IRSA Propiedades Comerciales S.A.
Q1 2019 Earnings Call Transcript

Published: 11 May 2019

[Operator:]

Good morning everyone and welcome to IRSA Commercial Properties Third Quarter 2019 Results Conference Call. Today’s live webcast, both audio and sideshow, maybe accessed through company’s Investor Relations website at www.irsacp.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’s website. After management’s remarks, there will be a question-and-answer session for analysts and investors. At that time, further instruction 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 statements. I will now turn the conference over to Mr. Alejandro Elsztain, Chief Executive Officer. Please go ahead sir.

[Alejandro Elsztain:]

Good afternoon everybody. We are beginning our third quarter results of 2019 conference. We can move to Page number 2 and we can see the main events for the first nine months of the period. We have just achieved ARS 3.6 billion adjusted EBITDA and if we compared to last year numbers this is a 12% decrease adjusted by inflation and Matias will explain later that all numbers are today adjusted by inflation. We can divide here the three main segments. If we talk about the shopping malls, ARS 3.2 billion this is at top almost 14% comparing to last year numbers. The office buildings ARS 0.8 billion and this is a big increase 72% to last year and since that development there is here a loss of 0.4 billion and because of the Tarshop sale La Arena. If we speak about the same shopping mall cells, so we’re excluding the Buenos Aires Design that we gave back to the government, the drop of the cells adjusted by inflation 12.8% and the occupancy of those malls is 94.5%. And if we talk about the office portfolio the range of the square meters are $26.3 per square meters and today the average occupancy of the office portfolio occupation is 91.4%. Related to the net income there is a net loss of the accumulated year, so we have a ARS 4.5 billion comparing to a gain of last year numbers and to the controlling share company shareholders, they did a ARS 4.6 billion. And the main explanation of that number is the loss in the fair value of investment properties. If we talk just including the rest of their period only this last quarter there was a gain of almost ARS 200 million comparing to a loss of last year numbers of ARS 2.5 billion last quarter of last year. So, recently and on May 6, and we're going to explain later Daniel will explain related to Zetta office building in May 6, we opened this building and it's fully leased, almost fully, no, I think only their floor, the base floor it is only few square meters not rented still. But almost 100% with two big tenant. So, this is a good news. We are opening office building is this critical year period. So now I will introduce Daniel Elsztain to you through the conversation.

[Daniel Elsztain:]

