IRSA Inversiones y Representaciones SA (IRS) 2017 Q4 法說會逐字稿

Good morning, everyone, and welcome to IRSA's Fourth Quarter 2017 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 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. 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 statement.

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

Good morning, everybody. We are beginning our conference call of the fiscal year 2017, so we're closing the whole year. And we can begin in Page #2, talking about the main highlights of the year. The company has changed recently, in this quarter, the method of valuation and now for investment properties on the 30 of June of this year. When we speak about the financial consolidated results, we achieved revenues for ARS 74 billion and from those, we divided in ARS 5.8 billion from Argentina operational center and ARS $68 billion from the Israel operational center. From the adjusted EBITDA, ARS 10 billion was the result and from those, ARS 2.4 billion came from Argentina and ARS 7.6 billion from Israel. And of the net gain, this was a net gain of ARS 5.2 billion. And from those, almost half, ARS 2.7 billion, came from Argentina and ARS 2.5 billion came from Israel. And from those attributable to the shareholders of IRSA are a gain of ARS 3 billion.

Related to Argentine Business Center, there were very good results on the rental segments, and we saw that in the presentation of IRSA commercial properties that you can follow on the web. And the adjusted EBITDA for the rental segment grew by 27.5% comparing year-to-year numbers. There was a lower result from sales of investment properties of this year. This year was a -- sales too lower than last year and a lot of development instead of that, from ARS 128 million this year to the last year, that's ARS 900 million -- almost ARS 900 million. And there is -- there's lot of buildings under progress like the Polo Dot and Catalinas Office Buildings in the company in IRSA commercial properties level and in IRSA too.

So -- and related to Israel business center that we are going to speak deeper in the whole presentation, we saw very strong results due to the Adama sale and an increase in the share of price of Clal and its value on market value, as you know, having 50% of the share, we are still marketing at the market value of the share. And a lot of issuance of notes and here we only showed 1 that was the IDBD level. We issued 1 -- ILS 1,000 billion -- ILS 1 billion and ILS 642 million later. So 2 issues at the holding level at 5.4% and 5.3% fixed rate due 2019 and 2022. So these were financed at the holding level. And we're going to explain a lot of issuances that we did at Israel level a little later.

Now I will introduce Daniel Elsztain, COO.

Thank you, Alejandro. Good morning, everyone. On the following presentation, we can start with Argentina business centers. We're going to see the main events of 2017 at the IRSA commercial property level. Starting with the change of the valuation method. We decided to change the valuation method of the investment properties from historical cost to fair value, that happened in the third quarter of fiscal 2017. We added on the operating figures, on the rental shopping mall, sales grew 29 -- 19.1% on this fiscal year compared to the previous fiscal year and occupancy is at the level of 98.5%. We had good results coming from the office segment due to devaluation and a positive outlook for the AAA (sic) [A+] building office market in Buenos Aires. There is some push on the prices on this segment.

Regarding investments during this fiscal year, we grew the GLA of the existing shopping centers by approximately 8,000 square meters due to the expansion -- small expansion on different shopping centers, and we have to keep doing this. And we acquired on -- the Phillips building. It's an adjacent building to the Polo Dot office park. This was a building bought for $29 million and the building and also rights to build 18,000 square meters on the company.

The CapEx for the year is approximate -- we plan to develop 20,000 square meters of shopping malls' expansions during this fiscal year, including the expansion of Alto Palermo and some others in our -- along with our portfolio. There is some -- there is work in progress in our office buildings developments; the Polo Dot first stage building, the Catalinas that is expected to be finalized for -- by the fiscal year 2020.

Other investments. We increased stake in La Rural. It's the fair and convention center. And by this increase, we now have control of the managing company of the La Rural. Also, we increased our stake in Avenida. It's an e-commerce company dedicated here in Argentina. And a subsequent event, we have acquired convertible notes of TGLT for a total value of $22.2 million.

Regarding the debt and this a subsequent event after the closing of the fiscal year. We issued notes in the local capital markets for $140 million at a 5% fixed rate due in 2020. And that is to use this money to keep investing in the real estate in Argentina.

