in the coming months to exchange the shares of IRCP for IRSA shares. We expect that to happen probably in the next 2 to 3 months.

Regarding the outstanding shares post merge of IRSA, currently, we have an outstanding 500 -- sorry, 658 million shares. We will issue 152 million shares because of this exchange. And after the merge, the outstanding shares will be 810.1 million shares of IRSA. Remember that the ADRs trade 10 common shares per ADR. So the company structure after this merge and how IRSA will look forward? We have the rental segment that we used to have it at IRCP level with shoppings and offices. Now we include the hotels as well. Then we will have a development segment that will be -- drive basically by Costa Urbana and other mixed-use land bank that we used to have in IRCP and IRSA as well. And then the financial segment with our stake in Banco Hipotecario, with a 30% stake in Banco Hipotecario.

We used to have the international segment. In December, we conclude the disposal of our shares of Condor. Condor sold all the portfolio of hotels and then distribute a dividend. IRSA collected $25.3 million from that dividend and also some other loans that IRSA lend to Condor. So now we basically don't have international assets, only minor assets or one project in Montevideo, Uruguay and other minor assets abroad Argentina. If we move to Page 5, we can see the evolution on the operational side of our shopping malls. Regarding our stock, we've finished the expansion of Alto Palermo. Now we have 335,000 square meters of GLA. The occupancy remain stable compared with the previous quarter. When we analyze comparing with prepandemic levels, we are below the 95% of the prepandemic levels.

Basically, here, we suffered the departure of some big spaces like Falabella, Walmart and a new whole appliance -- home appliance store that closed their operations, so we suffered that departure. If we eliminate the big spaces, the occupancy will be 95%. So we will be working in replacing that big spaces with probably small proposals and recover the occupancy going forward. If we see the same-store sales in real terms, we are very happy that for first time in many, many quarters, we surpassed inflation. The quarter finished with a real evolution of 7.6% above prepandemic levels. Here, we are not comparing with the previous year because the previous year, the operation was almost closed. And so all this comparison is against prepandemic levels. So we are very happy with that. If we see visitors, we are recovering, but still some lag comparing with prepandemic levels, so that give us more space to grow going forward.

Next page, we see here the expansion of Alto Palermo shopping. We finished it and we opened the new spaces. We are happy with the development. We have fully occupied all the spaces available with world-class tenants and local important tenants. The total investment was around $23.5 million, still $3 million pending, but also expanding the movement of the food court in a new foothold and then replacing the old food court with new stores.

If we move to Page 7, we can see the office building evolution. Here, we have been working in doing a flight to quality over the last years. We can see that the square meters that now -- that we own are 109,000 square meters, more or less the same than the previous quarters. We have been selling some floors. The last years, we sold the Boston Tower and the Bouchard Tower, and then we opened 200 Della Paolera, and then we start to sell some floors of 200 Della Paolera. So now we have 109,000 square meters.

If we see the leases per square meters remain stable at $25 per square meter and occupancy is lower than the previous year at 76.7%. Basically, when we sold last year, the 2 buildings were fully occupied. And now with the incorporation of Della Paolera building that is not fully occupied, we are suffering that impact in vacancy. In the -- regarding the B buildings, basically the Suipacha building that is fully -- is completely empty, and we are working trying to sell that building in the next -- going forward.

In page 8, we can see the disposals that we did during November and December. We sold 4 floors of the 200 Della Paolera building at very good prices. We received $41.2 million, an average of $8,600 per square meter of the official exchange rate. We still have 20 building -- sorry, 20 floors with 24,000 square meters available in this building, probably one of the best buildings in the city of Buenos Aires.

In Page 9, regarding the hotels, this is an industry that was very, very affected by the pandemic. We still have the impact on restrictions on tourism into Argentina. Although it was start to open in the end of the last year, the occupancy on the Buenos Aires hotels still very low at 36% occupancy, that we hope to recover going forward. And in the Llao Llao Hotel, we see a big evolution and a big recovery, recovering the same occupancy in the prepandemic level, but here affected by some closure of some rooms that we are developing and turn around some rooms here. So that also affect the occupancy. But going forward, we see big, big recovery for the Llao Llao Hotel.

