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Edited Transcript of IRSA.BA earnings conference call or presentation 10-Sep-19 1:00pm GMT

Q4 2019 IRSA Inversiones y Representaciones SA Earnings Call

Buenos Aires Sep 14, 2019 (Thomson StreetEvents) -- Edited Transcript of IRSA Inversiones y Representaciones SA earnings conference call or presentation Tuesday, September 10, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alejandro Gustavo Elsztain

IRSA Inversiones y Representaciones Sociedad Anónima - Second Vice-Chairman

* Daniel Ricardo Elsztain

IRSA Inversiones y Representaciones Sociedad Anónima - Chief Real Estate Operating Officer, Operating Manager & Regular Director

* Matias Ivan Gaivironsky

IRSA Inversiones y Representaciones Sociedad Anónima - Chief Financial & Administrative Officer

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to IRSA's First -- Fourth Quarter 2019 Results Conference Call. Today's live webcast, both audio and slide show, may 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 issued yesterday are also available for download on the company website.

After management's remarks, there will be a question-and-answer session for analysts and investors. At that time, further instructions 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 earning release regarding forward-looking statements.

I would now turn the call over to Mr. Alejandro Elsztain, Second Vice President. Please go ahead, sir.

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Alejandro Gustavo Elsztain, IRSA Inversiones y Representaciones Sociedad Anónima - Second Vice-Chairman [2]

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Thank you very much. Good morning, everybody. We are beginning our annual report. This is finishing our fiscal year 2019 of 30 of June. And we can begin in Page #2 seeing that we are achieving a very big loss. When we see the company was affected by some, mainly fair value, but we talk about the adjusted EBITDA. The adjusted EBITDA of the businesses that we are running was a very positive number. We achieved ARS 19.7 billion, and this is 13% comparing to last year number, the EBITDA. And when we divided the 2 segments, the Argentinian and the Israeli, we see that the Argentina Business Center is ARS 5.6 billion, that is a drop of 2.4% comparing to last year numbers. Remember that this year we had adjusted by inflation, more than 50% inflation. And in the case of Israel, we achieved ARS 14 billion, that is 18.6% comparing to last year numbers, not to '19, to '18 numbers.

And when we see related to Argentina, we see an increase of 6.8%, and this is the EBITDA growth. And there are 2 segments that they were very benefit, and Daniel will explain later, that they are the Office business and the Hotels. They two are driven by dollars and because of devaluation and dilution on cost, we had much more benefit on the year comparing to last year numbers, not in the shopping centers that we had a real decrease on the sales.

As we speak about the Israel numbers and we remember that we have a delay of 3 months in the results of Israel, we see an increase of 39% and that was mainly driven because of the revenue recognition, according to IFRS, in the residential business. This -- up to here, the segment is not showing an increase, but the rental is increasing too in the next segment. So Israel business, rental business is working very well on the year.

If we see related to the net income of the company, it is a net loss of ARS 26.8 billion comparing to a gain of last year of ARS 23 billion. The main explanation of this we're going to see later with Matias, that is because of the fair value of investment properties in Argentina Business Center. This is devaluation of the shopping center of the company in Argentina.

We have 2 material effects on the balance sheet in this annual report. One is the opening of the Zetta building in the north that we're going to see the results of that business. And from the other side, in Israel, the other big material thing was the sale of 19.5% of the Clal shares, and we have today 35% directly and through swaps. And we are going to show what we were doing recently paying to bondholders with those shares.

So now I will introduce Daniel Elsztain, please.

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Daniel Ricardo Elsztain, IRSA Inversiones y Representaciones Sociedad Anónima - Chief Real Estate Operating Officer, Operating Manager & Regular Director [3]

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Thank you, Alejandro. Good morning, everyone. On Page #3, we'll start with Argentina numbers on the left side of the page with the shopping centers numbers. In terms of the total GLA, we see a small reduction this year compared to last year. This is mainly explained by the end of the concession of the Buenos Aires Design. It was a mall dedicated to construction and decoration that belonged to the city, we gave back. So the total GLA now is 332,000 square meters. Occupation is 95%, it's a small drop also compared to last year. This is mainly explained by Walmart that had Dot Baires Shopping centers that we closed. So we have that empty space. If we would exclude that specific supermarket, the total occupancy would have been 98.5% compared to last year of 99%.

