IRSA Inversiones y Representaciones SA (IRS) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to IRSA's first-quarter 2016 results conference call. Today's live webcast, both audio and slide shows, 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 the 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. (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 statement.

I will now turn the call over to Mr. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

Hello. Good morning, everybody. We are beginning our conference call of the first quarter of 2016. If you go to the first page, you can see our main highlights for the quarter.

The revenues from sales, leases and services for the year was almost ARS730m (sic - see slide 2 "ARS731.5m"), 21% higher than last year. The EBITDA of the Company was almost ARS780m, 14% higher to last-year numbers.

The net income went to a loss of ARS316m compared to a gain of last year of ARS135m (sic - see slide 2 "ARS135.8m").

The mall business, the shopping centers industry, we achieved a growth of 37.8% comparing to last-year numbers to a number of ARS420m.

The office segment to ARS48m, it's an increase of 581%. This is because we transferred the business in -- it is not comparing year to year. In fact, be the same, because we transferred, in the middle of the year, the buildings, the office buildings to the Company and that's the reason.

The mall tenant sales increased 44.5%. But if we compare exactly the same-store sales it was 36%. This is because of the entrance of the two new shopping centers, the Alto Comahue and Arcos.

Office leases remained stable at the level of $25.3 per square meter.

We had a gain on the sale of the investment properties for ARS156m. This is -- we sold almost 6,000 square meters of Intercontinental Plaza building.

The levels of occupancy in both businesses are still high, 98.9% in shopping, 96.4% in office buildings.

As to the balance sheet, this is after September 30, we had a sale of Maipu building for $3m, paid outside, for a gain for ARS25.6m, so we can recognize in next quarter.

In the case of IDBD, we -- our partner Extra Holdings sold its investment. IFISA was the buyer, increasing the stake for 31%. And IRSA remained at 49% through Dolphin.

And we had a change in valuation because of the court -- because of the lawsuit we had. And now Matias is going to explain why we have recognized a ARS660m loss in the recognition of that change of valuation method.

I will introduce now to Daniel Elsztain, our COO, keep speaking about commercial property.

Thank you, Alejandro. Good morning, everyone. On page number 4 we can see our strong operation figures on the top of the page. Shopping center sales, our tenants were doing very well on this quarter. We see an increase of 44.5% increase. The first effect is because the inclusion of the two new shopping centers. If we compare same-store sales, we see an increase of 36.3%. That's a big increase. And the first comment I can make is because we are comparing the last-year quarter, we have a low base.

On top of that, we have very good sales. And the consumer, electronic consumer appliances also had a peak; they were not performing so good. So that is explaining, basically, why we have an increase in sales in our shopping centers.

We also see -- on the bottom of the page, we see that we increased our stock by the inclusion of these two new shopping centers for about 23,000/24,000 square meters. And our occupancy is a little bit up, went to 98.9%. So stock is up, occupancy is a little bit up, sales went up and we also increased visitors, of course, because of the inclusion of the two new shopping centers.

On the next page we can see our, today, existing development of the second phase of Distrito Arcos Premium Outlet. As you remember, we opened, during this year, the first phase and we are very happy the shopping is performing very well. Actually, it's performing better than expected. And we are going to finish during this fiscal year the second phase.

The total approximately investment is about ARS74m. This is an expansion of about 3,500 square meters of GLA. And the development is in progress. We have already signed agreements for the tenants, about 60% of the tenants, for Farmacity, Akiabara, Wendy's, the food chain, and Megatlon.

And everyone is very -- there is a high expectation on the opening, because this is really the conclusion, and the shopping center is doing very well. As you remember, this is our flagship in premium-outlet shopping centers. So we believe, this is a good model and we have a lot of space to grow.

Also we opened the museum of photography in the shopping center in the second floor. And it's a museum we owe the city; we had a commitment to do some cultural events. And the shopping center is doing very, very well.

On the next page we can see a small expansion, and this is just an example of what we are doing in our portfolio. When we see a shopping center that is performing well, and we have availability of square meters to grow, we do it. We are growing on Alto Rosario Shopping Center in the province -- in the city of Rosario. We're having an expansion of 650 square meters of GLA. It's CapEx of ARS15m. This will be finished, this construction, by the middle of next year of 2016, or maybe even before that. And we already have agreements signed for the 100% of the new stores that will be opening in this shopping center.

