IRSA Inversiones y Representaciones SA (IRS) 2004 Q4 法說會逐字稿

Good morning, and welcome to the IRSA and Alto Palermo conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your hosts, Alejandro Elsztain, Director, and Gabriel Blasi, CFO. You may begin.

Hello. Good morning, everybody. We will talk about the results of the fiscal year that ended in June of 2004.

And we are glad to announce the results of the Company, where the net income for this fiscal year was near Ps. 88m. Our operating income increased 300%, coming from levels of Ps. 26m to levels of Ps. 105m in 2004. And the EBITDA of the whole Group made Ps. 110m, 6% higher than the previous year.

In this year, we cancelled part of the debt that after Gabriel will explain us, with a big discount. As part of that, there was a conversion of our loans that we will discuss a little later, too.

In the case of Alto Palermo, Alto Palermo made a very good job this year and increased its EBITDA 28%, growing to levels of Ps. 94m. It's a recovery from levels in the past. Remember that the EBITDA of the Company in the best year was at levels of $60m, and we are recovering to these levels of 30-something and growing. We are expecting continued growing for this year, too.

The occupancy of our shopping centers was very good, at levels of 99%. And we can say that they're all full and we are deciding the best tenants for each. We are finishing the project of Rosario. We will announce that project soon. In November of this year we will open the first stage, that will be a big shopping center comparable to the size of the Abasto, probably one of the largest shopping centers of the Group.

In the case of the offices, the year was a recovery. We achieved, remember, in the past levels of 60% occupancy, and we are finishing this year at levels of 85%. And this shows that there are players coming and occupying our offices at lower prices, we will see later but we see a recovery in this system, too, that in the past was hard to think of 85% or higher occupancy, and today we are planning to have like 95% or 90% at the end of June of 2005. So we think that this is a part of the Company that is recovering a lot.

In the hotel segment was very good, the performance, and we will talk a little later. And we began a lot of projects in the land reserve and [sales]. This was a part of the Company that was sleeping for 2 or 3 years. After what's happened in the Argentine economy we decided to stop all the projects, but this year we began to launch. I will explain what projects we began. I will show in the balance sheet the ones that will come soon.

So the net result of the Company were Ps. 88m, were lower than last year. Last year was Ps. 286m. But this explanation of that comes from the finance, from the part of the buying of the debt that last year we made and the improvement of the peso comparing to the dollar. So in the operation, we compare lines, and in the majority of our lines there was a very, very positive number, operationally talking.

I will go first in the shopping centers industry, where we come from a-- We increased Ps. 33m comparing to last year's Ps. 6.8m, in 2003. So this is a very big indicator. The EBITDA, which Ps. 94m compared to Ps. 73m last year, a 28% increase. And the cash flow from operations went to Ps. 78m.

So in the case of Shopping Centers, we could buy back debt that Gabriel will explain. We could buy from bankers, using the cash generation of the Company. The Company is making a free cash flow like $2.5m or $3m per month, and that is being used in the construction of the new shopping centers, in the paying of the debt, and in buying. We are expecting to buy more properties and to develop more projects for the future.

In the numbers of occupancy and sales, we improved the sales in 34%, our tenants' sales. And that shows that the recovery of them is still very, very, very, very strong. And we saw numbers of growth year-to-year, at levels of 30 or 40 since 2002. Remember that May 2002 is the time where the [line crosses the past], and from there to now the growth is amazing. We closed last month, again, at levels of 30%. So the growth in sales, that is-- Remember that in the case of Alto Palermo, we catch part of that growth because we charge a complement that is a percentage of the sales, makes the EBITDA of Alto Palermo grow to the levels, from the levels we've come, going to levels of $35m to $40m for next year.

So this is the kind of recovery, and not having [indiscernible], we are opening a new shopping center in Rosario. And in there - that will be in November - today we have 33% that are reserved, but we can say that we'll open having 95% occupancy. There is a lot of demand and the players are recovering from very bad levels to very good levels. So we've found that all the tenants want to grow, so we will be opening a shopping center with very good occupancy, and with better numbers than what we expected when we began the project.

The total investment of Alto Rosario is around $17m, and we are finishing that probably exactly at the budget.

We are, apart of that, we are projecting to remodel Alto Avellaneda and putting more cinema. And in that shopping center where today they have 6 old, we are thinking on going to 12 new cinemas, and we are trying to update our shopping centers in this year. So maybe we will be launching an [indiscernible] of size of Patio Bullrich, which we have our building, besides the possibility that maybe we can put together through the shopping centers. So the expectation for this year for shopping centers is really very, very strong.