Regarding malls' sales, we see, in real terms, a reduction of 13.5% compared to last year. But we see in the trend that we are -- this quarter was a little bit better than it was the previous quarter. When we see this in nominated terms, we see an increase of 36%. And if we could exclude the effect of the sales of Walmart, this could have been a 12 -- a reduction in real terms of 12.6% compared to last year. Just as a note, at the end of this quarter, we were seeing a reduction in inflation, we were seeing an increase on consumption. That changed after the primary, but it was -- at least, it was a good or a better ending of the fiscal year than we were seeing in the previous quarters.

Regarding the Office segment, we see -- from this year compared to last year, we see an increase in the total GLA. We are running from 83,000 square meters to 115,000 square meters. This is being the incorporating the Zetta Building at the Polo Dot Office Center, an increase of 38% of our portfolio. We're going to have another increase for next fiscal year because we're including the 200 Della Paolera building in the Catalinas' neighborhood. That will be an increase of another 30,000 square meters of GLA.

In terms of price per square meter, we are running on $26.4 per month per square meter. This is a triple net, if we excluding the common charges. Occupancy is running at 88.3%, but this reduction is mainly explained by the big class portfolio that we have. If we see that we have here the breakdown. The Class A and AAA buildings portfolio is running at 97.2% of our total GLA. This business is really stable, prices are stable. And as Alejandro mentioned, it's all dollar nominated. So all the rents in our offices is collected in dollars. So that's why we see the big increase because we increase the size and also we are collecting all the rent in dollar terms.

On Page #4, we see some numbers of the Zetta building that was recently concluded and opened, opened in May 2019. Total investment of $60 million, estimated EBITDA almost $9 million, a cap rate of 15%, unlevered cap rate. For this transaction, we had a small debt for the construction. Tenants are happy. We are happy. It's a fantastic building and it's -- the location is getting better and better. We have demand on this location to make new product, nothing to be communicated thus far, but really it's a great location, a great product.

On Page #5, the 200 Della Paolera development. It's under development, 87% belongs to IRSA Commercial Properties, 68% works progress. We estimate to open in fourth Q of fiscal year 2020, estimated investment of $90 million. This investment, I mean, it was the original investment. Inflation is helping us to make some reduction on this total number. Estimated stabilized EBITDA for this building will be somewhere between $10 million to $12 million, approximately 12% cap rate. We are seeing demand, good demand for prospect tenants on this building, so we hope to open this building also with high occupancy levels next year.

On Page #6, regarding our Hotels portfolio, we have 3 hotels, 5-star hotels and 1 is a destination luxury hotel in Llao Llao. We have seen a small drop in occupancy from 70% last year to 65%, although the room rates went up from $191 to $197. And here costs are -- all costs are in pesos, and we are getting here the rent in dollars. So that's why we see a huge increase in EBITDA on this segment compared to last year's ARS 71 million, this year ARS 588 million. This is -- this was a very good year for Hotels in our portfolio. We are very happy, although it's a small piece of all our portfolio in terms of size.

Also as an important event of the year, in February 2019, IRSA acquired the 20% of the shares of the Hoteles Argentinos company. That was the entity owner of the, what it used to be the, Sheraton Liberatdor, now it's called only Liberatdor hotel. Since we bought from Marriott that stake, we no longer call the hotel a Sheraton, it's no longer flagged as a Sheraton hotel and it's running independently.

On Page #7, some investments on the abroad. First, we're starting with the Lipstick. Go to bottom of the page, we are running at 97% occupancy with $77 per square foot per year on the building, very similar to last year. NOI, it's $27.4 million. And the main events of the year is first, there was a debt refinance from $53 million to $11 million. This debt is maturing and it's being paid during the year, but it's going to be maturing in April 2021, big event also for the ownership of the building. Also in June 2019, there was a deposit -- escrow deposit for an agreement to buy the ground lease from the ground lessor at a discounted price. The option value was $5.1 million. This option expired, so the owner is entitled to collect the deposit. Nevertheless, the company is -- we're still in negotiations with the ground lessor, and we are still looking the way to try to obtain those funds to execute the purchase of the building.

