IRSA Propiedades Comerciales S.A.
Q2 2020 Earnings Call Transcript

Published: 11 Feb 2020

[Operator:]

Good morning, everyone. And welcome to IRSA’s Second Quarter 2020 Results Conference Call. Today's live webcast, both audio and slideshow, may be accessed through Company's Investor Relations Web site 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 Web site. After management's remarks, there will be a question-and-answer session for analysts and investors. At that time, further instructions will be given.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. Alejandro Elsztain, CEO. Please go ahead sir.

[Alejandro Elsztain:]

Thank you very much. Good afternoon, everybody. We are beginning our second quarter 2020 results. Now we can begin on the Page number 2, speaking about the main event of the six months. We can see the adjusted EBITDA of 2020 comparing to last year numbers, and there is a small drop of 9.1%, explained by EBITDA drop in the Shopping Centers and a rebound because of newbuilding and dollar denominated rents in the office buildings. Later Daniel will explain in deeper details these effects. But we have a small drop comparing to inflation in the digital real term and remember that we are adjusting our inflation in the adjustment of the inflation of our balance sheet. So in real terms, we have a small drop of 9.1%.We can see the net loss this year we have only ₱250 million basis of loss in the six months. And if you talk about the attributable to the concerning company, we have ₱381 million comparing to ₱647 billion of last year numbers. So a brief rebound and we are going to explain deeper in all of the segments. There is quarter result we can see that the same shopping sales in real terms this last quarter, we begin to see a rebound, there was an increase of the real sales of 5.6% in normal term, this is a 60% increase.We are keeping the same price square meter of the office buildings of last quarter. We are in the occupation of the shopping centers we are in the 95% of occupation and 97% in the AAA office buildings, in total 88.7, because the category B is suffering some of the occupation.This quarter, we delivered a dividend we paid to shareholders almost ₱600 million, representing a dividend yield of 2.6. So now I will introduce to Mr. Daniel Elsztain.

[Daniel Elsztain:]

