IRSA Inversiones y Representaciones SA (IRS) 2007 Q3 法說會逐字稿

Good morning. My name is Barbara. And I will be your conference operator today. At this time, I would like to welcome everyone to the IRSA third quarter fiscal year 2007 conference call.

(OPERATOR INSTRUCTIONS)

It's now my pleasure to turn the floor over to your host, Mr. Gabriel Blasi, CFO. Sir, you may begin your conference.

Thank you, Barbara. Good morning, everybody. I'm here with David Perednik, our CAO. Thank you for waiting for us. We suffered some technical issues and we weren't able to put the presentation on. Going to our presentation, we are going to make a quick recap on Argentina's situation as always and after that to -- with a review of the company's results and each of the business lines.

Argentina continues to grow steadily, reaching 8.5%, meaning that in the last year, the country has grown almost [50%], as you already know. Going to page third, we continue to have a positive trade of balance, is important for the situation that 21% of our exports are related to commodity or raw material prices, 53% of them to agriculture, meaning that the outlook continues to be good for the prices of our production, meaning that the country's sustainability in terms of the fiscal situation, as you can see on page four, the outlook is very good.

If you move to that page, you will see that this fiscal surplus and the current account continues to post excellent figures, putting a very strong situation in the area of the ability of the Argentinean state to comply with its obligation. On the other hand, the international reserves, because of the acquisitions of dollars in the market on a daily base are growing steadily.

Moving to page five, you will see that unemployment ratios continue to be very efficient, less than 10%. And the inflation has reached in the last year a low two figures. And the outlook for this year for us is on the same range.

If we go to page six, you will also see the evolution of wages. Because it is an election year and because of the general growth and recovery of the economy, there is an increasing pressure on wages on the general, as you can see. We have a strong recovery that is reflected in the cost of the different companies. On the other hand, the consumer confidence index continues to be very positive, boosting the consumption in general terms.

On page seven, completing the picture, you will see the exchange rate evolution showing that although the government, as part of economic policy, is trying to keep the currency undervalued, it is becoming really difficult in real terms as you can see from the graph. We have a strong peso revaluation. And on the other hand, compared to the trade basket of currency, the foreign exchange is also pretty smaller than the nominal exchange rate. Our outlook in this sense is similar to last year in the way that we don't think that the foreign exchange rate will go vis-a-vis with the inflation rate.

Regarding the residential investment, on page eight, and the local credit supply, we continued to have a positive situation with a slight recovery in the credit and in the mortgage market, as we have discussed several times.

Going specifically to our third quarter, our net income amounted ARS113.9 million with an increase of 178.3%, compared to the same period of the previous year. Operating income grew more than 30%, reaching ARS159.8 million. And EBITDA grew by 22%, reaching [ARS223.5] million, and showing the excellent momentum our businesses have.

Regarding Alto Palermo, the operating result was 19.2% higher than the result in the same period the previous year, reaching ARS126 million. The EBITDA increased 14.9% to ARS176.1 million.

In the sales and developments segment for the same period, we reached ARS40 million of income, compared with the ARS32.8 million for the same period of the previous year. Also, we continue showing very strong recovery on the Offices segment with 99% occupancy rate during the first nine months of the fiscal year, compared to the 92% of the previous year and reaching an income of ARS37.9 million for the period from ARS21.5 million of the previous year.

Additional improvements were also I would like to highlight on the hotels segment, where we reached ARS94.4 million for the period, compared to the ARS79.7 million of the previous year. We are going later to describe briefly these results.

Now David is going to give us a description on the income statement of the company.

Good morning. First of all, I would like to let you know that we opened the segment of credit card operations in our financial statement of this quarter to show in a better way the activity of shopping center business from the credit card business.

Going into the profit of the third quarter, we have an increase of 176% from ARS40 million in 2006 to ARS113 million in this quarter of 2007. The revenues increased 36.9% from ARS381 million in 2006 to ARS522 million in 2007.

