IRSA Inversiones y Representaciones SA (IRS) 2011 Q2 法說會逐字稿

Hello, my name is Don, and I will be your conference operator today. At this time I would like to welcome everyone to the IRSA earnings release second quarter fiscal year 2012 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I would now turn the call over to Alejandro Elsztain, Second VP and Gabriel Blasi, CFO. Please go ahead.

Good morning everybody. We are going to begin the presentation of the first half of the year. And if we go to page 2, we can see that the Rental segment improved revenues for 27% and EBITDA for 24% in the first six months comparing last year. And I think this is the more important part of the balance sheet where we see that the rental, that is the flow of the year is still very firm in majority of our business, mainly in the Shopping Centers.

And part of that was offset because of the bad lower sales in the Sales and Development segment that last year we were very active working in the sales of some office spaces that this year we didn't sell almost nothing the first semester. The revenues of the six first months increased 6% to ARS698 million. The operating result rose 3% and the EBITDA increased 2%.

Shopping Centers, that I explained before, had a very sound performance, and the sales grew 31% and EBITDA was at level of 77%. The Hotel in this case after last year where we have the flue, this year we have a normal and good year. We've shown a firm recovery.

Apart of that, we were actively buying outside Argentina, and we acquired an office building in Manhattan and restructured the debt of the other one that we bought in the past, the Lipstick. Today in that we increased our interest to 49% of the shares.

So the net income of the whole balance sheet was achieved, ARS171 million comparing to ARS264 million of last year, and this is mainly due to the lower income from Banco Hipotecario gain that last year did in the sovereign bonds revaluation and this year stayed almost stable. During the last quarter, IRSA distributed dividends for ARS120 million.

So I will introduce, Mr. Gabriel Blasi, our CFO.

Thank you. Good morning everybody. Moving to page 3, we make a review on the sales and EBITDA evolution by segment. On the upper-left we see the revenues split by the different business segment. The first three Shopping Centers, Office and Other Rental and Hotel operation show a consolidated increase on revenues for the Rental segment of 27% compound for the three segments with an excellent performance of Shopping Centers, a performance in line for Office and Other Rental, and also significant recovery in Hotel operations.

Moving to the other segment, Development and Sales of Properties and Consumer Financing, we have to address as Alejandro has mentioned, that we have sales much less property than compared to the period, same period of last year where we have an adjustment in the office portfolio as you might remember where the Company sold a non-AAA property to balance the office portfolio and that is affecting -- that effect is affecting the segment.

On the other hand, on the Consumer Financing, what apparently (inaudible) is because the deconsolidation of Tarshop, which was only included during July and August. After that remember that 80% of the interest of the Company was sold was to Banco Hipotecario.

When we go to the EBITDA with same rationale you see the very strong performance of Shopping, a performance, a very good performance of Office and Rental and the recovery of the Hotel operations showing a 24% increase in the Rental segment at EBITDA and the impact in EBITDA for Development and Consumer Financing showing that in the case of Consumer Financing, and in spite the deconsolidation of the Company we almost yield the same EBITDA confirming the excellent momentum of the consumption in the country. And Development and the Sale of Property affected by our decrease in the rhythm of sales compared to the extraordinary period of last year for this comparison.

On the EBITDA margins, similar situation showing what I have explained on Development and Sales of Property, aligned performance in Offices, Shopping Centers and Hotels very strong, and the consumer financing segment which is having a huge revamp. When we go to the EBITDA variation by segment, we finally show the same situation with a significant change in development and sales as explained, aligned in Office Rental and the good performance in the rest of this segment.

When we go to each segment on page 4, in detail of Shopping Centers, revenues have increased in the comparison, 31%, reaching ARS331 million for the first six months of the year, ARS182 million for the second quarter of the year, showing that we continue to have aligned the revenues by tenant sales. There is slight difference because the lack of the adjustment of the variable percentage of sales which we are adjusting and we have implemented measures to correct in the short run.

Same situation with the cash generation on the upper-right, 29% of growth for the consolidated within the first six months of year, with a 29% growth for the second quarter, reaching ARS140 million in the period, a total of ARS253 million.

Tenant sales continue to have a very strong behavior. We totaled growth of 36% compared with the same period of last year reaching almost ARS2.2 million -- billion for the period. Regarding the GLA evolution, you have here on the low-right that with a occupancy rate of 97%, this is due to the introduction of Soleil and the change that we are doing in the Shopping with very significant performance.