In the other side, our bad debts were zero, and we come from Ps. 10m last year to zero this year, and with an additional Ps. 1m allowance recovery. That shows their intention of continuing in this business. They are paying; we are putting pressure that they are selling. When they sell, they pay. And that's the explanation why Alto Palermo is making so good last year.

If we talk about the Office, the Office segment went to Ps. 15m, comparing to near Ps. 18m, and part of that was we achieved the lowest level this year. We had to adapt the charge per square meter at low levels. We began at the beginning of the year at levels of $6/$7 per square meter, and now we are improving and the contracts we are signing the last 3 months are beginning to improve to levels of $8, $9 and $10 per square meter. Remember the contracts are over a period of 3 years, and we are getting sales in dollars in the figures of Offices. We are charging in dollar terms, and quoting different levels for the next period.

So we think this is a segment that - in the past remember that IRSA made levels of $20m of revenues in this industry. We went at the lowest of levels of 4.5. Today we're going-- Today our cash generation per month is Ps. 1.5m, but it's $0.5m per month. That is like 6m analyzed today. So we think that we are occupying a recovery levels of-- In the past our revenues were [$20/$25] per square meter. Today we're beginning to charge $8, $9 or $10 for the future.

So we think that this trend began to recover. Last year was the worst, and now begins to be a positive. It never was negative, but now there seems to be more positive. We think that the expectation for next year of this will be better. So we are presenting to be at levels of [Ps. 90m] or [Ps. 95m] at the end of June of 2005.

Going to the segment of Sales and Development. We reported revenues of Ps. 31m, as comparing to Ps. 47m, and the main explanation was last year the sale of Piscis Hotel in Las Lenas. And this year we didn't make that big sale. The sales we made in this part was mainly in [April]. The loss we have still on top. Today we have a total 70 loss from the 1,000 total numbers lost, so we have the last part to sell.

And so this part of the Company was not very-- Was a lot of movement last year, and we began to move this segment. We are developing very many projects. One is in Barrio Parque, we are making a particular exclusive area with 27 apartments that will be open on April 2005. And we will begin to sell these soon, pre-sell part of that.

Apart of that, we gave through the swap agreement 2 buildings in the Puerto Madero area that we will receive soon 2,800 square meters. That is 40% of the total construction. So we are going to show the results of that the [indiscernible] [of those sales]. We think that the prices we are going to sell will be very better than what we expected when we made that swap, both [indiscernible] will make gains on this segment.

The Benavidez Option. Again, remember that that was an option we gave to a company to develop that land. We gave that option of $4m, and we took an option instead of receiving from this $4m, we put $3m and we'll receive 110, we will receive 110 lots. But we think we will collect a lot more money than the $3m we paid for these 110 lots. But we will begin to sell in probably the beginning of next year, and the effect of that will come to part of that in the balance sheet of 2004/2005.

In the case of Santa Maria, and many times we talk about that, it's a part, one step more from more parts of the government, and today it's in the hands of the chief of the government of the City of Buenos Aires. And we think it will be soon in our hands and that will take first year. So we think that we will begin the construction of the infrastructure of that next year, so in 2005. Won't probably be any reflection of results in 2004/2005.

And something that happened after the close of the balance sheet, we gave to a company, we will change a property in Puerto Madero too, and we will receive 28.5% of the total square meters to be constructed. It will be a very first class building of 37 floors, and we will receive this 29% of the square meters. That will be part of that pre-sale, but probably not in this next balance sheet, so the other one.

On this slide we have the second part of the option, for 31.5% to make another second building.

So we began to move the land reserve, and we saw that in the Rosario project in Alto Palermo. We are thinking of moving, maybe, the [indiscernible] project for Alto Palermo, too. And we are moving part of the reserve of land of IRSA in the Puerto Madero area. So the Company began the construction again, and that will be reflected in the next balance sheet.

In the case of the Hotels, this was boosted by 2 reasons, mainly by foreigners. And we saw how we come from levels of 57% occupancy, we came to 68%. So a big recovery in occupancy. Not in rates. The only one who made better rates was the Llao Llao, not the other 2. But the total makes the change of occupancy a recovery of 23% and revenues going from Ps. 57m to Ps. 71m. And the operating income of this level of Hotels made from Ps. 6m to Ps. 10m.