Thank you, Alejandro. Good afternoon everyone. One Page 3 we can start with shopping malls operating figures. First GLA it was reduced a little bit because after hand of sale it was the end of the concession of the Buenos Aires Design Center. So from 340,000 sq. m. of bubble GLA in shopping centers now we have 332,000 sq. m. of bubble GLA in shopping centers now we have 332,000 sq. m. of GLA. Occupancy will also see a reduction from the 99% we have on the same quarter last year through a 95%. This is mainly explained by the vacancy generated at the DOT Baires shopping center because Walmart left the space. So we are working to replace that space with smaller tenants. It is more efficient than will be, attraction for the shopping centers. So, if we exclude that effect of Walmart, the occupancy would have been 98.3% on this quarter. It is true, we have a little bit more vacancy than we used to but mainly this is explained by the Walmart. And it will take some time, so we do the construction and we would finalize with all the tenants on this space. We already have some contract sighing on this space and we're working to get the rest of it. In terms of sales, we see that in this quarter we had an increase in nominal terms of 29.6% but if we see the real terms, it's a charted by inflation we see a drop of 14.7% in terms of sales. In the next page we can see how this is explained by the six different segments of what we sell in our shopping centers. The dot line is our average, which is 14.7% the drop. But we can see that in the clothes and footwear it’s not doing so bad, actually, when we compare these numbers with durable products, cars or houses, I mean, it's bigger, bigger effect on this. Also, what is really affecting us as, it's a big drop on electronic appliance itself, we see a drop of 42%. It is true because there's not a lot of financing in the country that the sales are going down, but it's also a matter of comparison. For this time last year we were talking about the World Cup and the electronic stores were selling thousands and thousands of TVs, which is not happening now. And on top of that, having financing is also reducing the sales of these stores. Remember that we collect more money from as a percentage of sales from clothes, footwear, and restaurants that we do from electronics. On Page 5, we can see the Alto Palermo shopping expansion. It's underway. It's working as of today, we are on time. We're working on producing the new space, the new food court and it's going to be a big attraction as this is located in the main entrance of the shopping center near Santa Fe. As of today we have a progress of 10.5% of the construction, but mainly it's the structure, the concrete structure that is underway. This is going to be an expansion of approximately 3,900 square meters of GLA. We estimated this construction of $28 million. And when we started the project, it will be open by fiscal year 2020. Big expectancies for the shopping center to tenants know this is a big event for shopping. Remember, this is our best performing shopping center and this 3,900 square meters represents a big increase of the total GLA that has today, the shopping center. On the office segment on Page Number 6, we can see that when we close this fiscal year, we didn't have the Zetta building at Polo Dot office park open. So the total GLA was – there was a small reduction because we saw one floor at this building. So we saw that it was 83,000 square meters. Now with incorporation of the Zetta building, we're going to have 115,000 square meters of GLA, real GLA, no loss factor. This is real GLA production income. And we estimate that by fiscal year 2020, we will have the incorporation of the 200 Della Paolera, which we used to call the Catalinas project and we want to achieve 145,000 square meters of GLA in this segment. This is a big increase. I mean, it's increasing our portfolio by almost 74% – 75%. In terms of occupancy, we see that we still have a similar occupancy that we have on the last quarter. This is not taking in account that the new incorporation of the Zetta building because it's just starting on May not at the end of this quarter that we’ll show you today. And the price per square meter remains very stable, especially on the Class A segment. The Class B segment is being a little bit more challenged and we still don't have any precision was going to happen in near future. On the following page, we have – here some pictures of the new building of the Zetta building, what we call the Zetta buildings, which is 32,000 square meters of GLA. It's fully leased. As Alejandro mentioned, there’s only small space on the ground floor that is dedicated for F&B that we are negotiating. We wanted to have the building open. We didn't want to have an operator before the building was occupied, it could have been a big risk for the tenant so we're waiting for that. But anyway, it's a very small space in the building. The rest is fully occupied and we have already the tenants in the building working very happy. Everybody's surprised and happy with the product and the tenants, they are thinking about growing. They are also growing in the same location because they liked very much the location and they liked the building. That was an investment of $60 million. The estimated EBITDA now which is almost, reality is approximately $9 million and this represents 15% cap rate in the investment. On Page number 8, we can see the use of projects at the same office park. The only real pictures, I mean that it's a render that it's more real and more accurate. It's what you see the Polo Dot second stage that is real render that’s what we're working. For the second stage, we have demand for new offices. We are not launching anything so far but this is a real render. And also what is the real render is the future model expansion. The other pictures are not real renders. Just schematics can show what we can and we will do in the future when we see that it's the right time to do it. It's a tremendous potential that we have here and we believe that everything we do here, it's going to make better, also, the shopping centers. The prices that we are getting at these locations are very good compared to downtown and the best locations of Buenos Aires. On Page number 9, the 200 Della Paolera office building. It’s under development. Remember, we have 87% of these buildings, 13% was sold to a local firm, a leader in technology development called [indiscernible]. The total project is 35,000 square meters of GLA estimated opening for fiscal year 2020. They estimated a business for our portion of the building will be between $10 million to $12 million and the work in progress is 51.6%. This is a real picture that we can see here taking a few weeks ago. This is really going fast and it's a really amazing building. All the prospect tenants that they got is, I don't want to say they fall in love and they really are enthusiastic with the place, location, the view, flexibility, and we are building a real world-class standard office building in Buenos Aires. So now to go for financial results, we're going to introduce Matías Gaivironsky, CFO of the company.