On page 7, and speaking about the office industry, IRSA Commercial Properties today is running -- we are not comparing with the previous quarter, because the previous quarter we only had one building, so it's not really easy to compare. But we can say, today, the occupancy on our shopping -- sorry, in our office buildings is 96.4%. And our monthly leases are about 25.3% (sic - see slide 7 "$25.3"). What we're seeing is a trend in -- that the rent is going a little up. We're pushing rents up, as the market is pushing rents up.

And the big figure; we can see that the prices on selling office buildings really changed the trend during this year. During 2015, we see that the prices were going down, not much. We are talking about record prices compared with the past of the Argentina's market, but the trend now changed and it's going up again.

As an example, and Alejandro mentioned, we sold Intercontinental Plaza building. We did about 6,000 square meters sold for ARS324m; that is seven floors, at about $5,800 per square meter at a 5.2% cap rate, which is -- it's very low for the Argentinian past history of selling office buildings.

On page number 8, this is what we could grow at the IRSA Commercial Properties level. We have a portfolio of 334,000 square meters of GLA in shopping centers. And we have [SAR] on the shopping centers to grow almost 1.7 times. We could go to 300 -- sorry, to 567,000 square meters in both, being new development and expansions on the current shopping centers. And, which I showed you, [when reviewing] Rosario, we are starting to do that process, because it's the easy, the low-hanging apples that we can create value in our portfolio on the -- as I said, Rosario and Arcos both.

On the office buildings, we also have today a portfolio of 80,000 square meters of GLA. And we could grow with today's existing land -- this is not by any single new acquisition -- we could almost double the size of our office portfolio.

Now, we're going to talk -- on page number 10, we saw already what IRSA Commercial Properties has; shopping centers, office buildings and available land bank to growth. The rest, the other diversified assets that IRSA holds -- has is hotels. Hotels, it's a very small piece in our portfolio. Occupancy was very similar to last year. Revenues -- RevPAR was very similar to last year. But the exchange rate is not helping this business. So we see that expenses went higher, went up more than revenues. And the income was a little bit below our expectations.

Nevertheless, this is a very small component of our portfolio. We do believe that the future movements on currency will help this business and the trend in value of rooms -- price per key, the trend will start to go up. Also in IRSA, we still have a very big land bank, also being prepared, working to get permits and working on the land bank to make and create value on the land bank.

Also we have under IRSA the international segment. First of all, it's IDB that we will speak later. We still have Condor Hospitality Trust and the Lipstick Building here. And the last piece is Banco Hipotecario of which IRSA owns 29.99%.

This is a sale that occurred after the close of the quarter, but we inform about this sale. We had a sale of $3m that were paid abroad the country. This is a total of about 864 square meters, two floors of office, with four parking lots. And the price is about $3,400/$3,500 per square meter. That's a 5.5% cap rate. And we recognized a gain of about ARS26m on this sale. This building belongs to IRSA. We only have now remaining 2,000/2,100 square meters, and this is held for sale.

On page 12, we can see the international opportunistic investments. The Lipstick Building, it's performing very, very good. When we bought it and we started to operate in 2013, it was 86% occupied. Today it's about 95.5% occupied. The rent is going up; the average not that much, because the majority was still old leases. But the new leases are really very good numbers in the [$80s] or maybe going close to [$90s] on the top of the tower.

On Condor Hospitality Trust it was a change in name. It was renamed from Supertel Hospitality to Condor Hospitality as it's new management. They were appointed a CEO, CFO and new CAO; that has been taking place for the last five, six months and this is a really big change. They have been [trying] -- they kept on selling the very small, economy-segment hotels and moving to select-service hotels that achieve better margins and they have better scales to operate.

Now I introduce to Matias Gaivironsky, CFO of the Company.

Good morning, everybody. Going to page 13, here we have the description of our investment in IDB. The latest developments on IDB were the acquisition from IFISA of our former partner Extra. So nowadays Dolphin controls 49% of IDB, IFISA controls 31.7% of IDB. Remember that IFISA is the parent company of Cresud, is where our Chairman, Eduardo Elsztain, has his stake on the Company. And others control 19.3% of IDB.

In the bottom right of the page you have the commitments and the investment that we did so far. We have commitments for the rest of the year 2015 until December. We have an underwriting commitment of ILS200m. So this week we are discussing the terms and conditions of the [instruction]. It probably will be a rights offering or an offering that will be offered to the market. And then we will have the underwritement, if the public doesn't participate. So we are discussing that in Israel this week. So today I can't give you more information, because are developing that are happening right now.