Remember that we have just got that as we are in the process of generating the first outlet, premium outlet in the country. And also the inclusion of Dot which is increasing total GLA of almost 300,000 square meters.

On next page, when we consider the development of the business segment -- of the Office segment, sorry, revenues have increased 3% for the period, EBITDA generation shows a slight decrease of 3%. Remember that we have here an adjust of the square meters as you can see on the low graph on the page five where we see the impact of the lease area because of the change of portfolio that we made, and with the increase of GLA in the last part of the year with the inclusion of Dot building, but still this is a new area for our Office business, shown as a different behavior in terms of occupancy. The total occupancy of the segment without the Dot building is 92% for the AAA and 82% including this building. These figures do not include our international segment --

This is not consolidated in 87%.

87% for the -- sorry, for the occupancy without building.

So if we move to page six we can see the sales and development segment. And here we can see the residential price increase that we are seeing in our country. And the lack of sales of the Rental is the main explanation of the difference. When we go to see what we are selling and many properties are selling but have to know they are not appearing on the balance sheet because we didn't finalize and we didn't sign the possession of the building, but we are very active in land reserve and things that we're not giving any rent.

So when we consider that it's a very good year, because all the portfolio is recovering in price and the only part that is moving is the part that is not generating any cash. So we, instead of being preoccupied we are very quite on the sales of the Development segment because of what the portfolio is having. And if you think about what has happened in the last year to this year, there is a very increase -- very important increase of price of the portfolio of assets and the Company is holding.

And we are deciding if to keep selling some non-core assets of the Rental, but the majority of them are occupied so we have not any hurry. And we think that we would prefer to be selling properties with no rental than that in the past.

We see here that we sold Terreno Beruti, next to Alto Palermo, to TGLT. This was done in exchange of a percentage of square meters, 17.3% of the square meters, 15.8% of the parking space, 100% of commercial parking space for use for Alto Palermo shopping, plus $10.7 million cash that was exchanged for equity. And with that we acquired 7.47% of interest of the Company that began [an IPO] this year. So we now are one of the more important shareholders of that TGLT.

In the other things we were selling we -- it's almost sold, it's hold -- sold Horizons and we are finishing during this balance sheet we're going to almost finish all of these projects. Nuevo Caballito is 75% sold. Torres Rosario, we began to sell the apartment, but the land reserve we are finishing all the sale of that plot of land. Torres Rosario, the other part that we receive apartment, El Encuentro that was the land was a neighborhood that we received, we swapped the land for lot and we are beginning the sale and we sold this year 39% of the lot.

So everything that was -- comes to the Company, it's very fluid and the sale of that property. And that is the explanation of the 37 million of the -- and big part of that is explained in net, and Gabriel maybe later can explain that big part of that, it's explained not in the sales line, so in the down -- in the balance sheet, in the [NRB] line that explain the gain of the projects that they are not signed.

Okay. Continuing on page 7 with the Hotel segment, there we see the recovery. On the upper part of the graph we have the comparison between the two last year, [2001] and 2010 where we saw the decrease in the average price per room and occupancy, and now for the six months of this fiscal year we have a significant revamp with occupancy over 77% and the average price has recovered in dollars to $179 per room. The segment sales and EBITDA show a similar behavior going to ARS105 million generation. And the average price per room has increased 17%.

Moving to next page, we continue to see a good behavior in Banco Hipotecario, although we encourage you to get a bank public information through their own conference call if you want to dig in the details. Bank evolution, it has continuing -- diversifying its ways of funding and in ways of payment with the private sector increasing in the share of the total loan portfolio of the bank and the net financial margin which has shown some decrease.

This is both related to having a significant drop in the interest rate in the country, and at the same time the growth to more competitive segments of the market as (inaudible) the corporate loans. And a very strong behavior in the portfolio showing the good quality with a significant reduction on the non-performing loans.

If we move to page 9, we see a couple of comments about the evolution of our international segment. We complete at the end of last year a very successful capital restructure of Lipstick building, as part of that reorganization of the [vehicle] remember that the Company that owned the building filed for bankruptcy. That -- we represent a plan for rescheduling the [rent]. And part of that plan we increased our stake from 30% to 40% --

49%.

