IRSA Propiedades Comerciales S.A. (IRCP) CEO Daniel Elsztain on Q1 2022 Results - Earnings Call Transcript

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IRSA Propiedades Comerciales S.A. (NASDAQ:IRCP) Q1 2022 Earnings Conference Call November 8, 2021 9:00 AM ET

Company Participants

Santiago Donato - IRO

Daniel Elsztain - CEO

Matías Gaivironsky - CFO

Conference Call Participants

Alvaro Garcia - BTG Pactual

Santiago Donato

Good morning, everyone. I'm Santiago Donato, Investor Relations Officer of IRSA Commercial Properties, and I welcome you to the First Quarter of Fiscal Year 2022 Results Conference Call.

First of all, I would like to remind you that both audio and slide show, 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 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 that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risk 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. Daniel Elsztain, CEO. Please go ahead, sir.

Daniel Elsztain

Good morning, everyone, to our first call of the 1Q 2022. We are going to see on Page 2 our main highlights and subsequent main events for this quarter.

Starting with the shopping centers, we see an interesting recovery in terms of sales and traffic that this recovery is getting even better after the ending of this quarter. The team is focused on occupying the vacant area that was created due to the COVID situation and we see better performance in terms of increasing occupancy.

We see a slight decrease in the office rents and occupancy. Nevertheless, the companies are returning back to the offices in a hybrid model. And also, we see more activity in terms of companies looking for new space or renewing their space.

In terms of the EBITDA of this quarter, we see that it's basically the full rental operation with no asset sales. Last year at the same quarter, we had a lot of asset sales. Nevertheless, our rental EBITDA still 36% below pre-pandemic levels. We are getting better in the operation, but still, we are not yet there of pre-pandemic numbers.

The net loss is mainly explained by the change of the fair value of our investment properties. ARS1.7 billion is attributable to this controlling company. There is a merger proposal with ISRA approved by the Board of Directors still pending for the shareholders' meeting to be approved.

And a subsequent event, we sold three floors at the 200 Della Paolera building and this reflects the strong liquidity that we see in the premium office buildings, and at very low cap rates, may be the lowest that we have seen in many, many years.

So now going into the details on Page 3. We're going to see some shopping mall figures. First of all, we see a small increase in our GLA. This is mainly the first stage of the expansion of Alto Palermo shopping. Remember, we were under construction expanding the shopping center. We finally finished the first stage. The second stage will be for next year, the beginning of 2022 in the same fiscal year. The increase take us to 335,000 square meters of GLA.

And occupation, we see that we see a small reduction getting to 89.6%, but this is mainly explained by the exit of Falabella. Remember, we had Falabella in some of our shopping centers. The last exit was in the shopping in Mendoza Plaza Shopping.

And if we would exclude this effect of this Falabella, occupancy would be 94.3%, which is reflecting more activity, more people wanting to open stores in the shopping, and at the same time, the store of Falabella we're going to talk later, is being occupied. So we project for the next quarter, better occupancy also including this store of Falabella.

When we look at the right side of the page, we see the sales of our tenants. The bottom graphic is - now it's very difficult to compare because the last two quarters, we are comparing with last year that the shopping centers, most of the shopping center were closed. So we see this high and ridiculous figures of growth 570% and 322%, so we consider that it's better to understand the situation that we focused on the top right chart here, where we compare our sales of this quarter with the previous quarter that we had regular sales.

This is the fourth quarter of 2019 of fiscal year 2019 and the first quarter of 2020 just to measure apples with apples. And what we see is that, the last quarter of '21 compared to the last quarter of '19, we had a 55% reduction in real terms of sales. This is just the beginning when we were reopening the shopping centers and on this quarter, we see a very good increase in terms of sales of our tenants, that put us in only 10% compared to real term sales of a quarter, where the shopping was completely opened.

And since then, I mean what I can tell you that the sales at shopping centers and traffic in shopping center is still growing, we are projecting better numbers by the end of the second quarter of this fiscal year.

