IRSA Inversiones y Representaciones SA (IRS) 2012 Q1 法說會逐字稿

Good morning, everyone and welcome to IRSA first quarter 2012 results conference call. Today's live webcast, both audio and slide show may be accessed through the Company's Investor Relations website at www.irsa.com.ar/ir by clicking on the banner, Conference Call.

The following presentation and earnings release issued last week are also available for download on the Company website. After management's remarks, there will be a question-and-answer session for analysts and investors. At that time, further instructions will be given. (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 would now like to turn the call over to Mr. Alejandro Elsztain, Second Vice President of IRSA.

Please go ahead, sir.

Thank you very much. Good morning, everybody. We are beginning our conference call of the first quarter Fiscal Year 2012 IRSA results. And if you move to page number 2, we see the main highlights of the Company for the first quarter. IRSA's revenues increased by 12% in the first quarter to ARS343.7 million and the EBITDA rose 17.1% to near ARS208 billion

The biggest in size and in growth still was the shopping centers that have continued to exhibit a very sound performance. The increase of the EBITDA of 43% and improvement in the EBITDA sales margin that reached 80% and occupancy higher than 97% of our tenants in the shopping.

APSA purchased 50% of the new shopping center located in Santa Fe City. It's called La Ribera shopping center. With that we achieved the 13th shopping centers for the Company.

In the Office segment revenues and EBITDA increased by 9% and 10% respectively. The improvement in the activity has mainly driven by an increase in the portfolio occupancy that we have the lack of occupying the Dot Building that was almost empty last year and today 100% occupied and with that we achieved 95% of occupancy for the whole portfolio.

The net income amounted to ARS5.7 million comparing to ARS56 million last year, the same quarter of last year, and mainly due to the higher financial charges and a negative result of the value of the option to acquire new shares of Hersha at market value that we are going to explain later.

The shareholders meeting held in the 31st of October approved the payment of a cash dividend of ARS211 million but will be paid during November, dividend yield of 8.6% for the Company.

So I will introduce Mr. Gabriel Blasi.

Good morning, everybody. Thank you, Alejandro.

Moving to page 3, a quick glimpse on the residential real estate market. As you can see on the upper left graph, the construction activity continues to be strong with a two-digit increase compared with the same quarter last year and in the consecutive quarters of this year.

On the upper right, the signing of deeds in the city of Buenos Aires shows still a significant growth at quarter level and in the comparison with last year of new transactions done within the capital city of Argentina.

And regarding the environment of pricing in the region, as an example, we chose the central neighborhood as Recoleta, in downtown Buenos Aires. The price increased in US dollar terms (inaudible) compared to this year has been up 12% confirming the very strong momentum that the real estate market has.

To move to page 4, we see the opening of the result of the Company on the upper left. Shopping center confirm the excellent momentum in terms of sales with an increase of 36% in peso terms, 9% for the Offices, 19% down on the Hotel operation. And this is mainly because of the evolution of Llao Llao. As you might remember our most important resort in the Patagonia is suffering because of the volcano eruption in Chile, which is affecting all the flights in the middle and central area of Argentina. And the Development and Sales, with a significant increase mainly by the signature of this of our project Horizons.

Regarding the impact in EBITDA, the shopping center 43% increase is a very important characteristic. We have only not been successful in increasing sales but also we achieved a very significant growth in shopping center margins as you see from the EBITDA volumes.

On the Offices, a 10% increase in EBITDA for the period with a very positive evolution. Hotel affected, as I mentioned, mostly because of Llao Llao which is -- all this meteorological events is affecting the area in a significant quarter for the Hotel.

And Development and Sales showing -- although the revenues are very positive, a significant part of those results have been already recognized has not impacted strongly on EBITDA.

Then [configurations] regarding the EBITDA margin, you see the very strong evolution, in the low left, of the margin of the shopping malls meaning that we increased the margin by 3 points in what represents roughly three quarters of the total cash generation of the Company. Offices, which is stable. The Hotel, as we have described, and Development and Sales with the explanation I have already given.

