Business context and reporting period
IRSA Inversiones y Representaciones Sociedad Anónima is an Argentine real estate company with operations in Argentina, Israel and selected international markets. Its businesses include shopping malls, offices, residential development, hotels and investments in telecommunications, insurance, retail and real estate through IDBD and DIC.
The filing is an annual Form 20-F for the fiscal year ended June 30, 2019, prepared under IFRS and presented in Argentine pesos. It is not a quarterly filing for “2018 Q4.” Argentina was treated as hyperinflationary from July 1, 2018, and the financial statements and comparative information were restated under IAS 29. IFRS 9 and IFRS 15 were adopted from July 1, 2018 using the modified retrospective approach.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | Ps.69,767 million | Ps.58,824 million |
| Gross profit | Ps.27,767 million | Ps.24,178 million |
| Operating profit/(loss) | Ps.(12,073) million | Ps.27,521 million |
| Net financial results | Ps.(12,055) million | Ps.(28,460) million |
| Profit/(loss) for the year | Ps.(26,847) million | Ps.23,237 million |
| Loss attributable to parent shareholders | Ps.(25,615) million | Profit of Ps.14,727 million |
| Operating cash flow | Ps.18,920 million | Ps.14,287 million |
| Capital expenditures | Ps.13,123 million | Ps.13,339 million |
| Cash and cash equivalents | Ps.60,482 million | Ps.58,055 million |
| Total borrowings | Ps.312,528 million | Ps.321,463 million |
| Total equity | Ps.85,819 million | Ps.119,515 million |
Current assets were Ps.141,276 million versus current liabilities of Ps.73,959 million, producing positive working capital of Ps.67,317 million and a current ratio of 1.91. The filing reports debt of Ps.37,107 million in the Argentina operations center and Ps.275,421 million in the Israel operations center. Debt maturities include Ps.45,504 million due within one year and Ps.72,090 million due in years three to four.
Investment properties totaled Ps.233,360 million, down from Ps.253,239 million. The company recorded a Ps.23,710 million net fair-value loss on investment properties, compared with a Ps.16,981 million gain in FY2018. This was principally affected by inflation, peso depreciation, higher discount rates and weaker valuation assumptions for Argentine shopping malls.
Material changes versus the prior comparable period
- Revenue increased 18.6%, primarily because of peso translation of the Israel operations and higher office, hotel and development revenues. Excluding Israel, segment revenue increased 8.5%.
- Operating results reversed from a Ps.27,521 million profit to a Ps.12,073 million loss. The principal driver was the swing from a Ps.16,981 million fair-value gain to a Ps.23,710 million fair-value loss.
- Argentina shopping mall revenue declined 12.4% and tenant sales declined 13.9% in real terms to Ps.66,075 million. Occupancy fell to 94.7% from 98.5%, mainly because of 12,600 square meters of Walmart vacancy at Dot Baires; excluding that vacancy, occupancy would have been 98.5%.
- Argentina offices revenue increased 68.0% to Ps.1,566 million, partly due to the Zetta building and exchange-rate effects. Hotel revenue increased 20.7% to Ps.2,066 million.
- Financial losses improved to Ps.12,055 million from Ps.28,460 million, mainly because net foreign-exchange results changed from a Ps.9,460 million loss to a Ps.873 million gain and the prior-year DIC debt-swap loss did not recur. Interest expense nevertheless increased to Ps.15,549 million from Ps.13,645 million.
- Operating cash flow increased 32.4%. Investing activities generated Ps.7,829 million, compared with Ps.21,363 million used in FY2018, while financing activities used Ps.19,419 million.
- DIC’s sale of an additional 7.5% of Shufersal reduced its interest to approximately 26.02%; Shufersal is no longer consolidated and is accounted for as an associate.
- Total equity declined by Ps.33,696 million, primarily reflecting the annual loss, other comprehensive losses and changes in non-controlling interests.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings guidance. Management’s strategy remains focused on recurring rental cash flows, development of existing land reserves, selective acquisitions and capital appreciation.
- Argentina’s economic environment is a major risk: the filing reports 55.8% CPI inflation, 60.8% wholesale inflation and a 47.1% peso depreciation for the fiscal year. Exchange controls were reintroduced after year-end, potentially restricting debt payments, dividends and repatriation of capital.
- IRSA has significant foreign-currency exposure because much of its debt is denominated in U.S. dollars while Argentine revenues are mainly peso-denominated. A further peso depreciation could increase debt burdens and impair tenant collections.
- IDBD had negative equity, negative operating cash flow and low-rated debentures. Bondholders were evaluating possible insolvency proceedings. IRSA guaranteed commitments to fund Dolphin with up to NIS 210 million through 2021, although IDBD and DIC debt is otherwise described as non-recourse to IRSA.
- Investment-property fair values are highly sensitive to discount rates, inflation, GDP, exchange rates, tenant sales and projected devaluation. The FY2019 fair-value loss is largely non-cash and may reverse or worsen with market conditions.
- Puerto Retiro faces litigation and a risk of losing the “Planta 1” waterfront land. The investment was fully reserved as of June 30, 2019.
- The Lipstick Building investment has substantial tenant concentration: Latham & Watkins represented approximately 75% of New Lipstick’s base rent and plans not to renew its lease expiring through June 30, 2021. New Lipstick reported a $36.8 million net loss and $215.1 million members’ deficit for FY2019.
- Subsequent events include issuance of additional IRSA notes, a proposed capital increase of up to Ps.200 million, an in-kind dividend of up to Ps.480 million in IRSA CP shares, additional sales of Gav-Yam and Clal interests, and further DIC debt repurchases.
- The filing states that there were no material off-balance-sheet arrangements with unconsolidated entities. Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2019.
Most important facts for investors to verify
- Reconcile reported revenue and profit trends after IAS 29 inflation restatement and the modified-retrospective adoption of IFRS 9 and IFRS 15.
- Assess recurring operating performance excluding non-cash fair-value adjustments, discontinued operations, currency translation and other unusual items.
- Review debt maturities, currency composition, refinancing needs, interest costs and the extent to which Argentine exchange controls affect repayment capacity.
- Monitor IDBD’s liquidity, bondholder actions, Dolphin funding and IRSA’s guarantee of up to NIS 210 million.
- Evaluate the sustainability of shopping mall occupancy and tenant sales, particularly the vacant Walmart space at Dot Baires.
- Verify the valuation assumptions for Argentine investment properties, including discount rates, inflation, peso devaluation and projected tenant sales.
- Track the Puerto Retiro litigation and potential loss of the Planta 1 land reserve.
- Assess the leasing and refinancing implications of Latham & Watkins’ planned departure from the Lipstick Building.
- Confirm the final terms and dilution effects of the approved capital increase and the subsequent dividend in IRSA CP shares.