If we go into the segment lines of our business, the revenues of development and sales of property, this increased 22% from ARS32 million to ARS40 million in 2007. This increase was attributed principally to the revenue from the sale of the [plot set] of Dique III, the ARS4.2 million of the revenues of Edificio Cruceros, and ARS4.1 million of San Martin de Tours.

If we go into the segment of offices and rents, this segment increased 76% from ARS21.5 million in 2006 to ARS37.9 million in 2007. Basically, this increase was due to a 6.9% increase in average occupancy rate, an increase in average [banking] rates also.

If we go to shopping centers, the revenues from our shopping center segment increased 27.5% from ARS155.5 million during 2006 to ARS198.3 million during 2007. This was due to an increase in leases, additional [rights] revenues as a consequence of a 22.8% increase in sales by our tenants that reached ARS2.31 million during the period ended in March 2007. The average occupancy rate of our rental property in our shopping center was 99%.

Going to the hotel business, the revenues increased 18.4% from ARS79.7 million to ARS94.4 million. And this was mainly due to an increase of 27% in the average price per room from ARS379 to ARS481 per room. And if we see hotel by hotel increase, the revenue from Llao Llao increased ARS7.8 million. The revenue from Intercontinental Hotel increased ARS4 million. And the Sheraton Libertador increased ARS3.1 million.

If we go into Tarshop, our credit card company, the revenue increased 66.2% from ARS90 million to ARS149.6 million in 2007.

Going into our cost, the cost of all our segments increased 27.8% from ARS164 million to ARS209.9 million.

The gross profit of our company increased 43.8% from ARS217 million to ARS312 million. Again from valuation of inventories at per market value, this line was ARS11.5 million in this year. I'll remember you that this line reflects all the evaluating of net realizable volume for those assets that have received purchase price or lease advances at fixed price. And this ARS11.5 million was mainly due to Dique III that we sold to third parties, ARS8.8 million, San Martin de Tours, ARS2.4 million.

Going into the selling and administrative expenses, this line increased 60% from ARS105 million to ARS168.1 million. We are going to disaggregate this line. The selling expenses increased 63.9% from ARS41.9 million to ARS68.7 million, primarily due to an increase in the credit card operation and also in the shopping center. In credit card operation, the increase was ARS17.8 million from ARS21 million to ARS38.8 million. And in the shopping center business, the increase was ARS5.2 million from ARS10 million to ARS15.2 million.

If we go to administrative expenses line, this line increased 57.3% from ARS63.2 million to ARS99.5 million. From this increase of the ARS36 million, we can say that Tarjeta Shopping, Tarshop, our credit card operation, increased the administrative expenses ARS14 million. That means that 39% of the total increase of the administrative expenses in shopping centers increased ARS9 million was 25% of all the increase. And then we had an increase in development and sale of property of ARS5 million, 14% of the total increase and ARS4.4 million in the offices and rental properties.

Going into the operating income, our operating income increased 30.7% from a profit of ARS122.3 million to a profit of ARS159.8 million. This increase can be disaggregated. In the shopping center business, we had a 30% increase from ARS26 million to ARS99.1 million. In development and sales, we had a decrease of ARS6.2 million. In the offices and rental properties, we had an increase of 166% from ARS6.4 million to ARS17 million of operating income. The hotels increased 30.7% from ARS12.5 million to ARS16.4 million of operating income. And the credit card operation increased 27.2% from ARS22.3 million to ARS28.3 million.

The financial results show the variation of ARS66.3 million from a loss of ARS42.7 million in 2006 to a gain of ARS23.6 million. This can be explained by an increase of ARS44.3 million in financial operations, due to an investment that we have in [Estanco Quantum] of ARS47.3 million. And also, we had a difference in the exchange difference gain of ARS15.7 million due to a lower depreciation of the peso in 2007 compared to 2008.

With respect to the line of equity gain from related companies, we had a decrease of 31.8% from a gain in the mainly in Banco Hipotecario profit from a gain of ARS37.2 million in 2006 to a gain of ARS25.4 million in the current nine-month period as of 31st of March 2007.

