IRSA Inversiones y Representaciones Sociedad Anónima (NYSE:IRS) Q1 2024 Earnings Call Transcript

IRSA Inversiones y Representaciones Sociedad Anónima (NYSE:IRS) Q1 2024 Earnings Call Transcript November 7, 2023

Santiago Donato: Good morning, everyone. I’m Santiago Donato, Investor Relations Officer of IRSA, and I welcome you to the First Quarter of Fiscal Year 2024 Results Conference Call. First of all, I would like to remind you that both audio and slide show can be accessed through the 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. If you want to make a question, please use the chat. 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. I will now turn the call over to Mr. Matias Gaivironsky, CFO.

Matias Gaivironsky: Thank you, Santi. Good morning, everybody. So we are starting our fiscal year 2024 with very good results. Our shopping malls keep surpassing inflation and occupancy keep improving. Regarding our hotels, we have a very strong EBITDA during the quarter and very good occupancy. Offices also has a slight recovery in occupancy. Also, our real estate activity was very strong during the quarter, with the disposals of three floors of the 200 Della Paolera building, the Suipacha building, the first office building of IRSA and Quality that was the owner of a plot of land in the San Martin in the province of Buenos Aires. During the quarter — after the quarter in October, our shareholders’ meeting approved a dividend payment that represented around 12% of yield.

That dividend was paid in Argentina in the last days, and there is still pending, the distribution to our GDS holders that we will see later. So I introduce Santiago Donato, our IRO, to follow the presentation.

Santiago Donato: Thank you. Well, here, we can see the evolution of the quarter of the shopping malls. Here, we can see portfolio occupancy increased to levels of 98%. Remember that during the pandemic, we have some vacant surfaces of big tenants like Falabella, Garbarino and Walmart, mainly because they left Argentina. Well, it took us some time to recover that, but we are now in our historical highest levels of occupancy that has been very, very stable ever at levels of 97%, 98%. So we are very glad about that. In terms of sales, we keep — we kept growing in real terms. We are 10% up in the quarter compared to the same quarter of last year and 34% above the pre-pandemic levels of 2020. This is explained mainly by the April segment, the ticket of April and more visitors in our malls.

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Q&A Session

So we are seeing very good levels of consumption, the same trend as we saw in the fiscal year 2023. On the next page. On the office segment, well, we sold during the quarter, we kept selling some floors of offices, the entire Suipacha building and one floor of [indiscernible] Della Paolera building. And then subsequently, we sold two additional floors. So we currently manage approximately 62,000 square meters of GLA, mostly A plus and A, the only building of B category is the Philips building in the Polo Dot complex. The rest are all premium buildings, which occupancy increased to levels of almost 89% with an average rent in dollar per square meter of 26, which is quite stable compared to previous quarters. Finally, on the hotel — on the rental segment, hotels, keeps doing great.

Occupancy is very, very high at levels of 66% in the three hotels. Remember that we own two hotels in Buenos Aires, Libertador and Intercontinental, and we own 50% of the exclusive resorts in the south of Argentina and Bariloche, the LlaoLlao Resort. The average is very high occupied, with rents — with rates per room that are growing in almost $270 per room the portfolio. Then here we have a breakdown between Buenos Aires hotels that recovered from the previous figures, both in rates and in occupancy and the LlaoLlao that is doing great, is almost fully booked. It’s a great place for local high-income tourism and also international tourism, with rates that are reaching almost $530 per room. So the three rental segments are doing very well.

We hope we can sustain these indicators in the next quarters. For the sales and development segment, I will turn to Jorge Cruces, our CIO.

Jorge Cruces: Good morning, everybody. When we sold the [indiscernible] building, at $6.75 MEP. It had a gross leasable area of 11,465 square meters, and it was a quite moving experience to sell because it was our first office building that we had acquired in the year 1991. It was a Class B building. It was vacant at the moment, and we are continuing with our strategy of flight to quality. So it was good for us to sell it at the moment and it was vacant. Otherwise, it’s much easy — much, much more difficult to sell if it’s halfway rented. We also sold Quality Invest. We had — the 50% of the stock capital, we sold it at $20.9 million. And this had a — it used to be from British American Tobacco, and it was a land plot in San Martin.

