IRSA Propiedades Comerciales S.A.
Q2 2022 Earnings Call Transcript

Published: 14 Feb 2022

[Santiago Donato:]

Good morning everyone. I'm Santiago Donato, Investor Relations Officer of IRSA and I welcome you to the Second Quarter of Fiscal Year 2022 Results Conference Call. First of all, I would like to remind you that 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 are also available for download on the company website. After management remarks, there will be a question-and-answer session for analysts and investors. 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. Eduardo Elsztain, CEO.

[Eduardo Elsztain:]

Welcome to the second quarter of the financial results of year 2022 results conference call. I am very glad to be hosting this webcast and sharing with you all our investors and the analysts, the main highlights of IRSA for the period. A new IRSA merged with IRSA CP and consolidated in only one real estate vehicle that brings me closer to the operation again and with the satisfaction of having the approval of Costa Urbana project. This combination it's incredible. The company consolidation the two of them in two will save a lot of cost we'll save a lot of operational cost tax cost. We think it's an incredible achievement and the fact that we got after 20 years the approval of a project that came to the legislation more than five times, it's an increasable achievement of a group that show resilience, patience, and persistence to go in the project. I also believe that this year is going to be a very special year, even though it's not all commonly shared by all the investors in Argentina, I see that this cycle of liquidity in the world go into commodity will really affect our market in a very good way. I want to pass this now to Matías, our CFO who will get with you onto the details and thank you. Thank you very much again for joining us today to the webcast of IRSA.

[Matías Gaivironsky:]