When you consider the breakdown variation from period to period, the most relevant there, of course, is the Shopping and Offices. Regarding the things mentioned there about the consumer financing which is because of the reconciliation of the same period of last year still include a percentage of our consumer financing business that you remember was sold to Banco Hipotecario. In this period, that consolidation is no longer taking place and that explains the results.

If you move to page 5, we can see the evolution on the Shopping Center segment. First, in the graph we see revenues and how strong we have growed last year we reached ARS674 million of revenue. And if we compare the first quarter of this year to the first quarter of last year, we see that the growth in revenues rose from ARS148 million to ARS202 million, which represents 35.6% in growth in revenues.

When we see that in EBITDA, we see that from ARS114 million last year we grew to ARS163 million, a 43% growth and apart of that, the EBITDA margin increasing to -- growing to 80.4%. The sales of our tenants are still increasing, 32% compared year-to-year. And the gross leasable area evolution we grew a little with a new shopping center, [the 13th], the La Ribera shopping center that made us to keep this profit growth in the Company and we are going to add the next shopping centers under construction.

If you move to page 6, we see the Office Rental segment, and in here we see the numbers in revenues towards the growth this year to the last year, the first quarter of 9% in revenues. A big portion of that is explained in occupancy. Last year as a whole year we were at levels of 91%, the average of the year. This year we are beginning and today we are at 95%.

The portfolio is stable; we are still with the same 150,000 -- well, 151,000 square meters. The rental price is same too. So this business is recovering in occupancy mainly and some in price. Remember that this business is a dollar related business. So a 100% of this rental is dollar denominated.

If we move to page 7, the Hotel segment, here we see a drop in sales and in EBITDA. And we put, especially the case of Llao Llao. The Llao Llao came from levels of 50% to 58% in 2011, but in this fiscal year the first quarter the level rose up 14%. And today, it's worse than that because of the -- the airport is not open and the clients of this hotel are very high end. They fly through airports -- through airplanes and this will be closed because of the volcano, plus today they are repairing the land -- the airstrip.

So, the reparation of that will make us to have the task next quarter too. We expect to recover some in 2012, but for 2011, the situation for Llao Llao, the level of occupancy will be tough.

We have very good levels in the other two hotels, the two -- they are located in Buenos Aires city that the levels of occupancy and the rates are very high and we see that the first quarter is not so direct because of [back compensation] of the two hotels based in Buenos Aires.

If we move to page 8, we talk about the sales and development projects. We -- the barters done in Rosario, we signed the deed of that. The project began in 2008. It's in Rosario and we received -- the apartments have been delivered and we began the sales of these apartments, and here we see the gains of each of the project.

The gains -- and that's why we sold and there is a lot of sales on that segment but not a lot of gains. The explanation of that is in the case of Libertador, [Quaternavatioj] and other projects, the sales reflect big portion of gains.

In the case of Horizons, because of the accounting system, majority of that gain was reflected before. Today, we're signing the deed, but they don't bring gains. Majority of that was done in the past. So there is a big portion of the sales, but they are not bringing EBITDA.

Here we show the projects we have under management. In the case of Horizons, 100% was sold. In the Nuevo Caballito, to date, 81% was sold. In the case of Rosario just 31% of the apartments we are receiving are sold.

In the case of Renoir, 100% was sold, and in the case of El Encuentro project, 65% are sold to date. So, the rest are going to be reflected next quarter.

Regards the big sale that is a portion of land reserve in San Justo, we had land of 8.7 hectares and we had a book value for that for less than $1 million. We sold very recently for $4.7 million. So, that was done in October of this year and we'd certainly reflect it in next balance sheet of December of this year.

So, we didn't sign another more attractive than selling this project instead of doing a neighborhood or keeping like warehouses, we decided that it was better to sell it than to keep it on the book up here.

(Inaudible) company was closed, the signing of an agreement related to a new investment in the United States. As you remember, in 2008, we began to look for opportunities in the United States related to our businesses identifying good value potential and growth possibility to also some type of a financial -- not distress necessarily but where our investments might help a company to pursue their growing goals.

As part of that process that we have completed very successfully, with very good investment in Hersha trust, the Madison building and Lipstick building, we have been proven to be right in terms of our investment case.

