IRSA Propiedades Comerciales S.A. (IRSA) Earnings Call Transcript & Summary

Welcome to this webinar that we organized on occasion of the merger proposal between IRSA Inversiones y Representaciones and IRSA Commercial Properties that was approved by the Board of Directors of both companies, in which IRSA will absorb IRSA Commercial Properties. Senior management will give a presentation explaining the rationale and the main characteristics of this merger proposal. And after that, we will open to a Q&A session for analysts and investors. I will introduce Eduardo Elsztain, Chairman of the Group and CEO of IRSA Inversiones y Representaciones for his opening remarks.

Welcome to the webinar on the explanation about IRSA and IRSA CP merger rationale. We welcome you all to this event. I will try to think and share with you the history of 30 years of a public company investment in Argentina. Over these 3 decades, we started in '91 with the acquisition of the majority of the IRSA shares and this is the beginning of operation of IRSA. And we started with , which was at that time called SAMAP, which was the company owner of the Abasto in '94. The 2 operations, one was dedicated to housing and office, in the case of IRSA at the beginning, and we started with the shoppings with Alto Palermo. And then we changed many years later, the name of the company into IRSA CP, that was maybe about 20 years later. During the years, we thought it was very interesting to have 2 vehicles because one was a regional office and housing and some hotels. And then we did expansion international. But then when we did the shopping center, we decided to do this as a pure vehicle, and we started that in '94, then we have the group Parque Arauco from Chile joining us when they developed the shopping in Mendoza. And we associate the shopping in Salta, which was the first shopping of Argentina with the one in Mendoza, and then we developed together the shopping of Abasto. Since that year, we bought many assets. We bought Alto Palermo, Alcorta, the Patio Bullrich. And in the periods after crisis, we developed major shoppings. It was after the crisis of 2001 that we did Rosario, which is one of the leading shoppings of the company and then we did after 2008, the shopping of Dot. And then we did the last one after crisis, it was the one in Arcos. So the strategy of the company was to develop shoppings and to acquire shoppings. Now over the years, they worked as independent companies. And in the year 2000, we listed also in the NASDAQ, IRSA PC. The crisis of after 2008 make us an opportunity that we bought the big stake from the group of the Chilean group. And then IRSA became more than 90% shareholder in IRSA PC. I think we reached to 95%. What happened at that time? We started thinking maybe it's the time to do a merge of the 2. But everybody said, no, no, no. There's much more interest of the investors to have a pure vehicle of rental in Argentina. And then we concentrated all the rental property, which was the office and the shoppings in one vehicle. And we did a pure vehicle. This pure vehicle, we started trying to grow as a pure vehicle in the markets. We did these block sales of 8% with the target to increase liquidity. And the main reason for doing that was it was not possible to have that company with us as a shareholder of 95%. And our idea was to place in the market more than 30% to 40%. But the market started with the elections in 2019, and the crisis started coming with the change of the policy and then came the agreement with the IMF. And as we describe Argentina in the last 30 years that we are in public markets, we have been surviving crisis after crisis. So after 30 years or 3 decades of having 2 main vehicles, we realized it's time for us to be rational and economical, more aligned with the investment that we are doing. Why? We are the major shareholders of 2 leading companies in real estate, and most of the investments are in Argentina. We thought that by putting the 2 together, we will make a very much more simple structure. And this will have a tremendous advantage to increase the liquidity of the 2 companies that are today with small liquidity to have instead of a small stake to have -- almost to have 45% of the stake in the market. What we achieved by doing this merge? I think that there's a lot of synergies because we will reduce -- double this thing, 2 markets, double board, double accounting, double -- I mean, there's many things that by putting the 2 companies together, we will make a tremendous saving of costs. But on top of that, we have a tremendous benefit on the tax issue, having one company with big losses and having one company paying a lot of taxes. So from the tax point of view, it makes sense. From the management point of view, it makes sense. From the business, one is called IRSA and the other one called is IRSA CP. So it makes sense that in being in the same company, in the same business, in the same country with the same management team, it will only eliminate all potential conflict of interest. So I think that in an environment where the opportunity is very attractive, I think that this is unique. Now I also want to share that I believe that it's a very, very good time for Argentina. And I know that even though if the mood of the world is very sensitive and very against investing in Argentina, I believe that we are getting, after this year, into a very strong cycle of commodities. And I believe that this is something where Argentina, whether we like it or not, will be benefit. Why is that? I think that the most [ produce ] of the things we do are in the agriculture. In a country that can grow food for much more populations that we can consume ourselves, I think that we have the resources in energy and resources in mining. And I believe that all the printing machine all over the world is showing the first signs of inflation. And we have been in the last 3 weeks -- 3 decades that we work, learning how is to survive inflation. And we do it through investing in real assets, and one of our main real assets has been real estate. So I hope that after this transaction, we can only give more liquidity, more size, more profits, more dividends and that we can make a clear vehicle for our investors. I hope that by this presentation, you understand after the presentation of all the management team of the details of the company. And I hope that in the next few months, we succeed to do such an important transaction, and I'm very happy to share all this with you. Thank you very much.