Thank you, Eduardo. Good morning everybody. So, we start the presentation in page three with our merger process. The merger as you know was approved in December with our shareholders' meeting with approval of 99.88% in IRCP and 94.57% in -- sorry 99.88% in IRSA and 94.57% in IRCP. The process is ongoing. We are surprised with the speed of the process so far. In January, we presented the definitive merger agreement and all the information to the SEC and to the CMB locally. And we are waiting for the final approval that will take place in the coming months to exchange the shares of IRCP for IRSA shares. We expect that to happen probably in the next two to three months. Regarding the outstanding shares post merge of IRSA, currently, we have an outstanding 500 -- sorry 658 million shares we will issue 152 million shares because of this exchange and after the merger, the outstanding shares will be 810.1 million shares of IRSA. Remember that the ADRs trade 10 common shares per ADR. So, the company structure after this merge and how IRSA will look forward. We have the rental segment that we used to have it at IRCP level with shopping and offices. Now, we include the hotels as well. Then we will have a development segment that will be drive basically by Costa Urbana and other mixed-use land bank that we used to have in IRCP and IRSA as well. And then the financial segment with our stake in Banco Hipotecario with a 30% stake in Banco Hipotecario. We used to have the international segment. In December, we concluded the disposal of our shares of Condor. Condor sold all the portfolio of hotels and then distributed a dividend. IRSA collected $25.3 million from that dividend and also some other loans that IRSA lend to Condor. So now, we basically don't have international assets only minor assets or one project in Montevideo Uruguaya and other minor assets abroad Argentina. If we move to page five, we can see the evolution on the operational side of our shopping malls. Regarding our stock we've finished the expansion of Alto Palermo. Now we have 335,000 square meters of GLA. The occupancy remained stable compared with the previous quarter. When we analyzed comparing with pre-pandemic levels, we are below the 95% of the pre-pandemic levels. Basically here we suffered the departure of some big spaces like Falabella, Walmart and a new whole appliance -- home appliance store that closed their operations, so we suffered that departure. If we eliminate the big spaces, the occupancy will be 95%. So we will be working in replacing that big spaces with probably small proposals and recovered the occupancy going forward. If we see the same-store sales, in real terms we are very happy that for first time in many, many quarters we surpassed inflation. The quarter finished with a real evolution of 7.6% above pre-pandemic levels. Here we are not comparing with the previous year because the previous year the operation was almost closed. And so all this comparison is against pre-pandemic levels. So we are very happy with that. If we see in visitors, we are recovering but still some lag comparing with pre-pandemic levels so that give us more space to grow going forward. Next page, we see here the expansion of Alto Palermo shopping. We finished it and we opened the new spaces. We are happy with the development. We have fully occupied all the spaces available with world-class tenants and local important tenants. The total investment was around $23.5 million still $3 million pending but also expanding the movement of the food court in a new foothold and then replacing the old food court with new stores. If we move to page seven, we can see the office building evolution. Here we have been working in doing a flight to quality over the last years. We can see that the square meters that now that we own are 109,000 square meters. Most -- more or less the same than the previous quarters. We have been selling some floors the last year. We sold the Boston Tower and the Bouchard Tower. And then we opened 200 Della Paolera and then we start to sell some floors of 200 Della Paolera. So now we have 109,000 square meters. If we see the leases per square meters remain stable at $25 per square meter and occupancy is lower than the previous year at 76.7%. Basically, when we sold last year, the two buildings were fully occupied and now with the incorporation of the Della Paolera building, that is not fully occupied, we are suffering that impact in vacancy. In the -- regarding the B buildings basically the Suipacha building that is fully -- is completely empty and we are working trying to sell that building in the next -- going forward. In page eight, we can see the disposals that we did during November and December. We sold four floors of the 200 Della Paolera building at very good prices. We received $41.2 million, an average of $8.600 per square meter of the official exchange rate. We still have 20 building -- sorry, 20 floors with 24,000 square meters available in this building, probably one of the best buildings in the city of Buenos Aires. In page nine, regarding the hotels, this is an industry that was very, very affected by the pandemic. We still have the impact on restrictions on tourism in Argentina, although was started to open in the end of the last year. The occupancy on the Buenos Aires hotels still very low at 36% occupancy that we hope to recover going forward and in the Llao Llao Hotel, we see a big evolution and a big recovery recovering the same occupancy in the pre-pandemic level, but here affected by some closure of some rooms that we are developing and turnaround some rooms here. So that also affect the occupancy. But going forward, we see big, big recovery for the Llao Llao. Probably one of the main events of the last 20 years of the company is the approval of Costa Urbana project. We are very glad on the approval. This is a major development for the history of the group. We hope that, this project will drive the future growth of our company going forward. As you know, Costa Urbana is a plot of land of 70 hectares close to Puerto Madero in the city of Buenos Aires. If you see in the left in the right part of the graph, you can see that, this is like a natural expansion of Puerto Madero that probably is one of the best neighborhoods of the city of Buenos Aires. The City Congress finally approved, the project, the agreement that we reached with the city was that IRSA will donate around two-thirds of the land to the city for public uses basically parks, and some other plot of lands to the city. And in exchange of that, the city approved construction capacity of almost 900,000 square meters that we will do different uses homes, offices, shop, services, education, entertainment. So this will be a new neighborhood in the city. The contributions to the city, as I said was the two-thirds of the project. So this will be probably the second largest park in the city of Buenos Aires. Also, we committed to contribute around $5 million in cash and in bonds. So, this $2 million in cash and $3 million in bonds that, we will do in the next months. And then, we committed to invest around $40 million in infrastructure and road works in the projects in the next years. The location is very premium, probably is one of the few plots of lands in the city of Buenos Aires with rework cost. So we are very, very happy on this new development. Here you can see the picture of the current stage of the land and the current status that it was an empty land for almost 20 years, and this is the render of the project. It's a huge project, will take many years to develop. But we will be working going forward in defining the final project and start structuring how we were developing this going forward. Now we go to the financial results. We are presenting our first six months of the year. Sorry. This is the first time that we present our financial statements as a merge company with IRCP. So basically what changed is that before we eliminated the non-controlling interest of IRCP now is fully consolidated or fully inside IRSA. So if you see the six-month column we are finishing the six-month period with a gain of ARS25.5 billion, compared with a loss of ARS1.7 billion in the previous year. Here we have different impacts. The main impact is in the line for the change in the fair value, we can see a gain of ARS22.4 billion against almost ARS14 billion last year. This year is related to the approval of Costa Urbana. After the approval we reevaluated the land at a value of $360 million, compared with the previous stage or without approval at $210 million. Besides the change in the fair value there is another important effect that is in the line nine, the net financial results that we can see a gain of ARS4.3 billion that I will explain later. The income tax that we are recognizing a deferred tax of ARS4.5 billion that is related to the change in the fair value that we are -- all the time that we reevaluate the land we recognize a deferred tax that is a potential tax that we have to pay if we sell the land. And the other important effect last year was the consolidation of the investment in Israel that generated a loss of ARS10.7 billion that this year we have no more results from Israel. If we move to page 15, we can see the different effects of the adjusted EBITDA by segment. Shopping mall in the six months we see a big recovery 227%, reaching ARS4.3 billion of adjusted EBITDA that if we compare with pre-pandemic levels this is still below the pre-pandemic levels was ARS5.5 billion. So there is still room to reach pre-pandemic levels here. In the offices the results are lower than the previous year in pesos terms since we have revenues tied to dollars at the official exchange rate and the official exchange rate the devaluation was lower than the inflation when we saw the last year numbers adjusted by inflation are generating this big impact in pesos term. In dollar terms this is different than I will show in the next slide. But this segment is affected by some higher vacancy and the disposals of some floors that we sold during the last years. The hotels are showing a recovery against the last year, but still very affected with pre-pandemic levels. And sales and development, here we show the effect of disposals. This year we sold only four floors of the office buildings compared with the previous year that we sold to one entire building and half another building. In page 16, we see the numbers in dollar terms. And here is different the comparison we see in shopping malls a big recovery in dollar terms at $25.1 million in the last quarter. So we are recovering levels, good levels of EBITDA, again after the effect of the COVID situation. And in the offices, we see that basically we have more or less the same results than last year. This is a combination of different effects. We sold some square meters that used to generate $1.6 million of EBITDA, new square meters that generate $2.9 million, the vacancy that generate $1.6 million of difference and rent price that generated $0.5 million of decrease in EBITDA. If we move to Page 17, we can see the evolution of the net financial results. As I mentioned, we finished the six months with a gain in the financial line of ARS4.3 billion. This is basically related to the evolution of the exchange rate in Argentina. The exchange rate evaluation was only 7%, while the inflation during that semester was 20%. That is our real appreciation of the pesos at 11% and this generate again in the net foreign exchange differences that you can see in line two that we generated a gain of ARS6 billion. Then in the net interest losses, we see a decrease in -- of 25%. This is related to the decrease in our debt as well on the results of the lower devaluation compared with inflation. So Page 18. Here we try to show our net asset value at the official exchange rate. Here we have all the distortions of the difference between the blue chip swap and the official exchange rate. You know that some part of our portfolio we are recognizing in pesos term at the blue chip swap and some at the official exchange rate in the shopping, we are showing all the results in pesos at the official exchange rate and in the offices and in the landbank at the blue chip swap. So here we have this distortion of the gap between the official and the blue chip swap in the offices and in the landbank. So basically, if you want to convert this at the blue chip swap, you have to divide by two, more or less the offices and the landbank. But here compared with the previous quarters, the main effect or the main impact was the approval of Costa Urbana that generated $150 million more in valuation that at the official exchange rate that is like $300 million. So the net debt -- we reduced the net debt to levels of $501 million and we have a target here to keep reducing this, as when we presented the merge, we talk about $470 million of net debt. So we will keep working to reduce to those levels. So the net asset value at the official exchange rate reached a level of $1.9 billion and an LTV of only 21%. So finally, regarding the debt profile, we can see here the evolution of the net debt on a consolidated basis between IRSA and IRSA commercial properties that we reduced significantly the debt from $755 million before the pandemic to $501 million. So it's a 34% reduction. So we are very happy on this reduction. The debt amortization is schedule, we have most part of our debt that expired during fiscal year 2023. So we will be working trying to extend the tenor of the debt. But the levels of debt remain conservative in terms of LTV to 21%. And in terms of net debt to EBITDA, still affected by the decrease in the EBITDA levels. Now the debt reduced, but the EBITDA level reduced as well because of the pandemic. So we hope to see better numbers going forward. So with this we finish the formal presentation. Now we open the line to receive your questions.