The income before tax and minority interest showed an increase of 81.2% from a gain of ARS109 million to a gain of ARS199 million. And with respect to the income tax, we had an increase of ARS6.9 million from ARS49.7 million in last year to ARS56.7 million in the financial statement as of 31st of March, mainly from APSA, from Alto Palermo that we had an income tax accounted from a loss of ARS42 million last year to a loss of ARS49 million in this year.

Therefore, our net income increased 178% from a gain of ARS40.9 million to a gain of ARS113.9 million.

I would like to make a comment in our related company Alto Palermo. The net profit of the company increased, in the financial statement of Alto Palermo, increased 63% from ARS32.5 million last year to ARS53.3 million this year, showing an increase in the total revenue of ARS29.5 million from ARS268.5 million to ARS347.8 million. And in the gross profit, the increase was of 41% from ARS164.6 million to ARS231.8 million as of March 2007.

Thank you, David. Moving to page 11, there you can see that, as David has described, our long-term evolution. Sales continue to grow steadily more than 50%, at 37% for the period.

Going to page 12, the situation with the cash generation confirming the excellent momentum that we are having with increase d(inaudible) of the business line, 45% since last year, 35% for the period, and again, with significant increases in all of the business lines.

Page 13, we can see there the sales evolutions of our tenants in the shopping center subsidiary, confirming that the consumption pattern is strong and growing with sales of almost ARS250 million in April. And regarding the revenues, you will notice that increase on the page, share to 55%. This is because we are including there the stands that we formerly showed on a separate page. If you see the percentage rent, it doesn't have significant variation from our historical average.

Moving to page 14, the occupancy continues to be very strong, almost 99%. And the EBITDA generation, as David has described, has grown 38% for the last fiscal year and 22% for this business line for the period under consideration.

If you go to page 15, we would like to share with you the render of our biggest project in this business. We have launched the construction of our biggest shopping mall. It is located in the conjunction of the two main accesses to the City of Buenos Aires. This is a transit knot -- a traffic knot of 200,000 cars on a daily base. The plot is the biggest commercial plot available in the City of Buenos Aires. We are going to build there a complex with parking lots, hypermarket, ten cinemas, offices, and residential facilities.

At this stage we are starting the construction of the shopping mall and the hypermarket. The investment is ARS100 million. It's an investment 80% Alto Palermo, 20% (inaudible) is a subsidiary of a Spanish firm, which is dedicated to the construction of malls. They have built several malls in Spain.And in Argentina, they are also represented in the past the interest of the French supermarket company, Auchan. They contribute part of the float. The other float was acquired to Philips. It was a former plant of Philips in Argentina. And with that, we build up the facility. $80 million of the investment are going to be provided by Alto Palermo. We have already funded $20 million to the project. And this is the biggest use of proceeds of the recent Alto Palermo issuance of debt.

We move to the next page, page 16. The other significant project that the shopping centers are going to develop, as in the previous case, we already mean to have this project finalized at the first stage by the end of next year. It's the construction of a mall in our land reserve in Neugeun. For those who follow us will remember that the company used to have a land reserve there that we acquired several years ago. We solved all the technical issues that we used to have with that property. And we have started a first stage construction of 21,000 square meters of shopping mall and a hypermarket of 10,000 square meters. In the future, this project will also include hotel and residential facilities. The investment is $35 million, the total [information] and is the second in importance use of proceeds of the recent debt issuance.

The other significant use of proceeds is the refurbishment of all our shopping malls, the most important is Alto Palermo. Remember that Alto Palermo, our flagship, is the mall with highest sales per square meter of the country since it was opened 19 years ago. We never made a major refurbishment of the mall. Now we are doing that. And we are adding some [modernization] of parking to Paseo Alcorta, in Alto (inaudible) we are adding an anchor store. We are expanding Patio Bullrich by the acquisition of the neighborhood building that we are adding square meters to this facility.