Thank you, Alejandro. Good afternoon, everyone. On Page number 3, we can see some numbers about shopping malls. Our total gross leasable area is in the 3,032 -- 332,000 square meters of GLA. Our occupancy for the quarter was 95%, a very small increase compared to last year. If we would exclude the vacancy that we have in dot shopping center when Walmart left that occupancy we exclude that to say, it’s in the range near to 98%. We have been seeing a little more, more and more activity in the leasing activity. So I think we're going to see better numbers maybe for next quarter.In terms of sales, Alejandro mentioned, we see in real terms an increase of 5%. This was very good. This was motivated basically by incentives to sales through the [indiscernible]. This is to pay the acquisition with no interest that all the balance have to participate. And we can see that if we make -- this is on the quarter. But if we do the six months figure, that would be an increase of 0.4% in real terms.If we move to Page number 4, we're going to see how we performed compared to our competitors. And we see that in total we have 5.6% increase compared to last year, and we can see that our competitors in the red line, this is all shopping centers of the country, they grew of 1 -- they have a growth of 1.8%. This is numbers that are given by being big, so this is real figures.And we can see that the different segments how they move. Others, that is services from a determinant on-course grew at 12% but the majority of our sales is in the upper segment you can see on the left corners how do we split the spread our sales and the majority our sales is in upper half that grew on this quarter 3.4%. Nevertheless, our average is 5.6%, we are very happy. I mean, November and October the whole country was expecting another good performance in terms of sales. Nevertheless, we saw and our tenants and also ourselves, we're happy with our performance.In the office -- no matter we have an increase in sales, unfortunately, we haven't seen this increase in revenues. The main factors that drove this scenario is we have some vacancy where we did not collect rent and we have to pay the common charge of those spaces. We had a small delinquency compared to previous years, nothing that we are worried so far.And also because some of this increase in sales did not achieve to serve us the minimum rent. So we are not collecting more rent in some cases, because they are still paying the minimum rent and not achieving a percentage of sales. We expect that we see sales on the trend that we will be able to achieve this improvement in sales also in our revenues.On Page number 5, on the office building segment, we can see our portfolio now is in the 115,000 square meters of total GLA, no lost area. So we had an increase of 39% compared to last year. We're projecting that we're going to grow another 26%, achieving almost 146,000 square meters for next fiscal year.And as Alejandro mentioned, we are running with very good and high occupancy level in the A class and AAA category buildings, but we are running in a low occupancy at 47% in the B class segment. The B class is only 14% of our total portfolio. So in terms of numbers, it's not significant but it's -- and the majority is driven by the one building that is a B class in location that has been challenged now. So we are working to see alternatives of what to do with this building.Nevertheless, on the class A buildings and the new building that we're going to incorporate the 200 Della Paolera, we have good leasing activity. So we expect to have this high occupancy also for the new square meter that we’re going to have in the portfolio.The average is 26.9, almost the same like last year. And we expect that leases to remain at that level at least for now. The projects that we have under development 200 Della Paolera, it’s 235,000 square meters of GLA, the stake of IRSA Commercial Properties is 87%, the work in process at 86%. The first tenant in the building will be moving into the building by April, mid April, end of April.And we also delivered the units to Globant that bought four floors on this building. They already have occupancy and they're going to start working on their premises very soon. The estimated EBITDA that we have for this project once it’s all leased is in the range of $10 million to $12 million per year, and the investment that we had projected was in the $90 million. We know that we are getting close to the ending of the construction is going to be a little less than this number.Also we can see here on the right side Alto Palermo expansion. This is an expansion of 3,900 square meters of GLA. The progress -- where progress is in 51% is going to be opening sometime by the spring of Argentina this year, spring of the beginning of summer and the projected investment was $28.5 million. And we already signed some -- leasing the stores, and we have a lot of demand in Alto Palermo. This is a shopping that always has demand no matter what's going on with the country, there's always demand for the spaces that we put in this shopping center.On Page number 7, and here to discuss what we have been doing. First on the left side, the Walmart surface, the conditioning, remember Walmart used to have 13,000 square meters of GLA, which is for one big store into three big stores, some medium stores and some small stores. We have now a commercialization progress of 25% that it's already signed, and leasing is getting momentum. We are talking with a few tenants, potential tenants, the small, stores it’s not a problem, I think we're going to have them all leased when we finish the construction.The medium and big stores are more challenging in this context in Argentina. Nevertheless, two of the big stores are already are signed or to be signed and two or three of the medium stores are under negotiation. The estimated EBITDA for this space in the first few years, because we are giving some concession, it's about $300,000 per year.Also in the shopping we opened a rooftop on December of 2019, it’s a 1,600 square meters surface that was empty since the construction of the shopping, there was no tenant interested to come here. The interesting thing here is that it's fact that people coming from the office building next door, they come for the happy hours, they come for lunch, they come for dinner. So these spaces producing almost 20% to 30% of the food hall of the whole shopping center -- of the food court actually of the shopping center. And it was a small investment but a big impact in the neighborhood. We are very happy with this and we are also expect then what's going to happen also in the ex Walmart surface.On Page number 8, we can see two of our swaps, the spaces that we gave to developers to develop and we -- in the left side the airspace of Abasto, this is on top of a supermarket COTO. There is a project for building the two towers, tower number one is 8,400 square meters of buildout area, the total project is twice the size approximately and the payment that we're getting today is $4.5 million, of which we already collected $1 million in cash and we're going to collect the balance with apartments with at least 35 apartments, which represents 24.2% of the total area. This is only for the first Tower. We're going to -- once the developer finish and sells the first tower, he has the option to do the second one and we're going to collect also a percentage near the 24% of those square meters that have been sold.On the right side, we see the Caballito plot this is a very big area. It has -- the total project is approximately 80,000 square meters of buildable apartments and stores, it’s a mix use. The developer is already signed and it’s about to start construction of the first plot of 11,400 square meters of buildable square meters of the apartments and also on the ground floor stores. And we are going to -- they're going to pay us $5.5 million for this first plot with giving us a combination of stores and apartment units of approximately 25% of the total square meters that will be built. And in this case also, once of the developer finishes the first floor and if it were successful, they have the option to keep going on the construction of the three remaining plots that we have on this piece of area. Our intention is to hold all of the stores on the ground floor, because once the four floors are built and we have all the stores built and connected, it’s going to be like a small medium shopping center compared something similar of what we have in Distrito Arcos in the neighborhood of Palermo.So for now for financial results, Matías Gaivironsky, CFO of the company.

[Matías Gaivironsky:]