On Page 4, here we can see something, because if you look at the occupancy, it looks like it's similar to the previous quarter. But here is to show the effect of what happened. It's 10% when we had last year last quarter and 10% also vacancy at the end of this quarter. But what happened, we had a 1.5% increase of the Falabella exit at Mendoza as we mentioned.

We had a lot of occupation in terms of the other stores see that from having 4.6% of other stores, vacancy now is only 3.7%. So the team is really working in bringing new tenants as you can see on the top pie chart, you see that now we have only 52% of apparel and we are bringing in services and others, home and design, restaurants, electronics.

So, and also on the pictures, we opened at the Dot Shopping Center, where we had a lot of vacancy. Remember the space of Falabella now is almost fully occupied. We opened Home Design, we opened Soccer Field complex, the first we have indoor soccer field complex indoor. We also opened some banks, services, pharmacies, pharmaceutical. So there is new activity and not only in apparel.

So we are very optimistic in term of being able to occupy the empty space that Falabella left us and also those tenants that were not able to stay during the COVID period of time. The team is really occupied. There we are seeing signing more than 100 leases per month. So we are very optimistic on terms of occupancy and on terms of recovery of the shopping centers.

On Page 5, we see the office building portfolio compared to the first quarter of '21. We see a slight increase, that's because the incorporation of the 200 Della Paolera building, which we are right now and it's our head office - our headquarter here. Nevertheless, we see some small decrease in terms of occupancy. Now we have - we show 78.9% of occupancy, basically all those buildings we saw were fully occupied. This new building is not fully occupied. Also we have to remember Falabella not only left us the shopping center space, but also a big space of office at the Zetta building in the Polo Dot office park.

But the good story here is that we are starting to see again companies looking for space. There will be some bright pressure on price. And we see that during this quarter we now have a small decrease. Now it's $25.1 per month per square meter. We believe there will be pressure on pricing. But the good news is that we see more activity in terms of leasing and companies looking for space. After the quarter closed, we signed one more floor at this building and one floor at the Zetta building. So we are now a little bit more confident on the office market.

Also what we have noticed is that the companies are not more looking for a reduction in space. This is a trend that we saw first in New York. There, of course, because the economy is growing and their business is growing, and actually they are looking for increasing this space. But the thing is, because now they know that the team, the workforce is going to be at the office at least two or three days a week and nobody is willing to share a desk, the size of the offices are not forecast to be reduced.

At least, this is what we are talking with the companies here. That's what we are hearing on the market. So, yes, there will be pressure on price. But we do not expect to lose much more space in terms of occupancy in the offices and maybe we are lucky and we keep doing some of this thing.

On Page 6, we can see that we sold in November 2021, three floors of the 200 Della Paolera building, 3,500 square meters of GLA for a total price of $32 million, which it's almost $9,000 - it's $8,950 per square meter on this building, which is an incredible sale. It's an incredible price. Cap rate of 3%, which is really low.

And we still have at this building 20 more floors that represent 24,000 square meters. And as I mentioned, one of those floors that we had empty was - we signed a lease, and we have another prospect to sign on this building.

So, that's mainly the main activity on the real estate. Now for the financial results, Matias Gaivironsky, our CFO.

Matías Gaivironsky

Thank you, Daniel. Good morning, everybody.

If we move to Page 8, we can see the breakdown of our P&L. We are finishing the first quarter of 2022 with a loss of ARS1.8 billion, compared with a gain last year of ARS20.2 billion. We started to show in this fiscal year, information compared with the fiscal year 2020. To have a reference of a normal year to comparing with the previous year sometimes will not make sense, because it was very affected by the pandemic.

So here we can see the revenues. They are, of course, growing with - compared with the previous year. And comparing with 2020 is still 31% below. We believe the first quarter was open 100% for our shopping malls. But we also - we implemented some rules and some politics with our tenants that affected our revenues that we believe that in the next quarters that effect we will reduce it. So we will start to recovery faster than in this quarter.