We also acquired the building -- remember that the last acquisition we made in this business segment was Cordoba Shopping Mall. We also acquired the building, the City of Cordoba, which is one of the three biggest cities in the country, has three shopping malls. We acquired the biggest one of them. The second one is this one where we acquired the building which has a concession to a third party that operates the business. And we are taking this as a defensive mood to future entrances.

Going to the next page, we have our shopping mall portfolio showing that with the inclusion of (inaudible) Panamerican Mall, which is the project of General Paz. And the last one that we have acquired, we are increasing our portfolio almost 40% in this year and in the next year.

If we move to page 18, to complete the (inaudible) of Tarshop business, as David has described, we can see that Tarshop continued to grow very consistently, confirming the excellent momentum that the financing of consumption have in the country. Remember that Tarshop is the fastest-growing credit card in the company. Its EBITDA has grown [300%] in the last three years. They have a portfolio of $170 million.

You may remember that the financing of this company is achieved through the securitization of the credit in the market. Our total exposure is not bigger than $50 million. We keep the subordinated notes of this issuance in our books.

Next page, evolution of the offices with a brief description of market evolution. Remember that during the crisis, the vacancy grew up to 20% on a market base. Today this vacancy is almost nonexistent with Buenos Aires, as we have commented to many of you. There is almost no space available. Market prices are 25% on average. For the AAA building, they are in the range of $30 per square meter or more. Our portfolio is yet to receive the benefit of that increase in the prices. We haven't yet fully priced it in our income. The market share of the company is 20%, both in the AAA and in the AA segment of offices.

Regarding the sales of this segment, and as David has explained, we have almost completed recovering in terms of occupancy. And as I already described, we are in the process of pricing the new market situation in our portfolio. The price in the last nine months, as David has stated is ARS7 million on the previous period to ARS12 million for the period under consideration.

We go to page 21. In this period, we have completed the acquisition of Edificio La Nacion, which is one of the biggest buildings or offices in the city, with 33,000 square meters of gross leasable area. And we signed the deed. And we finalized the operation, final price of $84 million. And we are in the process of beginning the construction of Dique IV in Puerto Madero to continue to strength our market share in this business segment.

Going to the hotels, as David has already explained the situation on them, just a couple of considerations. We are in the process of refurnishing the rooms of the Sheraton. This will allow us to raise significantly the RevPar. The hotel, as we have discussed at times, has become rather old. But with this major refurbishment of all these rooms will allow a significant increase in its price.

And on the Llao Llao, we include there the real picture of the operation as we are doing the addition of the 42 rooms. But we are going to finish them this year. Remember that this hotel is [effectively] a national park. And because the park (inaudible) hotel situation, national park, the construction is very specific in terms of environmental issues. There you can see the degree of how parts of the construction has. We are aiming to finalize the construction by this year, increasing the capacity of the hotel by 30%.

Moving to next page, we include the render of our biggest residential project that we are launching. Briefly, this is a plot that the company acquired in our statement is under [Ruvela]. That's the name of the vehicle. We are planning there to build 22,000 square meter of residential space. This is a northern area of Buenos Aires, in the province of Buenos Aires, close to the City of Buenos Aires, close to the river. On the right picture, you have the coast of the river. It's five blocks from the residence of the President. And we are launching this project in a non-traditional area. We have a lot of expectancies by this project.

We are going to change our business model. If you remember, up till now the company used to make swaps and receive a square meters build. Now we are going to make the sales from the beginning of the project. And it's very likely that we are going to make this development with an international operator.

On next page, just the update of our project in the residential area with 97% of our participation in [Dipilos] already sold. At [Torre Renoir] progress in the construction is 74% of the first tower. The second tower is still in the beginning of construction. And Barrio Chico, we have sold 96%.