The tender-offer obligation, we have the obligation to launch a tender offer for ILS250m by the end of this year, and ILS262m by the end of the next year. There is an important development around this tender-offer obligation, that was that there was a presentation in the court from the arrangement [practice] of the former bankruptcy process on the parent company of IDB, it's IDBH. Remember that when we enter, we enter through a bankruptcy process. And the main issue was that the arrangement trustees present a clarification of who has the right to participate in the tender offer.

So we have a decision from the court. It's a first-instance decision, that the court said that the only participants of those tender offers are the minority shareholders. We appealed that decision to the Supreme Court. We believe that part of our shares had the right to participate in those tender offers. So we went to the Supreme Court to discuss that.

So -- but according to the first decision from the judge, we have to change our valuation method on the shares of IDB. So far, we recognized the value of IDB according to market method. So every quarter we used the amount of shares that we have, multiplied by the price of the shares in the Tel Aviv Stock Exchange. So it seems that today, instead of having only one class of shares with only one price, this decision creates, in fact, two classes of share. So now our shares have different rights, or appears that they have different rights than the rest. So we have to create our own valuation method on the shares.

Basically, what we are using is to analyze the value of the shares, the implicit value of the shares, deducting the tender-offer obligation. So we will have our own valuation method so far. So that created a loss, an increase of ILS410m against the previous quarter. So we recognized an additional loss due to this change in the valuation method.

So today our investment is recorded as of September 30, 2015 to ARS1.375m. And we have the tender-offer obligation, the 50% of the tender-offer obligation, for ARS516.6m.

Going to page 14, there is the description of our investment in Banco Hipotecario. The investment generated ARS68.8m. It's 58% higher than the previous quarter of the last year. And our market value of the investment in Banco Hipotecario totaled $203m. Remember that we are not recognizing mark-to-market in the valuation. We have the equity method. But here is the description of the financial value of the asset.

Going to page 15, this is the breakdown of financial results of IRSA Commercial Properties. This is not on a consolidated basis. On IRSA, this is IRSA commercial. So as Daniel described, revenues increased very well in both; of course in the offices, because we are -- we have different portfolio than the previous year, and in shopping center, that is comparable, we grew 37.4%.

The same in EBITDA, 37.8% in shopping centers; and in offices the 581%, that is the inclusion of the rest of the office assets. EBITDA margin month-end similar levels in shopping centers, very good level, 78.8%. In office it's 77.3%. Here we start to allocate the different -- the costs of IRSA Commercial Properties in the two segments. So now we are allocating more cost to the office segment, so that is the reason of the decrease in margin.

EBITDA breakdown this quarter, we have, probably, an extraordinary gain from the sales of assets. We sols the asset -- some floors in the Intercontinental Plaza building and that created an extraordinary gain. So, for that reason, the sales and development increased to 23.9%. But shopping centers remain the main important part of the portfolio.

Also, IRSA Commercial Properties declared a dividend in the last shareholders meeting for ARS283m. That is a dividend yield of 2.4%, that will be paid next week on November 17.

Going to IRSA consolidated results, here we divided between the rental segment, and most part came from IRSA Commercial Properties, increased 27% from ARS321m to ARS408m.

Sales and development increased 13.9%. Last year remember that we sold Madison building, that generated ARS307m gain. In this quarter, we sold mainly the assets from the Intercontinental Plaza, that part was recognized at the level of IRSA Commercial Properties, and part at IRSA level. Remember that when transfer assets from a company like IRSA to IRSA Commercial Properties, we don't recognize any gain. So only we recognize gain, when we sell to third parties. So now that IRSA Commercial Properties sold to third parties, IRSA also recognized a gain at a standalone basis.

Others, international and financials, here we can see a decrease from 11.2% (sic - see slide 16 "ARS11.2m") in the previous year. That mainly was Madison. And we recognized the rent from Madison that, this year, we don't have the building. And also we have higher expenses at the level of the international that is mainly the cost associated to IDB.

Going to page 17, well as I just explained, all the operational results, we have an increase from ARS640m to ARS724m.

The results of associates and joint ventures, here we have mainly the big difference that is mainly the decrease in the valuation of IDB, the ARS400m of loss.

Then the net financial results, here we don't have a further valuation, so the valuation of this year compared with the previous year was almost the same; it's [3%]. Interest cost was almost the same. So the main difference between the two years are the valuation of Supertel, now Condor, that is, we are recognizing valuation according to the market.

And there we have a decrease in the price of the shares, so that generated a loss of around ARS200m when you compare with the previous year. The previous year we recognized a gain of ARS100m. This year we recognized a loss of ARS100m. So the difference is the ARS200m.