[Matías Gaivironsky:]

Thank you, Danny. Good afternoon, everybody. So going to Page 11, we can see our financial statements. So we divided the table in two. On the right you have the accumulated nine months and on the left the third quarter. So starting with the accumulated nine months, we can see a net income that we generated a loss of – almost 4.5 billion pesos against again last year of 12.4 billion pesos. This is mainly attributable to the change in the fair value of our investment property. So if you see in the page – in line four that is the evolution. Last year we generated a gain of 5.6 billion pesos. Again, a loss this the year of 7 billion pesos that is mainly reflect the change in the main drivers of the economy in Argentina, basically the lower expected growth on the GDP and the higher exchange rate. When we go to the top line, the revenues, decreased 6% in real terms and then we will see in the – the breakdown in segments in the different segments. The other important line is the line seven, then I will explain in the next page that is the net financial result that we have higher FX losses compared with the previous a year. Something important for us since we grew lower on the inflation, we put a lot of effort to Montana were cost on the same level. So if you see the line two that is the cost plus the line five, that is the SG&A expenses. You’re having the vote on off the page that you can see that the total cost of their companies increase in real terms 6% in the same line done there our revenues. Regarding the income tax in the line eight, you can see that last year, we generated gain of ARS 3.7 billion. Remember that was a true up trouble to the change in the tax regime in Argentina that the government reduced the income tax that generated again in our deferred taxes, other taxes that we have deferred on regarding our investment properties. Regarding the quarter, we generated a gain as Alexandra said ARS 200 million against ARS 2.4 lost. Last year, here some of like the lines and regarding the changing their fair value on the operational side, we will see in the following pages. In Page 12, we can see the net financial results that breakdown and you can see that the exchange rate, they were loose from last year, we had a evaluation of 22% from 16.5% to 20.1% and this year is 51% that is – that generated an impact in all our dollar denominated debt. So you can see in the foreign exchange differences that effect. So we – last year we generated a loss of ARS 247 million, this year almost ARS 2 billion regarding that and also generated higher interest payment, because of their evaluation, our most of our datas in dollar terms. Page 13, we can see the breakdown in the two main segments that shopping malls and the offices. So in the nine-month period, we decreased – our EBITDA decreased by 13.9%. We maintain our EBITDA levels in 74%, again, 77% of the last year. Then we will see that in the offices we increase, our EBITDA margin. The rest of the lines remain in the – with the same trend these decrease. In the quarter, we have a lower result in the shopping malls, mainly attributed to a current situation of our tenants. We saw that the rents decreased by 16% and unsaved decrease by 16%, and our own is decreased by 20% and our adjusted EBITDA is a little lower here we have some – something that – that some of our agreements were shorter term. So we are generated lower commissions and lower key money. But in the nine months period, we see that – for these quarter and not for the long-term. In the offices, we generated a much better results on the last year basically, because our agreements are in dollar terms. Remember here, we only include the real appreciation or depreciation of the peso. So part of the difference go to inflation. So last year we increased the numbers of the last by inflation. So the 67.7% that you see is against or above the inflation. We already started to recognize on the accounting side, part of the revenue from their sector yielding ARS 140 million were recognized in this quarter because we already delivered the unit to the tenants. So at that moment we started to recognize the revenues. As I said, there is a margin increase from ARS 79.8 million to ARS 82 million. And if you seen the quarter from ARS 77 million to ARS 85.6 million. Regarding – something else regarding shopping malls is related to Walmart in Polo in and both. Remember that now we have a little more vacancy we receive initialed or one shot penalty from Walmart. So is like we collected like two years of rent from that store. So in terms of revenues, they've got vacancies not generating a lot to the company. So if we replace the tenant in the short run, we will not suffer there that resignation. Going to Page 14, we can see our NAV. So the evolution compared with the previous quarter is quite stable. But we have today, these is in our books, our gross asset value of $1.7 billion and a net debt of $333 million. So net asset value today of the company is almost $4 billion of value. Page 15, we have the main financial metrics and ratios of the company. So we can see in dollar terms the last 12 months EBITDA achieve $119 million, almost $120 million. The last 12 months NOI $144 million and the last 12-month adjusted FFO almost $90 million. The ratios, we are traded at the cap rate of 14.6%. And this compare at zero value all the landbank. So this is only the assets that are generating cash. EV to EBITDA 8.3 times, right to FFO 7.3 times and price to NAV is 0.5. So when you compare this company with our peers in the region, you will find that we have trained at much lower raises in all of them. In Page 16, we have the breakdown of our debt. There is no news on the debt side in the quarter. The only event was the subsequent event after the close him in April. That nears the commercial properties grounded at credit line to our parent company years for up to $180 million for three years, at an interest rate that will be equal to the same yield than the years of bond, years are 2020, 2021s or any of the bonds that we placed that bond in the future. And then our debt amortization scale remains in the same. So we have the next payment in the fiscal year 2021. So with this, we finished our formal presentation. Now we open the line to receive your questions.