No doubt that the main effect on this quarter was in the line for the change in fair value. We can see a drop of ARS5.6 billion. Last year, we recognized as an important gain in this line. Basically, here, what happened is that the inflation in Argentina was higher than the devaluation and the evolution of the blue chip swap. The two variables has an effect on our valuation in the - of the malls and the offices and the land bank.

So while the inflation is higher, we will keep showing losses. And if we see an evolution of the different - the other variables, the FX and the blue chip swap that, for instance, in this quarter, we have - after this quarter, we have an increase, a significant increase, we will see gains going forward.

If we move to the next page, we have the breakdown of our EBITDA in the different segments. The shopping malls, the adjusted EBITDA totaled ARS1.5 billion. In the previous year, we have a loss was - we have losses in two quarters of the previous year. The first quarter was one. And when we compare with the previous year, first quarter 2020, we see a gain of ARS2.3 billion, so we have a decrease of 35% at the adjusted EBITDA.

The offices, we have also a drop that I will explain in the next page. Compared with the previous year, we have only 4.3% below and compared with the 2020 37.4% below. Sales and development, we don't have a significant development during this quarter. As Daniel mentioned, the disposal of the three floors in this building in Della Paolera building will be reflected in the next quarter.

If we move to Page 10, we can see the part of the evolution of the malls. EBITDA and the line of the graph, it reflects the percentage of the operation open in each quarter. So we can see the different stages of the pandemic. But the good news here is that we see a first quarter with an EBITDA of $15.5 million, that is above all the previous quarters of - since the beginning of the pandemic. And compared with the previous quarter, before the pandemic is close, the level was $16.3 million.

So this is good news that the shopping malls started to generate cash again, good levels of cash. And in the offices, we can see here the evolution that compared with the previous quarter was similar. The level was - previous quarter was $6.6 million, now it's $6.3 million. But we see a drop that came from the square meters that we sold during the previous year, that was the Bouchard [indiscernible] and the Boston Tower. Also, we incremented by $2.2 million with the opening of 200 Della Paolera building. We have a negative effect of the increase in the vacancy of $1 million and the price - the change in the rent price is almost flat, only $0.1 million.

Going to Page 11, we see the evolution of the net financial results. Here, the main driver is reflected in the graph below. We can see that in the previous year, we have a devaluation - a real devaluation of 0.4% and a nominal devaluation of 8.1%. During this quarter, we have a real devaluation negative, and in fact, was an appreciation of the currency by 5.6% and nominal 3.2%.

So that effect is reflected in the line two, the foreign exchange differences that the last year was negative by ARS139 million, and in this year, we have a gain of ARS2.1 million. This is the effect to value in pesos, the - our exposure basically of our debt in dollars.

In terms of the net interest losses. is similar than the 2020 numbers against 2021. Here, we reduced a little the credit line with IRSA that generated positive interest. So the net effect today is a little higher because of the reduction on the collection of interest that we received from IRSA. And the rest of the lines are not significant differences.

If we go to Page 12, we have the evolution of our net asset values. This is how we value all our properties in our books. Last year, we used to value at $1.5 billion at the official exchange rate and now it's $1.8 billion. If we see that compared with the valuation of our - in the market of our shares, the price to NAV, it's only 0.3 times.

And also considering that we are using, for instance, in the shopping malls since we don't have comparables to use other valuation method that we are using DCF. So the $513 million for our total portfolio of shopping malls, we believe that is very conservative. In terms of the implicit cap rate that we are trying is 15.7%, enterprise value to EBITDA 7.7 times, and price to FFO, 13.5 times..

Finally, in Page 13, we have the evolution of our debt profile. Net debt of IRCP is stable at levels of $259 million. We can see the debt amortization scale that during this fiscal year, we don't have a significant amortizations. The main amortizations will be in next fiscal year related to our international bound 2023 notes. The LTV of the company remain very low at levels of 16.9%. And regarding the ratios, we have a net debt to EBITDA of 2.9 times and 4.2 times net debt to rental EBITDA.