We complement that with a new investment in Supertel Hospitality Inc. It's a real estate investment trust dedicated to medium scale, economy and extended-stay segments of the hospitality industry.

It has more than 8.8 thousand rooms in more than 100 hotels across 23 states in the United States. Many of these hotels are operated by third-party management companies under franchise agreement with brands as Comfort Inn, Days Inn, Hampton Inn, Holiday Inn Express, Sleep Inn and Super 8.

The Company is listed in NASDAQ under the ticker SPPR and what we have agreed mainly and it's important to understand this deal is pending of the approval of Supertel shareholders, and the acceptancy from IRSA of certain type of refinancing agreement that the Company must fulfill of our guidelines on the investment case, we shall compromise investment between $20 million to $30 million mainly in convertible preferred shares that allows us to reach up to a maximum of 34% of the total interests of the Company with certain characteristics and with a 6.25% coupon and -- including conversion to common shares.

The exercise period is five years. Of course, all this information is detailed very [slowly] and we are open to your q-and-a if you need further details, but in the benefit of being sure, we consider that this investment will help significantly the Company to fulfill its growth and gain a financial flexibility.

If we move to page 11, we can see some pictures of the projects of 2011. We just launched the Shopping Arcos, the one that is located in Buenos Aires in Palermo region. This will be a 40,000 square meters project with a gross leasable area of 13,000 square meters.

And this is a -- this week we opened the comparison for direct contracting the construction. So, now the machines are beginning this next week. So, that is 18 months from now. And this will be in the middle of one of the best neighborhoods of Buenos Aires city and we are beginning the commercialization next year, in 2012.

In the case of Shopping Soleil, the one we received last year, we began now the restyling and the expansion of that shopping center and it's under development. That is a 10 month time of building and restyling, but we changed majority of the tenants.

There were now 30 new tenants enter to this new shopping center, but now the restyling will allow us to achieve this outlet premium brand that is shopping center and this is the first outlet premium of the country and we are going to keep growing on that segment if we can.

The other two are still under the authorization process and the preparation for the beginning of the construction. So, we didn't begin the construction. We cannot talk about time of the end of that -- those two projects.

A quick wrap-up on page 12 regarding Banco Hipotecario situation, as we can see there, the bank has increased significantly its funding base reaching more than ARS5.5 billion of total funding and $1.7 billion in foreign currency debt.

The income from interest on private sector loans has increased from ARS198 million to ARS219 million, and the mortgages continue to be losing part of the impact in the balance sheet of the bank. As such, the bank is continuing the strategy of growing in a wider segment of businesses.

The net financial margin for the period has been has been ARS173 million in September, ARS139 million in June, and ARS73 million in September mainly related to the increase in the cost of funding. The non-performing loans continue to -- a very positive trend, going down to less than 1.8% of the total portfolio loans.

With respect to the IRSA's income statement of first quarter of 2012, operating income increased ARS25.7 million, 18.6% from a gain of ARS138 million in 2010 to a gain of ARS163.7 million in 2011. The operating income arising from development on sale of property segment decreased ARS0.5 million, 6.7%, from a gain of ARS8.1 million in 2010 to a gain of ARS7.6 million in 2011.

Operating income arising from Office and other non shopping center rental property segment increased 11.2% from ARS22.5 million in 2010 to ARS25.0 million in 2011. Operating income from the Shopping Center segment increased 51.6% from ARS84.7 million in 2010 to ARS128.4 million in 2011.

The operating income of Hotel operations decreased ARS4.5 million from a gain of ARS3.6 million in 2010 to a loss of ARS0.9 million in 2011, and the operating income of the consumer financing segment decreased ARS15.4 million from ARS19.1 million in 2010 to ARS3.6 million in 2011 due to the deconsolidation of [Tarje Tarshop] that was sold to Banco Hipotecario as Gabriel mentioned before.

With respect to the financial result net loss increased ARS90.3 million from a loss of ARS63.1 million in 2010, to a loss of ARS153.4 million in 2011 and it was due to more interest, sales difference and also to a call option that we have on Hersha.