For a very big development, it was 16 hectares big, and it had — half the plot was constructed, and we prefer to concentrate and to focus all our efforts in Costa Urbana now that it’s approved and most — with today’s economy, it’s much more better. It’s better for us to focus at something premium and big and important like Costa Urbana. We also sold three floors in 261 Della Paolera. One floor first in August, it was sold at $12.1 million, and that was the ninth floor. And then we sold two floors, floor #28 and 29 at $14.9 million MEP. In both cases, there were big companies. They’re even tenant of ours in the shopping malls, and we were all very happy. We still have four floors left that we may be selling in the next year looking forward.

Last but not least, Costa Urbana. In regards to the master plan of the development, we have submitted for final approval of the project for infrastructures and roadworks that configure the master plan of the development, fulfilling the law requirements. As soon as the authorities grant approval, we will file in the working permits with the town hall and the utility companies. Respecting the master plan for the public park, the architectural and landscape draft of the public park was submitted for approval. Previously, the [principals] of the [site] team of West A and [PALO Architecture] held a meeting with the authorities and made a full presentation of the master plan for the public park. About being able to sell plots, we have submitted the final draft of the notarial deeds for transferring ownership to the city.

38 hectares of the [Poly Park] and free lots along Espana Avenue. This is the process of creating the land registrations in the industrial database of the city for issuing the titles of ownership and being able to sell and transfer the plots. As to environmental public hearings, we are working on the update of studies to be submitted as requested by environmental authorities, and we are looking forward to the convening of the public hearing by the Environmental Protection Agency. So let me turn over once again to Matias, our CFO.

Matias Gaivironsky: Thank you, Jorge. So going to Page 9. To understand our financial results. First, it’s important to understand what happened with the inflation and devaluation of the official exchange rate and dollar MEP. If we see in the center of the page, the inflation during the quarter was 35% against an inflation last year of 22%. So in real terms, during the quarter, we have a slight devaluation of the peso. On the left part, you can see the 1% devaluation in real terms against an appreciation of 4% during the last year. And regarding the dollar MEP, there was a real devaluation of 21% from 650 to 789 against an appreciation last year. That will have an impact basically in two lines: one, the fair value of our investment properties and the second, regarding the FX differences on our — that affect our debt.

So going to Page 10. More on the operational side, we can see what happened with our adjusted EBITDA. So we have very good numbers and real terms. Shopping malls increased by 22%. Offices decreased by 4%. That is related to the lower stock of square meters that we have after the disposals. And in the hotels, we have a 34% increase compared with the previous year. So if we see our rental EBITDA, the increase is 21% above the previous year. Regarding margins, we can see an improvement in margins in basically in shopping malls and in hotels. Shopping malls reaching almost 80% of margin — 77 — sorry, 77.7% margin. And in hotels, 35.2% above the previous year. And a slight decrease in offices that is related also because our lower stock of square meters.

On Page 11, we have the evolution of our operating income, leaving aside the fair value impact. So we had an increase of 44%. So when we see the impact of the fair value of our investment properties here, we have the main number of our quarter. That is an improvement of ARS102 billion. So this is more related on what I said at the beginning about the evolution of the dollar MEP, since we value all our properties, the office portfolio and the land bank, we are using the dollar MEP to convert those dollars into pesos. And regarding the shopping malls, we are using the official exchange rate. If we measure the properties in dollar terms, the portfolio is stable. So we don’t see a significant improvement or decrease in prices. So it’s relatively stable compared with the last quarter in June.

But when we convert those pesos — or those dollars into pesos at a higher exchange rate, that is the reason why we are posting this gain of ARS102 billion. Going to the next page, on Page 12, we have the other important effect that is related to the net financial results. Last year, we have — again related to net FX results because of depreciation of the peso this year, we have a slight depreciation of the peso, devaluation of the peso. So we have a loss during the first quarter of this year. Related to the net interest line, we are paying less interest because of the reduction of our debt. So that line is decreasing compared with the previous year. And then we have the impact of the inflation adjustment than the last year was higher than this year.