-- 49%. The mortgage restructure was reduced from $210 million to $115 million with a payment of $15 million and a junior debt cancellation of $45 million with a payment of $2.25 million. The occupancy has increased to 92% and the average rent for the building is $5.6 per square feet, about $60 per square meter.

The second acquisition that we made is 183 Madison Avenue; we bought their GLA of 20 -- sorry, 246,000 square feet, 23,000 square meters of GLA. Our interest in the controlling entity of this building is direct 49%, plus an 8% indirect. We paid a price, implied price of $357 per square feet, about $3,800 per square meter compared to the $3,000 that we perceived in average with the non-core asset that we sold last year in Argentina. On the Office market, the occupancy is 70% and the average rent is $3.4 per square feet, about $37 per square meter.

The third investment that we have done is Hersha Hospitality Trust. Remember the REIT -- Hotel REIT with hotels in the eastern coast of the United States, we acquired 3 million shares during the capital reopening. The average price of the shares is $5.8 today, 1.5 million sold during this period. Our stake as of December 31 is 9.83% which can go up to almost 12.80% on a fully diluted base. We realize a gain of $6.9 million. On average, the total result of this as of the end of last year has been $8.8 million because of the holding of the options embedded in the deal, $6.9 million of realized gain because of the sale of shares, $1.2 million of dividends. In total, net of the expenses related to the transaction we have up to now recognized $[16] million of gain of this business.

Moving to --

It's much higher than that.

Of course. We have a portfolio unrealized gain in the range of $40 million on average.

When we go on page 10 to our income statement, as we have mentioned during the presentation when you look at the gross profit of the Company is in line with what we perceived last year, important what Alejandro has mentioned is the gain from the recognition of the inventories that almost tripled the amount of last year, reaching ARS35.9 million compared with the ARS13.9 million of the prior year.

The reduction in the net gain of interest security receivables is the reconciliation of Tarshop. Remember, on the securitization of those credit which now is reflected on Banco Hipotecario, the operating income is aligned as we have mentioned. Below this line important to address the difference in financial result of course, is related to the increase in debt. Remember that we have increased with the issuance of another $150 million note that we have used those proceeds for the acquisition of a 30% of Alto Palermo stake.

We have realized the result of Banco Hipotecario or the impact of Banco Hipotecario in this term has been much smaller than same period last year. This is explained because last year we fully recognized the huge revamp in Argentine securities. Remember that the bank has because of all the financing that has done in the Argentine financial system significant holdings in securities. Today those securities are more normalized in terms of their yields and their prices.

Also here the effect that I mentioned, the impact of Hersha, the recognition of result on Hersha that was realized in the period, all that brings up a gain before taxes up $270 million after the tax effects go into $170 million which is smaller than the same period last year but specifically because of the different impact of the Banco Hipotecario to result as we have already discussed.

At the end if we consider the final debt of the Company you have there the break down of the debt as usual, where the most relevant impact is the appearance of the 220 maturing 10 years bond, $150 with a coupon of 11.5. Remember that we have a purchase, Parque Arauco interest in Alto Palermo, paying $126 million in cash.

Now the Company held 94.89% interest in Alto Palermo as of the year of last year. Alto Palermo paid a dividend of ARS113 million. We have sold 217 notes from Alto Palermo with a face value of $39.6 million receiving $38.1 million in cash. These are the notes that we bought in the market in 2008, about 40% of its par value.

And ISRA has paid dividend equivalent to ARS0.2 per share in a total of ARS120 million, recovering the payment of dividend after several years of not doing so.

We, operator, invite to shareholders to ask some questions. Operator.

(Operator Instructions) [Pedro Richard].

I had two or three or questions. My first question is regarding the Office segment, and if you expect occupancy in the Dot Building to increase significantly in the coming months or at a more gradual pace?

And also regarding the segment your average rental price for the total Office portfolio is around $25 per square meter per month, do you see it converging to market rental prices which are little higher then that?

My second question on is regarding the international investments. If you plan to continue with this acquisition of opportunities abroad how many more these transactions should we expect to see in the future?

And my last question is regarding the timing of the current projects to the -- I mean, the refurbishing of Soleil, the building of Arcos, the shopping center Arcos del Gourmet, Neuquen and the office in Catalinas, what's the timing for those projects? Thanks.