Next, Daniel Elsztain, CEO of IRSA Commercial Properties.

One of the main synergies of this merge is basically the new use of the real estate. After the COVID and after new trends of real estate, we have seen home office modality will stay. Decentralization of the main cities is also something that came for -- say, for a while. And we believe that our projects have the ability to be transformed, to be converted not only in exclusively commercial, but also residential, commercial to have a mixed use real living in our real estate assets. So basically, by doing the merge, we believe that we can do the development of all the potential real estate in residential of the -- on the land that we already have, like the cases of Alto Palermo, where we can have a building -- we can have a building to the shopping center. The same case in Patio Bullrich. In the case of Polo Dot office center, we have the ability to make a lot of residential developments. The same in Costa Urbana, which already was approved the first round and is pending for the second round, the case of La Plata where we already have the permits to do a mixed-use real -- project. And the same in Caballito. And this is not all the portfolio. We also have more land available to be developed in the near future. So because of that, we believe that the merger of the 2 companies by doing the ability of getting the best on commercial and the best on developing residential and other segments will be very effective and efficient.

Next, Matias Gaivironsky, CFO of IRSA and IRSA Commercial Properties will give the details of the transactions and main financial indicators.

We have been thinking in this transaction for many, many years. I think since we acquired the stake of Parque Arauco in 2011 that we thought it makes sense to have only one listed company or 2 separate vehicles. Now we believe that it's the right moment to merge the 2 companies. The context of Argentina makes sense to try to make the structure much more efficient, reducing cost, improving the liquidity of the shares and many other advantages that the merge brings. For this transaction, we decided to suggest a ratio of 1.4 shares of IRSA for each share of IRSA Commercial Properties. This exchange ratio was supported by 2 [ furnish ] opinion, one from Banco Santander and the other from Banco Itau. And also the 2 audit committees of the 2 companies approved the ratio. The pro forma structure after the merge is the following: Cresud will have 53.6% of the shares of the merged vehicle that the name will be IRSA, and the free float will be 46.4%. When we see the current structure and the pro forma structure, we can see that IRSA, as of today, control 80% of IRSA Commercial Properties where we have all the shoppings, offices and land bank. And then the remaining asset of IRSA are the hotels, the mixed-use land bank, Banco Hipotecario and Condor. Regarding Condor, there was a recent new (sic) [ news ]. Condor announced the disposal of all the hotels to Blackstone. Blackstone is acquiring all the portfolio. And then IRSA will receive the proceeds from this disposal. So IRSA -- we estimate that IRSA will receive around $25 million from now to December. So the closing -- the expected closing of this transaction will be around November, December. So it's a very good news after the last transaction that we tried to do a couple of months ago. The pro forma structure, of course, the vehicle IRSA Commercial Properties will be absorbed by IRSA. And then we will have all the shopping malls, the offices, the hotels, the mixed-use land reserves and Banco Hipotecario directly from IRSA. Here, in this graph, we are not including other assets that we have like [indiscernible], other convention centers, parks in the case of IRSA. So these are only the main assets of the group. Regarding the ratio, how we achieved to 1.40 in exchange ratio? We basically are using the VWAP of our shares during the last 180 days, that -- we see that the ratio is 1.40, but also when we engage the 2 banks, they perform an analysis of some of the sum of the parts of the 2 companies, the NAV of the 2 companies, and they reached a similar ratio. So we conclude that this 1.40 is the fair ratio to exchange the shares. One of the advantages that we believe this merge will create is the liquidity of the shares. We will increase significantly the free float of the shares. In the case of IRSA Commercial Properties, you know that we have been trying to improve liquidity since a couple of years ago when we did the block trade in 2017 that we increased from 5% to 14%. And then because of price -- market conditions and the price of the shares, that was impossible for us or was not -- doesn't make sense for us to sell shares. So we decided to distribute shares as a dividend and then we increased to 20%, the free float. But we can see in the graph that the liquidity per day was very limited in the 2 cases, in IRSA and IRSA Commercial Properties. So we believe that this merge will create more liquidity since we increased the pro forma free float of the group. Regarding the synergies and cost efficiency of this transaction that is one of the drivers of the merge, we will really improve the efficiency on the administrative processes of the group. And also, we will