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IRSA Inversiones y Representaciones S.A. (NYSE:IRS)
Q2 2020 Earnings Call
Feb 12, 2020, 9:00 a.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 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 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 notes in the company's earnings section release regarding forward-looking statements.

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

Alejandro Gustavo Elsztain -- Second Vice President

Thank you very much. Good morning, everybody. We begin our second quarter 2020 results. We can begin in the page number 2 looking at the main events for the two quarters. The net result of the year is a positive ARS4.9 billion comparing to loss of last year of ARS8.4 billion. And when we see the net result attributable to controlling company, we see small negative ARS1.4 billion comparing to ARS8.1 billion of last year.

We see that related to the adjusted EBITDA of the businesses, we had improved year-to-year. We improved this 16% achieving ARS11.7 billion this year. And we can see that in Argentina, we had a small drop, the Argentina Business Center had a small drop of 5% and this is mainly because of lower results on the shopping center, but better in some other segments that later Daniel will explain. And in the case of Israel Business Center, there is an increase and this is mainly driven by Cellcom how they changed on their IFRS 16. So because of these two effects there is a small increase of 16% year-to-year.

So let's go to Argentina Business Center summary.

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Thank you, Alejandro. Good morning, everyone. On page number 3 we can see Argentina Business Center on the left side, starting with shopping malls, we see a consumption recovery, same sales stores an increase of 5.6% in real terms compared to the same quarter last year. If we do the six months figures, we see an increase of 0.4% mainly this is driven by consumption policy from the government industry programs Ahora 12 and Ahora 18. Occupancy remained stable at levels of 95% and the leasing team is working to improve that number. Consumption has been the recovery -- recovered. We didn't get all that recovery in our revenues, but we're working to make it happen.

On the office segment, the industry remains very strong. Rent is stable at levels of almost $27 per square meter per month. Occupancy levels in our Class A and AAA buildings is at levels of 97.1%, this is very similar to previous quarter. We see a lower occupancy in the Class B building, especially one building that we have in our portfolio and nevertheless the Class B in our portfolio is only 14%, so it's not significant. The progress at the working in the 200 Della Paolera office building is at 86% progress. We expect to open some time during the third quarter of 2020. We expect to have occupancy from the first tenant to start working on the premises during this month and next month. And leasing activity on this building has been also very good. So we expect to be close to our total occupancy levels and not to decrease our occupancy level by the incorporation of this building. And also the rent of the building are achieving exactly what we underwrote. So we're very happy with the progress.

In the hotels lines, we see a lower sales due mainly the Libertador deflag, used to be Sheraton, now it's Libertador. The deflagging made some distress for a certain period of time. There's now a recovery. This mainly explains the reduction in sales, and also other successful events that happened during 2019. We had the RE20 [Phonetic], the G20 and also other significant events that we had previous year that we don't have this year.

Respecting the land reserve, during this period, we did two barter. We swapped land to developers so they can build the buildings and we're going to receive units and cash for those buildings. The two ones, one is the Abasto Air Space and next to our shopping center there is a supermarket. We own the air space, the air rights and we barter those air rights for some developer that is going to build 8,400 square meters of apartments and we will receive in apartment and cash, the combination of cash and apartments were $4.5 million in the first tower. And there is another tower to be built on the same location that the same developer has an option, in case that he's successful and we're happy with his work.

And in the case of Caballito, there are four plots of land that total make 80,000 square meters to be developed. This is a mixed use in between residential and commercial. The first plot is 11,400 square meters that will develop by a developer and we will receive in between all the value of all the apartments and the retail space, we're going to take all the retail space on the development, it's approximately $5.5 million in value.

Regarding the financial and international saving of the company, Banco Hipotecario brought us losses for ARS923 million due to impairment over government notes and doubtful accounts that those accounts also -- well a lot of banks on the system has the same problem. And Condor Hospitality Trust is under sale process, settlement is expecting for third quarter of 2020. Estimated proceeds for IRSA will be in the range of $29 million and this is in progress and it's all public information.

So now we move to the Israel Business Center to Matias Gaivironsky, CFO of the company.

Matias I. Gaivironsky -- Chief Administrative and Financial Officer

Thank you very much, Daniel. Good morning, everybody. So if we move to Page 4, we can see the structure of Israel right now. Our corporate structure data, you'll remember that we have been working hard in order to fulfill the concentration low that established that we can have more than two layers of public company. So we have been working harder in order to accommodate our structure. Now we fulfill 100% our obligations. So we basically what we did was to dispose shares of Gav-Yam and we lost control on Gav-Yam shares.

