IRSA Inversiones y Representaciones SA (IRS) 2018 Q4 法說會逐字稿

Good morning, everyone, and welcome to IRSA's Fourth Quarter 2018 Results Conference Call. Today's live webcast, both audio and slide show, may be accessed through company's Investor Relations website at www.irsa.com.ar by clicking on the banner Webcast/Link. The following presentation and the earnings release issued yesterday 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 the 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.

At this time, I now would like to turn the call over to Mr. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

Thank you very much. Good morning, everybody. We are now beginning our conference call of the closing of the year -- of the whole fiscal year 2018. We can begin on the Page #2, speaking about the financial statements that we are closing. The net income for the whole year, we have reached ARS 21 billion that is more than 300% comparing to last year numbers, and the part attributable to IRSA was ARS 15 billion comparing to ARS 3 billion last year. The adjusted EBITDA, we reached ARS 9.3 billion. Comparing to last year, it was 32% higher.

When we divide Argentina Business Center, we can see a gain of ARS 14.6 billion, and that is mainly explained by higher rental results and higher results from change in fair value of investment properties. This gain having a loss in dollars, but still a gain in pesos. From other side, we had bigger, comparing to last year, financial losses, and we had an impairment on the Lipstick value.

In the case of Israel, we bring a gain of ARS 6.7 billion, and this is mainly explained by few big things we are going to see later in the operational results, but some is related to Shufersal stake sold -- we sold a portion of this company, and we began to nonconsolidate that and the change of that valuation made a big gain for IRSA. Some of that gain was partially offset by the exchange of DIC debt that we did a few months ago and in other quarters. And another thing that gave -- was fair value of some financial assets and a decrease of share of Clal that was last quarter, but now without a gain, but is not reflected in our balance sheet. So there was a loss in Clal's shares, and we are reflecting in the delay -- that we used 3 months delay in this balance sheet.

Related to Israel too, we had in this -- IDB sold, again, 5% of the Clal's shares. Remember that we are forced to sell this 5% per quarter, so we sold another 5% recently. So the stake reduced to 29.8%. And in the case of Shufersal, the sale of this 16.6% of the shares made us to raise capital to DIC of ILS 853 million. So DIC is very strong in cash after the sale of that. So there is one accounting issue that is the changing of the method, but there is a financial issue that we raised almost ILS 850 million for DIC for 2 other operations.

Related to Argentina, the rental was very good, and Daniel will explain us how good it is comparing to last year. And occupation is still filling the 3 segments.

So now I will introduce Mr. Daniel Elsztain.

Thank you, Alejandro. Good morning, everybody. On Page #3, we can see our main events for this fiscal year of 2018 at the IRSA commercial property level.

Starting first with the operating figures, we see that sales in shopping centers grew 25.3% compared to the previous fiscal year and occupancy remained very high at levels of 98.5%. The average rent on the office portfolio decreased a little bit. Now it's $26.1 per square meter per month. This is net. We are taking -- I mean, all the cost is excluded from this -- the cost of operations is excluded from this number. And the occupancy was reduced to 92.3%, and this is mainly explained by the incorporation of the Philips Building in our portfolio with its smaller rents and also with smaller occupation. The occupate hire on that building is 69.8%, and this is the -- how we acquire. We are working to take the occupation at the level of the other buildings that we have in the portfolio.

In the CapEx side of what we did on this year, we acquired a plot of land in La Plata, which is the fifth largest city -- in the province of Buenos Aires, the fifth largest city of the country in terms of population, and there are no shopping center, no commercial area like a shopping center in this city. We paid for this land $7.5 million, and this is going to be a mixed-use project of approximately 100,000 square meters. We are working with the city of La Plata to get approval. And it's a fantastic land. It's a fantastic location.

We also acquired -- after the closing of this fiscal year, it happened in July, we acquired Maltería Hudson property. This is also a very nice piece of land, again, in the province of Buenos Aires in the locality of Hudson, to develop a mixed-use project. And this piece of land is 170,000 square meters of land. We are working on what we can do on this huge piece of land. It's -- there are existing buildings that will be transformed, but the idea is to keep on the retail because it's part of what we want as part of the portfolio and to sell the balance of that to developers in the future.