reduce listing fees, credit rating, filings with the CNV and SEC. We will eliminate one of the Board of Directors Supervisory and Audit Committees because we will have only one. And the main synergy is related to taxes. You know that IRSA has today a tax credit, and IRSA Commercial Properties, in a normal scenario, is a company that pay taxes because it's one of our main costs. Having the 2 companies together, we will have that synergy that we can use the tax grade of IRSA with the tax profits of the malls and the offices. We have been showing the net asset value of the 2 companies on a separate basis. And now you're having this graph altogether, it's difficult to show information in dollars that we have different exchange rates in Argentina. So when we are showing this information here, we are using all at the official exchange rate. So we start with our numbers in pesos term. And sometimes when -- for instance, in the offices and in the land bank, we are showing information in pesos using the dollar map. And here, after those pesos, we divide by the official exchange rate. So we can see that the net asset value of IRSA Commercial Properties is around $1.2 billion. So what the transaction add to that is $587 million of other assets that are -- that belong to IRSA. Directly here, we have Condor, Banco Hipotecario, land bank and the hotels and the debt. So we include the $587 million of assets and $298 million of debt. So the total net asset value after the merge will be around $1.5 billion. Regarding the flows, you know that from the point of view of IRSA, nothing changed because we have been consolidating the information of IRSA Commercial Properties. But when we see from IRSA Commercial Properties, most of the flows came from directly from the shoppings and the offices. So what IRSA add to that is the hotels. It's only $5 million on average from 2017 to 2021. This information is all on average from the last 5 years to exclude the effect of the pandemic during the last year. Regarding the net debt, IRSA Commercial Properties, the net debt was $275 million; IRSA, $298 million. That generated a merged pro forma net debt of around $573 million. That is an LTV of 27.3%. If we enter in more details about the debt, we can see that the debt of IRSA with the market is only $189 million from the total $300 million. The rest of the debt is -- that is in the hands of IRSA Commercial Properties. Here, we have the credit line of around $70 million plus bonds that IRSA Commercial Properties acquired in the market. So the debt with the market that we -- including the merged transaction is that $188.7 million. The rest will be eliminated in the merge. So the net debt of $572 million, we can see the debt amortization schedule that part of the debt -- or most part of the debt expire in 2023. This is our international bond, $360 million of IRSA Commercial Properties. And then we have bonds in IRSA and also bank debt. We have the intention to reduce the debt fastly in the coming months. I told about Condor that is in the process of selling all their portfolio. So IRSA will receive around $25 million. And then using the blue-chip swap, we can cancel debt in Argentina for around $50 million. And also, we have the intention and in the process of selling some assets that we believe that we can achieve $100 million in this year, including Condor that is in the process of disposal and other assets. So we believe that we will reduce to around $470 million as a net debt of the merged company. How is the time line of the transaction? This is a transaction that will take some time. So we are announcing the merge proposal today. And then we have to file a prospectus with the SEC that we expect to file in the coming days. And then, we will depend on the approval of the SEC to lease the new shares of IRSA that we will give in exchange of IRSA Commercial Properties shares. So after we received the approval from the SEC, we can call to our shareholders' meeting. The approval of the shareholders' meeting is required for this transaction. So all of this is subject to approval of our shareholders, that should take place between November and February of the next year. Then when we call to the shareholders' meeting, the CNV should approve the exchange ratio that we are proposing. And then, after the shareholders' meeting, we will have to sign the definitive merger agreement and submit everything for registration in the [indiscernible], that is the public register here in Argentina. And then, after that, after we receive the approval from the [indiscernible] is the moment that we will have the exchange of the shares. So up to that day, the shares of IRSA Commercial Properties will continue to trade in BYMA and in NASDAQ as well as the IRSA shares. Once the transaction is approved, the merge will be effective from July 1, 2021. So we'll take some time to receive all the approvals and to do the exchange of the shares, but we are confident on the process. So with this, we finish the formal presentation. We have been thinking in this transaction for many, many years. So we hope this is clear, but if not, you have our department -- IR department and capital markets department to solve any question that you can have. Thank you very much for your participation.