On the right side of the page, we can see some numbers on Condor. Condor, as of July of 2019, signed an agreement to merge with a nonrelated company. This merge would represent for existing shareholders to collect the cash for their shares. In the case of IRSA, the ordinary shares will be paid at a price of $11.10 and the Preferred E convertible shares will get a price of $10 per preferred. This transaction will be concluded -- the closing will be sometime from October to December. The buyer and merger have the option to do it any time from October to December, and the estimated proceeds to IRSA will be approximately $29 million. Since announcement, the price of the share went up very close to the transaction price, so now it's trading in the range of $11 per share.

So now we're talking about some figures on Banco Hipotecario, Matias Gaivironsky, our CFO.

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Matias Ivan Gaivironsky, IRSA Inversiones y Representaciones Sociedad Anónima - Chief Financial & Administrative Officer [4]

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Thank you, Danny, and good morning, everybody. So going to Page 8, we have the evolution of our investment in Banco Hipotecario. Unfortunately, what happened after the primary generated, the valuation of the shares decreased significantly similar than the rest of the banks in Argentina and they're similar than the rest of the stocks in Argentina. So now what you see that was the market value for our investment around last year is decreasing significantly to levels of $87 million.

Regarding the results, this year, we posted a loss of ARS 1.7 billion against a gain last year of ARS 291 million. This is basically due to the impairment of an investment property at the Banco Hipotecario level, they built building to develop a headquarter. They made an impairment on that building. And also because of the inflation adjustment, we are recognizing losses because of that. Banco Hipotecario still -- they don't have the obligation yet to shut value inflation on their balance sheets, but when we recognize the result from them, we have to do it.

So going to Page 9, Alejandro will continue with the Israeli investment.

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Alejandro Gustavo Elsztain, IRSA Inversiones y Representaciones Sociedad Anónima - Second Vice-Chairman [5]

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We can see the current corporate structure between IDB and DIC, how we are running 100% of IDB and 82% of DIC. We can -- as you remember, we were -- because of the concentration law resolution, we had to solve the layer -- the third layer of the company, and so we had to decide what to do with Mehadrin, Gav-Yam and Ispro.

From the case of Ispro, Ispro was 100% in hands, but now we are privatizing the public debt. With that, we'll be sold. In the case of DIC -- Gav-Yam, sorry, Gav-Yam, we had -- we came from 70% and now we are showing here that we went to 35% of the shares. This is -- Gav-Yam is the rental properties in Israel, mainly office buildings and logistic centers. And so we decided how to solve is to deconsolidate this Gav-Yam, so we sold, the last quarter, 16.7% of the shares of Gav-Yam. We had 51%. Now after those 2 sales, we are below the 35%. With that, we are not having more -- 100% control of the company. So now we are deconsolidating for the balance sheet, we are complying to the concentration law.

The last one that we need to solve is Mehadrin that would need to be defined before the end of the year. We have here 45% of the shares, and we need to go all to the 100% or below the 35%, that is under discussion today. So the concentration law is close to be solved. And from the other side, we have the Clal issue of the sale that we are going to explain little later, what we were doing the last quarter.

Related to the CEO appointment, we are in the process of appointing a new CEO. As you know, the headhunting that we were doing, it was closed to be finished. And we are receiving very good CVs of candidates, of Israeli candidates to be CEOs of these 2 companies, IDB and DIC. So we are close to that end.

If we move to next page, in the Page #10, we can see the evolution of the shares of the portfolio of companies in Israel. We can see that in DIC, there was a big drop mainly related to the Cellcom. I think today the Cellcom is the company that is damaging a lot the DIC valuation. From the other side, we see the Clal evolution, and we show in the red color the shares -- the day we are selling shares. So these are the dates that we were begun to sell shares and the last 2 are in this balance sheet.

So there was a -- in the case of Elron and in the case of Cellcom, we are buying in the decrease of the prices. We are buying more proportion of the companies. In the case of Gav-Yam, we can see the evolution of the last years, how the company did a very important increase to date in the maximum of the history of the company. So we were selling in these increasing price of the shares when going to the 35%. In the case of Shufersal, we did some -- the same one last year, the one this year, going to the 26% that today we are running. And in the case of PBC, we have still a lot of shares. Still, the company is improving. So we are discussing how to refocus the strategy of each company. So we wanted to share with you the evolution of the shares of the portfolio of Israel.

Now I will give to Matias to explain the Clal sale process. Matias?