On next page, we have the debt situation for the company. The net debt situation for IRSA is $140 million. Remember that we issued a $1.15 million note on February. Just to make a wrap up, the two first debts are the debts that are maturing November 2009 linked to the FRN. Our (inaudible) loan was a loan that we restructured and that we were able to acquire from the fund that acquired that from the local bank Argentine portfolio. The seller's note of the [addition] we shared, particularly the Microsoft building. The loan of the seller's note for [Pisa] remember that we acquire the totality of this subsidiary, which is the owner of the Hotel Intercontinental, the Intercontinental tower and Porto (inaudible) to Goldman Sachs just last year.

Llao Llao loan is related to seller's note to a property that we acquired close to the Hotel Llao Llao for future development in the area. And the notes that we have already issued, and we still have $80 million pending from disbursement to our projects as already disclosed.

In the case of Alto Palermo, the total debt of the company for the beginning of the project and the refurbishment that we have already disclosed is roughly $58 million. The net debt of the company was at that moment $30 million. We have issued a note on the next page, page 26. We have the (inaudible) consideration of the note under the $200 million program of Alto Palermo. We issued $120 million senior unsecured note with a ranking higher than the country itself and a tranche in pesos in five years equivalent to $50 million, reaching $170 million in total. It was a very successful placement with a coupon on the dollar issuance of 7.875% and 11% for the peso tranche, which was distributed among investors, mostly in the United States for the peso issuance and more on a widespread on the dollar issuance.

With the proceeds of that issuance, we are going to pre-cancel the short term debt, roughly the $50 million. We are going to fund (inaudible - highly accented language) project, as disclosed, $80 million and $25 million and we are attending the refurbishment of the different malls.

Moving to the next page, page 27, we have the evolution of our share because of the convertible bonds. As of March, we say that we have almost completed the issuance of all the shares. There you see that as of today only -- as of that date -- sorry -- $24 million of convertibles were pending to conversion and $44 million pending to the turning into equity of the warrants, meaning that IRSA is yet to receive in the range of $50 million of cash because of the exercise of this warrant.

Next page, page 28, we have the price consideration since the issuance of the convertible bonds, showing that in spite of the strong dilution, we were able to fully price the value of the company in the new shares. And on page 29, the current term sheet of the warrants showing, as I mentioned, the situation of 23 convertible notes outstanding. Remember that half of those convertibles are owned by Cresud and the warrants (inaudible) $4 million as described.

Thank you very much for your attention. Now if the operator, Barbara, for IRSA will allow the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is coming from Steve Trent from Citigroup.

Good morning, gentlemen. Just one or two questions from me, actually -- first, I think some people were having trouble accessing your presentation, myself included. So if you've mentioned this in the slides, forgive me. But I was curious, what are you seeing at this point with respect to potential for middle income and upper middle income mortgages? In other words, are you seeing anything from the banks or any language from the Kirchner administration that would lead you to believe that you're going to see some increase in this area? Thank you.

Okay. Steve, sorry for the technical issues. I've been informed that you have to refresh the call. With that, the problem must be solved. Regarding your second question, it is my personal opinion. I think that first of all the banks as a whole have made a significant effort in terms of extending tenors and the cost of the mortgages. I will say that probably related to the inflation now they are very attractive. You can get a loan in Argentina for 20 years in pesos at a fixed total cost including commission and expenses in the range of 16%, which considering that we have an expectancy for inflation that's in the range of 10%, is attractive. Also, if you are applying this loan for buying your own house, you are entitled to a tax shield of 35% for the interest on your tax considerations.

So I will say from that side the picture is very attractive, probably because of the huge revamp in the prices of the real estate, the recovery of that was not so quickly because there was a huge gap between the income, the general wages situation and the cost of the property itself.

On the other hand, as you may see from historical pattern, we tend to delever after the crisis of the general behavior for our economy, we tend to delever. I would say that probably -- and this is my personal opinion -- probably because of the very attractive package that the bank has already started to build around the second stage, the significant recovery in wages, I think that we'll expect some improvement in the near future on this area.