Our consolidated fiscal statements. Our adjusted EBITDA for this fiscal year reached ARS 2.581 billion. This is an increase of 20.5% compared to last year. And excluding the sales of investment properties, as Alejandro mentioned, we didn't sell as much as last year. This grew -- this could have been a growth of 27.8%. If we split this, the adjusted EBITDA in the mall's segment, this would be ARS 2.2 billion and in the office segment ARS 303 million. This will be a respective increase of 23.1% and 35.2% of the office. The net income for 2017 reached ARS 3.3 billion compared to a gain of ARS 12 billion in the last year. And mainly this is explained by lower results in the change of the fair value of investment properties.

On Page #4, we can see some pictures of the construction progress on the Catalinas building. Remember, this is a total investment of approximately ARS 101 million -- $101 million, sorry, total GLA is 35,000 square meters. The construction is under progress. It's on budget and on time.

On Page #5, we can see our Hotels segment. We can see that occupancy went up a little bit from 65% to 67%. But the rate, the average price, went down a little bit. This is because of the increase of the dollar, but the business is doing well. As you can see on the bottom right side, revenues went up 35.7% compared to last year, which is $725 million -- ARS $725 million, sorry. And EBITDA went up to ARS 20 million. This is 100% increase from the previous year. This segment is doing better. We are receiving more tourists, and we expect this to keep for the near future.

On Page #6, we can see here the Greenvielle closed community. This is a neighborhood that we used -- we had the land. We gave the land to a developer, and we received in a barter agreement 52 lots. We have started the sale of these lots. We have 6 that are signed and 4 that are under execution as of June 30. Now we believe we're going to keep selling these units at a good speed. The infrastructure is fully complete. There is a hotel inside that's ready to be opened.

And also during this fiscal year, we can't sell the Caballito, we had an agreement on Caballito. And after they stopped doing the work, the developer that had this land and would have a barter. After they stopped construction and several unfavorable judicial sentences, we decided along with the developer to grant deed of distraction from the barter agreement. This mandates the dissolution of the agreement, so we will receive again the land. And we believe we can have a good use of this land once we receive it. The balance will be registered and -- it is registered, a loss of approximately ARS 27 million.

On Page #7, we can see that the building, the Lipstick Building, our asset in New York. Occupancy is at the level of 95%. We had 1 tenant left the building that we had that in the account. The price per square meter is going up, from $67 per foot per year to $69 per foot per year. The building is doing very well. Tenants are very happy. Still the best building on Third Avenue. It's an iconic building. And NOI is at $26 million per year. Currently, we are working to restructure the debt with the lender, it's a debt of $113 million debt that is maturing on September 15. We're working on restructuring that debt with the lender.

Also on our investments in the USA. Condor, remember, we have a percentage 28% of the Condor Hospitality Trust. On March 2017, Condor issued 4.7 million shares at the price of $10.5, so now there is a float of 46% of the company approximately. We have 28% and Stepstone has 25%. On May 2017, there was an extension of the credit line from $90 million to $150 million and all these deposits are basically to keep dying hotel. And there was a refinance on short-term and acquiring of hotels. This was big, the big transformation of the company that used to have very low-income hotels, like motels. And now the company has -- the company has select service hotels serving in good cities and getting very good results in terms of RevPAR and growth on the company.

So now Matias Gaivironsky to explain a little bit about Banco Hipotecario, CFO of our company.

Thank you, Danny. Going to Page 9 here, we have the evolution of our investment in Banco Hipotecario. So we'll receive again this fiscal year of ARS 83 million against a gain in the last year of ARS 259 million. Basically, the bank has -- had lower results, financial results this year when you compare with the previous year. So in terms of book value, the bank reached ARS 6.7 billion and its consolidated asset around ARS 55.3 billion. So the bank is continuing developing a sustainable solution for housing deficit in Argentina. There are starts in Argentina, starts of recovery in the mortgage industry. So we hope that the bank could take part of that evolution. It's increasing also the share in the financial consumer market and trying to boost corporate product businesses. You remember that last year, the Banco Hipotecario started to convert in a more commercial bank after being 100% mortgage bank. So in terms of our investment today, at market value, our investment is around $180 million, against the last year that was $220 million.