Also, during this fiscal year, we advanced with the development and expansions in the existing shoppings. We expanded about 3,000 square meters that were incorporated already in our portfolio, and we keep on the construction of the Polo Dot building -- the Polo Dot office building -- office park, the building that we have actually under construction and also the construction of Catalinas office we are going to see later.

Looking from the EBITDA by segments on the bottom of Page 3. We see an increase of 24.5% in the EBITDA for shopping centers and only 19.1% on the office. We're going to see that the component of office will grow in the future as the dollar is going up. We will see. And also, we are growing the portfolio of office buildings, so we're going to see that the office EBITDA in the future growing a little bit more.

On the net income, as Alejandro mentioned, we see tremendous growth. It's 363% growth, achieving about ARS 15.6 billion. This is mainly explained -- of course, we have higher operating results, but the mainly explanation of this is the increase on the fair value of the properties that more than compensate the loss of the net financial of the year, both for the company and also what is attributable to the controlling company, IRSA.

On Page #4, we see the developments that we have under construction. The Catalinas project on the left, it's now on the 10th floor, almost the 11th floor maybe today. It's going at good pace. In pesos will be a little bit more than what we estimated in the batch when we first started the construction. But in dollars, we think we're going to have good savings because of what's going on with the country and the currency right now. But construction is very good, in good pace. And we estimate to have the -- on fiscal year 2020 the opening of this building. And also, the other construction that is not here, the Polo Dot is also very good and the tenants are coming into work now. So we'll be opening by the end of this year.

Argentina Business Center, regarding hotels on Page #5. This is going to be a good year for hotels. I mean, we can see for -- nice growth of 5% in average price on the rooms. We're achieving $191 per room. And occupancy also is quite high. It's under 70% range, but the cost is not going up so fast as the dollar. So we are closing -- what -- it is a decent year in the hotel segment, but we see that the balance of this year is going to be -- looks that's this is going to be a little bit better than we saw in the past.

On Page #6, on the Lipstick Building, something on international. First of all, we refinanced the Lipstick debt from $113 million debt. Now we owe to the bank only $53 million. We had also -- we extended the term that was finalizing this year. So we now have this loan till April 2020. And the interest rate was reduced from LIBOR plus 4 to LIBOR plus 2. This was the good news. The bad news that we're going to have to work on retenant the building as the main tenant will be leaving in 2021. That is a big challenge. And because of that, we have now seen an impairment that we have to reflect a loss in our balance sheet for approximately ARS 1.9 billion that is reflected on this balance sheet.

Occupancy levels are very high today. And also, the NOI is growing because the building is okay and is doing very well. Actually, as we said before, this is the best building on Third Avenue, and the prestige of the building remains intact. But as we're going to have to work retenant the building because the main tenant is leaving, that's why we have to reflect this loss and we have the challenge for the future.

On Page #7, something about Condor. We have been receiving the dividends from Condor. We received net dividends for $2 million in this fiscal year, both from common and preferred shares. And the recent events -- we did -- I mean, the company actually here sold the legacy hotels and was buying good hotels. And the reality is that the company is really completely fixed. Nevertheless, there is no change in the share price, which is, in some way, frustrating. But the company is really in very good shape compared of what had in the past. And the market value of -- as of August 29, it's $27.5 million. It's an increase -- well, we see the split in the common. We have $23.5 million in the common and $4 million in the preferred shares. And this is at value of $10.45, and the NAV of this company is a little bit higher, if not very high, than what it's trading today. And the company is analyzing strategic alternatives of what to do.

So now we go to -- back to Alejandro.