Thank you very much for so many questions. I will try to answer first about the Dot, it's delaying the occupancy of Dot Building. We opened that in July, and from there to now we occupied just three floors, and we are thinking on the other three -- the other five are a little delayed. We expect to be occupied during this year but that's it's not a very mature area for office buildings like Catalina or the Board -- IRSA has majority of its office. So that is taking time, probably its little lower and slowlier then our -- what we expect.

But in the case of the occupancy that we have in the rest of the portfolio, that is 92% or 93%, it's similar. And in some cases in majority of that it's better than the market. And the price in some of them we are receiving prices because we bought the buildings and the buildings come with old prices. So every time that we are renewing those contracts are growing, so we expect to in each of the premium building to keep growing the prices. So the Dot will take some time but we expect to finish the year with near half of the building or little more. But at the end of the year I hope this will be near full.

About investment abroad, we make the first three in the States. Now we are still searching for more assets and more shares in the world. And we would like to keep that company buying abroad small comparing to what we are investing in Argentina.

And I can combine with the other question. We are launching three new projects like Soleil, Arcos and Neuquen. The three -- Soleil, it's an investment of near $6 million, and we are doing now, in March we are beginning.

Arcos and Neuquen are projects of $25 million, both of them need a $25 million each, and we are launching them soon too. We are beginning the three projects, and that time we are doing Catalinas. Catalinas will begin a little later because we are in the process of preparing the plans. So this is totally more near the half of the year and Catalinas is a $50 -- $50 million investment.

So the Company is ready, and the Group -- the team is ready to begin the construction of these four assets. But the idea of keeping buying again what we think there are good opportunities in the world that can appear. So I think with that I advise all of your questions.

Okay, thanks very much.

[Tally Wiener].

My question for you is about the Lipstick Building. And I'd like to know what the status is of the BLMIS lease, and whether it's your intention to rent the space out either with the FBI in it or after they clear out? Thank you.

Can you repeat, sorry?

I'm sorry. My name is Tally Wiener, and I have an interest in the BLMIS headquarters, the Madoff headquarters in the Lipstick Building. And I would like to know if you can tell what are your intentions, whether you intend to rent it out either with the FBI in it or whether you are looking to rent it out when the FBI moves out.

Yes, that is certainly the case as you are mentioning. In fact, one of the leases -- in one of the floors has already ceased in its original term, and the other two are still -- are still taking place. We are in the process of putting them in the market once the leases are completed.

And who would be a good person to talk to about the possibility of leasing that, would that be you guys or someone in New York?

We have in New York Daniel Elsztain who is managing the business of the Company there. You can send off a mail and we are going to connect to you to him.

Fantastic, thank you very much.

This is a very useful conversation in the conference call. Is there someone else to tell something?

[Denis Parisien].

Good morning, gentlemen. Sorry to interrupt your -- sorry to interrupt your live auction of the leasing space, and good luck with that.

But I'm coming from the debt side rather than the equity side, and for a debt investor regardless of what is undoubtedly high-quality investment that you have made, your leverage has gone up significantly in the most recent couple of quarters by my calculations.

And I know your cash has also gone up, but on a net basis, including your short-term instruments as cash, for the sake of argument, your leverage gone up on a net LTM basis from 2.24 times to 2.57 times last year, and in most recent period to 3.3 times.

And if we exclude your short-term investments, you've gone from 1.94 times to 2.95 times. It's a pretty significant increase. Could you tell us whether -- and most of your conversation seems to be about increasing investments both abroad and finishing projects in Argentina.

How high is your leverage going to go and when is it going to come down and what level do you see yourselves running in the long run on average? Thanks.

The -- you are seeing the glass from a very -- top surface perspective, (inaudible) and talk about what we bought. If we see that we bought 30% of the Company that generates a bid of more than $120 million. That is the case of Parque Arauco stake. For $120 millions, that explain majority of that.

We bought Hersha that more than tripled the value, and it's a liquid, in cash and it's a cash. And so we are very glad of what we were doing this year. So the assets, and maybe you can do that valuation of the purchase that IRSA did and Alto Palermo did, I think are very, very generators in EDBITA. And in the one that they are not, they are very good assets, like the case of Hersha, that it's a very liquid asset. So I will give you our CFO to talk about the leverage levels of the Company.

Yes, from a level perspective, we are very comfortable. Definitely, we are in 3.2 times coverage of debt, and as Alejandro explained, in fact when you look at the type of assets that we have, we have achieved two very important effects with this acquisition.

