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IRSA Propiedades Comerciales SA (NASDAQ:IRCP)
Q2 2020 Earnings Call
Feb 11, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to IRSA's Second Quarter 2020 Results Conference Call. Today's live webcast, both audio and slide show maybe 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 issued yesterday are also available for download on the company website. [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 call over to Mr. Alejandro Elsztain, CEO. Please go ahead, sir.

Alejandro Gustavo Elsztain -- Chief Executive Officer

Thank you very much. Good afternoon, everybody. We are beginning our second quarter 2020 results. We can begin in the page number 2. Speaking about the main events of the six months, we can see the adjusted EBITDA of 2020 comparing to last year numbers and there is a small growth of 9.1%, explained by a bigger drop in the shopping centers and a rebound because of new buildings and dollar denominated rents in the office buildings. Later, Daniel will explain in deeper details these effects, but we have a small drop comparing to inflation. This is a real term, remember that we are adjusting our inflation in the adjustment of the inflation in our balance sheet. So in real terms, we have a small drop of 9.1%. We can see the net loss. This year we have only ARS250 million of loss in the six months. And if we talk about attributable to the controlling company, we have ARS381 million comparing to ARS6.7 billion of last year numbers. So a big rebound, and we are going to explain deeper in all of the segments.

There is a quarter result we can see that the same shopping sales in real terms this last quarter we begin to see a rebound. There was an increase in the real terms of 5.6%. In nominal terms, this is a 60% increase. We are keeping the same price per square meter of the office buildings of last quarter. We are in the occupation of the shopping centers. We are in the 95% of occupation and 97% in the AAA office buildings. In total, 88.7% because the double -- the Category B is suffering some of the occupation. This quarter we delivered a dividend. We paid to shareholders, almost ARS600 million, representing a dividend yield of 2.6%.

So now I will introduce to Mr. Daniel Elsztain.

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Thank you, Alejandro. Good afternoon, everyone. On page number 3, we can see some numbers about shopping malls. Our total gross leasable area is in 332,000 square meters of GLA. Our occupancy for the quarter was 95%, a little -- a very small increase compared to last year. If we would exclude the vacancy that we have by DOT Shopping Center when Walmart left, that occupancy, if we exclude that affect, it's in the range near to 98%. We have been seeing a little -- more and more activity in the leasing activity. So I think we're going to see better numbers maybe for next quarter.

In terms of sales, as Alejandro mentioned, we see in real terms an increase of 5%. This was very good. This was motivated basically by incentives to sales through the program, Ahora Esta las Ocho [Phonetic], Ahora 12. This is to pay all the acquisitions with no interest that all the banks have to participate. And we can see that if we make -- this is on the quarter, but if we do the six months figure that would be an increase of 0.4% in real terms.

If we move to page number 4, we're going to see how we perform compared to our competitors. And we see that in total we have a 5.6% increase compared to last year. And we can see that our competitors in the red line, this is all shopping centers of the country, they grew of -- they have a growth of 1.8%. These numbers are given by the index, so this is real figures. And we can see that the different segments how they move.

Others, that is Services, Home Entertainment & Anchors, grew at 12%, but the majority of our sales is in the upper segment, you can see on the left corner how do we split the spread our sales, and the majority of our sales is in upper-end that grew on this quarter, 3.4%. Nevertheless, our average is 5.6%. We are very happy. I mean, November and October, the whole country was expecting not a good performance in terms of sales. Nevertheless, we saw and our tenants and also ourselves were happy with our performance.

In the office -- no matter we have an increase in sales, unfortunately, we haven't seen this increase in revenues. The main factors that drove this scenario is we have some vacancy where we did not collect rent and we have to pay the common charging of those spaces. We had a small delinquency compared to previous years, nothing that we are so -- that we are worried so far. And also because some of this increase in sales did not achieve to surpass the minimum rent. So we are not collecting more rent in some cases because they are still paying the minimum rent and not achieving a percentage of sales. We expect that we see sales on the trend that we will be able to achieve this improvement in sales also in our revenues.