We conclude the presentation, and we open for the Q&A session. You can use the chat. We will take the questions in the order we receive them. Thank you.

Thank you, everybody. Well, we'll start the Q&A session. We are going to use the chat because there are a lot of attendees. So we will take them in the order we receive them. I will try to integrate the ones that are on the same topics. We will start with the first one. I would like to know if there is any type of violation in covenants or events of default that could be triggered by the M&A, especially talking about IRCP '23?

Okay. So regarding the indenture of the 2023 notes that are the applicable covenants for IRSA Commercial Properties, the merge is permitted. We have basically a limitation on the amount of debt that we can incur. It's an incurment covenant. So the limitation is to incur an additional debt. And so we have a ratio, but then we have some baskets. So the debt that we will add to the merged company, of course, IRSA will have to assume the indenture of IRSA Commercial Properties. And then all the debt that we will incur because of the merge is allowed according to the baskets.

Next question is related to the approval. What is the level of approval required by the shareholders of both companies to authorize the merger? And a question in that line, will the control shareholders be allowed to vote?

Okay. So in the -- for each of the shareholders' meeting is an extraordinary shareholders' meeting, so we will need 60% of the quorum. And then we will need to receive majority of the shares for that approval. In the case of the controlling shareholders, they are allowed to vote in both shareholders' meeting. We will define that vote during the process. So this is a process that we are launching today, but we'll receive all the feedback during these coming months, and then we will decide on our vote. So the votes -- the majority of the attending votes, not the total vote.

Next question, is it possible to quantify the tax benefits?

Yes, there is many. So there are some on the [ VIT ] side. So we have some tax credit on that on IRSA, and IRSA Commercial Properties pay every month the VIT that we collect from our leases. That credit, in the case of IRSA, is around ARS 800 million. But the main synergy is in the tax gain. IRSA today has a tax credit of ARS 14 billion of tax credit that in taxes is 35% of that. So it's around ARS 5 billion, so $50 million at official exchange rate. And IRSA Commercial Properties, after selling the offices that we sold during the last year, we consumed all the tax credit that we used to have. And now on from the cash generation and the profits that we estimate that after the COVID situation, we will recover fast, then IRSA Commercial Properties will start to pay taxes. So that $50 million, I think we will consume not in one shot, but will depend also in the level of properties if we sell some properties. If we sell some property, the tax -- the cost for the properties is very low. So each disposal generate high taxes. So that is a very good advantage of the merge proposal.

Next question is related to possible merge with Cresud. Is the further simplification be a merger of Cresud and IRSA something you are thinking of? Why not highlight this as positive? And could you elaborate, on same question, on the additional asset sales Matias mentioned, please?