Related to the income tax. Here, we see a significant loss of ARS41 billion. Remember that every time that we recognize an appreciation of our portfolio of the investment properties. At the same moment, we recognized a loss related to the potential tax — is a deferred tax. If we sell the asset, and if we have to pay taxes, so we automatically recognize a loss every time that we recognize this appreciation, and the same way, if we recognize an impairment, we recognize a gain in the income tax. So with all these different drivers, we finished the fiscal — or the first quarter of the fiscal year with a gain of ARS81 billion compared with a gain, in the previous year of ARS3.1 billion. These are numbers here said fiscal year ’22 and fiscal year ’23 are — is a mistake is first quarter of fiscal year ’23 against first quarter of fiscal year ’24.

Well, if we see the evolution of our rental EBITDA in dollar terms, this is used in the official exchange rate, we can see that we are growing significantly compared with the pre-pandemic levels and also with the last year. So the last column is the last 12 months, including the first quarter of ’24, so we are reaching an EBITDA of $176 million at the official exchange rate. And we can notice also that the hotels are surpassing again, the office portfolio. Regarding our debt, we can see the evolution of our leverage. And we have been reviewing this in the last quarters that we have a strong deleverage. We reduced our debt by 61%. So after the dividend, we have today a net debt of $296 million that we believe that is very conservative comparing against any metric, not using coverage ratio or LTV or net debt to EBITDA.

We are — we have a very conservative capital structure. About the debt amortization schedule, we have — this shows our gross debt of $383 million with a debt amortization schedule that is distributed in the coming years. We have this year, $123 million with the cash level that we have, we can manage that, but probably we will do some transactions in the market as well. About the dividend distribution. As I mentioned at the beginning, we — our shareholders’ meeting decided to approve a dividend of ARS64 billion. That represents a yield of 12%. So we paid on October the 12, we did a payment here in Argentina using the Contado con Liqui or the blue-chip swap exchange rate that this represents dividend around $67 million compared with $64 million during the previous year.

So regarding the — in Page 17 regarding the status of the GDS holders payment. Unfortunately, since we approved the dividend on October 5, we decided a payment methodology on October 6. On October 10, the government or the Comision Nacional de Valores put a new restriction about what Bank of New York as our representative of our GDS can do. So today, there is certain limitations for them to convert those pesos into dollars. So we are working with them trying to find a solution. So in the meantime, and we did an announcement about that, in the meantime, what we did is not to transfer the pesos to them. If we just send the pesos to them, that is our obligation. So in fact, is the thing that we should do, with those pesos Bank of New York can do anything.

So they will maintain the pesos without any kind of investment. So for that reason, we decided not to transfer the money to Bank of New York, and to invest the money temporary in money market fund managed by Santander Asset Management. The name of the fund is the Super Ahorro pesos. And we tried to mitigate with that the inflation impact and we will keep working with them trying to find a solution in order to pay the dividend to our GDS holders. We can’t anticipate a timing. Unfortunately, it’s not upon our control. So we are asking for exceptions to the CMB and trying to fight other solutions. But today, we can’t give you a certainty about the timing. So for that reason, and considering the impact of inflation, we decided not to transfer the money and to invest the money temporarily in that fund.

About our share repurchase program. Yesterday, we decided to extend the program 180 days more, so that matures — stays, and we decided to extend. So the program, remember that is for ARS5 billion and we already repurchased 42% of that plan. So there is still room for more repurchase that we plan to do in the coming months. So with this, we finish the formal presentation. Now we open the line to receive your questions.

A – Santiago Donato: Okay. Well, now it’s the time for the Q&A session. If you have a question, you can use the chat. We will take them in the order we receive them. Okay, we have some questions related to the dividend. I guess Matias have already answered this. If there are particular questions, please write it in the chat. There is a question here about the development of Costa Urbana. If we’re going to take new leverage for this development, how are we going to finance the project?