So with this, we finished the - sorry, sorry, there's one more in Page 14. Regarding the merger proposal, we announced it in September - by the end of September, the intention of the Board of Directors to merge IRSA Commercial Properties with IRSA, where IRSA will be the absorbing company and IRCP will be the absorbed company. And then we will dissolve and liquidate - without being liquidated IRCP now will be incorporated inside IRSA. We already started all the process of the merge. We filed it with the SEC, the F4. We filed it with the CNV prospectus.

So the next step is to call a shareholders' meeting to approve all the processes subject to the approval of our shareholders' meeting. We expect to have our shareholders meeting in December. So before what we anticipated at the beginning that could last until February. Now we believe that during December, we can have the shareholders' meeting to approve the merge. And after that, there is a time frame that we need to fulfill. But the next main event is the approval. After that, the merge is effective if our shareholders approve and will be effective with the date that is July 1, 2021.

So now, yes, we finish the presentation and open the line for a Q&A session.

Question-and-Answer Session

A - Santiago Donato

Yes, we'll start with the Q&A session. You can use the chat or raise your hand. We will take the questions in the order we receive them. Any question? Here we have the first one from Alvaro Garcia from BTG Pactual. Go ahead, Alvaro.

Alvaro Garcia

Thanks for the space for questions. Just on margins, actually. I think it's - you did a great job of explaining sort of sequentially what's going on your top line. But how should we expect margins both in offices, and especially shopping to normalize throughout this fiscal year as activity comes back, given they're still sort of well below pre-COVID levels? Thank you.

Matías Gaivironsky

Thank you, Alvaro. It's tough to show the results when you have all the variables that were affected by the pandemic and many things happen. We have to change some of our commercial policies, we have to change our revenue collection. But we have been working very, very tough in order to reduce cost. That part, you can see when you compare the cost against 2020 that we see a drop in the sum of all the costs. We reduced like 200 employees during the last two years. That will be reflected in our margins.

So our target is to recover margins pre-pandemic. We see these numbers in the offices. We have already around 80% margins in the office. And you know that before the pandemic, the target in shopping malls was around 75%. So we hope that after we see full activity and no concessions on revenues, we will - we can recover again to those levels.

Alvaro Garcia

And I guess, sort of selling, especially in the office space, selling those properties and then the entrance of Della Paolera, there's probably some natural sort of margin impacts there, right, as you're not sort of 100% productive yet on the new GLA?

Daniel Elsztain

Yes. In the office, yes, but you know that the margin on the office is higher than in the malls because basically, you have the allocation of our headquarters to that segment. But in terms of the amount of people that work directly on the operational side is much lower in the offices than in the malls. So yes, has an impact, the disposal of some of our office space, but it's not significant.

Santiago Donato

Any other question? You can use the chat or raise your hand. Okay, thank you. There are no more questions. We return back to Mr. Daniel Elsztain, CEO for his closing remarks.

Daniel Elsztain

So the world is coming back to normality as well as Argentina same. Tourism is restarting all around the world and Argentina reopen frontiers. We expect there will be a flood of tourism coming to Argentina because Argentina now is really cheap - really, really cheap for tourism, everything is really an opportunity for our country neighbors. People is coming back to the offices and malls, stronger than we expected.

And as we finish the to be process we have, now we are building liquidity to put in work for our future projects. Real estate is showing some recovery. There are more transactions in the market, and it's a clear way to save money and protect wealth in the country.

This is established, and we see that trend moving forward. As Matias mentioned, we reduced cost and got rid of a lot of fat that we have at look the structure of our company. And we had incorporated a lot of technology, digitalization and to face these new times, we took opportunity of this year that we were not so active to really make that transformation. And now we are working on the merge, as Matias said, to keep reducing costs, to produce tax efficiencies, to focus the company in working and not having friction. So we expect that we are getting again as we were for a long time, some company producing a lot of cash and having a lot of projects to keep growing the company.

So thank you everybody, for participating on this call. We expect to see you on our next quarter. Thank you very much.

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