Probably one of the main events of the last 20 years of the company is the approval of Costa Urbana project. We are very glad on the approval. This is a major development for the history of the group. We hope that this project will drive the future growth of our company going forward. As you know, Costa Urbana is a plot of land of 70 hectares, close to Puerto Madero in the city of Buenos Aires. If you see in the left -- the right part of the graph, you can see that this is like a natural expansion of Puerto Madero, that probably is one of the best neighborhoods of the city of Buenos Aires.

The City Congress finally approved the project. The agreement that we reached with the city was that IRSA will donate around 2/3 of the land to the city for public uses, basically parks, and some other plot of lands to the city. And in exchange of that, the city approved construction capacity of almost 900,000 square meters that we will do different uses, homes, offices, shops, services, education, entertainment. So this will be a new neighborhood in the city. The contributions to the city, as I said, was the 2/3 of the project. So this will be probably the second largest park in the city of Buenos Aires.

Also, we committed to contribute around $5 million in cash and in bonds. So this $2 million in cash and $3 million in bonds that we will do in the next months. And then we committed to invest around $40 million in infrastructure and road works in the projects in the next years. The location is very premium, probably is one of the few plot of land in the city of Buenos Aires with river coast. So we are very, very happy on this new development. Here, you can see the picture of the current stage of the land and the current status that it was an empty land for almost 20 years, and this is the render of the project. It's a huge project, will take many years to develop. But we will be working going forward in defining the final project and start structuring how we will developing this going forward.

Now we go to the financial results. We are presenting our first 6 months of the year -- sorry. This is the first time that we present our financial statements as a merge company with IRCP. So basically what changed is that before we eliminated the noncontrolling interest of IRCP now it's fully consolidated or fully inside IRSA. So if you see the 6-month column, we are finishing the 6-months period with a gain of ARS 25.5 billion compared with a loss of ARS 1.7 billion in the previous year. Here, we have different impacts. The main impact is in the line 4, the change in the fair value. We can see a gain of ARS 22.4 billion against almost ARS 14 billion last year. This here is related to the approval of Costa Urbana. After the approval, we reevaluated the land at a value of $360 million compared with the previous stage or without approval at $210 million.

Besides the change in the fair value, there is another important effect, that is in the line 9, the net financial results that we can see a gain of ARS 4.3 billion that I will explain later. The income tax that we are recognizing a deferred tax of ARS 4.5 billion. That is related to the change in the fair value that we are -- all the time that we reevaluate a land, we recognize a deferred tax. That is a potential tax that we have to pay if we sell the land. And the other important effect last year was the deconsolidation of the investment in Israel that generated a loss of ARS 10.7 billion, that this year we have no more results from Israel.

If we move to Page 15, we can see the different effects of the adjusted EBITDA by segment. Shopping malls in the 6 months we see a big recovery, 227%, reaching ARS 4.3 billion of adjusted EBITDA. That if we compare with prepandemic levels, this is still below. The prepandemic levels was ARS 5.5 billion. So there is still room to reach prepandemic levels here. In the offices, the results are lower than the previous year in pesos terms since we have revenues tied to dollars at the official exchange rate and the official exchange rate, that evaluation was lower than the inflation.

When we show the last year numbers adjusted by inflation are generating this big impact in pesos term. In dollar terms, this is different and I will show in the next slide. But this segment is affected by some higher vacancy and the disposals of some floors that we sold during the last years. The hotels are showing a recovery against the last year, but still very affected with prepandemic levels. And sales and developments, here, we show the effect of disposals. This year, we sold only 4 floors of the office buildings compared with the previous year that we sold to one entire building and half another building.

In Page 16, we see the numbers in dollar terms. And here it's different. The comparison we see in shopping malls, a big recovery in dollar terms at $25.1 million in the last quarter. So we are recovering levels -- good levels of EBITDA, again, after the effect of the COVID situation. And in the offices, we see that basically we have more or less the same results than last year. This is a combination of different effects. We sold some square meters that used to generate $1.6 million of EBITDA, new square meters that generate $2.9 million, the vacancy that generate $1.6 million of difference and rent price that generates $0.5 million of decrease in the EBITDA.

If we move to Page 17, we can see the evolution of the net financial results. As I mentioned, we finished the 6 months with a gain in the financial line of ARS 4.3 billion. This is basically related to the evolution of the exchange rate in Argentina. The exchange rate evolution was only 7%, while the inflation during that semester was 20%. That is a real appreciation of the pesos at 11%. And this generate, again, in the net foreign exchange differences, that you can see in line 2 that we generated a gain of ARS 6 billion. Then in the net interest losses, we see a decrease in -- of 25%. This is related to the decrease in our debt as well on the results of the lower devaluation comparing with inflation.