Regarding niche product, it was a matter of the companies. We privatized the debt. And regarding Mehadrin, that used to be a subsidiary of PBC. We distributed Mehadrin shares as a dividend. So now the shareholder is DIC, DIC today has around 38.6% of the shares and now we are increasing some. So we -- with this we finished the concentration low. Other important event was the appointment of our new CEO in Israel. So we have a new CEO, Eran Saar [Phonetic] since December, 2019. So now we have already the management team in place there.

If we move to Page 5, we have the other important challenge on our structure there, the ownership of Clal. You remember that we couldn't control Clal and the regulator forced us to dispose the shares. So here you have all the evolution. At the beginning we tried to maintain all the economic rights on the shares, but at certain point the regulator forced us also to sell the economic rights. So at the beginning we did the total return swaps then we had to start closing those swaps and selling the shares in the market. So here you have all the evolution. Today we have stake in economy -- economic stake of 15.6%, 8.5% are direct stake and 7.1% is through swaps. So price of the shares were -- the performance were bad and we will see more details later, but today the market value against book value is only 53%.

The other subsidiaries in Page 6, more in the operational side. We have good result in most of them. If you see PBC, what PBC is doing is selling non-core assets and selling commercial properties more in the retail space. And so, PBC sold Ispro Planet and Kiryat Ono Mall...

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Ispro Company not Planet.

Matias I. Gaivironsky -- Chief Administrative and Financial Officer

Ispro -- sorry, Ispro Company not Planet and Kiryat Ono Mall and other non-core assets in Shufersal. We don't control more the company, we have a direct stake of 26% and the company is focused in cost reductions and synergies in the farming retail with the WE [Phonetic] acquisition. They're doing large capital investment in the logistic center and the automatization of the logistic center.

In Mehadrin, was appointed also a new management. We have a new CEO in the company. We -- as a management, we changed the controlling shareholder. We still have a partnership 50 -- the same stake with other the company. They distributed the shares, we distributed shares. So there's no more JV. And we have been acquiring some shares also in the market. And in Cellcom also, we appointed a new CEO and they did a capital increase in the company that DIC subscribed, shares revamped sharply in the last four months since the minimum price of the shares increased by 88%. So good performance also in the price of the shares.

So if we move to Page 7, we can see the financial situation of IDB. So here we can see today the net debt of each of the two holding companies in IDB. We have $525 million and in DIC $830 million. In DIC we have a strong cash position of $345 million, and you can see that amortization scale. And in IDB, we have a cash position of $68 million with a debt amortization this year of $78 million. So we will need to keep selling our stake in Clal and that is the area to cover to debt amortization. During the last quarter, we did a capital -- new bond in IDB with Clal shares as collateral. So we raised ILS236 million at the yield of 4.7% with the collateral of the shares. And in DIC, what we're doing with some of the liquidity, we're are buying back bonds. So we did buyback of almost ILS100 million that generate a good profit.

So if we move to Page 9, we can see our consolidated financial statement. We are finishing the semester with a gain of ARS4.8 billion against a loss of ARS8.3 billion last year. Here we have several effects. So I will try to describe the main ones. So I will leave the operational part to the following page and then we should focus in this page in line four, that is the change in fair value. So in Argentina, this semester we recognized a gain of almost ARS3.9 billion against the loss last year of ARS9.5 billion. This is more related to the macroeconomic situation of Argentina and the volatility of the macro variables like the exchange rate and the cost of capital of the country that affect our valuation in shopping center, but in pesos term, it's positive because all the rest of the asset that are dollars like the offices and the land bank we're recognizing a gain.

Then the other important effect in Argentina is in the line nine, the net financial results that I will explain in the following page. Then other important effect is in the line 12, deferred tax. This year since we're recognizing again in the fair value for all properties also we recognized the deferred tax on that potential appreciation. Last year we had -- they were opposite. We had a loss and then we recognized again in the deferred tax. And also here we have the implementation of inflation assessment in our tax balance sheet. This is the accounting balance sheet, but when we perform the inflation assessment in the tax balance sheet that generates also a loss.

That is in the part of the Argentina. The important changes in the part of Israel, we have in the line 14, the main effect that is the consolidation of Gav-Yam that automatically generated a big profit of ARS16.6 billion against ARS3 billion last year. And the other effect is in the financial line that I will open in more details in the following page.

If we move to Page 10, we can see on the operational side each business line. So shopping malls, as Danny mentioned, we have a performance 18.7% below last year. This is with inflation assessment. Although we have seen here a recovery in tenant sales. We haven't translated yet to our income. So we're -- in compare with the last year in real terms, we are around 13% below revenues and in EBITDA 18.7%. We have some extraordinary events below the revenue line.