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Matias Ivan Gaivironsky, IRSA Inversiones y Representaciones Sociedad Anónima - Chief Financial & Administrative Officer [6]

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Thank you, Alejandro. So regarding our investment in Israel, as Alejandro mentioned, we used to have 2 main challenges. One was related to concentration law, so we already solved it. And the second one...

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Alejandro Gustavo Elsztain, IRSA Inversiones y Representaciones Sociedad Anónima - Second Vice-Chairman [7]

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Closed to solving it.

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Matias Ivan Gaivironsky, IRSA Inversiones y Representaciones Sociedad Anónima - Chief Financial & Administrative Officer [8]

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Closed to solving it because we have a minor issue with one of our companies. So the second one was regarding our investment in Clal. So since the beginning, the regulators haven't allowed us to have the control permit and then they forced us to sell in the markets. So you can see in the graph that since the beginning, our strategy was to maintain our stake. So we started, since the beginning, with all our stake direct held by the company and then we start to do swap transactions in order to avoid missing the economic rights on the shares.

So finally, in August '18, when the regulators started to force us to sell in the market. At that moment, we requested to have the control permit. For first time since our original investment, we submitted a request for control. But finally we decided to pull back the control permit in August '19 when we realized that the chances to get the control in this stage was very limited. So we decided to pull back and then the regulator asked us to not renew the swaps. So we have to start selling the swaps or closing the swaps losing the economic rights.

So you can see that in June '19, we started to sell the economic rights. So we decreased from the 54.8% to 44.3%. At that moment, instead of going to the market and sell the shares, we entered an agreement with 3 -- 2 families and very well-known families in Israel, and we gave an option to a third party that used to be the CEO of one of the largest insurance companies in Israel with idea that they will help us also to show confidence on the company.

So finally, we executed or they executed the 2 first options, and we are in the process of executing the third part, that is the option to the former CEO of the company, the insurance company. So we -- at the end of September, what we did was also to enter into agreement with the bondholders of IDB to exchange bonds of IDB for shares that was a way since the bonds of the company are traded with a discount at the same that the Clal shares that are traded at the deep discount on the book value, was a way to sell indirectly Clal shares at much closer book value -- closer price than the book value. So what we did was to -- almost the same than selling the shares of Clal at 90% book value. So we will try to keep doing these kind of transactions in the future. So we are working on that.

Finally, in Page 12, we can see the debt amortization scheduled for IDB and DIC. Starting with DIC, you can see that we have cash and cash equivalent for the same amount that we have the debt until 2022, so we don't see any problem with the DIC debt. Regarding IDB, we are working in the structure. We are doing these kind of swaps between the bonds and shares, that is a way to cancel debt as well. We today have the resources to serve our debt for this year, and we have assets that are held for sale that we expect to sell in next year to cover the amortizations for the next year. And due to this financial situation also, IRSA decided to invest an additional ILS 70 million in IDB in the September, so we already did the first payment, and also commit to invest 2 additional tranches of ILS 70 million in September 2020 and September '21. So now this is our only obligation with the company. Our commitment also is subject to certain conditions, so not 100% sure that we will invest the money, but our commitment if that conditions are in place is we are obliged to invest the money in the company.

So now going to our financial results in Page 14. As Alejandro mentioned at the beginning, we are finishing the fiscal year with a loss of ARS 26.8 billion, attributable to our controlling interest ARS 25.8 billion against a gain last year of ARS 23.2 billion or ARS 14.7 billion. So when we analyzed the results here in the table, you have the Argentina Business Center, the Israeli Business Center and the total in Argentina, the ARS 25 billion -- ARS 25.6 billion is mainly related to the Line 4, change in fair value, that you can see that we have a loss of ARS 27.1 billion. So that is basically the main effect, and then I will explain the rest of the effects.

In Israel, we are finishing with ARS 1.6 billion, that also is related to financial results. Last year, we had the disposal of some Shufersal shares that make the company to deconsolidate the operations. So you have the results in the Line 14 of net income from discontinuing operation that created a gain of ARS 20 billion -- ARS 20.4 billion last year. So leaving aside that, we improved the results on the company, and I will explain the Line 9, that is the net financial results, on a -- deeper in the following pages.

So moving to Page 15. Here for us is the most representative in terms of the operational performance on the company. You can see the shopping malls decreasing by 15% in real terms, this is basically attributable to the lower consumption in Argentina. All metrics on consumption lag inflation. Inflation accelerated significantly in Argentina to levels of 55% and consumption was in levels of 35%, 37%.