Matias Gaivironsky: Well, we mentioned sometimes that there is still — it’s not the word uncertainty. We haven’t defined yet how we’re going to develop. Now there is many different ways that we can develop that land. Remember that it’s a huge project. So typically in Argentina, you have how developers finance the projects, basically, they presell units from the scratch — is something that IRSA can do. There is also — and if you see what we have been doing in the last years, we did some barter agreements of swap transactions, where we put the land, someone else develop and pay us with square meters. In that sense, we don’t need to invest money. So the developer will invest and pay us with square meters, and then we sell it.

Or we can do directly development without preselling and finance the operations directly. So we don’t plan to do all with financing. So we probably use all the alternatives. And also, we don’t have a rush to develop. So we will develop if we see demand for the project. So we will launch each of the buildings if we see a demand. So the capital or the working capital that we will use for each of the buildings, I believe that will be limited.

Santiago Donato: Same question. There’s another on the timing. When do we expect to launch the development of the first towers of the projects?

Jorge Cruces: Well, infrastructure, we’re starting the infrastructure next year, 2024. And as from then we can start building the buildings. The infrastructure is something — it’s going to be in different stages and it’s quite fast in the different stages. The buildings you need approximately two or three years at least. So most likely, maybe at the end of next year, we can start — starting a building or the presales of the building.

Santiago Donato: We have another question. Is the trend of sales growth in the malls, I imagine, seeing during the quarter still continuing during October?

Matias Gaivironsky: Yes. Yes, the trend is positive. We still see good levels of consumption in October and in November. So yes.

Santiago Donato: Another question. If we have a project to expand Alto Rosario, well, we have the capacity in our own malls to expand, including Alto Rosario and the recent project. In general, the Company communicates all the projects when we launched it and not before. And there is another question here related to the — all the [committers] vacant on the [Children’s] Museum. If it’s — we have the project to reopen that.

Matias Gaivironsky: We will replace the museum with new proposals. So yes, we are working on that.

Jorge Cruces: We consider convenient for more entertainment. So it’s going to be replaced with more entertainment. And regarding — if we were to do something in Alto Rosario, just like a shopping mall, as Santiago said, it’s going to be set at the right time, but we still have the possibility of — to a mixed use. So it’s very possible for different kinds of malls to have a little bit of mix use that includes Alto Rosario, not only retail.

Santiago Donato: Well, I give you some minutes more for any additional questions. Use the chat, we will take them in the order we receive them. Again, there’s a question related to the consumer environment post-elections. What are your expectations for the malls business?

Matias Gaivironsky: It’s a tough question to know what will be the new administration, is a little uncertain about what will be the new policies in Argentina. We are confident about the quality of our portfolio. Of course, we will be affected by the macro economy of Argentina. So if there is an important assessment definitely, we will see part of that in consumption. But I think it’s still early to know what’s really going to happen.

Santiago Donato: One more question, are there any plans to trace financing in the local or international markets for your projects?

Matias Gaivironsky: Well, yes, definitely, we have been using the local capital market in the past years that Argentina and international market is much more complex, because of soaring debt of Argentina. But well, we saw recently some company going to international markets. So I think for good names, there is still the market open. And yes, regarding the coming amortizations that we have during the year, we will use as well the local capital market. For the international capital markets, always you need size, it’s not efficient to issue, I don’t know, less than $100 million or $150 million debt. We don’t need that amount of money. So our next transactions will be much smaller than that. So we will find — we will try to find the most efficient structure to finance our operations.

Santiago Donato: Okay. Well, with this, we conclude the presentation and the Q&A. Thank you for joining for the participation. And I will turn back to Matias Gaivironsky for his closing remarks.

Matias Gaivironsky: Thank you, Santi. We are very happy. We saw a very good quarter. We — good numbers in all the segments, malls, offices, hotels, sales and development. So we are very optimistic regarding the rest of the year. As I mentioned, although the elections always bring uncertainty, we trust in the quality of the portfolio. And we believe that we are very well prepared in terms of our corporate capital structure to face any scenario that can present in Argentina. So thank you very much for your participation, and I hope to see you in the next quarter.