So Page 18. Here, we try to show our net asset value at the official exchange rate. Here, we have all the distortions of the difference between the blue chip swap and the official exchange rate. You know that some part of our portfolio, we are recognizing in pesos term at the blue chip swap and some at the official exchange rate. In the shoppings, we are showing all the results in pesos at the official exchange rate and in the offices and in the land bank at the blue chip swap. So here, we have this distortion of the gap between the official and the blue chip swap in the offices and in the land bank. So basically, if you want to convert this at the blue chip swap, you have to divide by 2 more or less, the offices and the land bank. But here, compared with the previous quarters, the main effect or the main impact was the approval of Costa Urbana that generated $150 million more in valuation that -- at the official exchange rate that is like $300 million.

So the net debt. We reduced the net debt to levels of $501 million, and we have a target here to keep reducing this. As -- when we presented the merge, we talk about $470 million of net debt. So we will keep working to reduce these to those levels. So the net asset value at the official exchange rate reached a level of $1.9 billion and an LTV of only 21%. So finally, regarding the debt profile, we can see here the evolution of the net debt on a consolidated basis between IRSA and IRSA Commercial Properties. That we reduced significantly the debt from $755 million before the pandemic to $501 million.

So it's a 34% reduction. So we are very happy on this reduction. The debt amortization schedule, we have most part of our debt that expired during fiscal year '23. So we will be working trying to extend the tenor of the debt, but the levels of debt remain conservative in terms of LTV to 21%. And in terms of net debt-to-EBITDA, still affected by the decrease in the EBITDA levels. Know the debt reduced, but the EBITDA level reduced as well because of the pandemic. So we hope to see better numbers going forward.

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

Now it's time for the Q&A session. (Operator Instructions) First question comes from [Juan Emanuel Vazquez]. Can you provide a breakdown in dollars of last 12 months EBITDA, this $83.5 million between shopping malls, offices, hotels and sales?

Yes. Thank you, [Juan]. The breakdown is we generated around $54.7 million in malls, $18.4 million in offices, $2.5 million in hotels and $11.6 million in sales and development.

As a follow-up, could you provide more color on the tax impact of the revaluation of Costa Urbana? It creates a deferred tax but not an immediate cash tax impact.

No, not at all. All the effects of the revaluation of properties and all the fair value of our investment properties are not generating a tax impact -- cash impact. It's only accounting rules that we have to recognize the deferred tax in the case that we sell. But also, we have rollover now. If we sell, we can reinvest that money in a new project, so we defer the tax payment. So it's more tax impact than a real cash impact.

Next question from Gordon Lee from BTG Pactual.

Can you hear me?

Yes. Yes. Perfect, Gordon.

Just a question on Costa Urbana. And I know it might be a little bit early to ask this question, but do you have a sense of when we might begin to see capital being deployed towards the development of that project? Do you have a master plan that at some point you would share? Have you selected your partners? How will you finance it? I know it's early days yet, but I was wondering if you could at least maybe provide us a sense of timing of when some of these things may happen?

Thank you, Gordon. As you can imagine, we have been working in this approval for 20 years. So all the focus of our team was put in getting the approval. And since we don't have any certainty that we will reach it, there is some work that we have to do going forward. So the final way that we will develop this project, we are working on that. It's a huge project. So there is no absorption for a project like this in 1 or 2 years. So we need to work and do it in stages.

If we analyze how we develop in the last years at IRSA level, basically, we did many swaps agreement where we put the land, someone else develop and pay us with square meters. But here, maybe some of the first plots we will have to develop because it's an empty land, and we need to attract people to the projects. So we are defining the way. I don't expect to see a major CapEx over the next 2 years. For the -- this year, we have to pay to the city around $3 million that will take place in the next months probably.

And then we need to develop part of the infrastructure and part of the parks. That $40 million that we committed to the city, at the official exchange rate, is something that probably could take place in the next, I don't know, 2 to 5 years. We don't have to do all together, so we can do it in stages. So we will see. And probably when we define how we will develop this, we will announce or we will be informing the news about this project going forward. But the team was really focused on getting the approval that took place finally in December. So now we are working in how to develop going forward.