Regarding offices, since we have dollar-denominated revenues, we are generating very good results and also we have the incorporation of the Zetta building that also started to generate results in the segment. So for that reason, we have the 116% above last year. Hotels, this also are improving significantly. And sales and development decreased. Basically, last year, we sold more properties than this year. This is the part that is nonrecurrent along the years.

Regarding the Israeli business segment, here we have the real estate and telecommunications. Remember that the devaluation between the shekel and the peso was 22%. So to compare apples with apples, you have to use the 22% is the devaluation. So we can see better results in real estate basically related to recognition of -- or to the implementation of IFRS 15, that makes the company to recognize results on the developments of -- on residential. And telecommunications line decreasing in operational -- in the operations against last year. So the competitive environment in Israel is still very heavy. So all the companies in the telecommunications segment are performing lower than the previous year. So that is still the situation on that industry.

The others segment is basically the results on the headquarters and the cost of the headquarters at other company.

Page 16, to open the line of net financial results. So starting with Argentina, we see an improvement from a loss of ARS 10.8 billion to ARS 2.1 billion. You can see in Line 2, the net foreign exchange losses, last year, we had important impact of ARS 9.2 billion against a gain of ARS 700 million this year.

In the bottom left of the page, you can see the evolution of the exchange rate. Last year, the devaluation was 74% with an inflation of in average 29% means that in real terms, we have a huge devaluation this year. The devaluation was 47% with an inflation of 55%. So we have an appreciation in real terms, that is why we are recognizing a gain against the loss of last year.

In the Line 1, we have the net interest losses that we increased our net interest payment. This is related with our dollar-denominated debt. With the devaluation, we are paying higher interest in pesos. And finally in Israel, we can see 2 lines. The first one is the net interest losses. We increased by 11.4, but remember that the real devaluation was 22%. So in real terms, we are paying lower interest in Israel. This is basically the deleverage of the companies and the reduction on the cost of the debt.

And in the Line 3, the fair value gain from financial assets and liabilities, here we have the refinancing. Last year, we refinanced -- sorry, one second. Sorry, in the Line 3, we have the exchange on the debt of DIC that we did last year, so we recognized a loss. And also we have the Clal evolution that last year decreased by 14% shares that you can see in bottom of the page and this year increased by 20%.

So going to Page 17. Finally, we have here the debt amortization schedule. So we have the net debt of the company remained stable at $333 million. Some financial events, one was, as we discussed in the last earning release, we established a credit line between IRSA and IRCP. So IRCP can lend up to $180 million to IRSA. So that was one of the events. And the second one was that we did 2 issuance of bonds, one in May 2019 that we issued $96.3 million at 10% interest rate that expires in November 2020. And finally, in August this year, we issued a second tranche of the Class 1. So we reopened the bond we issued in May, and we enlarged by $85 million at an yield of 8.75%. And also we issued a new series of bonds that expire in next year, in one year. The currency is Chilean pesos, $45 million in Chilean pesos at a rate of 10.5%, half of that we already swap it to dollars and the other remain in pesos Chilenos.

So in the graph in the bottom, you can see the part that we have recently issued. So we refinanced to the next year the amortization of this fiscal year. So the next payments will be in fiscal year 2021. Also yesterday, we canceled the debt that expired yesterday. So we paid $130 million that expired yesterday.

So with this, we finish with the formal presentation. Now we open the line to receive your questions.

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Operator [9]

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(Operator Instructions) This concludes the question-and-answer session. At this time, I would like to turn the floor back over to Mr. Alejandro Elsztain for any closing remarks.

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Alejandro Gustavo Elsztain, IRSA Inversiones y Representaciones Sociedad Anónima - Second Vice-Chairman [10]

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It was a very active year. A lot of things, and a resolution in Israel and Argentina and under construction, the real estate companies are doing a lot, office buildings in Israel and Argentina. The portfolio is improving its ability and its quality. So we are closing in a tough in valuation year, but very good in activities and resolution on assets and shares. So we expect to keep the company doing what we do, and what we know is to do more real estate globally as we were doing actively last year. So thanks to everybody to the conference call. And next let's work a lot for the next fiscal year that begins now. Thank you very much, and have a very good day. Bye.

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Operator [11]

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