IRSA Inversiones y Representaciones SA (IRS) 2015 Q3 法說會逐字稿

Good morning everyone and welcome to IRSA's Third Quarter 2015 Results Conference Call. Today's live webcast, both audio and slide show may be accessed through Company's Investor Relations website at ww.irsa.com.ar/ir by clicking on the banner, Conference Call.

The following presentation and earnings results issued last week will also be available for download on the Company's website. After manager'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 will now turn the call over to Mr. Daniel Elsztain, Chief Operating Officer. Please go ahead, sir.

Hello, good morning and thank you everyone for joining us on our third quarter's result conference call. During this quarter, exactly on March 17 of 2015, we opened our 15th shopping center at Alto Comahue. After years of years of promising, the shopping center is finally opened. We had solid tenant sales growth during the quarter. We had good results in office and hotels during the quarter. Sales of investment properties were about ARS801 million during the nine months of 2015 fiscal year. And on February 15, we did an additional investment in Dolphin for $105 million.

So, summary of the financial results up to the nine month of 2015, we had revenues, including the sales of investment properties for around ARS5.1 billion; that is 135% more than the nine months of 2014. The EBITDA of this period was about ARS21 billion; it's a growth of 99.7% versus the nine months of 2014. And if we exclude the effect of the selling of the investment properties, the growth on the EBITDA was around 19%.

Net income for this period was a loss of ARS163 million, versus a loss of ARS78.8 million on the nine months of 2014.

Talking about operating results of the third quarter, we can see on page number three, a growth of 35.4% in the sales of our tenants. If we want to see this at same store sales, it's 31.3% increase, and this is the effect of inclusion of the two shopping centers. We included Distrito Arcos and Alto Comahue this quarter, so we went from a stock of 311,000 square meters to a stock of 333,000 square meters on this fiscal quarter. So our stock grew up, occupancy remains very stable at very high numbers. This is including the two openings. Sales went up, and we have to be here -- to consider that on March, we see a big increase, and it's of course, is because we added new shopping centers, and also because the holiday came instead of April. Last year, we had the holidays in April, this year came on March. So we have these two effects. And we are very stable (inaudible), we will see that number growing, because we included new shopping centers.

On page number four, we can see the opening of the 15th shopping center in the Province of Neuquen. This is about 9,500 square meters of GLA, 104 stores. At the closing of this fiscal period, we had almost 90% occupancy. Since then, we have been working and we are now about to sign the contracts to have 95% of this shopping center occupied. The shopping is a big event on the [city], we have seen very good sales, a little bit above our expectation. And everyone wanted to see this new shopping is real, a big event on the city since inauguration. We're just getting good comments from tenants, good comments from the customers. We still have here a mixed-use expansion that is next to the shopping center, and we're working about what kind of project we can do in this land.

During this fiscal quarter, we also did the expansion of this food court in La Ribera Shopping in the Province on Santa Fe. We went from 51 stores to 65 stores and the opening of this new food court and the moving of the -- was on January 15 and we increased about 1,100 square meters on the shopping center. There is a big transformation on this shopping center that we started when we bought the shopping center and now we can see new brands, new customers, so we are very happy with the performance of the shopping centers. Again, this is a very small shopping center, but has a very good future.

On page number six, we can see also a small expansion that we did in Alcorta Shopping; this is in the City of Buenos Aires. We had an intervention on the third level, the level of the food court, we replaced some food court stores for retail stores and we also grew in part of the mall. So we included now with an expansion of about 700 square meters to the GLA, it is about 5% of the GLA increase and this is -- and the development will be finished in the coming months. And we have very high expectations, because this shopping has really changed the perception, now with the new trendy shopping center in the city and everyone wants to come into the shopping center. We didn't have space. Now we have space to bring new tenants and we are very confident that the future of the shopping center will keep on -- will keep growing.