Going to Page #8, speaking about Banco Hipotecario, the main events for the year. The results of the bank generated a gain for the whole year of ARS 620 million comparing to ARS 83 million last year, so a much better result, and mainly explained because of an operational improvement and increasing present value of its financial assets. And 2 other things that the company did extraordinary this year: Paid dividend ARS 200 million and IRSA received almost ARS 60 million in April of this year. And on the other hand, the company approved the capital increase of 900 million shares, representing 60% of current stock capital. And this is to finance future growth, and the company is waiting for the regulatory approvals and better market conditions. And we can see in the right the market conditions on the banking industry made the shares of the company go down, a big decrease. And we can see how today, what represent the 30% ownership that IRSA runs of the Banco Hipotecario shares.

We can move to Page #9, and we can see the main events about IDB and DIC in Israel. Main achievements of the year: Risk reduction, and I think the improved liquidity in the cash flow of the 2 made a part of that using what we spoke about the sale of the Shufersal stake that gave us a lot of liquidity makes much more comfortable the situation -- the financial situation of the 2. The decrease in the leverage in IDB went from 80% to 56% -- going to 80% in the case of IDB and in the case of DIC went to 56%. And because of that decrease in the leverage, we had better credit agents talking about us, and DIC went from BB- to be BB+ stable. The -- in the case of Clal, during this year, we had to sell another 5%, again. And with that, we went to 20% of shares that we swapped in 4 transactions in the similar conditions of the last. The commissioner is going to be changed. It's going to be changed now. The market cap to equity, there was a small rebound recently. Today, it's almost 70%, the market cap to equity. And related to the companies, we are going to see a little more about them a little later. But they are keeping their leadership and new developments in each of them. And the big issue for the year, I think, it's the concentration law. That last year, we were able to reduce one of the layers, but we have the forecast of doing in the next year. In the end of 2019, we have to solve the next -- the last layer to solve about the concentration law.

We can move to next page in Page #10, and we can see what we did to solve the first step that was done last year to solve the concentration law, and how today DIC is at the same level of IDB, IRSA running directly the 2 of them, one with 98.7%, IDB; and one with 76.8%, DIC. The only big change apart of doing this reorganization of the layers was the sale of the stake of Shufersal. Today, we have only 33.5% of the shares. And with that, we deconsolidate that company from the balance sheet, and that made us begin recognition of the ARS 8.5 billion in the last quarter, plus the cash that came to DIC, the ILS 850 million that I explained before. And the rest is very comparable to last year numbers.

We can move to next page, and we can see the leading real estate companies in Israel. And I think this is the first time we can show the assets in the map of Israel. Here, you can see the points in the map in a short -- in a small country. But we can see the office and hi-tech parks, the commercial and retail, the industrial and logistic, properties under construction, residential and land reserves. This combination is almost 1.2 million square meters of rental properties in Israel, 97% are occupied. Having rights -- today, rights of 670,000 square meters for doing more and looking for much more rights because the land reserve we have is huge. So this is the existing right. And here, we brought some of the names -- the more important names, Oracle, Nike, Microsoft, IBM, Yahoo. We didn't include because we are going to launch an Amazon building that is going to be delivered very soon in Haifa and HSBC in Manhattan, Apple in Herzliya. So we have 142,000 square meters in USA. So the rental properties in Israel is huge.

And in next page, in Page #12, we can see 8 projects under development. These are some of the examples. One in Rehovot, close to Weizmann Institute, partnering with the Weizmann Institute. One in Haifa. This is the building, Matam-Yam, the building for Amazon that was renting and fully occupied for them. In the Negev, in the cyber area. One in the ToHa. It's one that is going to be finished soon. And today, the contracts for this 57,000 square meters of rental, 85% are signed. So it's going to be open almost 100% occupied. The last picture in the Haifa Bay, the logistic center, we bring something that is interesting for this company that logistic is growing too. We are developing 7,000 square meters of new logistic area, and we have a lot of land to do more. These are the pictures of them. We are doing only the one. The rest are going to be constructed in the future. We are discussing more. So the company is doing logistic too. So these are some examples of the things that the company is doing. Financing at levels of 3% fixed in shekels and doing new buildings at 9% or 10% yield. Doing a lot per year.