And also we have a difference in valuation of bonds that we used to have in the portfolio. So those are the main differences in the net financial results.

So with that, we finish this quarter with a net loss of ARS316m -- attributable to controlling shareholders is a loss of ARS275m (sic - see slide 17 "ARS275.7m") and non-controlling interest ARS40m -- against a gain of ARS135m (sic - see slide 17 "ARS135.8m") of the previous year.

Going to the page 18, here we have the breakdown of our debt. Remember that we use a standalone basis. We have the two international bonds. But also we have the credit from IRSA Commercial Properties from the asset sales. So IRSA Commercial Properties owe IRSA $246.4m, that match the maturities that we have in 2017 and part of the 2020.

And at the IRSA Commercial Properties level, the net -- the debt is around ARS454m. And net debt much lower than that, around ARS311m.

And we are studying the market. And we see an opportunity to restructure and extend amortization for 2017, and replace intercompany loan with the market, is something that we plan to do during the next year.

So with this, we finish the presentation. So now we are open to answer your questions.

(Operator Instructions). [Jaral Gulati], Morgan Stanley.

Good morning, gentlemen. So on IDBD, as I understand it the way the new valuation methodology works, is that you're taking the market cap and then you're subtracting the value of the tender-offer obligation. And the value of that tender-offer obligation is based on the methodology that you've created. Am I understanding it correctly?

Yes, Jaral, good morning. Yes. It's -- you simply it a little. It's a little more complex because there is no clear price of the tender offer. So we have to start with the valuation of the shares and try to deduct the put option. In that methodology, we are using scenarios. Basically, the part of the put we are using Black and Scholes, but then we apply different scenarios and chances for each scenario. So we still have 50% chances that we will be succeed in the Supreme Court appeal in that valuation method. But yes, you described well that idea. But then, to give you an idea, we are recognizing the price of the shares of around ILS1.2 per share, while price of the share today is ILS2.2.

Okay. So net it's about half of the value almost that will be in the tender offer?

Sorry, can you repeat the question? We couldn't follow --

We can follow up later with the details. I also had another question on the potential development pipeline for malls. So in your presentation you say that the potential development pipeline for the malls could see GLA double for this portfolio. I was wondering when would you expect these developments to start taking place, and what returns, either IRRs or yield on costs, are you targeting?

This, as you probably know, it's changing every week. And in Argentina now is a very enthusiastic mood, because the election is coming. We expect the decrease in the cost of capital of the country. So this will allow us to speed all of our growth in our existing and new shopping centers.

So we are now probably presenting the next -- you know that always we present when we launch, not before. Now we are discussing one project in Dot; that probably will be the first of an expansion. So we are looking for an internal rates of return surpassing 10%. And we are expecting the decrease of the cost of capital for the country for increasing the speed for our expansions.

That's very helpful. Thank you very much.

(Operator Instructions). Jonathan Rosenthal, Newfoundland.

Hi, guys. How you're doing? I was going through some Israeli headlines and read that there are actually three bidders for the Clal insurance asset at a substantial premium to, at least, existing market prices. What I'm wondering is, I think the three bidders are Chinese. And in light of that, will this affect the timing of the closure of this transaction, because, the way I interpret it is, if you're able to sell this stake, this will pretty much ring-fence future cash needs for your Israeli investment. So if you could give us any color on that, to the extent that you can, that would be most helpful. Thanks.

Thank you. Yes, it's true that there are three offers. There is a process that is in place now. Today we are not controlling that process, or there is a trustee that is managing that disposal. There are three offers that came, as far as we know, from Chinese companies. So there is a process of due diligence right now. So we can't assure the timing for the transaction. There is -- the regulator has to approve in Israel any kind of acquisition of an insurance company. So there is some steps that should be covered.

In terms of the pricing, yes, the price is much higher than the price of the shares today. The shares are trading at the market cap of around 3.1 -- ILS3.2b. The offers are around ILS4.5b or more. So, yes, they are significantly higher than the market. But we don't control the timing of the process. So the process will be managed by the trustee and there are some legal stages that we will monitor, of course.

Okay. And then one other headline that I'd like clarified. I read that IDB Development is mooting the replacement of the share offer with a bond sale. And I guess the company's holding talks with bondholders currently. Who is in charge of these talks as well, is it the creditors; or who is representing the company? And how is this possible, if you guys already committed, or the company is already committed to issue equity? What's in it for the bondholders to replace the share offer with more leverage, more debt?