Thank you, Daniel and good afternoon everybody. So if we move to Page 10, we can see the results from the semester. On the right side, we have the semester and on the left side, we have the quarter.So we finished the period with a loss of ₱250 million against a loss of ₱6.4 billion in last year. Most of the loss came in this quarter. If you see the main impact in the quarter was the change in the fair value, the line four that we have a loss of ₱4.9 billion against a loss of ₱17.8 billion last year. Remember that, we value our properties at fair value and we are giving impact on the different variables of the volatility of Argentina in our valuation.So that this year that we perform in the shopping malls was affected by increase in the cost of capital for Argentina and also the valuation and the projected growth our Argentina. The other important affect came in the line of financial results in the line seven, and you can see that during the semester we have a loss of almost ₱5 million against a loss of ₱2.4 billion. I will enter into more details in the next slide.And finally, the other important affect is in the income tax. Here is important to mention that this effect is a non-cash effect. We are not paying taxes because of the losses that we have. This is only the recognition of the deferred tax on the potential tax that we would have -- we sell the properties that we are recognizing again in the line. During the semester, we had a gain of ₱2 million.Also started -- this year, we started to recognize the effect of the inflation assessment in the tax balance sheet and this is the accounting balance sheet and this is completely different than our tax balance sheet. According to law this year, we have to start recognizing results from the inflation assessment of the tax part and that generate also a loss during this semester.If we move to Page 11, here we have the breakdown in the different business lines of revenues and adjusted EBITDA in shopping and offices. We can see, as Alejandro and Denial mentioned, the shopping malls, the adjusted EBITDA decreased by 18.7% during the semester and the office is an increase of 37%. In the offices we have, the incorporation of the Zetta building and also where revenues are in dollars, so the devaluation help in this regard. In the most, we have, as Daniel mentioned, although, we are increasing or our tenants are increasing the sales, we haven't adjusted our revenues under the same base. So we expect that these to recover in the future if this trend of sales continue. Also in adjusted EBITDA, we have some exceptional items during this year or the comparison with the last year that makes this growth a bit harder than the revenues. The revenues are decreasing 13 and the EBITDA 18.7.If we move to Page 12, we can see the breakdown of the net financial results. The other important effect that is basically related to the devaluation in Argentina, in the bottom of the slide, we can see the devaluation of the peso during the last year. The real devaluation was 3%. This year was 13.5%. And that is affecting the line number two of the foreign exchange differences that this year we’re ₱3.2 million negative against ₱2 billion last year.Other important effect here is in the line of fair value gain on financial assets. Thus, this year we have a loss of ₱160 million against a gain last year of ₱1.3 billion. This is more related to our portfolio of liquidity that during the last year we have gains the loss this year.If we move to Page 13, we can see the evolution of our NAV. This is after the recognition of the gains and losses during the quarter. We can see that the net asset value of the company now in our books is at $990 million against $1,415 million last year. Basically, the decrease is in the shopping malls, because we are performing this year and the offices and the land reserve we are valuing it with comparables in the market, so this is more comparable transactions against the shopping that are not transactions in the market.Even with these prices or with these values of NAV, we can see the devaluation ratios remain very cheap compared with region and compared with other countries. The cap rate, implicit cap rate in our valuation today is 15.4% EBIT to EBITDA of 8 times, price to FFO of 7 times and price to NAV also considering these value of NAV, we are trained at 50% discount. So that is the implicit valuation according our metrics. During the last 12 months, the EBITDA would reach almost $108 million and then $134.4 million and the adjusted FFO at $75.4 million.Finally in the Page 14, we have the breakdown of our debt, there are not significant transactions or developments here since the last quarter. Our debt remain stable at $346.9 million net debt. Most of our debt expires in the next year in -- in 2023, $368 million and during this year, we have an amortization of one of our bonds for $133 million that we will be working on that.So with this, we finished the formal presentation. Now we open the line to receive your questions.

[Operator:]

Thank you. The floor is now open for questions [Operator Instruction]. Our first question comes from Sam Epee-Bounya with Wellington Management.

[Sam Epee-Bounya:]

Just a couple of questions, first of all on the Walmart departure. Is that something that was expected? And do you expect any other big tenant to leave your portfolio?

[Daniel Elsztain:]

This was really well expected. Walmart never performed well in the shopping center. They wanted to leave for a long, long time actually, but they had to close where they had to pay us a penalty and they didn't want to do it. So for that reason, they extended for a long period the decision to leave. A year and half ago, we negotiated that penalty to make some concessions, because we understood that we could do better if they leave and not paying us the full amount of the penalty by us from forming that space into better and more attractive spaces for the shopping center.So we collected that penalty of what we negotiated, and that's one of also the reasons that revenues this year are little bit lower than last year, because we do not have the rent nor even the penalty. And we know this that's why we're working on the project, how to transform this space. Now we know what we're doing. Actually, we are on the progress in the construction and hopefully, soon what going to happen, we're going to include a band, a new team and space for medical services leading store. So yes, it was affected and we expect that this is going to be a good thing for the shopping center too.

[Sam Epee-Bounya:]

And do you expect any other big tenant to be leaving your mall?

[Daniel Elsztain:]

No. I mean, we were going to have so many big tenants. The tenants of this sites are only supermarkets. And in some of the cases, there's a supermarket that we have in the shopping center is still the owner of this space. So we are not -- not that I have on mind, I don't have any of the big tenants actually leave, even the medium size also, I'm not seeing any people going out of business or reducing space in our shopping centers.

[Sam Epee-Bounya:]

And if I may, just a last question on my side would be on your maturity. One is do you hedge --my understanding is that you don't hedge any of your debt. And my question is, how would you plan on addressing kind of the bonds that are due in September 2020 that's 135 million, and then you already thinking about 2023 bonds? And if you raise some money locally, can you hedge it?