So if we move to Page #13, we can see some of the evolution of Shufersal and Cellcom. They are the 2 big companies of the Group. In the case of Shufersal in the left, we can see that a lot of things done related to service and customer experience, bringing fresh products to the -- for the supermarkets, increase in the private label. We are growing and growing in private label selling. The online and digital is achieving almost 14% of the sales of the company. The acquisition of New Pharm, the pharmaceutical company that was included in Shufersal stake and the financing of the company. And from the other side, the Cellcom increasing the number of subscribers in TV, transforming from a cellular company to a telecommunication group and trying to survive in a very competitive environment in the cellular business in Israel. So the companies are going well.

So we can see, finally, in the Page #14 that the decrease in the leverage in the 2 holdings in IDB and DIC, a dramatic deleverage of the company is done and is still doing. We think it's a combination of improving the situation of the company through deleveraging the holdings at the same time.

So now I would introduce to Matias Gaivironsky about the financial results.

Thank you, Alejandro. Good morning, everybody. Going to Page 16. Here, we have the explanation of our financial statement for the year. We separated into the 2 main business centers: Argentina and Israel. So we can see that net income -- starting with the net income that we finished the year with ARS 21.295 billion against ARS 5.2 billion of the previous year. So we -- I will separate explanation in different parts. I will use these charts just to show the main impact of the year.

So starting with the Argentina Business Center, the main important effect was the change in the fair value of our investment properties that we accumulated this year ARS 20.6 billion against ARS 4.1 billion. This figure, when you see the number in dollar terms, we will use our investment -- the value in dollars of our investment properties. Remember that we value shopping malls at the DCF model and offices at comparables and the same with land bank. So shopping malls, when we include the new forecast of Argentina and the current FX and GDP expansion estimations decrease in dollar terms, but the rest in offices and land bank remain stable in dollars.

Other important effect is the net financial results that I will explain in the next page. Also something important to mention, Alejandro already explained, but we started to deconsolidate Shufersal in this quarter. So here, when you see the figures, it doesn't include Shufersal anymore for 2018 and also for 2017. We will keep presenting information in this segment, but not more in the financial statement.

So you can see in -- a big result in the net income from discontinuing operation of ARS 12.5 billion that was deconsolidation of Shufersal. So the rule is established that you need to value your stake at market value at the moment that you deconsolidate. Going forward, we will value at the equity method, so we will recognize results according to the results of Shufersal. But at the first time, we will recognize the value for all the -- our stake in -- at market value prices.

Last year, the ARS 4 billion -- ARS 4.1 billion was related to disposal of Adama. Other important effect is in the line of the income tax. Remember that in the deferred tax, we recognized again a gain this year that was related to the change in the tax regime in Argentina that decreased the income tax from 35% to 25%. For that reason, we recognized it again in the deferred. And in the current tax, the devaluation of the peso that we have to reflect our debt in pesos term generate a credit in the -- or a lower payment in the current income tax.

So we can move to the next page. In Page 17, we have the breakdown of the other important line that is the net financial results. So Argentina, unfortunately, this year, we have important evaluation until June was up to 28.85. You know that the current level is at 37. So we will recognize the effect in the next quarter. But when we analyze this fiscal year, last year the devaluation was only 10.6%. So when you go to the net foreign exchange losses, we recognized the loss of ARS 9.7 billion against ARS 883 million of the previous year. Also, since our debt is in dollar terms, the net interest expenses that we are paying in pesos is higher ARS 1.5 billion against ARS 819 million last year.

And finally, the fair value gain from financial assets. So our liquidity -- investment of our liquidity generated this year ARS 2.2 billion against ARS 442 million of the previous year.

In the Israeli business segment, when you compare the net interest expenses, it's similar in shekels, it's lower. Here, we are showing in pesos. So in pesos, we have devaluation year-to-year from shekels to pesos of 27%. But when we see this figure in shekels, we are reducing the interest expenses because of [reaction] in debt and also the lower interest payment on the new debt that different companies are achieving.