[A - Santiago Donato:]

. First question comes from . Can you provide a breakdown in dollars of last 12 months EBITDA, this $83.5 million between shopping malls offices hotels and sales?

[Matias Gaivironsky:]

Yes. Thank you, Juan. The breakdown is we generated around $54.7 million in malls $18.4 million in offices $2.5 million in hotels and $11.6 million in sales and development.

[Santiago Donato:]

As a follow-up could you provide more color on the tax impact of the revaluation of Costa Urbana? It creates a deferred tax, but not an immediate cash tax impact.

[Matias Gaivironsky:]

No not at all. All the effects of the revaluation of properties and all the fair value of our investment properties are not generating a tax impact of -- cash impact is only accounting rules that we have to recognize the deferred tax in the case that we sell. But also, we have proven if we sell, we can reinvest that money in a new project. So we defer the tax payment. So it's more tax impact than a real cash impact.

[Santiago Donato:]

Next question from Gordon Lee from BTG Pactual.

[Gordon Lee:]

Hi, good morning. Can you hear me?

[Santiago Donato:]

Yes. Yes. Perfect, Gordon.

[Gordon Lee:]

Good morning. Thank you very much for the call. Just a question on Costa Urbana. And I know it might be a little bit early to ask this question. But do you have a sense of when we might begin to see capital being deployed towards the development of that project. Do you have a master plan that at some point you would share? Have you selected your partners? How will you finance it? I know its early days yet, but I was wondering if you could at least maybe provide us a sense of timing of when some of these things may happen? Thank you.

[Matias Gaivironsky:]

Thank you, Gordon. As you can imagine we have been working in this approval for 20 years. So all the focus of our team was put in getting the approval. And since we don't have any certainty that we will reach it there are some work that we have to do going forward. So the final way that we will develop this project we are working on that. It's a huge project so there is no absorption for the project like this in one or two years. So we need to work and do it in stages. If we analyze how we develop in the last years at IRSA level basically, we did many swaps agreement where we put the land someone else develop and pay us with square meters. But here maybe some of the or the first plots we will have to develop because it's an empty land and we need to attract people to the projects. So we are defining the way. I don't expect to see a major CapEx over the next two years for the -- this year we have to pay to the city around $3 million that will take place in the next months probably. And then we need to develop part of the infrastructure and part of the parks. That $40 million that we committed to the city at the official exchange rate is something that probably could take place in the next, I don't know two to five years. We don't have to do all together, so we can do it in stages. So we will see and probably when we define how we will develop this we will announce or we will be informing the news about this project going forward. But the team was really focused on getting the approval that took place finally in December. So now we are working in how to develop going forward.

[Gordon Lee:]

Perfect. That's great and congratulations by the way. That's phenomenal news on that approval. Thank you.

[Matías Gaivironsky:]

Thanks.

[Santiago Donato:]

Thanks, Gordon. Well, here Alvaro also from BTG is asking, can you give us more color on what exactly drove the revaluation at Costa Urbana to $695 million. It was a $300 million increase at official effort, I think you mentioned.