Well, regarding Cresud, we are trying here to simplify the structure and not to mix different businesses. Today, after the situation of our investment in [ Israel ], the IRSA structure is much cleaner. We have only the hotels as the main asset Costa Urbana and Banco Hipotecario. So when we analyze the kind of business between IRSA and IRSA Commercial Properties, are very similar. Hotels enter into a category of commercial real estate. Costa Urbana will have some retail space and residential. And as Daniel mentioned, we have the -- going forward, the prospect that real estate will include much more the mixed-use components. So mixing IRSA and IRSA Commercial Properties makes a lot of sense. In the case of Cresud, I think that is a different business. It's agriculture. So we, here, try to generate efficiency and also attractiveness for our investors. And mixing the 2 businesses, I think, will create a more complex structure. So we believe that having a real estate pure vehicle makes sense. So we are not thinking on merge with Cresud. And I don't know the other part of the question was?

Could you elaborate on the additional asset sales? And there is a question on that line that says that wanted to clarify if the $100 million that you net from the $570 million of net debt pro forma included the Condor sale or not.

The $100 million, yes, include the Condor sale. And regarding the other assets, we always want to communicate when we do the things not before. But if you see what we did during the last year, that we sold some of our office portfolio, that will give you an idea about the kind of assets that we have been selling plus other assets that are at the level of IRSA.

Can you repeat the estimated total debt reduction? Is intercompany debt included in the estimated total debt reduction?

They are seeing the presentation now?

Yes, yes.

Okay. So if we see in Page 12, the net debt, the pro forma is $572 million. That is already eliminate all the intercompany debt. All the intercompany debt in the merge disappear. So that is the estimated pro forma net debt. The $100 million is our estimation on how the size of the debt that we plan to reduce during the year. So $472 million is our target. I don't know exactly to commit a date on that, but it's what we will try to work, to reduce that debt.

Next question related the exchange ratio. Does it take into account the dilutive effect of the capital increase and warrants in IRSA?

Yes. We do it in both ways. We -- when we define the ratio, we are using the VWAP of the shares. The VWAP of the shares should include all the available information in the market, so that is one part. But on the other part, when we perform the analysis of the net asset value and divide by the amount of the shares, we are including the money that we estimate to receive from the -- the total money that we can receive from the exercise of the warrants and the outstanding total shares of the exercise of the warrants. So the diluted effect is already included.

Next question related to the pro forma EBITDA breakdown by country and business line for the new entity.

What we showed in this slide, in Slide 11. Here, we are showing the recurrent EBITDA. Now this is the adjusted rental EBITDA, not the part of the disposals of the asset sales that always in our history we have been very active buying and selling assets, but it's difficult to give an estimation of that. So here, we include only the rental activity. And that is -- the pro forma here is -- this is the average of 5 years. We believe that we can achieve this rate, this level again in the next 2 years after the recovery of the -- recovery of Argentina and the impact of the pandemic. But it's 100% in Argentina. These numbers are -- all the assets here are in Argentina. After the disposal of Condor, we will have only the project of Uruguay in the case of IRSA and some minor assets in IRSA level. In IRCP was 100% Argentina. So all the rental will be generated in Argentina.

Next question related to Costa Urbana, development could now be carried out by the merged company or it is still in the pipeline, the possibility to create a new company?

First of all, we won the approval. We received the first approval that is a very important step in the coming -- these months, we will have a public hearing, public audience and then this will be submitted again for approval, and we hope this can happen before the year-end. So after the approval, that will be a very, very important step for the group. We have been trying to approve this project for the last 20 years. So it will be a very important tombstone for the group. But then, we will decide how to develop this. This is enormous project, will take many years to develop. The absorption of Argentina today of a project like this is not in 1 year. So probably will take at least 10 years to develop. The way that we will finance this project, there are many, many different alternatives like preselling, like doing swaps that we put the land someone else develop, or do some kind of project finance, or to create a new company. So we will see how is the best structure to develop the project. But our main goal is to have the approval.

Next question is related -- well, quantify savings, accounting lease things, I think something Matias already said.

I haven't said about the synergies on the operational side. We estimate at least $1 million per year of cost savings on the structure plus an intangible, that is the hours that we expend to carry the 2 companies separated. That part is not quantified. There is a lot of work internally. So the [ hour costs ], we estimate in $1 million.

Another question related, the ratio, why not use market ratio?