Then the other effect here is the DIC debt exchange of ARS 2.2 billion that we did in the previous quarters. The last effect is the fair value gain from financial assets that is related to our investment in Clal. Clal, we value at market value. So remember that when we consolidate IDB, we are using a lag of 3 months, so our -- all our information is up to March. But we include significant effects after March. So for instance, the value of Clal is as of June, is not as of March. So here, you can see in the bottom right what happened with the evolution of Clal's shares in the market. So last year increased 51.9%, this year decreased 13.5%. So that generated the loss of [ARS 175 million] against a gain of ARS 2.5 billion last year.

So finally, when we go to Page 18, we can see the evolution on the operational side. And here, we included adjusted EBITDA of all of our segments in the quarter and in the fiscal year. Fiscal year, we finished shop -- with the shopping mall increase of 24% below inflation. Offices at 22%. This segment will grow significantly going forward because of the devaluation. Remember that we charge all our tenants dollars. So for the next quarters, we will increase significantly in pesos term. And also, we will incorporate the new Polo Dot building. And we will start to collect rent probably at the beginning of the next year. So that will grow also for that reason.

Hotels, also, we estimate that will grow with the new situation of the FX. Probably, Argentina will start to receive more tourism, and the rates are in dollars, so it will increase.

Sales and development, we have marginal sales during the year related to some properties. The main property was Baicom that we sold during the year. And also, we could maintain good margin levels. When you see the margin of shopping center, we achieved 75% EBITDA margin; in offices 74%. So we're in line with our prior margins in those segments.

In Israel, here you have the different segments. So to analyze these, you have to remember that the devaluation in -- from shekels to pesos was 27% for the year. So when you see increase above that is that the performance is good. And if not, it's that we are decreasing against the previous year. So you can see real estate growing at 43%, supermarket at 31%. Telecommunication, the competitive environment is very challenging. It's 15%. And others that is mainly our cost on the G&A, on the corporate side cost is 20%. So it's below previous year.

So going to Page 19. Finally, we have the debt amortization scale of our debt. The net debt of the company remains stable at $335 million. So we have the next important amortization on our debt in the next fiscal year. So we will be working on that during the year.

So with this, we've finished the presentation. Now we open the line for your questions.

(Operator Instructions) The first question today comes from Jorel Guilloty with Morgan Stanley.

I have 2 questions. My first question is relating to your expectations for the consumer going forward, particularly in light of the macro stress that Argentina has seen recently and it has accelerated. So what I was wondering, do you expect a decline in sales going forward? Do you expect it to stay about the same that you've seen in the past few months? Just if you can provide some color on your expectations.

Jorel, thank you for your questions. Yes, of course, we are looking very deeply this -- the trend, what's going on. As of today, we didn't see big changes. But remember that every time we saw this kind of movement in the exchange rate, immediately, we started to see tourists coming to the city. So the first effect that you can see that is in the high-end shopping centers, like, for example, Patio Bullrich, we are seeing like sales going up faster than we were expecting. And this is mainly because of tourists and also because of those people that they had the money in dollars. The value of the merchandise is cheap. I mean, we used to be like expensive compared to the neighbor countries and also with international brands. And if you come today to Buenos Aires, everything looks cheap. So for those that they have the dollars in their pocket, this is a good time to spend. Is it true? It is true that for the wages, the prices, not today, but might look more expensive in the near future. But we think that in between the tourists and the people that it's not going away. Remember that we had thousands and billions of dollars going away the country that were spent in Miami, in Chile in between the new tourists and those are not going away. And there will be some adjustment in salaries. Of course, we -- it's going to take some time. We do not expect a big impact. Of course, we can have some, but we are not expecting a big impact.

Okay. And then my second question is along the same -- because, obviously, recent macro stress has increased the cost of capital. And I was wondering, if this effects in any way your expectations for future greenfield and brownfield growth going beyond what you've announced on your development pipeline?