On the other hand, regarding the more middle income properties, we really expect a significant shift here. And example of that is our new project in Vicente Lopez, where we are targeting a different area of Buenos Aires, not so premium like Puerto Madero. And we think that we will see further opportunities in this segment in the future.

Great. Thanks, Gabriel. And I'm sorry. What was the area called, middle income properties?

The area is Vicente Lopez. It's located in the northern area of the City of Buenos Aires. In fact, it's the closest neighborhood to the City of Buenos Aires, going up to the north and close to the river coast. And on our balance sheet, the vehicle that has that investment and will reflect that is under [Rumala].

Great.

There you will find. Okay?

Terrific. Thank you very much, Gabriel. Just one other quick question -- looking at the office rental segment, there has been some M&A activity in recent quarters. Are you seeing one or two other players emerging as strong competition for you? Or do you see this M&A activity more as one-off, where foreigners see an attractive opportunity?

I will say that, of course, we are finding out additional players coming to the market, couple of more investment firms are approaching the market on a dedicate base to Buenos Aires. And probably as part of a general strategy of growing of new real estate funds, they are starting operations here. Specifically, on the offices segment, we continue to grow organically and by acquisition.

Still, there is significant lack of other parties' investment in this segment in consideration to the recent demand that the market shows. The most significant buildings that are being constructed in Buenos Aires today for the office market are corporate buildings. They are not just dedicated to rental. As an example, the Banco Galicia building or Repsol YPF building can address that, which are probably a couple of the biggest projects.

We have under consideration, of course, other possibilities. We have a project for building a second tower near our offices in the same plot where our office is located today in the Intercontinental Plaza. We have a project for building a second tower there. And we are starting the construction of Dique IV in Puerto Madero also to continue to strengthen our market share and our position in these markets.

Great. Thank you very much for that.

Thank you.

Thank you. Our next question is coming from [Elwaldo Albush] from Millenium.

Yes, hi, guys. Just a quick question about what have you seen in terms of cap rates in Argentina for both office and retail -- maybe you can give us a sense of where things are trading outside of what you have traded and/or some sort of estimate of how much compression have you seen.

Okay, Elwaldo. Well, the situation is pretty -- I would say pretty mixed up because it depends. It varies significantly from operation to operation because the market is not, I would say, very liquid. And this market, and the last three significant deals that have done are the deals that the company has done. I will be more focused on this because I think that this is the best reflection of the market that I can give you.

Regarding the [consideration] it will depend on the acquisition side. It will depend consistently if you are referring to a distressed asset or a different situation. For instance, if you compare the cost of acquisition in the operation that we made for Dock del Plata compared to the rental potential of the property, you will find out that the company paid at the end of last year $1,600 per square meter for a property with a potential rental price of $25 per square meter. In the case of La Nacion, the price paid is significantly higher than that, almost double. But all the rentals that the building [hasare maturing next year, meaning that we have the ability of changing all that consideration in the next year.

In the case of Banco Republica, which we have optioned, but yet we haven't fulfilled acquisition, the situation may be completely different because the building is the only AAA empty building in Buenos Aires. So that may allow us to immediate price the building to market situation, meaning that a building that's like that will receive at least a price of $30 per square meter.

Having said all this, we think that still the demand is very strong and growing. The companies are growing. And we think that the positive trend will take some time to, I will say, to change its pattern of growth.

I guess just a follow up question -- so I guess you just said or you have commented in the past that there's some foreign institutional money pouring down into Argentina real estate. Is there -- have you seen them more into the development part of it or more trying to acquire, given that it's such a liquid acquisition market?

I think that we have find them in both areas.

Okay. Thanks.

For instance, just to give you an example, this is public information, in the bidding of Edificio La Nacion, part of the process, a fund like the one you have described was part of the process.

Thank you. (OPERATOR INSTRUCTIONS) There appears to be no questions at this time. I would like to turn the floor back to management for any closing comments.

Okay. Thank you very much for your attendance. And we would like to confirm that the outlook for our business continues to be excellent. Thank you.

This concludes today's IRSA conference call. You may now disconnect.