If we move to Page # 10, and we begin the explanation of what happened in Israel this year, we can talk about the main events. One was the sale of Adama. DIC sold its 40% stake in Adama for Chemchina. And that gave $230 million in excess of the total loan cancellation of $1.17 billion. So this was a big situation for DIC. And this gain, recognized IRSA gain, ARS 4.2 billion. After that, there was a signing of Israir, the airline company that the company had in the past, and that transaction was the sale of Israir within the framework of which a net amount of approximately $42 million to $45 million will be received in cash and 20% (sic) [25%] of the shares of Sun D’or subject to some approvals and that has to happen, it didn't finish up to now.

In the case of the debt, there was a lot of raising and -- the raising of the rating, the strengthening of the liquidity and the continuation of the lowering on the yields, we are going to see little later a lot of examples of bonds that they were issued at (inaudible) levels, from the holdings to the subsidiaries. And there was something good, very important to the IDBD level that was the removal of the going concern clause and covenants at that company. In the IDBD, there was a refinance of short-term debt to 2019 at 5.4% fixed rate.

There were dividends at DIC, the first after many years. They paid dividends, for the first time since 2014, for the total amount of ILS 694 million. In the Clal insurance company, there was a continuation of the legal process in the matter of the outline for the sale of the company holdings in Clal. And as today, IDBD sold 10% of Clal Insurance through 2 swaps that were last week one and few months before, so that was recently done 10% by swaps.

And about the Concentration Law, I will bring Matias, the work -- to explain what we're doing in respect of that.

Okay. So if you go to Page 11, you know that, in Israel, there is a law that establishes how many layers of public companies we can control in Israel. So basically, they established that we can't have more than 3 public layers by the end of 2017. And as of today, the company controls 4 layers. So what we propose to do is to create a new vehicle. And on Page 11, you have a graph of the proposed transaction where Dolphin will create a new vehicle that will acquire all the shares of DIC. And we will pay that acquisitions through a nonrecourse loan guaranteed by the DIC shares. So we are negotiating with IDB, terms, and conditions of this transaction. But basically, if we are able to fulfill the transaction, after that, we will be in compliance with the law. So DIC will be the first layer, PBC will be the second layer and some of the subsidiaries of PBC will be the third layer. So we won't have any fourth layer. It's important to mention that, this transaction is subject to approval, the IDB and IRSA independent members should approve the transition because these are related to the transaction. And also there are some regulators in Israel that had to give the green line -- the green light of this, so we can comment that finally, we will execute this transaction.

If you move to Page #12, we can see the impact of the Clal Insurance market value share change from last year to this year 52% in shekels. And this made a gain in our balance sheet of ARS 2.5 million -- ARS 2.5 billion, sorry, versus a loss of -- last year of ARS 1.8 billion. The 2 sales of the 5% stake at market price through the swap transactions were done during this balance sheet. There was a subsequent event came to the company, a nonbinding offer for IDB to buy the stake in Clal. We received a nonbinding offer from Huabang Financial Holdings Limited that -- to acquire our entire stake in Clal. And the amount to be paid will be the equivalent to equity that today is ARS 4.88 billion, much higher -- sorry, ILS 4.88 billion much higher than the price that we are showing in our results that is the market value. And this transaction is subject to certain conditions, including regulatory approvals. So that was very recent last week.

We can move to next Page #13, and we can see the evolution on the dividends payment. There was likely cancellations in the year of 2014 and '15. But from our entrance to the company in 2016, the companies began to pay again. And we see here PBC and Shufersal in 2016 paid and in 2017, the 2, PBC and Shufersal, the real estate and the supermarket companies, and recently, DIC paid a big dividend of ILS 694 million. And from those, IRSA received ARS 165 million for our 6.07% after the dilution we had in DIC, and we received that payment of the dividends recently.

If we may move to the next Page #14, we can see the big achievement of the year, I think. I think one of the major was the decreasing on the debt of the company. The first 2 graph shows the IDBD, decreasing from 2012 when we entered to the company from ILS 4.8 billion to now ILS 2.7 billion, so a decrease of ILS 2.1 billion of decrease. And you can see that in DIC, the other holdings, that decreased from the ILS 9.6 billion to almost ILS 3.1 billion. Now a decrease of ILS 6.6 billion, a big decrease too. And a lot of issuance, and here we can see, in the case of Gav-Yam, last week, we were able to close a bond of ILS 424 million at 2.55% fixed rate in shekels due 2034. This is a maturity of 7% -- 7 years that arrived to 2034 at a fixed rate of 2.55%. We did, at IDBD, ILS 642 million at 5.3% fixed, up to 222 (sic) [2022]. At PBC, ILS 446 million at 3.68% fixed, 2029. At Gav-Yam, linked to the CPI, ILS 430 million, 1.69%. So DIC at 4%, at IDBD at 4 -- 5.4%. So a lot of issuance very deep, so the capital market is very, very, very deep today there. And we are seeing that at the holding levels and subsidiaries at the very -- and we think the 2.55% fixed in the case of the Gav-Yam shows we are developing buildings at 9% or 10% cap rates at cost of the money at 2.55%. And that's the reason we are doing 5 buildings at the same time. So this is the -- how the companies are behaving.