[Operator:]

[Operator Instructions] And our first question comes from Gerald Ferrante from Morgan Stanley. Please go ahead with your question.

[Gerald Ferrante:]

Good afternoon gentlemen. So, I want to start out with the $180 million line of credit for this, that was opening in April. I have two questions surrounding that. I was trying to better understand what was the rationale behind, opening this line and has any of it been drawn? And then I had some questions about tenant management. So specifically, have you seen any meaningful increase in delinquencies within your mall portfolio? And if so, how are you dealing with these, are you giving more rent discounts? Are you taking the opportunity to optimize your portfolio by swapping out tenants? Any color you could provide here would be helpful? Thank you.

[Matias Gaivironsky:]

Thank you, Gerald. Regarding the credit line, when we analyze the liquidity of IRCP, the following commitment regarding our CapEx, and our next cash generation for the year, we have an excess of liquidity. So today we have a cash position of more than $200 million. And when we – you analyze what are the remaining CapEx from the projects that we already launched, for the next year we estimate a CapEx of around $30 million. And if you see our FFO for the year, we are around $90 million. We are not paying today taxes. So that $90 million is basically the main use is CapEx or dividend, we are not paying dividends today because some restrictions on the – it’s not efficient on the tax side. So typically if we are able to do that, we probably will distribute dividend higher than what we are doing. So for that reason, we considered that the liquidity on the company is okay. And for that that reason we decided to create this credit line. Today probably managing the liquidity in Argentina is subject to risk and we believe that these efficient weight on the group side to manage our liquidity. Remember that is a control today around 81% or 82% of IRSA Commercial Properties. So we preferred to have the credit line open, is not necessary that we will use it. So this – we will sit in fact this week, we did a bond for IRSA. So, IRSA grow and it sells to the market. But we wanted to have these credit lines open soon in case. Gerald, regarding – this is Daniel, Gerald. regarding the question on delinquency, first of all, what is – it’s really driven the delinquency on our tenants. It’s the cost of that debt. they have been finding very difficulty to finance their own operations; the interest rate is really high on that today in Argentina. So, by that, they have been trying to get the way they had an on hand to finance the production of the clothes and the material that they needed. So that’s why we see some increase on delinquency. But the majority of delinquency that you see in our numbers is basically three tenants that they were having some troubles and problems that we typically – and then – and you’re going to see this that we solve the issues have after we see some delinquency, we negotiate with them and wait to pay that delinquency. And we usually collect all that money plus interest. And the bad part that I always complain is that all the interests that we collect is not reflected on our EBITDA. It’s always more than what we collect from the interest that delinquency that we show. We do show on the EBITDA. So, in terms of the process we see this moving forward. I think we’re going to get what we see today. We’re going to collect some of this money in the near – in the near-term, near quarter. But that I still believe that we’re going to have some small delinquency of the small tenants, because it’s the way to finance. Also remember that the interest rate that we collect is really high. So, if we look at a business, I mean I would say that we’re making some money by collecting this interest and what do we do? I mean we don’t – we don’t want to have vacancy and if you show, sorry – if you see in the page where we put the self that we have compared, I mean by segment in page number 4 you will see our competitors. You're going to see that our competitors are way below our performance, they are 19.5% it's the index in the metropolitan area of Buenos Aires. So how do we do this, we tried to keep occupancy at the maximum levels that we can, that really make sense and we worked very much to have – to make the tenants to have the merchandise, to push them to have a stock in the stores replacing, if we know that they will not be able to actually go ourselves. But our marketing team, our commercial team is really working hard hand-to-hand with the tenants so we do not lose sales and we collect all the rent that we are supposed to.