On page number 5, on the office building segment, we can see our portfolio now is in the 115,000 square meters of total GLA. No loss area. I mean -- so we have -- we had an increase of 39% compared to last year. We are projecting that we're going to grow another 26% achieving 146,000, almost 146,000 square meters for the next fiscal year. And as Alejandro mentioned, we are running with very good and high occupancy levels in the A+ and AAA category buildings, but we are running in a low occupancy and 47% in the B Class segment. The B Class is only 14% of our total portfolio.

So in terms of numbers, it's not significant, but it's -- and the majority is driven by one building that is a B Class in location that has been challenged now, so we are working to see alternatives of what to do with this building. Nevertheless, on the Class A buildings and in the new building that we're going to incorporate, the 200 Della Paolera, we have good leasing activity. So we expect to have this high occupancy also for the new square meters that we're going to add in the portfolio. The rent average is 26.9, almost the same last year. And we expect that -- leases to remain at the level -- at that level at least for now.

The projects that we have under development, 200 Della Paolera is 35,000 square meters of GLA. The take of IRSA Commercial Properties is 87%. The work in process 86%. The first tenant in the building will be moving into the building by April, mid-April, end of April. And we also delivered the units to Globant that bought four floors on this building. They already have occupancy and they're going to start working on their premises very soon. The estimated EBITDA that we have for this project once it's all leased is in the range of $10 million to $12 million per year. And the investment that we had projected was in the $90 million. We know that we are getting close to the ending of the construction, it's going to be a little less than this number.

And also we can see here on the right side, Alto Palermo Expansion. This is an expansion of 3,900 square meters of GLA. The progress -- where progress is in 51%. It's going to be opening some time by the spring of Argentina this year, spring or the beginning of summer. And the projected investment was $28.5 million. And we already signed some -- we are leasing the stores and we have a lot of the demand in Alto Palermo. This is a shopping that always has demand no matter what's going on with the country. There's always demand for the spaces that we produce in this shopping center.

On page number 7 and here to discuss what we have been doing. First on the left side with the Walmart surface reconditioning. Remember, Walmart used to have 13,000 square meters of GLA. We transformed one big store into three big stores, some medium stores and some small stores. We have now a commercialization progress of 25% that is already signed and leasing is getting momentum. We are talking with a few tenants, potential tenants. The small stores is not a problem, I think we're going to have them all leased when we finish the construction. The medium and big stores are more challenging in this context in Argentina. Nevertheless, two of the big stores are already are signed or to be signed. And two or three of the medium stores are in negotiation. The estimated feedback for this space in the first period because we are giving some concessions, it's about $300,000 per year.

Also in this shopping, we opened a rooftop on December of 2019. It's a 1,600 square meters surface that was empty since the construction of the shopping, there was no tenant interested to come here. The interesting thing here is that it's packed. The people coming from the office building next door, they come for the happy hours, they come for lunch, they come for dinner. So this space is producing almost 20% to 30% of the food hall of the whole shopping center -- of the food court actually of the shopping center. And it was a small investment, but a big impact in the neighborhood. We are very happy with this and we are very also -- expect then what's going to happen also in the ex-Walmart surface.

On page number 8, we can see two of our swaps, the spaces that we gave to developers to develop and we -- in the left side, the air space of Abasto. This is on top of a supermarket called COTO. There is a project for building the towers with tower number one is 8,400 square meters of buildable area. The total project is twice this size approximately. And the payment that we are getting today is $4.5 million, of which we already collected $1 million in cash and we're going to collect the balance with apartments. We have leased 35 apartments, which represents 24.2% of the total area. This is only for the first tower. We're going to collect -- once the developer finish and sells the first tower, he has the option to do the second one and we're going to collect also a percentage near the 24% of those square meters that have been sold.

On the right side, we see the Caballito Plot. This is a very big area. It has the -- the total project is approximately 80,000 square meters of buildable apartments and stores, it's a mixed-use. The developer has already signed and is about to start construction of the first plot of 11,400 square meters of buildable square meters apartments and also on the ground floor stores. And we are going to -- they're going to pay us $5.5 million for this first plot with -- giving us a combination of stores and apartment units of approximately 25% of the total square meters that have -- that will be built. And in this case also, once the developer finishes the first plot and if it was successful, they have the option to keep going on the construction of the three remaining plots that we have on this piece of area. Our intention is to hold all of the stores on the ground floor because once the four plots are built and we have all the stores built and connected, it's going to be like a small, medium shopping center compared to something similar of what we have in Distrito Arcos in the neighborhood of Palermo.

