IRSA Inversiones y Representaciones Sociedad Anónima (NYSE:IRS) Q2 2024 Earnings Call Transcript

IRSA Inversiones y Representaciones Sociedad Anónima (NYSE:IRS) Q2 2024 Earnings Call Transcript February 6, 2024

IRSA Inversiones y Representaciones Sociedad Anónima isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 2024 Results Conference Call. First of all, I would like to remind you that both audio and a slideshow 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. 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: Good morning, everybody. We are finishing the first half of our fiscal year 2024 with very good results on the operational and financial. We will see the numbers later. During the first half, the tenant sales were very good and occupancy was higher than the year before. Also, the hotels remained with a very strong and high occupancy. Our premium offices, we also improved occupancy. Also during the first half, we have a very active on real estate transactions, selling two floors of Della Paolera building, and we did a new barter agreement on one plot of land that, of course, we will explain later. And also, we finished the setup of a new trust for a very important building in downtown Buenos Aires. Also, we finished with our dividend distribution, but that was some delay to — for the payment of our — to GDS holders because of the regulation, now we finish with everything and we already distributed that.

So now, Santiago will answer in more details about our operational performance.

Santiago Donato: Thank you, Matias. Well here, we see that the shopping malls figures. Well, occupancy have increased to levels of 98%. This is maximum historical levels after all the impact of the pandemic, we finally reached our maximum levels. This is the same than previous quarter and the first quarter of 2023. Sales grew 8% in real terms in the second quarter, compared to the same quarter of 2023. And we are about 30% when we compare to pre-pandemic levels. This shows really good performance of our tenant sales in malls that surpassed inflation as of the first half of the year. The second half, the one that we are going to present in the future is going to be a challenge to keep these levels of sales, given the acceleration of inflation due to the first measures of the new government after December and its impact on real wages and consumption.

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Q&A Session

So we expect slowdown in sales and in visitors in the next quarter. But we trust in the quality of the portfolio, we hope this is going to be a short impact that we soon recover our growth trend. Moving to the office portfolio. Here, we can see that we kept selling some floors, as Matias mentioned, we sold the two — the entire building in the Suipacha building and two floors of the Della Paolera at very good prices. We have a portfolio of around 60,000 square meters mostly A+ and A. We have only 1 building B category, that is Philips. The plan is in the future to recycle and position as a premium building in all that [Dot] (ph) complex together with the shopping and the second building and some other projects that the company owns there. When we see occupancy, occupancy has increased to levels of almost 93% at the second quarter and trends at stable levels, the devaluation has a positive impact on offices.

You know that this is all dollar-linked contracts. So the devaluation of official FX to levels of ARS850 per dollar, this is a natural hedge to the official devaluation. And the third rental segment hotels, that is also linked to our hedge to devaluation, it’s doing very, very well. We reached occupancy of almost 72% in the three hotels, remember that we own Llao Llao resort in Bariloche, and two hotels in Buenos Aires, Libertador and InterContinental. The rent per room average is in levels of $240 per room and good performance both in Buenos Aires Hotels and in Llao Llao. Tourism is strong, remains strong for both domestic and international. Regarding the [indiscernible] Della Paolera, we sold two floors during the last quarter. So this is the case.

We have already presented this in some conference calls in the past. This was a great investment. We sold 86% of the building. Remember that we opened it in December 2020. It was a building that we bought in that moment for long-term lease. But finally, we saw a great opportunity to sell floors, a lot of demand. This is a very premium building, and we sold 86%. We have obtained profits from sales of around $200 million in excess of what we invested that was around $112 million between the land and the construction costs. And we keep some floors there for a valuation of $32 million. So the profit over investment, we expect to be over 200%. A great case and the plan is to — in the future, now replace with new square meters again and develop new projects, mixed-use projects in the near future.

So on that part, I will give the word to Jorge Cruces, our CIO, for the real estate transactions of the period.

Jorge Cruces: Thank you, Santiago. Good morning, everybody. In December, we signed a Barter agreement transferring ownership of a land Ezpeleta to a well-known land developer of Quilmes district. We have developed very successfully Quilmes Nuevo, and they named this new development, Quilmes Quilmes Nuevo 2. We will receive 40% of the development, meaning 125 single-family lots and 40% of the buildable square meters of the multifamily lots. Banco Hipotecario had acquired the main office building of the city’s administration to build its headquarters. For a number of reasons, this never happened, and this building was on sale. Currently, there is a reconversion program from commercial to residential with tax benefits. We gathered a pool of companies willing to take advantage of this program and invest with us in this great premium residential development.