[Gerald Ferrante:]

Thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from Marcelo Motta from JP Morgan. Please go ahead with your question.

[Marcelo Motta:]

Hi, good afternoon. I have a question regarding the Land Bank. I mean the company had recently acquired some land plot and had also approved – also got some approvals for the launch new project. So just want them to understand, despite all these crises in Argentina and with these new credit line open, it would make sense to develop those projects in the short-term or if we need to see a little bit more stability on the economy before La Plata and Maltería [indiscernible] to be developed. Thank you.

[Daniel Elsztain:]

Thank you for the question. Different answers to the same question. The plot that we bought for mixed use development, for example, the case of La Plata, I mean we're working with the permit. We are getting very good feedback on hardware from the city to get all the permits to do everything we wanted to do, but it takes time to get the permits and also will take time to do development. If we had everything ready to do it right now, I mean we will not be launching in this situation. It has to do more with the economics of the project, more than the financing on the project. I mean we're going to see at the time that we have everything ready. Remember that the La Plata one, typically, is one of the largest cities that has no shopping center. So we’re going to see if the economics at the time that we have to everything done makes sense to do that development. The other – some of other developments we are working for example, in the case of [indiscernible] that we announce now not long ago, I don't exactly remember when, but we announced that we had the permit to do a mix-use residential and commercial. What I can tell you that we are working with developers and we are in very good and deep conversations to make a swap as we did in the past with developers. but nothing to be announced that we are working on to do that as we did in the past with other projects. And – but nothing that, I mean all those lands that we have are excellent locations with good proposals to be developed, but nothing that we are launching immediately now.

[Marcelo Motta:]

And let me ask something Daniel regarding the development curve, always takes like three years or two years and have to develop any kind of these projects. So, let's assume that we have a project of around $60 million, that means that we will need $20 million per year. So consider our liquidity, our net, our cash generation every year, we will open the Catalinas building that will generate $10 million or $12 million per year plus Zetta that is another $10 million, that only with that cash generation we can finance per year the development of a project of this size.

[Daniel Elsztain:]

And we are looking for the internal rate of return of the projects. Today, the retail is not giving enough comparing to costs of capital of Argentina. So the decision with investors asking us where do we launch and that's the reason why we launched recently the two of this buildings because we expect these kinds of situations and the coverage that we are achieving are very attractive.

[Operator:]

[Operator Instructions] And ladies and gentlemen, showing no additional questions, we'll conclude today's question-and-answer section. At this time, I'd like to turn the floor back to Mr. Alejandro Elsztain for any closing remarks.

[Alejandro Elsztain:]

The company is doing the job related to the full site, bringing new buildings to the portfolio, adding those buildings and opening them as full as we can, as we did with the Zetta, and we are very proud having two tenants like the quality tenants that we brought. We expect to keep doing that in the Catalinas fielding and Alto Palermo too. On meantime cutting costs, maintaining the margins and keeping the quality of their portfolio facets to the public. And this is a company job, doing the best marketing and bringing new digital solutions, at next presentations we're going to bring you about things that we are bringing to maintain the attractiveness of the business. So thank you very much for everybody and we see you next quarter, that is our Annual Report. Thank you very much and have a very good day.

[Operator:]

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