So now for financial results, Matias Gaivironsky, CFO of the company.

Matias Gaivironsky -- Chief Administrative and Financial Officer

Thank you, Daniel, and good afternoon, everybody. So if we move to Page 10, we can see the results of the semester. On the right side we have the semester, on the left side we have the quarter. So we finished the period with a loss of ARS250 million against a loss of ARS6.4 billion in last year. Most of the loss came in this quarter. And if you see the main impact in the quarter was the change in the fair value, line four that we have a loss of ARS4.9 million against a loss of ARS17.8 million last year. Remember that we value our properties at fair value and we are giving impact on the different variables of the volatility of Argentina in our valuation, so the DCF that we perform in the shopping malls was affected by the increase in the cost of capital for Argentina and also the devaluation on the projected growth of Argentina.

The other important effect came in the line of financial results, in the line seven. And you can see that during the semester, we have a loss of almost ARS5 million against a loss of ARS2.4 million. I will enter into more details in the next slides.

And finally the other important effect is in the income tax. Here it's important to mention that this effect is a non-cash effect. We are not paying taxes because of the losses that we have. It is only the recognition of the deferred tax on the potential tax that we will have if we sell the properties that we are recognizing again in the line four during the semester we had a gain of ARS2 million.

Also, started last this year, we started to recognize the effect of the inflation assessment in the tax balance sheet. Remember this is the accounting balance sheet and is completely different than our tax balance sheet. According to the law, this year we have to start recognizing results on the inflation assessment of the tax part and that generate also a loss during this semester.

If we move to page 11, here we have the breakdown in the different business lines of revenues and adjusted EBITDA in shopping malls and offices. We can see, as Alejandro and Danny mentioned, the shopping malls, the adjusted EBITDA decreased by 18.7% during the semester and the office is an increase of 37%. In the offices we have the incorporation of the Zetta building and also our revenues are in dollars, so the devaluation helped in this regard.

In the malls, as Danny mentioned, although we are increasing -- our tenants are increasing the sales, we haven't adjusted our revenues on the same pace. So we expect this to recover in the future if this trend of sales continue. Also in the subsidiaries there we have some exceptional items during this year or the comparison with the last year that makes -- these drove a bit harder than the revenues. The revenues are decreasing 13% and the EBITDA 18.7%.

If we move to Page 12, we can see the breakdown of the net financial results, the other important effect. That is basically related to the devaluation in Argentina. In the bottom of the slide, we can see the devaluation of the peso during the last year. The real devaluation was 3%, this year was 13.5% and that is affecting the line number two of the foreign exchange differences that this year were ARS3.2 billion negative against ARS2 billion last year. Other important effect here is in the line of fair value gain on financial assets. Thus, this year we have a loss of ARS160 million against a gain last year of ARS1.3 billion. This is more related to our portfolio of liquidity that during the last year we have gains against the loss this year.

If we move to Page 13, we can see the valuation of our NAV. This is after the recognition of the gains and losses during the quarter. We can see that the net asset value of the company now in our books is at $990 million against $1.415 billion last year. Basically, the decrease is in the shopping malls because we are performing the DCF and the offices and the land reserve we are valuing it with comparables in the market. So this is more comparable transactions against the shopping that are not transactions in the market.

Even with these prices or with these values of NAV, we can see that the valuation ratios remained very cheap compared with the region and compared with other countries. The cap rate, implicit cap rate in our valuation today is 15.4%, EV-to-EBITDA of 8 times, price to FFO at 7 times and price to NAV. Also considering these value of NAV, we are trading at 50% discount. So that is the implicit valuation according to our metrics. During the last 12 months, EBITDA will reach almost $108 million and the NOI $134.4 million and the adjusted FFO at $75.4 million.