Yes, regarding the impact of the option remember that we (inaudible) Hersha and other hotel within the United States originally at the share price of $2.5 per share. The investment -- the total investment that we -- in that moment was $64 million, we have already gained back $16 million, realizing a significant gain.

The share price went up and compared to a prior period -- also as part of that investment you might remember we were granted a call option to acquire additional shares with the same share price [as we pay].

The share price went up in that last period up to $5.57 and of course that was concurrently reflected to the price of that option. But from June to September there was a drop of 38% in the share price meaning that it went down from $5.27 to $3.46. That represents a significant drop in the value of the option meaning that the impact was likely about a third of the total financial tranche for the period.

It's very important to address that as of today share price has already recovered 28% from $3.46 to $4.40 meaning that of course that recovery would be reflected in the price of the option for the next period concurrently.

Going on with the financial statements, the gain from related companies decreased ARS10.3 million from a gain of ARS21.8 million in 2010 to a gain of ARS11.5 million in 2011.

We expect today income tax on -- minimum presumed income tax loss increased ARS10.9 million from a loss of ARS12.1 million in 2010 to a loss of ARS23.1 million in 2011. And minority interest increased ARS32.4 million from a loss of ARS25.5 million in 2010 to a gain of ARS6.8 million in 2011. And our net income for the three months period ended September 30, 2011 decreased ARS50.5 million from a gain of ARS56.2 million in 2010 to a gain of ARS5.7 million in 2011.

Finally, on page 14, the debt structure of IRSA on a consolidated basis. As you might see there are no significant development for the period with no significant change in the structural debt of the Company, probably the most relevant aspect of that is (inaudible) in the debt of Nobleza Piccardo which is related to the decision of [new land] reserve, a very significant in the boundaries of the city of Buenos Aires, and at Alto Palermo level a $3.8 million related to the acquisition of the last shopping, Shopping Santa Fe with no further development. The total consolidated debt for the Company is $608 million with a cash of $78 million -- $68 million, sorry, mostly held in US dollars and some debt repurchases that we have in our balance sheet totalized in a net debt for the Group -- of the two companies, $525 million in total.

We invite the shareholders and investors to make the questions now. Operator

(Operator Instructions) Jacob Steinfeld, JPMorgan.

I just had two quick questions. The first one, I see here you have -- you show $69 million of cash at the end of the quarter but then you are planning, I guess a $50 million dividend payment this month and then the $20 million investment that you announced last night in Supertel.

First wanted to understand like your current position in terms of liquidity and how you are thinking about that because I guess those two -- I mean the dividend payment and investment total, $70 million which is close to, I think, your current cash balance at the end of the quarter excluding some of the debt that's been repurchased, so just wondering if you could provide a little bit more color there?

We have already funded these two disbursements. Of course the disbursement regarding the new investment is not going to take place tomorrow (inaudible). And we have the recovery of certain assets that we have a place that we are going to redeem shortly strengthening the cash situation of the Company. We are not planning to increase significantly the debt to fund these two activities.

So were either of these activities financed or were they just -- was cash used from the balance sheet?

No, we have the cash in fact.

Okay. And then in terms of your plans I see almost a -- I guess $100 million of -- I was looking at the debt amortization schedule here. Could you just talk about your plans in terms of refinancing the short term debt?

In fact we are -- we have three different possibilities that we are at present discussing. If you follow (inaudible) you will find out that in the last month we issued a $60 million three-year note in US dollar that was very successfully placed, and we are analyzing, one, the possibility of using the remains of our first program of $100 million to repackage all these in a single note.

The second possibility is to issue a local note; as you might know, certain restrictions have been put in Argentina recently for insurance companies to repatriate reserves that they base abroad so there is like a new need for additional paper on the local capital market. And the third one that we are also analyzing is on some type of syndicate loan in IRSA balance sheet, I think of the total that portion is the only debt that at present is held in the banking system of the Company, of the total of [debt] infrastructure to the capital market.

We are analyzing these and we are in the process -- I would say (inaudible) process of finding out the best opportunity in terms of rate and also taking in consideration the new rules that have been -- that has come to the market, just I mentioned for it and this regarding the reserves of the insurance companies that might bring some type of significant change in some segments of the financial market.