Our stake of the investment will be 20.5% of the reconversion cost, obtaining 14.7% of the square meters of the project. We estimate a total investment of approximately $50 million net. The development has 720 departments sets, studios, one bedroom’s apartment and up to two bedrooms apartment, has 220 car spaces, has the amenities, rooftop, gym, co-working. It’s a great development. It’s a whole city block, right, one block away from the Obelisk, on the main avenues of Argentina, it’s called Nueve de Julio. Well, this is going to be a very important project in Buenos Aires and we are very proud to announce this development. Costa Urbana, on November 15, notarial deeds were signed transferring ownership to the city of four plots of land and creating the 61 lots for [indiscernible].

With this act, we fulfilled the second step in the process of creating the land registrations in the industrial database of the city for issuing the title of ownership and enabling IRSA to transfer the plots. The third and final step will be accomplished when we finish the road works and infrastructures for each block, enabling IRSA to officially transfer the ownership of the plot to third parties. By end of January, we have completed the submittal of all additional information and documents requested by City Hall for granting the approval of the project for the infrastructures and road works that configure the master plan of the development and updated assessments requested by the environmental authorities and we are looking forward to the convening of a public hearing.

We expect the hearing to be held by the end of March. Well, thank you very much. Now I’m going to hand over back to Matias.

Matias Gaivironsky: Thank you, Jorge. I’m trying to turn on the camera, but I can’t Santiago. So if you can allow me to turn on the camera, I’ll put it. So I started with the macro situation, trying to understand some of our results that has an impact due to the evolution of the FX and the inflation. As you know, during the last quarter, there was a devaluation of the official exchange rate from ARS350 to ARS800 from previous quarter that represents 131% increase against the 36% increase during the first quarter. So if we see in real terms, devaluation in the first quarter was almost zero. Then in the second quarter was 51%, that will have an impact on our dollar-denominated debt when we have to convert it into pesos and also in our ECS model for investment properties, where we’ll have to assess the value for our malls that will have a positive result.

Regarding the other part of the portfolio, the offices and the land bank, remember that we measure that at the dollar MEP, a double check swap. And if you see in the bottom right of the slide, you can see the real FX — MEP FX evolution that during the first quarter, we have a jump of 21% and now a decrease of 18%. So in terms of — when we convert those properties into pesos, the result of the semester is almost flat, the 0.2% that you saw — you see there. So going to the next page. And we can see the evolution of the EBITDA, the adjusted EBITDA increased by 54% during the semester. We can see good results in our malls, increasing by 15%. The hotels increasing by 33.7% and a decrease in the offices by 37%. Here we have a lower stock and the impact of the devaluation haven’t an impact in this semester, will have an impact in the next semester since the invoices of our offices for December were sent before the devaluation.

So the impact will come in the next quarter, but in pesos term, we will receive higher rents because of the devaluation. In terms of the EBITDA margin, we remain stable in the malls, the office is a slight decrease because of the lower stock and hotels increasing from 35% to 38%. Going to the next page. The operating income leaving aside the fair value effect increased by 47% from ARS37.7 billion to ARS55.5 billion. And here, we have the first major impact on the semester that is the change in the fair value of our investment properties, going from a negative result of ARS92 billion last year to ARS137.8 billion this year. If we measure the properties in dollar terms, we will see mostly flat numbers. So it’s not a positive evolution. This only is the impact on converting those dollars into real pesos adjusted by inflation.

So we have a positive result during this quarter. If the next quarter, the crawling peg of the FX remain at this pace of 2% and inflation at levels of double digits, that means that in the next quarter, we will lose money in pesos term, not in dollars as there is no major changes. The next page, we can see the net financial results. We have also important effect here from a positive number last year of ARS19 billion to a negative number this year. This is related to the devaluation. You can see in the table below, the net FX result, we generated a loss this semester of ARS94 billion. This is related to all our dollar-denominated debt when we convert that debt into pesos at a higher number. That is the fact but also that part was compensated because all our liquidity was invested in dollar-denominated securities.

So that has a positive result of ARS57 billion. Also, the inflation adjustment has a positive effect of ARS32 billion. If we see the net interest, we are posting better numbers and lower loss from ARS13.8 billion to ARS7.5 billion. This is because we have a lower leverage compared with the previous year. The income tax, here we have — last year was a positive number because remember that we recognize it — a loss in the fair value of the investment property. So the deferred tax was positive this year because we are posting a negative number — I’m sorry, a positive number in the investment properties, we have to recognize a deferred tax of that, that is the ARS48 billion that you see in the center of the slide. So with all those effects, the net result this semester went to ARS146 billion compared with ARS48 billion of last year.