[Daniel Elsztain:]

So first of all you can see our past position [Multiple Speakers], so regarding the amortization that we have. First of all, we have a cash position an important cash position today of almost $180 million that cash is in dollars, so we have a not hedged against our debt that expires. Besides that, we are working and trying to maintain the liquidity of the company. So probably, we will work if the market conditions allow us to refinance part or all the amortization during this year. So the plan A is to refinance that bond.Regarding the 2020 bond, it's too soon to start talking about, because we believe that today market condition for that size of bond will cost us very expensive. So we believe that is better to wait until to see what happen with the restructuring on the serving side. So we believe that if the serving restructured debt probably all the cost of our Argentina should reveal. So we believe that we will do it more efficiently in the future, so we have time. We have until March 2023 to do it. So for Argentina today it’s long-term now.

[Operator:]

Our next question comes from Thomas [indiscernible] with IBM Partners.

[Unidentified Analyst:]

So I just have a question regarding the shopping mall sales. So you put on Slide 3 that on real terms its positive 5.6%, and we can see that the GLAs stay flat over the period. And then in results in Page 11, we can see actually that the 2020 revenues are decreasing in real terms by 12%. So why do you have the discrepancy between the two slides? Was it something I'm missing?

[Daniel Elsztain:]

This is what I tried to explain earlier. I mean, this explanation that we -- we will not able to collect in revenues all the increasing sales and it’s spread out in different explanations. But first of all, it’s occupancy as we are running with no such a big number that we had last year. We are not collecting that revenue, that rent and we are paying also for the common charges of those spaces.The second effect is increase in sales. Usually, we collect a minimum rent and then a percentage of sales once you surpass that minimum rent. In many cases, this increase in sales did not achieve that minimum threshold so we are not collecting a percentage but we are collecting the minimum rent, so we were not able to make the difference for our revenues. And a third effect also that it’s applying on this case on this quarter is some delinquency that we did not have on the previous -- on the same quarter last year.This delinquency we manage in a way that we don't think we're going to see this delinquency at the end of the year, the fiscal year. But at this quarter, we see this delinquency that is a little higher than it was the previous year. And these are the main effects. Also, on this quarter we are compare the same quarter I think last year. And correct me, Matías, we also collected the penalty that we're talking through with Walmart.So all those four effects are the main explanation why we were not able to collect in revenues that increase in sales and also because remember when we were negotiating the leases since June till October, November, nobody was expecting this increase in sales. So our negotiations with tenants, we're talking about the rent. I mean they were really not in a good mood to accept high rents, but we had to do some concessions also on the rent.So because of those effects, I think we are not getting the benefit of what we are seeing the increase in sales and we expect and we hope that we can manage on this month ahead to collect part of this increase in sales.

[Matías Gaivironsky:]

Let me add something more that this is a very recent effect. Now we came from 18 months in a row with real decrease. So this is something that probably was triggered by the incentive of the government in the current payments without the interest rates, so that probably makes some impact on the sales. So we will see this trends is sustainable or not in the coming months. But definitely, we start to see a positive trend in the sales, then the negotiation with the tenants will change and everything in the industry will be easy. So we will see in the coming quarters.

[Operator:]

[Operator Instruction] Our next question comes from Jonathan [indiscernible] with JP Morgan.

[Unidentified Analyst:]

My question was regarding the prices of the leases of the 200 Della Paolera. I remember in previous conference calls, something in the range between $30,000 and $32,000 per square meter was discussed. How has the leasing activity discussion been? Thank you.

[Daniel Elsztain:]

We have been doing some leasing, actually we signed a lot of contracts actually I think that we didn't disclosed it so far. But I think we have only nine floors remaining of the total building, and the leases that we signed, we signed -- the average of the building is in the $30 range and the lower floors a little bit below the $30. On the middle of the tower, we are in the 30s number and above at the top with the most -- the top floor was leased $36 per square minutes. But average will be, I think I don’t have it exactly with me, but I think it's going to be in $30, or $31, or somewhere there.And we're very happy no matter what's going on the context of the country, all the things that you hear about the country, we have been doing very well in leasing and we achieve what we say we're going to do. So we are also -- we have some floors to lease and the leasing team is really active. So I expect that when we finish construction and we start occupancy, we're going to be even better than we have, we see today.

[Operator:]

This concludes the question-answer-session. I would like to turn the conference back to Mr. Alejandro Elsztain, CEO, for any closing remarks.

[Alejandro Elsztain:]

Well, we are finalizing our half year balance sheet keep the construction of the main projects that's Catalina and the Alto Palermo. And the company is intending to keep the occupation very high, sounds like the change of the environment is coming. We are seeing better sales in our tenants. So we expect the country to enter into a more normalized situation. So thank you to everybody and we see you again next quarter. Bye. Thank you very much.

[Operator:]

This concludes today's presentation. You may disconnect.