Perfect. That's great. And congratulations, by the way. That's phenomenal news on that approval.

Thanks, Gordon. Well, here, Álvaro also from BTG is asking, can you give us more color on what exactly drove the revaluation at Costa Urbana to $695 million? It was a $300 million increase at official effort, I think you mentioned.

Well, basically, Álvaro, I like to see this more at the blue chip instead of the official. The land used to -- was valued in our books at $210 million and now at $360 million. Basically, the change is the approval. Before there was no clarity about what we can do in the land. Now we have construction capacity of almost 900,000 square meters. So in the revaluation, we are giving impact on that construction capacity and using an average cost of land -- of incidence of the land in that construction capacity.

So typically, when you have land here, in all parts of the world, but here, what we do is, typically, you have a price per square meter of the finished unit. So let's assume that the finished unit could worth $3,000. And then you give -- you have the incidence of the land of 20, 30 depends on the location of the land. So that is basically the price of the land. Here, how we reached this valuation, we are using comparable numbers, probably conservative numbers in terms of price per square meter of land. This is around $400 per square meter of land. That is -- I believe is conservative comparing price of the land in the city of Buenos Aires.

Next questions. I will take 2 here, a follow-up, 1 from Rodrigo Nistor from AR Partners and Matias Castagnino in that battle direction as well from BCP. A follow-up on the performance of shopping malls and office buildings. Have you seen any significant change in sales traffic occupancy in January and February compared to 2021? Did the Omicron variant have any significant impact in results in January, February?

Well, we see a big increase in sales in December. December was an incredible month. When we compare with January and February is the vacation period and the holiday season here in Argentina and also with the Omicron and the increase in cases maybe have some impact in sales. So we will see that when we disclose the March numbers, but yes, has some impact. The combination of the 2 factors, the holiday season and maybe the Omicron variant that you know that in Argentina, the cases jumped significantly in January.

Did you hear one from Cresud? Did you see the proceeds from the -- did you use the proceeds from Condor liquidation to cancel debt using the blue chip swap rate?

Not yet. The numbers that you see in December are not including that effect. So we still have in cash the Condor proceeds.

There is a question on potentially which price would you sell Suipacha building? But those type of transactions we do not anticipate any price. We will release it if we finally conclude the transaction.

So I will move to the next one. Regarding office segments, what do you expect after COVID-19 pandemic? At the Zetta building, the occupancy increased by 8.7 points. Can you give me some color on how do you see rental activity?

We hope to see -- probably the office segment was affected by some turnaround and some decisions of companies to decrease the size of the operation or the size of the offices and maybe we will start to see new activity going forward. I think all those changes already happened. So we hope to see better occupancy going forward. Prices of premium buildings remain okay at levels of $25 to $30 per square meter. So that is not affected by this situation. It's more affected by the BBB or B buildings that since the occupancy review significantly the price per square meter decreased also a lot and maybe that affect some decisions of the companies to move from AAA to B buildings at much cheaper levels. But we -- in the premium buildings, we see no major concerns going forward.

I have one last question from Mariana Cruz also from BTG Pactual. If you can please comment expectations to see further sales of floor offices in the coming quarters?

Well, Mariana, typically, we don't give guidance on this kind of transactions. We just announce when we do it. But I can tell you that the strategy continue. We believe that if we can sell at good prices per square meters, we will keep selling. There is a good opportunity to do new buildings at a replacement cost cheaper than what we are selling. So for us, makes sense if we have good demand for the offices to keep selling. So it's something that we will continue going forward.

Is there any additional questions? If there are no more questions, we conclude the Q&A session. I will now turn back to Matias Gaivironsky, CFO, for his closing remarks.

Well, thank you, Santiago. This was a very exciting quarter with 2 major developments, Santa Maria, Costa Urbana and the merge. We are happy now, it's much simpler, the structure, is much clear. So we believe this will increase the liquidity of our shares and also generate synergies, operational and tax synergies. So we are happy with that. Costa Urbana is an amazing news for the company that will drive the company's growth for the next 10 to 20 years. So we are very happy. Regarding the pandemic, we believe that we are surpassing the effects of the pandemic. And now with a normal operation, we will see good levels of cash again in the malls. The hotels are recovering. So we are very optimistic about the future of IRSA. So thank you very much to all of you to participate in this call, and we hope to see in the next quarter in May. Thank you very much.