The first one is the stake of Alto Palermo, which doesn't reflect a significant change as it was already consolidated in the balance sheet. That didn't show any significant event in the ratios of the Company, but this is the best-yielding asset and cash-generating asset that the Group has. That's the first one.

The second aspect of that investment is that -- is an investment that hedge us even more against local inflation, and as you probably know, Alto Palermo income is adjusted automatically by inflation because of the percentage of sales which is for us a very good news in the personal environment of the country.

On third place, that investment has also provide access to the, I will say, the core of the production of the shopping malls as you are buying at a price of a single shopping mall, additional participation in the best yields of the portfolio which are the most -- the better locations that you cannot replicate today.

Regarding the investment that we have made in this stage, the other aspect that they have, the first one speaking of Hersha is an investment that is cashable at any moment and only with the investment of that will mean that the Company will receive almost two-thirds of the debt increase of the period.

We have a total position at present with a cash value of $140 million only with that investment without considering the rest. As we have shown, we can sold a minor stake to prove that liquidity is there, and we can really invest this.

But all the investment that we have done in the United States also provides us a very significant and comfortable hedge in US dollar. As you see, Hersha because of its rich condition has the obligation to pay dividends constantly, and that is also an interesting type of hedge for our obligations that are hedged mainly with the portfolio.

Regarding the total bid of the Company, we have still room on a consolidated base. This is including the balance sheet of Alto Palermo and IRSA. We have room to grow under the programs and has been already approved in the range of $300 million of total debt which is not very likely to happen for the present time.

Thanks very much for that explanation. But do you have a ratio in mind where you expect to be at the end of the year in terms of net debt to EBITDA on a 12-month basis?

No, no, the difficulty to establish a ratio to give you really a comfortable and reserved answer is based that we have elections in the middle in Argentina. We have, up to now, an inflation which is privately estimated in the range of 25% and the currency is not devaluating, so at that pace.

So for us, it's very difficult to give you a real view in this sense. We have always intention of continuing being solid, and on other hand when you compare the portfolio that we have and compare to the total debt of the Company, we have -- we are very far away for any peer in that you can get internationally for the comparison in the industry. As an example, we have the Company -- the shopping mall company where we held 97% with a total debt smaller than $150 million.

So on the consolidated debt, the picture has been, I will say, increased in the period definitely. But the reason is that we have made sound -- very sound investment. We really don't have at present to give you a guidance in terms of future ratio by the end of the year because of the explanation I am giving.

Apart of that the Company holds a lot of things that they're not reflected in EBITDA like the Banco Hipotecario. We have a stake of 30% of Banco Hipotecario. We are the largest land bank of the country. That there is lot of millions of dollars not reflected in anything on the conversation we are having. So the Company assets, it's really very, very, very important.

Thank you very much.

[Celina Merrill].

Good morning, thank you for the call, and congratulations on the quarter. I had a question regarding your Sales and Development Division. I know it's a little bit more volatile than your other segments because of the rate that which you closed various difference sales. Can you help me think about how to forecast this business going forward? Should we do it on a project-by-project basis and see what you are going to close, for example, in the rest of the year or how would recommend that we think about it?

Yes, it's tougher, it's not easier like the Rental part, it's a cash machine, and you are seeing the rental and the occupancy in this. We are not organized and the country up to now is not because of how we sell residential, but it's a dollar-denominated sale and its peso cost. And we have not plenty of projects, so it's tougher for the Company. And one day when we launch one big residential project like Santa Maria you're going to see plenty of land and the swap and the development.

So I understand that it's -- in that case it's more net asset value up to the date you begin to see that project on line. So analysts in general, we are thinking on that in net asset value, that it's easier to think. And the day they go to the market you begin to calculate the percentage of the sale like they do with the residential companies.

I will add to what Alejandro has mentioned that for instance just to give you color, the government has released in the last 15 days a new tax regulation regarding the disclosure of these transactions which affect a very significant part of the informal market that we have. We have not yet a clear picture of the situation, but of course in terms of competitiveness those new regulations are a good news for us as we don't have any type of exposure to that segment of the market.

Okay, thank you.

There are no further questions at this time.

We'd like to thank everybody for participating in the conference call. And we are going to see you next quarter and thank you very much and have a very good day.

Thank you for participating in today's conference call. You may disconnect at this time.