On page seven, we can see some information about our strong operation figures in office centers -- in office space. Our portfolio by the end of the quarter was 112,000 square meters. Since then we sold some of the space, so if you want to see the stock of our available office, it was reduced to [104,000] square meters. That is a reduction of about 7.5%. And our -- interesting is that our average lease price has gone up. If you remember, we talk about this in the previous calls that we had a strength maybe that the price could go a little bit high. We are seeing that on our negotiations. And also what we sold -- I mean, remember, we are trying to sell the non-core of those assets that we think that the value of the rent is not as much as [vacant]. So that also help us to grow a little bit on the price -- of the average price. So occupancy remains very stable. Leases in pesos went up, and also in dollars went up. Just to have an idea, that building, remember, when we built the shopping center, we had it next to our office. It was very difficult to get tenants for that building. Today, it's the opposite. We have more people interested to be in there in the building, there at the space that we have. So that let us increase rents, and now I can inform you that we are about 15%, 20% high on price in dollars than the previous contract we have on the same building. We didn't do the final, or the second round of the leasing, but this is the trend we're seeing.

On page number eight, we can see the transaction we did after the closing of this third quarter, but after relevant operation, we will disclose this information. We did a partial sale of the Intercontinental Plaza Building for ARS376 million. It's totally nine floors and 72 parking lots. The space that we sold is 8,470 square meters, and we still have 14,000 square meters that we have on the building, plus the remaining parking spaces. This give us a price per square meter about $5,000 and a cap rate of 5.5%. The recognition on our balance sheet will be at the moment that we do the deal; that will happen from now till July. But we got all the money from the transaction, it's in our hands.

Remember that we had this building that was most recently transferred from IRSA to IRSA Commercial Properties. At the moment we did that transaction, we were not able to recognize gains, but now that we're selling this property, we can recognize to gain both, in IRSA Commercial Properties and also in IRSA. And these are the figures that we can see. At the level of IRSA Commercial Properties, will be a gain of ARS122 million, and in IRSA the gain that we will recognize will be a gain of ARS315 million. So we're very happy with this sale. We'll continue looking for these opportunities. The cap rate is very low in Argentina, and we have the opportunity to sell good offices and build new ones.

Now we'll talk about financial results. I introduce Matias Gaivironsky, CFO of the Company.

Thank you very much, Daniel. Good morning, everyone. So, going to page nine, we can see the breakdown in different segments of the Company. We are very happy with the performance of our rental segment and in general terms, the rest of the segments all generated good results in terms of EBITDA. So revenues grew 29% in shopping centers, 26% in offices. And EBITDA for shoppings grew 28% and 31% for offices. Here we are excluding the effect of the cost for the transference of the office portfolio from IRSA to IRSA Commercial Properties that generates a cost of around ARS110 million, we are excluding from that calculation.

Sales and development also grew significantly in the nine month period, increasing by 368%; that is mainly because of the office buildings and the office floors that we sold during the nine month period; that it excludes the sale that we just did in the last week of the Intercontinental Plaza that we will recognize in the next quarter or the following one.

Offices grew at [13%] and international, we here include the sale that we did in -- of Madison building in the last nine month period. So EBITDA margin grew in offices from 69% to 71%. In shoppings, remained at the same levels at around 78%. On hotel, the same from the previous quarter. So the breakdown between the EBITDA of the Company, shopping center, still the segment number one of the Company with 74% participation; that exclude the sale of Madison that we did in the last quarter.

Going to page 10, here we include the results that we received from Banco Hipotecario. This quarter, we received from Banco Hipotecario ARS98.7 million, against [ARS174 million] in the previous year. That is mainly due to financial results that the bank generated last year. Against this year that was lower results on the financial side. All the operational figures remain very strong with very good results. We received a dividend this January of ARS12.9 million according to our stake, but the bank paid a total of ARS42 million. And in the bottom of the slide, you can see the evolution of the evaluation of our stake in Banco Hipotecario that went from $100 million in the previous year to $300 million in this year, so the performance of the share were very good in the last year.