[Matías Gaivironsky:]

Well, basically, Alvaro, I like to see this more at the blue chip instead of the official. The land used to -- was valued in our books at $210 million and now at $360 million. Basically the change is the approval before there was no clarity about what we can do in the land. Now we have construction capacity of almost 900,000 square meters. So in the revaluation, we are giving impact on that construction capacity and using an average cost of land of incidence of the land in that construction capacity. So, typically when you have land here in all parts of the world. But here what we do is typically you have a price per square meter of the finished units. So let's assume that the finished unit could worth $3,000. And then you give -- you have the incidence of the land of 20-30 depends on the location of the land. So that is basically the price of the land. And here how we reached this valuation. We are using comparable numbers probably conservative numbers in terms of price per square meter of land. This is around $400 per square meter of land that is I believe is conservative comparing price of the land in the city of Buenos Aires.

[Santiago Donato:]

Next question. I will take two here a follow-up one from Rodrigo Nistor from AR Partners and Matias Castagnino and that's -- that direction as well from BCP. A follow-up on the performance of shopping malls and office buildings. Have you seen any significant change in sales traffic occupancy in January and February compared to 2021? Did Omicron variant have any significant impact in results in January, February?

[Matías Gaivironsky:]

Well, we see a big increase in sales in December. December was an incredible month. When we compare with January and February is the vacation period and the holiday season here in Argentina and also with the Omicron and increase in cases maybe have some impact in sales. So we will see that when we disclose the March numbers, but yes has some impact. The combination of the two factors the holiday season maybe the Omicron that you know that in Argentina the cases jumped significantly in January.

[Santiago Donato:]

Did you hear one from clothes? Did you see the proceeds from the -- did you use the proceeds from Condor liquidation to cancel debt using the blue chip swap rates?

[Matías Gaivironsky:]

Not yet. The numbers that you see in December are not including that effect. So we still have in cash the Condor proceeds.

[Santiago Donato:]

There is a question on potential in which price would you sell Suipacha building. But those type of transactions we do not anticipate any price. We will release it if we finally conclude the transaction. So I will move to the next one. Regarding office segments, what do you expect after COVID-19 pandemic? At the Zetta building the occupancy increased by 8.7 points. Can you give me some color on how do you see rental activity?

[Matías Gaivironsky:]

We hope to see probably the office segment was affected by some turnaround and some decisions of companies to decrease the size of the operation or the size of the offices and maybe we will start to see new activity going forward. I think all those changes already happened. So we hope to see better occupancy going forward. Prices of premium buildings remain okay at levels of $25 to $30 per square meter. So that is not affected by this situation. It's more affected by the BBB or B buildings that since the occupancy reduced significantly, the price per square meter decreased also a lot and maybe that affect some decisions of the companies to move from AAA to B buildings at much cheaper levels. But we -- in the premium buildings, we see no major concerns going forward.

[Santiago Donato:]

I have one last question from Mariana Cruz also from BTG Pactual. If you can please comment expectations to see further sales of floor offices in the coming quarters.

[Matías Gaivironsky:]

Well, Mariana, typically we don't -- we don't give guidance on this kind of transactions. We just announced when we do it. But I can tell you that the strategy continues. We believe that -- if we can sell at good prices per square meters, we will keep selling. There is a good opportunity to do new buildings at a replacement cost cheaper than what we are selling. So for us makes sense, if we have good demand for the offices to keep selling. So it's something that we will continue going forward.

[Santiago Donato:]

Is there any additional questions? If there are no more questions, we conclude the Q&A session. I will now turn back to Matias Gaivironsky, CFO, for his closing remarks.

[Matías Gaivironsky:]

Thank you, Santiago. This was a very exciting quarter with two major developments Santa Maria, Costa Urbana and the merge. We are happy now is much simpler. The structure is much clear. So we believe this will increase the liquidity of our shares and also generate synergies, operational and tax synergies. So we are happy with that. Costa Urbana is an amazing news for the company that will drive the company's growth for the next 10 to 20 years. So we are very happy. Regarding the pandemic, we believe that we are surpassing the effects of the pandemic. And now with a normal operation, we will see good levels of cash again in the malls. The hotels are recovering. So we are very optimistic about the future of IRSA. So thank you very much to all of you to participate in this call and we hope to see in the next quarter in May. Thank you very much.