And finally, to explain where Israel is, here we brought what we deduce on the balance sheet, the IDBD net asset value at the 30th of June. And here we see the valuation of DIC, IDBD Tourism, IDBG, Clal and others, and we can see after the less the net financial debt, the valuation at the 30th of June was in total net asset value of ILS 800 million and shows a leverage of the 77% loan to book -- the LTV, sorry, for the company. So this is -- and showing the Clal here still at market value. The only thing we are here not showing in the book that it's -- in the case of Clal, we are still showing at much lower than the book, and it's the case because we think the authorities are not allowing us to put our majority on the book, and we are still presenting the numbers at market value.

So now I will introduce Matias to talk about our financial results.

So if we go to Page 17, here, you can see what we did regarding our investment properties. So we started to release or change the valuation methods of all our investment properties from book value to fair value. So we did it in all the segments in shopping centers, in offices and in land reserves, and all the investment properties from IDB that we used put it across since our acquisition. The -- all the assets that remain at historical book value was all related to property, plant, and equipment that is basically our hotels. To understand how we changed the valuation method, we restate all the financial statements for the last 5 years. So what we did is to give the impact since 2011, so we revalue all the assets in each of the years. So the first impact was -- that was in 2011 went to our reserve in our net-net worth. And then since 2011, each of the years that we saw the change in the valuation went to the line of accumulated earnings. And in this year starting in -- and you will see -- when you see the financial statement this year, in 2016 and 2017, you have the impact directly in the P&L line -- in a line that is -- the name is changing the valuation of investment properties. So every year, every quarter, you will see from now a result of the change in the valuation -- in the fair value of our properties directly in the P&L.

When you go to Page 18, you can see the impact. There is a huge impact in each of the lines. The investment properties of IDB changed from $3.2 billion -- almost $3.3 billion to $3.6 billion. Remember that, we've had to consolidate IDB last year. So in last year, we put it at fair value and then it started to amortize those properties, so the -- sorry, I said pesos, this is information in dollar terms. So the change was only 1.1x. But you can see most what happened is an increase of 12x our book value from $140 million to $1.7 billion. Office is the same from $52 million to $380 million, land reserve from $18 million to $325 million. There is still some land banks that since we don't have the approvals, we are not considering the full value of the property.

So then going to Page 11 (sic) [Page 19], when you have to understand our finance -- our P&L figures, we separated in operating income without the effect of the change in the fair value to understand the real performance of the segments. So you can see in the rental segment an increase of 24.4% compared with the previous year. In sales and development, a decrease from 20 -- ARS 92 million negative -- sorry, it's an evolution from ARS 92 million last year to ARS 28 million this year. Here, we are including also cost of our structure together with the sales of the year. And in financials and others, also an evolution from ARS 98 million negative to ARS 258 million negative. And in this -- this year, we have basically the same effects from our International segment and the La Rural we sold from Banco Hipotecario.

In Page 20, you can see the same evolution in Israel. So you can see the real estate -- we are not including comparative figures here because in Israel, we are consolidating 12 months and in the previous year only 6 months, so we are not including the comparative figures to compare apple with apple. So real estate was this year ARS 2.2 million, supermarket, ARS 1.6 million, telecommunication, negative ARS 253 million. And here basically it's an effect of higher amortization. When you see this information directly in the financial statements of IDB, this information is positive. But in Argentina since the accounting treatment that we have to perform at PPA, purchase price allocation, analysis and there some assets that are higher in our books than in Israel, the amortizations are higher as well. So that is generating a negative result for the telecommunication segment. And in the others, negative ARS 759 million is basically all the G&A and interest payments of IDB and DIC and no any income.