And so the Hotel is giving very good cash generation, and we are using part of that cash, in the case of the Llao Llao, to expand. We are making new 40 suites. That will be in a year and a half from now. It will take a year and a half to construct that. But we think that the hotel has today 160 rooms, it will go to levels of 200. So with these 200 rooms, the cash generation of the hotel will be very good. To give you an idea, this year the Llao Llao gave a result of $2.5m, and in the past had very hard years. So we think this is confirming the project and probably is the best result of South America.

I'll give now to Gabriel to talk about the buying of debt, and David Perednik, the administration officer, is here too. So we will try to finish our presentation soon to take your questions.

Good morning, everybody. Well, as most of you know, the last year has been a quiet year in terms of financial conditions in Argentina. Meanwhile, the country allows us to do so, the Company prepaid almost $30m of the debt by buying back $16m and $12m from HSBC Bank, both from Argentina and London branch, at an average discount of 30%.

From the convertible notes side the Company received a conversion of 12.9m convertible notes, which is issuing 23.7m shares. This does include the 5m convertible notes that were converted by [indiscernible]. And at the same time $7m from warrants were converted with a cash-in of $8.5m, an issuance of 13.1m shares.

The final balance of the outstanding balance of the convertible notes was $87.1m bonds and $92.9m warrants.

From the APSA point of view, after the balance was closed, APSA finished the repurchase of its obligation plus A2 and B2 notes, and the buyback [$20m] from this note. The reason for that buyback was not a discount but, in fact, it was related [at this] cost. This was a peso obligation, which was maturing by the beginning of next year and accruing a rate composed by a fixed rate of 8%, and an adjustment linked to inflation for the sale. Which ends in about 15% of costs on an annual base. As the situation of the Company has done a huge improvement in terms of EBITDA generation, we decided to cancel that debt also of the past [from this].

At the same time, also from the APSA point of view, just after the closing of the balance sheet, 2.6m warrants from APSA were converted, and that impacted the issuance of [72m] shares.

IRSA, in doing that conversion, this IRSA conversion which was done when the totals had not been diluted by third parties, by 1.2m units.

From the rating perspective, both Fitch [Argentina] and Standard & Poor's, who at the beginning of the period rated the Company by BB on the local rating and BB- by S&P, upgraded the rating to BBB in both cases. It is important to notice that there are very few companies in Argentina holding a BBB nowadays.

Good morning, this is David Perednik, the [First] Manager. I would like to explain a line that we have in our balance sheet. It is very important that we have recovered this year an impairment that we had received 2 years ago by the crisis in Argentina, where we [indiscernible] our financial statements of the last 2 years. And this year we recovered in the financial statements of IRSA Ps. 54m, mainly due to the recovery in the valuation of the assets of IRSA, [Ps. 37m, Ps. 37.4m]. And Alto Palermo has [indiscernible] to IRSA for Ps. 26.9m. In the case of-- If you see the financial statement of Alto Palermo, you'd see in the line of asset valuation, you'd see the Ps. 26.9m compared to the Ps. 10.4m that we recovered last year.

Analyzing, the Company bought more shares of Banco Hipotecario, and today the Banco Hipotecario shares are at a level of 12% of the Company. And the valuation level went from marketing the trading value of the share to the equity value, because we think it's less volatile. And so the proportional equity values of the Company and business, because it's less volatile and we have no [indiscernible] trading on those shares.

So we are closing a very good year. We are beginning to see the results. We found companies that [indiscernible] with less debt, but we're seeing part of the conversions, we're seeing part of the warrant. But it's a big part to be receiving in the future, remember this started [as to warrants] up to 2007, so. And the companies are generating cash in each, all the majority of the segments. And so we are very committed in developing our projects. You probably will see us in 2004/2005 closing more deals of purchasing assets, existing assets, or beginning the construction of land reserves or buying more land reserves.

We think that a real estate company is a big play, is a good play in a country where the system destroys a lot of value but the assets will recover, and they are recovering a lot of that value. And we see today's prices, that they are recovering from very bad levels to better levels, but still cheap comparing to the real estate levels of the world. And we think that will tend to continue growing, and thus our bet is to continue investing in real estate assets in all the segments. So you probably will see soon new results or comments about the Company's purchases or developments.

There is a big commitment from the management to make more projects for this year. We think we will launch a lot. And we are very optimistic because the Company can generate a lot of cash and can use to make new better projects.