In offices, we have a very good performance, 38% above. Here we have a new building, the Zetta building that today is operative and we are recognizing the full revenues on the building. And also the evaluation will help us because our revenues are in dollar terms, so our agreements are in dollar terms. So we have all the appreciation on the dollar.

Hotels, as Danny mentioned, is 29.2% below last year. This is more related to the Sheraton hotel and also an extraordinary income last year in the Intercontinental. So living aside that affect, we are close to the last year. And then in Israel, the real estate part here to compare apples-with-apples. It's important to mention that the devaluation between the -- the real devaluation between the shekel and the peso was 13%. So that is to compare results with the previous year. So real estate we're above that, we're 26.8%. This is basically related to a cost reduction and telecommunication 41%. This is more because of the implementation of IFRS 16. And in revenues, we are almost the same than last year.

In Page 11, when we see the consolidated financial results, we have in Argentinean part basically the main effect is in the line two, the net foreign exchanges, that if you will see in the graph below. We have this semester a real devaluation of 13.5% and in the last -- in the previous semester we have a devaluation of 3% that impact in that -- in all our dollar-denominated debt and is reflected in this line number two. The other effect is in the line three, the fair value of financials assets and liability that last year we have an appreciation of our assets and this year a decrease that was after the elections in Argentina that the market collapsed and we have some financial assets that we are recognizing a small loss of ARS120 million, but against a big gain last year.

And in Israel, the two effects are one related to Clal, in the line three. But if you see in the graph below, during the last year, we have a -- our appreciation of the share of 3% and this semester we have a drop of 15% and that is reflected in the line three that we have almost, ARS2,858 million against the gain of 57 last year. And the other effect is in the line five that we have a gain of ARS2 billion that is related to the buyback of bonds in DIC, so that is the $2 billion. So we have many, many impacts, accounting impacts. Almost all of them are non-cash effect. So that is important to understand what were the impacts in the net results.

If we move to Page 12 to finish with the presentation, we have our debt amortization schedule. So we have the challenge to refinance debt during the fiscal year 2021. So starting in July we have some debt repayment. So we will be working on refinancing these during the year. The total net debt stayed stable at $367 million.

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] Today's first question comes from Alvaro Garcia of BTG. Please go ahead.

Alvaro Garcia -- BTG -- Analyst

Hi, team. Thanks for the call. My question is on Israel, on IDB specifically. My question is on -- what's the refinancing strategy heading into December 2022? I was wondering if you can sort of walk us through what you're thinking now that you've sold down most of your Clal stake? Thank you.

Matias I. Gaivironsky -- Chief Administrative and Financial Officer

Thank you, Alvaro. So regarding the debt of IDB we have -- when you see basically two bonds that start to expire in 2022 and then until 2025. The idea there, we defined that basically the assets that are under IDB are for sale. So we are trying to sell our stake in the tourism company or doing an IPO of the company. So basically, we are disposing those assets. And the same with another asset that is a real estate asset, Las Vegas. So we are trying to find a way to maximize the value of those companies and sell, and also the Clal shares we're going to sell. So with these we perform all the disposal, probably we will have funds for the next two years.

And then going forward, we will see what is the best structure in terms of the capital structure. If we need to change something in the capital structure, remember that the main asset after this disposal will be DIC. So we -- it's something that we need to decide how to move forward after that.

Alvaro Garcia -- BTG -- Analyst

And just one quick follow-up there. I'm assuming the plan is to remain Israel isolated from the overall structure. There is no plan to sort of fund it via any sort of Argentine subsidiary at this point?

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Up to now, the only commitment that we have in Israel is we've signed an agreement that we checked, ILS210 million from that we already contributed $20 million, so it's remaining commitment of $40 million and that is our only commitment to IDB today.

Alvaro Garcia -- BTG -- Analyst

Okay. Thank you.

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

You're welcome.

Operator

[Operator Instructions] This concludes the question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Alejandro Elsztain for any closing remarks.

Alejandro Gustavo Elsztain -- Second Vice President

We are seeing how the companies are focusing on its strategy, as we are doing in the case of PBC, focusing and not having the retailer in Israel and selling the two shopping centers, we are raising almost $0.5 billion between these two at very low cap rate. So we are going to keep doing these kind of things in the portfolio. I think this gives us a much more clear picture on the mission of each company. And so each of the segments of IRSA are doing exactly that. So thank you very much, and we see you next quarter. Bye.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Alejandro Gustavo Elsztain -- Second Vice President

Daniel Ricardo Elsztain -- Chief Real Estate Operating Officer

Matias I. Gaivironsky -- Chief Administrative and Financial Officer

Alvaro Garcia -- BTG -- Analyst

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