So finally, on Page 21, you can see the gross profit increasing from ARS 10 billion to ARS 22.7 billion. The result in the fair value that was much higher in the previous year than in this year basically, because of a higher devaluation in last year and reveals in the weighted average cost of capital of the company that generates better results in the -- in all the investment properties in the previous year.

Finally, the operating income of the company decreased from ARS 20.8 billion to ARS 9.7 billion or ARS 9.8 billion, as a result of all the changes that I mentioned.

So finally, on Page 22, you have the rest of our financial statement, starting with operating income. Then we have the mainline that was net financial results that were close to the result of the previous year, ARS 4.8 billion against ARS 4.6 billion negative in this year. And the net income that decreased from ARS 9.4 billion to ARS 5.2 billion, attributable to our controlling shareholders is ARS 3 billion.

Also on Page 23, you can see the impact in our consolidated balance sheet that you can see the evolution of our assets, an increase from ARS 166 billion to ARS 231 billion. Liabilities that also increased from ARS 147 billion to ARS 183 billion. The liabilities include the deferred tax that we are recognizing. When we value its fair value, we automatically generate a deferred tax of 35% of the increase in the value of the properties that we are recognizing. It's more an accounting effect because it will be almost impossible that the company will sell all the assets at the same time, but the rule established that we have to recognize the deferred tax from that appreciation.

And finally, you can see the equity in our net worth related to the controlling shareholders that increased from ARS 3.6 billion to ARS 25.8 billion, so it's a big jump in the -- in our net worth. And related to book value per share, now it's ARS 44.7 per share. Our shares today are trading at ARS 43.5 per share, so it's close to valuation in the market. But remember that there is still some properties that is still at book value and land buying that is still at lower value than the full potential.

Page 24, regarding our debt, remain stable compared with the previous quarters. Our net debt remains at $328 million. The amortization schedule basically we have the main amortization in 2019 and then 2020.

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

(Operator Instructions) And your first question will be from Jorel Guilloty of Morgan Stanley.

I have a few questions on the fair market value adjustments. So first off, according to this online presentation, land reserves have a value of $325 million. What we were wondering is, what is the value of Solares de Santa María in there? Second, why are the hotels still valued at cost? And the third question is when you say that IDBD properties are worth $3.6 billion, what exactly are you referring to? Are these only the only rent-paying real estate, meaning, excluding cloud, supermarkets, et cetera?

Thank you, Jorel. Good morning. So regarding Solares de Santa María, the value according to the appraisal is $214 million. That is the value that is reflected in the $300 million that we have in the presentation, so basically, the main land bank that we have in that field.

Regarding the hotels, the categories of our hotel, we decided to value all investment properties. So the category of the hotel is property plan and equipment, so we haven't revaluated that line. It's true that the rule allows us to revalue also property plant and equipment. But since the results that will be generated by -- for the change in valuation won't be distributable to the shareholders because they allow -- don't allow that -- the rule doesn't allow that. We decided to maintain at book value.

And finally, the Israel property -- the investment properties that is the value of all the properties -- investment properties of Israel. That are basically the assets that are under PBC, all the PBC offices, and other income-producing assets. And there are some that are at a Shufersal level as well, but basically, the main is the PBC. Sorry, and Clal, remember that we are not consolidating Clal. Clal, we are maintaining everything at the market value of our shares. So we are not recognizing any result from Clal investment property.

(Operator Instructions) And I'm showing no additional questions. We will conclude the question-and-answer session. At this time, I would like to turn the floor back to Mr. Alejandro Elsztain for any closing remarks.

We finalize our presentation. We were seeing all of the past, and we saw a very good recovery in the Israel story and the issuance and refinancing of this financial situation in Israel and the sale of (inaudible) things. We saw a very good evolution on the rental in Argentina, a development -- big development in Argentina going in the shopping and in the office, refinancing in Argentina like the last [bond] of last week. So we have -- the company is at very good situation, having Argentina in a very strong market, a lot of capital coming to the country, and the company having a lot of capital to do that and a lot of land bank to do that and the ability to do it internationally using the capital markets of both. So we think the company is closing a very good year. And we expect the companies to keep doing the job that it is doing, doing more office everywhere, doing more shopping and doing things developing the real estate business in the world. So thank you very much, and have a very good day. Bye.

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