This is -- are not so liquid companies. When we discussed this with the banks, are not -- the shares are not the most liquid shares in the market. So to use spot prices are, for us, to consider the fairness of an exchange ratio is not the best. For that reason, we decided to use a VWAP more longer than the spot of 180 days. That -- when we performed the analysis of the NAV, and considering the assets against the assets of the 2 companies, that ratio is in the line of 1.40. So for that reason, we are not using the spot.

One more related Costa Urbana, which was the implied valuation considered?

Today, in our books, Costa Urbana is at levels of $206 million. That is without approval. So we value as of today -- or the last day that we published that information was in June and was without approval. So that is the implicit valuation in our books that -- so when we transform that into pesos, we are using the dollar map to show in pesos, the information in our books, but the valuation in dollars is $206 million. Definitely, we believe that with the approval, that valuation is more than $200 million.

Next question. Can you comment if you achieved the $100 million debt, if that is your target and ratios' target?

So that is our idea. We believe that we can achieve that number. It's not a commitment. It's what we are working -- we are trying to achieve, but it's not a firm commitment, but we believe that, that is achievable. The ratios, if we use the $120 million ratio, that gives a net debt-to-EBITDA of around 4.2x, something like that, that for comparable real estate companies is, I think, is an average. In terms of LTV, that is lower. The comparison, the LTV probably is levels of 27. Then, when we sell probably that number will go to 25 or something like that. So that will be the ratios. And something else to add, when we consider from the point of view of IRSA Commercial Properties, we will add some debt. We will add -- if we achieve that target, we will add around $80 million of additional debt to our current structure, that using an average cost of the debt of, let's say, 8%, that give you like $7 million of interest per year. And that additional cost on the flows, we believe that will be compensated by the tax credit that we have on the benefit, merging the tax credit of IRSA with IRCP. So the reduction in taxes that IRCP should pay, I think, more than compensate the additional cost on the interest that we will pay.

Next one, was it a mistake to split IRSA and IRSA Commercial Properties when you did it in the past?

Hard to say if was a mistake or not. Tell me if you anticipate that we will have the current structure of Argentina, and nobody anticipated that. We thought that we enter into a new -- in 2015, that we enter into a new market for Argentina that happens between '15 and '17, and many companies went to the market to raise money for equity and do new projects and new cycle of investment in Argentina. Unfortunately, today, the situation is other and we have to adapt the structure, trying to be more efficient to the current scenario.

I think I covered all the questions. If you have any additional question, of course, then the IR and capital markets departments are open for all the details. This is going to be a long process, so we have time to discuss all by phone or doing a call, but we give some minutes more for some additional questions. Well, I think this one was already answered, what liquidity sources will the new entity have?

Liquidity sources, always our main funding was with the market. We have our debt between the capital markets and the banks. We have excellent relation with all the local banks and the capital market. Unfortunately, today, the international capital market is closed for Argentina -- or it's very hard to access the international capital market. So during the last years, we have been doing transactions in the local market. The support of the local market was very good for us and we plan to keep using the local market. In a normal scenario, a company like this with this leverage should have access to the international capital market easily, and considering the current rates of Argentina, shouldn't be a problem. Unfortunately, we will be related to the situation of the sovereign debt in Argentina. So if the things improve, maybe we will have access to international capital markets against -- again like the -- like we did last time in 2016, but many, many times in our history. And I'm sorry, I missed one part that was the capital increase that we did in IRSA this year. Now we raised equity, and we did it in the past as well. So that is another source of funding for the company. We have also the warrants outstanding that if that will exercise, we will have that flow in the coming years. And also realizations. We sold assets during our history. Like last year, we sold like $200 million in assets. And then the recovery of our business. In a normal scenario, we -- I remember, in 2016, the part of the malls generated like $140 million of EBITDA. And now we are talking about next year of around $60 million or $80 million. So with that recovery also will be a source of funding for the future. Well, if there is no more questions, we will keep open for all the investors to -- if you have any doubts, call us. The idea is that -- is the process that we are starting today will take some time until we receive all the approvals. So we want to be very close to the market and explain all the details. So you have all our contact information. Thank you very much for your participation and hope that you support this idea that we believe that add a lot of value to all our stakeholders. Thank you very much.