Business context and reporting period
IRSA Inversiones y Representaciones Sociedad Anónima is an Argentine real estate company with shopping malls, offices, hotels, development properties and investments in Argentina, the United States and Israel. The filing is an audited Form 20-F for the fiscal year ended June 30, 2020, prepared under IFRS and IAS 29 inflation accounting in Argentine pesos. The request metadata refers to “2019 Q4,” but the supplied filing does not cover a quarterly period; it covers fiscal year 2020.
As of June 30, 2020, IRSA owned or operated 15 Argentine shopping malls totaling 333,062 square meters of gross leasable area, and 115,640 square meters of office properties. One GDS represents 10 common shares.
Financial performance and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | ARS 95,793 million | ARS 92,181 million |
| Gross profit | ARS 33,589 million; 35.1% margin | ARS 32,790 million; 35.6% margin |
| Operating profit/(loss) | ARS 38,339 million; 40.0% of revenue | ARS (27,727) million |
| Financial results, net | ARS (34,341) million | ARS (14,835) million |
| Profit/(loss) from continuing operations | ARS 5,646 million | ARS (45,511) million |
| Total profit/(loss), including discontinued operations | ARS 23,731 million; 24.8% of revenue | ARS (38,371) million |
| Profit attributable to parent shareholders | ARS 14,249 million | ARS (36,610) million |
| Operating cash flow | ARS 31,113 million | ARS 27,041 million |
| Investing cash flow | ARS 40,644 million inflow | ARS 11,189 million inflow |
| Financing cash flow | ARS (76,125) million | ARS (27,754) million |
| Cash and equivalents | ARS 90,359 million | ARS 86,443 million |
| Total borrowings | ARS 376,159 million | ARS 446,675 million |
| Current assets less current liabilities | ARS 62,333 million positive | ARS 96,211 million positive |
Operating and total profit were materially affected by a ARS 30,742 million net fair-value gain on investment properties, which is largely unrealized. Financial costs were ARS 21,465 million and other financial results were a loss of ARS 14,334 million, primarily reflecting currency and market effects.
Material changes versus the prior comparable period
- Consolidated revenue increased 3.9%, but Argentina Operations Center revenue declined materially excluding Israel. Shopping mall revenue fell 30.5% to ARS 5,935 million, while tenant sales fell 25.9% in real terms to ARS 69,965 million.
- Shopping mall operations were closed from March 20, 2020 because of COVID-19 restrictions. Occupancy declined to 93.2% from 94.7%, partly because of a 12,600-square-meter Walmart vacancy at Dot Baires.
- Office revenue increased 5.4% to ARS 2,358 million. Office occupancy declined to 86.1% from 88.3%.
- Hotel revenue declined 31.6% to ARS 2,021 million. Libertador and Llao Llao were temporarily closed, while Intercontinental operated under an emergency plan.
- The fair-value adjustment on investment properties changed from a ARS 37,877 million loss in FY2019 to a ARS 30,742 million gain in FY2020, driving the improvement in operating profit.
- Operating cash flow increased approximately 15.1%, while financing cash outflows increased substantially because of debt repayments, interest and note repurchases. Cash decreased by ARS 4,368 million after foreign-exchange and inflation effects.
- Debt declined by ARS 70,516 million, but approximately ARS 311,674 million was attributable to the Israel Operations Center. Argentina Operations Center debt was ARS 64,485 million.
- IRSA adopted IFRS 16, recognizing ARS 14,547 million of lease liabilities at adoption and ARS 19,859 million of right-of-use assets at June 30, 2020.
Guidance, outlook, risks and unusual items
- No formal earnings guidance was provided. Management indicated that the pandemic’s ultimate effects remained highly uncertain, while expecting the Company to continue meeting its financial commitments over the following 12 months.
- On September 25, 2020, after the reporting date, an Israeli court declared IDBD insolvent and ordered liquidation. IRSA concluded that it lost control of IDBD and DIC and planned to deconsolidate them beginning September 30, 2020. The financial statements include the Israel Operations Center through June 30, 2020 and do not include adjustments for this subsequent loss of control. The auditor issued an emphasis of matter on this issue.
- IDBD had negative equity, negative operating cash flows and substantial going-concern uncertainty at June 30, 2020. Its Series 9, 14 and 15 bonds totaled NIS 2,028 million and were secured by DIC and Clal interests. IRSA stated that this debt was non-recourse to IRSA and not guaranteed by IRSA assets, although IRSA faced litigation concerning a proposed NIS 70 million capital contribution.
- Argentina’s exchange controls restricted access to U.S. dollars and required refinancing of certain principal maturities. IRSA’s Series I notes originally due November 15, 2020 were exchanged at 98.31% participation; after settlement, Series I notes outstanding were USD 3.1 million. Series VIII and IX notes were issued at 10% fixed interest rates.
- COVID-19, inflation, peso depreciation, tenant defaults, reduced consumer spending, office vacancies, hotel closures, foreign-exchange restrictions and refinancing risk are the principal near-term risks.
- Other unusual items included a ARS 2,470 million impairment of associates and joint ventures related to Mehadrin, a ARS 1,480 million expected gain from the later Shufersal sale, and a subsequent accounting gain of approximately ARS 2.5 billion related to termination of the Lipstick Building ground lease and transfer of administration.
- Material contingencies include litigation involving Puerto Retiro, Arcos del Gourmet and Caballito development land. Puerto Retiro recorded a full impairment of the relevant investment property because of legal proceedings.
Important facts an investor should verify
- Reconcile the requested “2019 Q4” period with the actual FY2020 Form 20-F and confirm the appropriate comparable period.
- Assess the sustainability of earnings excluding the ARS 30,742 million unrealized fair-value gain and discontinued-operations profit.
- Review post-year-end deconsolidation of IDBD and DIC, including the effect on assets, liabilities, equity, cash flow and future reported revenue.
- Verify the status and terms of IRSA’s debt exchange, remaining Series I notes, new Series VIII and IX notes, and all refinancing obligations under Argentine exchange controls.
- Evaluate liquidity after debt service, dividends, asset sales and the substantial financing cash outflow, including access to cash held at subsidiaries.
- Monitor shopping mall reopening, tenant collections, bad-debt allowances, occupancy, rent concessions and changes in consumer spending.
- Review the legal status and potential financial exposure of Puerto Retiro, Arcos del Gourmet, Caballito and IDBD-related claims.
- Confirm the treatment of IAS 29 inflation adjustments, IFRS 16 lease liabilities and all discontinued operations in period-over-period comparisons.