Going to page 11, here you can see the chart of IDB, of the structure of IDB. The news on IDB was that in February, we did an additional investment of $105 million. So Dolphin participated in the rights offering that IDB did in February. So, therefore, Dolphin increased the stake to 49%.

IFISA, where our Chairman has his stake [and pursued] the parent company of IRSA did an investment that acquired 12.5% of IDB. And our partner (inaudible) shared that. You'll remember that we have started this investment with a 50-50 partnership with him. He doesn't participate in the rights offering, so [he was] diluted. Today, the current stake is 16.2%. Having said that, it's important to mention that today there is an arbitration proceeding in Israel. We are starting an arbitration proceeding, because our partner is claiming for certain issues that he believed that he has the right to acquire more shares from our recent investment. So that, of course, we don't think that he is right. So we're in that arbitration proceeding that will take place in the next month in Israel.

Besides that after the closing of this nine-month period, we did an additional binding and irrevocable proposal to the Board of IDB. The main terms of that proposal was that Eduardo Elsztain should be appointed as sole Chairman of IDB, and IDB commits to advance the obligation to exercise Series Warrant Number 4 that were issued by IDB. Remember that that has a strike of [1.66%] today. To give you an idea, the price of the shares of IDB is [1.58], so it's almost at the money. So we commit to advance the proceeds of [150] that originally was planning to exercise during the month of July. So, we commit to advance that obligation to May. Also, we commit to make a future capital injection for up to ILS100 million, it's roughly $25 million, subject to certain conditions. So this is like an underwriting commitment, but it's not clear, the final result of that. So this proposal was approved by the Board of Directors of IDB. So that is on a subsequent event that happens in the last week.

Going to page 12, here we include evolution of the IDB share quote in the Tel-Aviv Stock Exchange. And from here, you can see that since our investment, the shares of IDB reduced significantly and we have decided to recognize our investment in Israel, or to value our investment in IDB according to the market value. So we are recognizing the losses from this evolution. In the last period that we closed and we recognized results, the price of the share was [197 cents] and today at the end of the quarter, was [134.4 cents] and that's the rate -- additional losses that were recognized in this quarter.

So going to page 13, here you can see the main explanations on the financial statement. The main impacts were IDB and taxes; that is below the operational line. On the operational results, we had strong results in all the business segments. Shopping centers increased by ARS223 million; that is 33.7% higher than the previous year. Offices that we sold was ARS64 million lower than the previous year. That is mainly because of the transference of the assets from IRSA to IRSA Commercial Properties, where we have to recognize the cost of ARS110 million. So excluding that effect, we had positive results, and also with lower stock, we reduced our stock of offices and even though we have better results on the segment.

Sales and development, very good results, ARS357 million more than the previous year. That is mainly because of the sales of office buildings and office on some floors that we sold during the nine month period. Hotels were slightly lower than the previous year, in line -- was ARS4 million lower than the previous year. That is mainly because of a reduction in the occupancy of our hotels, from 71.4% in the previous year to 68.2% this year. And then in IDB or the international segment, we recognized losses ARS432 million lower than the previous year. That is mainly IDB. So the total recognition of losses from IDB is around ARS900 million that are included in this line, in the international line. Other is ARS47 million lower than the previous year. This is mainly because of the results from Banco Hipotecario. As I just explained that we received lower results from Banco Hipotecario, from ARS164 million in the previous year to ARS98.7 million in this year.

And then the other important effect is the net financial results, where we have a positive difference of ARS384 million and this is mainly because of the evolution of the exchange rate in the previous year. We have a huge devaluation and this year the exchange rate will remain stable. So we are not recognizing the same losses than the previous year. And in taxes, the main effect is Madison, where we have to pay taxes, because of the disposal of our investment in Madison.