It's important to remember that we -- this is the only short-term debt that we have with the [very] ability of finance that with the banks if you want to but also that we have a very, very strong generation of the shopping malls available that at the end yields us more than $10 million, almost on a monthly basis of free cash. And especially at this time of the year where we have December that represent typically doubling -- a typical month for the period. So we have a very strong liquidity position and several ways of addressing this small piece of debt of the Company.

Okay, thanks, and are you still considering an equity offering at the Alto Palermo level?

Well, as you know, probably we have trials and we completed those on the regulatory side, but of course, Alto Palermo considering the cash generation. Considering it is a Company with 80% EBITDA margins with a very significant market share in the country meaning that Alto Palermo is almost the name of the shopping malls in Argentina. Really, we need to have a market that really make justice to a company like this and to be sure that we get what the Company really represent in terms of valuation.

Great. All right. Thanks very much for your answers. I appreciate it.

(Operator Instructions).

Clara Quiroga, Raymond James.

Well, I have two questions. The first one is regarding the Office segment. Your average rental price for the total Office portfolio was around $22 per square meter per month in this quarter. Do you see these levels recovering to the $24 per square meter that you used to have?

And in the second place, if you are planning to enter into any hedge to avoid FX losses going forward. That's all.

Yes, from the Office, part of the drop of the value for the square meter was some months we gave to the new tenants of our building. And those building that is not in the middle of Catalina's area. But it's a building of $20 average comparing to the rest of the portfolio.

So the combination of that gave us more drop at the end. This will recover soon after these three months or six months in uptake of tenants. So it's going to increase. And the renewals of the rate of Catalina's area, which is very strong in price, and being occupied, we are (inaudible) of asking more price because of being very occupied. So if the situation of IRSA today, (inaudible) that was a few months ago because of the occupancy level.

Yes, regarding the leverage -- sorry, the hedge of the Company as we have addressed several times, we have this particularity that the real estate market in Argentina is mostly both sold and leased in US dollars. So regarding about our income base, the shopping mall is related to inflation and provides us a very sustainable hedge to that. And the rest of the income of the Company is mostly related to US dollars.

What we do -- and that arises very deeply from the balance sheet is that return to keep in cash about one year of financial charges would give us a very good hedge because that's the reevaluation that we have to pay. Regarding the rest of the reevaluation was, of course, we take always an eye on it because it has an impact on the low line of our balance sheet. The stocks of this are hedged by our portfolio differences that we need to live with the situation where we mark to market.

There is lot of exposure on the liability side but on the asset side, there is no mark to market for the property. But if you will go to the graph on page 3, you will see that last year real estate prices in Recoleta have increased 12% in US dollars.

If you translate that to the whole portfolio of the Company bonds, where we adapted -- we are considering any premium regarding location, regarding the type of assets that we have. Really we are very comfortable in terms of knowing that we have a huge, strong asset base able to be -- turn it into US dollars to meet our obligation.

And leaving that aside, very important that you need to consider that we shall build a very successful hedge also with our investment in the United States. In the case of Hersha Trust, where we put a net investment of $48 million and are worth today more than $100 million, that's [an asset] that can be also provide hedge.

Same situation with the Lipstick building and Madison Avenue which are all assets which are US related meaning that the Company has built up since the financial crisis of 2008 almost a portfolio where when you consider the market valuation, it is quite similar to the outstanding of US dollar debt that the Company has.

Okay. Thanks.

At this time there are no further questions.

Okay. The final remarks about -- we think that we are closing a good quarter where the rental segments are very thin. Just the only exception is Llao Llao because of what we explained before. The property value is very thin, like Gabriel said, in all of the lines of business and a 0.5 million square meters of rental give you an idea of what portfolio we have. And this has not reflected in balance sheet because we keep the cost of acquisition in pesos -- cost of acquisition in pesos. And we are going to launch the new developments and we are working on towards new projects to keep that high band of growth for the whole of the segment of the Company.

So thank you very much for everybody and have a very good day.

Thank you. This concludes today's conference. You may now disconnect.