Finally in the Page 14 we have the breakdown of our debt. There are not significant transactions or developments here since the last quarter. Our debt remained stable at $346.9 million net debt. Most of our debt expire in next year -- in sorry in 2023, $368 million. And during this year we have an amortization of one of our bonds for $133 million that we will be working on that.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Sam Epee-Bounya with Wellington Management.

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

Good morning, gentlemen. Thank you for the call. Just a couple of question. First of all on the Walmart departure. Is that something that was expected? And do you still need -- do you expect any other big tenant to leave your portfolio?

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Thank you Sam for the question. Yes, this is was -- this was really well expected. Walmart never performed well in the shopping center. They wanted to leave for a long, long time actually, but they had a clause where they had to pay us a penalty, and they didn't want to do it. So for that reason they extended for a long period the decision to leave. A year and a half ago, we negotiated that tenancy to make some concessions because we understood that we could do better if they leave and not paying us the full amount of the penalty by us transforming that space into better and more attractive spaces for the shopping center. So we collected that penalty of what we negotiated and that's one of those reasons that revenues this year are a little bit lower than last year because we did not -- we do not have the rent not even the penalty.

And we know this that's why we're working on the project how to transform this space. Now we know what we are doing. Actually, we are under progress in the construction. And hopefully very soon we're going to happen. We're going to include a band, a new gym, a space for medical services as medium stores. So yes, it was expected and we expect that this is going to be a good thing for the shopping center too.

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

Okay. And do you expect any other big tenant to be leaving your malls?

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

No, no. I mean we don't have so many big tenants. The tenants of this size are only supermarkets. And in some of the cases, the supermarket that we have in the shopping center is even the owner of the space. I mean -- so we are not -- not that I have on mind, I don't have any of the big tenants actually leaving. Not even the medium size also, I'm not seeing any people going now out of business or reducing space in our shopping centers.

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

And if I may, sorry, just the last question on my side would be on the -- your maturity. One is, do you hedge -- my understanding is that you don't hedge any of your debt. And my question is, why would -- how would you plan on addressing kind of the bonds that are due in September 2020, that's $135 million? And then are you already thinking about the 2023 bonds? And if you raise some money locally, can you hedge it?

Matias Gaivironsky -- Chief Administrative and Financial Officer

So first of all...

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

I don't know if you could hear me?

Matias Gaivironsky -- Chief Administrative and Financial Officer

Yes Sam. Can you hear me?

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

Yeah. I can hear you. Sorry about that.

Matias Gaivironsky -- Chief Administrative and Financial Officer

Okay. I hear your question. So regarding the amortization that we have, first of all, we have a cash position, an important cash position today of almost $180 million. That cash is in dollars. So we have a natural hedge against our debt that expires. Besides that we are working and trying to maintain the liquidity of the company. So probably we will work if the market conditions allow us to refinance part or all of the amortization during this year. So the plan A is to refinance that bond.

Regarding the 2023 bond, it's too soon to start talking about because we believe that today market conditions for that size of bond will cost us very expensive. So we believe that it is better to wait until to see what happened with the restructuring on the sovereign side. So we believe that if the sovereign restructure that, probably all the cost of Argentina should reduce. So we believe that we will do it more efficiently in the future. So we have time. We have until March 2023 to do it. So for Argentina, today it's long-term.

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

No. Thank you. I appreciate it. I'll be back in the queue. Thank you.

Alejandro Gustavo Elsztain -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Thomas Pierre [Phonetic] with IBM Partners.

Thomas Pierre -- IBM Partners -- Analyst

Hi, hello. Can you hear me?

Alejandro Gustavo Elsztain -- Chief Executive Officer

Yes, perfectly.

Thomas Pierre -- IBM Partners -- Analyst

Yeah. So I just have a question regarding the shopping malls sales. So you put on Slide 3 that on real terms it's positive 5.6% and we can see that the GLAs stay flat over the period. And then in page -- in the results in Page 11, we can see actually that the 2020 revenues are decreasing in real terms by 12%. So why is that? Why do you have this discrepancy between the two slides or is there something I'm missing?

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Thank you, Thomas. This is what I tried to explain earlier. I mean this explanation that we -- we will not able to collect in revenues all the increase in sales and it's spread out in different explanations. But first of all -- and it's occupancy. As we are running with no such a big number as we had last year, we are not collecting that revenue that rent and we are paying also for the common charges of those spaces.