So going to page 14, here you can see the breakdown on the debt amortization schedule of our debt. IRSA standalone remained with very low level of debt. The net debt is around $90 million. Remember that we transferred the assets -- the office assets to IRSA Commercial Properties. So IRSA has today a credit of $246.4 million, is a credit with IRSA Commercial Properties and the structure was created to match the debt between the international debt of IRSA with this credit. So that generates a lot of efficiencies in terms of having the debt in the operational company. So we transfer most of the debt to IRSA Commercial Properties. And today, at the IRSA Commercial Properties, the level of debt is very low. Here, we include a ratio that is not the best way to see it, but we analyze the EBITDA, just divide it by nine the EBITDA and multiply it by 12. This is not the right way to do it, because in this quarter, we have the transfer of the office portfolio that only generates result for three months, not for the whole period, but it's the easiest way to just see it. And, even though, the result is -- the net debt to EBITDA is only 2.3 times EBITDA.

So with this, we finished the presentation. So now we open to receive your questions.

(Operator Instructions) Jorel Guilloty.

I was curious to learn a little bit more about the investment in IDB that you announced and was approved by the Board of Directors on May 6. I was wondering if all these commitments go through, the ILS150 million warrants and the commitment for ILS100 million of capital injection, what does that mean in terms of your ownership stake for IDB for IRSA's ownership stake? And also, would it go beyond 50% and require consolidation of the balance sheet?

Thanks, Jorel. The investments was divided into -- the proposal was to advance the commitment to exercise Warrant Number 4. So, Warrant Number 4, we committed to exercise ILS150 million. So that will go through that instrument. And the other part, the ILS100 million is a new commitment and the structure probably will be a new capital increase in IDB, is not defined yet, the way that we will inject the money and from which vehicle. In fact, the proposal of Dolphin is to -- the commitment is from Dolphin or any vehicle that Eduardo has [same] control. So it is not defined yet how we will inject that money.

Regarding consolidation of IDB, it is something that is not defined yet. According to the current situation, we have 49% of IDB, so it's not necessary to consolidate. But, of course, if we change that threshold, probably under the current IFRS rule, we could consolidate IDB, but it is not defined yet how we will inject the money. So it's not clear if we will participate -- IRSA will participate up to 49% and the rest of the investment will come from third parties, or if IRSA will inject that money. So that is not clear yet.

My second question is regarding your office properties. If I look at the earnings release for IRSA Propiedades Comerciales and I compare to IRSA -- with you guys, I see that the EBITDA margin is about 60% for IRSA for the office properties and it's closer to almost 100% for IRSA Commercial Properties. So I was trying to understand why -- I mean, I know there is a different set of office buildings, but the majority are the same. So I was just trying to understand is there something accounting wise that is different there and what is accounting for the difference in margins in one -- for one set of assets and then for the same set of -- or similar set of assets in another company?

Jorel, the answer is because -- regarding the margin is because, when we transferred the assets, we haven't transferred the cost yet. According to the agreement, we will transfer the cost since April 1. So, probably, since April, we will start to see the same margins in both companies. Today, in IRSA, we have some assets that are held for sale. So, it's around 14,000 square meters that is still under IRSA level and haven't been transferred to IRSA Commercial Properties. So that is the difference why we have some additional square meters on a consolidated basis. But regarding margins, the main reason is that. Also, there is an accounting effect that we divide our corporate services or our corporate cost into the different segments, depending on certain ratios. So, some of the corporate cost of IRSA is allocated to the segment of offices. When we transferred that to IRSA Commercial Properties, we haven't did that so far, so most of the cost of the corporate services of the IRSA Commercial Properties were allocated to the shopping center segment, and probably is something that we will review in the next quarter.

And there are no more questions at this time. And this concludes the question-and-answer session. I would like to turn the floor back over to Mr. Daniel Elsztain for closing remarks.

Okay, thank you. So we see on this fiscal quarter that we keep looking that we're doing well with leases, good occupation. We're looking also very low cap rates for what we know in Buenos Aires and we will take advantage -- we took advantage of that. And we're also thinking what to launch soon. And so we think this was a very good year. We expect to finish the same way and we hope to see you all in our next call that will be with fiscal year in September. And thank you very much for participating. See you soon.

Thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice day.