Okay. I will try to answer that question. There are things that I can't comment, because our --

I know it's not a fair question, I just -- any incremental clarification is helpful.

Yes. As I described, we have a commitment to launch the tender offer and we have an underwritement commitment of the offering. Mainly, the -- why we give the underwritement commitment is because the company needs the money before the year end, the ILS200m. So part will go to pay debt, part will go to exercise warrant on BAC. So it's ILS100m each, more or less.

If the company had the money, and they don't need the capital increase, probably they can decide not to issue equity. So if they have another sources, like what you described, they'd[probably] issue more debt and inject, or the company needs money, probably they can replace the capital increase.

There are some negotiations around the tender-offer obligation. And there are some -- you know that there is a claim in the justice, we appeal in the Super Court. So there are some developments around the tender-offer obligations and there are negotiations around that. It's the only thing that I can comment.

But if the company -- regarding who participates in that negotiation, it's not any obligation from the company, the tender offer. It's an obligation from Dolphin. So people from Dolphin are in charge of the negotiation and it's with the arrangement trustees.

And how will be the approving process of that is more uncertain, because there are third parties and probably they should approve, or should verify any agreement that we reach with the arrangement trustees.

Thank you.

You're welcome.

Alejandra Aranda, Itau.

Hi. Good morning. Thank you for the call. I have three questions, if I may. First of all, I would like to know how you're seeing commercial dynamics evolving next year, especially given that we saw your tenants going up on the shopping malls. If you could tell us a little bit of what you're thinking and, with your relationships with the tenants, what they're viewing? Especially, if you could elaborate between differences that you might see between first half and second half of the year.

Then my second question would be on other projects or segments that you're seeing, in Argentina specifically. I know you're coming out with a bond on Hipotecario right after the elections. So if you could comment on other opportunities that you're seeing.

And the third, back to IDBD, is there a timing for the Supreme Court ruling?

Thank you, Alejandra. We'll start with the projection for next year. We still don't know what will happen in terms of pricing from our tenants if the valuation happens. And that will trigger -- we mention sales in terms of pesos sold, right. So we don't know what's going to be the main effect. So far, we have not seen any -- after the quarter, we have not seen any big change yet.

And we're also seeing a trend of international retailers, the big retailers, coming to Buenos Aires, asking us for potential locations. So there will be a mixture. At the end, we don't know. Whatever happens will happen in the first quarter. But our [shopping centers] are very stable and will follow the trend of the market and the macro economy of the world -- the country.

In terms of the projects, we are producing a lot of cash, the Company's a cash producer. And also we have opportunities on the market. We can leverage the Company; we did it recently and we can keep on doing, if the opportunity comes. And, as Alejandro mentioned, we will see -- we have many, many opportunities that we still have in our portfolio and new opportunities to buy. We are not announcing because we have not made any decision yet. But as you know us, every time we see the opportunities, we try to [get] them and we know how to finance them.

And regarding IDB, Matias?

Regarding the Banco Hipotecario, the offering, there is increasing confidence from Argentina, I think, from the investors. Banco Hipotecario has amortization next year and they are trying to replace the bonds in the market. So they announced the transaction to close after the elections.

There is -- probably it's more a question for Banco Hipotecario regarding the timing. But what I can comment from IRSA is that we see an increase in confidence from the investors and people that are asking for good-quality credits to invest. So we start to be confident on that trend in Argentina. And that is one of our projects for the next year regarding our debt. So this is something that we will try to do next year.

And regarding the timing of IDB, Supreme Court decision, the justice in Israel is [very] fast. So there we'll have an audience probably next -- probably the first days of December. But I can't give you exact date, because we don't control. Probably they will try to rule before the year end. That is the day that we have to pay or launch the tender offer.

Okay. Great. Just one on the project side, on a more general topic, is there anything that you're -- any sector that you're finding more enticing, or that you think -- that you're thinking more of, or just you're assigning the same waiting time to every single sector?

We are probably trying to do both. You know that we were selling some of our office buildings. And now we are thinking on [applying] to quality because there are some projects that are yielding very well. And so we are going probably to be launching the office buildings and the shopping centers at the same time.

Okay. Thank you very much.

Thank you very much, gentlemen. Operator, I think we have to leave. We have another conference call very soon. Thank you very much to everyone. This is the time of changes in the country. The elections are very soon. The country is under a lot of eyes that they are looking for opportunities. We expect the real estate to be very strong. We expect to be building a lot for the next quarters. So thank you very much for everyone and have a very good day.

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