The second effect is, this increase in sales we collect -- usually we collect a minimum rent and then a percentage of sales once you surpass that minimum rent. In many cases, this increase in sales did not achieve that minimum threshold. So we are not collecting a percentage, but we are collecting the minimum rent. So we were not able to make the difference for our revenues.

And third effect, also there is applying on this case on this quarter is some delinquency that we did not have on the previous quarter -- on the same quarter last year. This delinquency we manage in a way that we don't think we're going to see this delinquency at the end of the year, the fiscal year. But at this quarter, we see this delinquency that is a little higher than it was the previous year. And these are the main effects. Also, on this quarter, we have compared the same quarter I think last year, and correct me, Matias, we also collected the penalty that we were talking previously of Walmart.

So all those four effects are the main explanation why we were not able to collect in revenues that increase in sales. And also, because remember, when we were negotiating the leases since June till October, November, nobody was expecting this increase in sales. So our negotiations with tenants we were talking about the rents. I mean, they were really not in a good mood to accept higher rents, but we had to do some concessions also on the rent. So because of those, all of those effects, I think we are not getting the benefit of what we are seeing the increase in sales and then we expect and we hope that we can manage on this month ahead to collect part of this increase in sales.

Matias Gaivironsky -- Chief Administrative and Financial Officer

Let me add something more that this is a very recent effect. Now we came from 18 months in a row with real decrease. So this is something that probably was triggered by the incentive of the government in the credit card payments without interest rates. So that broadly makes some impact on the sales. So we will see this trend is sustainable or not in the coming months. But definitely, if we start to see a positive trend in the sales then the negotiation with the tenants will change and everything in the industry will be easy. So we will see in the coming quarters.

Thomas Pierre -- IBM Partners -- Analyst

Thank you. That's very clear. Thank you.

Operator

[Operator Instructions] Our next question comes from Jonathan Koutras with J.P. Morgan.

Jonathan Koutras -- J.P. Morgan -- Analyst

Yeah, hi. Good afternoon, everyone. My question was regarding the tenant, the prices of the leases of 200 Della Paolera, I remember in previous conference calls something in the range between $30,000 and $32,000 per square meter was discussed. How has the leasing activity discussion been? Thank you.

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Thank you, Thomas -- Jonathan for the question. Yes, we have been doing some leasing, actually we signed a lot of contracts. Actually I think we didn't disclose it so far, but I think we have only nine floors remaining of the total building. And then the leases that we signed, we signed -- the average of the building is in the $30 range and the lower floors are a little bit below the $30, on the middle of the tower we are in the 30s number and above at the top, the most -- the top floor was leased at $36 per square meter, but average will be I think I don't have it exactly with me, but I think it's going to be in $30 or $31 or somewhere there. And we're very happy.

No matter what is going on the context of the country, all the things that you hear about the country, we have been doing very well in leasing and we achieved what we say we're going to do it. So we are also -- we have some stores to lease and the leasing team is really active. So I expect that when we finish construction and we start occupancy, we're going to be even better than we have -- we see today.

Jonathan Koutras -- J.P. Morgan -- Analyst

Okay, great. Thanks.

Operator

This concludes the question-and-answer session. I would like to turn the conference back to Mr. Alejandro Elsztain, CEO for any closing remarks.

Alejandro Gustavo Elsztain -- Chief Executive Officer

So we are finalizing our half year balance sheet, keep the construction of the main project at Catalinas and the Alto Palermo. And the company is intending to keep the occupation very high. It sounds like the change on the environment is coming. We are seeing better sales on our tenants. So we expect the country to enter to a more normalized situation. So thank you to everybody. And we see you again next quarter. Bye. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Alejandro Gustavo Elsztain -- Chief Executive Officer

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Matias Gaivironsky -- Chief Administrative and Financial Officer

Sam Epee-Bounya -- Wellington Management, Inc. -- Analyst

Thomas Pierre -- IBM Partners -- Analyst

Jonathan Koutras -- J.P. Morgan -- Analyst

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