So we thank you very much for this conversation. We are glad to receive your questions, and thank you.

Thank you. The floor is now open for questions. [OPERATOR INSTRUCTIONS].

Our first question is coming from Mark Fuller.

Hi, this is Mark Fuller from the [Katy National] corporation. It looked like you had a very nice year. You mentioned at the end that the real estate prices were cheap compared to real estate levels of the world. My question actually goes towards how are the levels today compared to historical levels in Buenos Aires, in the country of Argentina.

In your report, you mention things such as [reached] historical records, current demand for the retail segment, and favorable macroeconomic conditions have all contributed to the financial results that you incurred during 2004. And really my question is, are we at record levels today, what you've seen in Argentina and Buenos Aires as far as retail sector goes and real estate? And where is it going, going forward?

Each segment has a different explanation. The real estate, the shopping center segment, is a record in peso terms, not in dollar terms. And I told you that in the past, the EBITDA of the Company was at the levels of $60m or more, and today we are talking about $35m or $30m-something. What we think is we are going to recover the EBITDA in dollars. And so the prices of the shopping centers is very related to EBITDA, and so you will see a recovery of prices of the shopping centers because of the EBTIDA.

There are no transactions to tell you about the price of the shopping centers. There was none, and so I cannot tell you what is the price of a shopping center in Argentina today, but in general it's [indiscernible] is multiple. So because of that recovery we think that will recover fast, but we have still a part of the recovery [in dollar terms]. And we are expecting not to go to the levels of the $60m/$70m of the past, but from the $35m of today to recover a little more, in dollar terms.

In the case of real estate, where there are prices, for example in the Office, we saw Office in the past at $2,500 per square meter. They went to less than $1,000 in the crisis. Today you will talk about $1,500 or more per square meter of a good AAA office in Buenos Aires City. So we think-- The rest of that segment, we saw that was in the past $25 or $30 per square meter. Today we've got a level of $10 or $12.

So we think we came from levels of $6/$7. So we saw that there is a recovery in the EBITDA, in the growth, less in the segment of the Offices than the Shopping Centers. I would say that the premium areas of Argentina, the recovery of prices is achieving levels of the [convertibility].

If you talk about a good apartment in the best Puerto Madero area, you will be paying $2,500 per square meter. That is the price we have to try for, or 10% less than in the best moment of the [convertibility]. That is the [very] premium. In the most premium, there is a discount of 30%, I would say, in the real estate in the apartments.

Great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Gilman Gunn.

My question is the relationship between IRSA and Cresud. Could you just please describe the ownership relationship at this point and how you would expect that to evolve, looking ahead over the next few years?

Today the shares that Cresud owns of IRSA has a value of 36%, and on a totally diluted basis, if Cresud exercised the bond, the convertible bond and exercised the warrant that is attached, will go to 41% of the total of IRSA. And that is a long-term investment. We charge it in a proportion of the equity value, and we are not expecting taking a loss.

We have a big portion of IRSA, and we feel comfortable with that investment. We saw that bond going from levels of 5 to levels of 7.5 [indiscernible] today. And so it's making a gain for Cresud, and we are expecting that to grow more. Because we think that IRSA has a lot of value, and that's why Cresud will buy, on a fully diluted basis, this 41%. And today the last month was not buying on the market, and has that position stable the last 6 months.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is coming from Lawrence Gilman.

Good morning. I just wanted to ask if you could expand on the comments you made regarding backing the acquisitions of projects in property, and if that also entails acquisitions outside of Argentina?

You asked if we're going to buy projects outside Argentina? Was that was your question?

That was part of the question. The other aspect was just to give more color on the types of projects that you're looking at.

Okay. We are not planning this year to grow outside Argentina. We are thinking on going, combining shopping centers, hotels and land to make new developments in Argentina. And not only in Buenos Aires, we are researching other provinces.

Apart of enlarging the land reserves that the Company today owns, today is searching inside the country in the whole segment. So you probably will be seeing profits in all of the segments in the country, and in Buenos Aires, too.

Thank you. [OPERATOR INSTRUCTIONS]. There appear to be no further questions at this time.

Thank you very much, gentlemen. We hope we'll have a very good year next year, too. We are optimistic. We think that we have a big play in real estate, and we think that Argentina can continue growing. And we will grow with that growth. We are very, very optimistic in the quality of the assets we manage, and the ones we've purchased. And so thank you for being shareholders of the Company, and we hope to show you better results next quarter, too. Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.