Yes. For sure that this effects and what you expect to do or not to do, you increase your ceiling of what to do or not to do. We -- as you know, we are -- we have launched some office buildings in IRSA commercial properties. One shopping center that is beginning the construction that is Alto Palermo. Now we have the pipeline of other things. And you know that we generally don't speak up to the day we begin them. But it's true that we are asking for a little higher return in dollar terms to the [new 2] launch. So the ones we are finishing, we are doing. The next we are going to announce, we are asking for a little higher return.

Okay. And then one more question, if I may. I was wondering if you can provide some color on the concession for Buenos Aires to sign. I believe that expires soon, correct?

Yes. The concession expires on November 18 of this year. We are supposed to give it back to the city by -- in 3 months after. So we are working. We did all the things on the legal side to be fully covered, to try to take tenants out of the shopping center. It's not as easy as it is in some other places here to take tenants out, but we did everything that we have in our hands to do on the legal side. So we are working on that process. Some of them, they are already leaving the center and some of them are planning to leave before that expiration date. Remember that the EBITDA of the shopping center is very little to our numbers. It is 1% or less, but it's taking us a lot of work because we are taking out the tenants. We are preparing also the shopping center to give it back in the right condition to the city. But the -- what we do not know as of today is what the city is going to do with this property because they're going to have to do something. And if it's going to be something that is in our line of business, we might be looking at it very deeply, with the interest of maybe to continue to do something in that location. In terms of delinquency, I mean, we are showing these numbers, some -- a little deterioration on the numbers, but -- and what's part of the IRSA commercial properties call, and it's mainly explained because of that. We don't see any deteriorations in delinquency mainly in the other shoppings basically. It was more related to the shopping center, Buenos Aires [in time], and -- but we are working with tenants, so we think we're going to collect that money eventually. And the other aspect that we can mention here is that we have also a situation with a portion of the ownership of this shopping center -- of this entity belongs to a company that they acquired from Banco Provincia this May. It's a company that's really looked -- it's in bankruptcy. So we have trustees from the bankruptcy in the company overlooking and making decisions along with us in this process.

(Operator Instructions) The next question comes from Álvaro García with BTG.

My question is on Israel. On the concentration law, particularly, you mentioned in your comments that next year we'll have to break another layer. So I was wondering if maybe you can walk us through what the corporate structure might look like? And what the plan is to sort of appease the regulators in light of this concentration law?

Alvaro, so the concentration law established that you can't control more than 2 layers of public companies in Israel. So used to be -- last year, the restriction was to not control more than 3. So we reduced it 1 last year. How -- the structure is that the first layer is DIC, the second layer that we have is PBC and the third layer that we have is Gav-Yam and Mehadrin. So from those companies, we need to establish some structure to reduce the control of -- how we structure control on those companies. That means that we can do any kind of transactions, corporate restructuring, mergers, acquisitions, spin-off. So it's not clear yet what we're going to do. And probably, we won't announce in advance what we're going to do. We will -- when -- at the moment that we decide the structure, we will execute like what we did last year. But could include any kind of transaction to reduce one layer. So there are plenty of different alternatives. So I can't comment more than that at this stage.

And just, I guess, to double check on this one issue that there's no possibility that IRSA will directly, let's say, buy PBC, for example. It would all be within the Israeli business structure?

It's according to the concentration law. It's one of the alternatives. But I can't comment more on that what are the -- the path that we will follow. It's much more likely that you will see a solution coming directly from Israel.

This should close the question-and-answer session -- section. At this time, I would like to turn the floor back over to Mr. Alejandro Elsztain for any closing remarks.

Just for finishing our annual report, we are happy on the results, the combination of the real estate of Argentina, the real estate global, the all activities. And they're not good stories that would happen to the Argentine economy, but the companies are in very good shape. So we expect a new year and a lot of development in every region, completing the buildings under construction and keeping the things and deleveraging the things we need to deleverage. So we expect a very good 2018, '19. So thank you very much, and have a very good day. Bye.

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