IRSA Investments: Tapping into a building boom

Matt Bierce | May 23, 2008 6:20am EDT | 1 Comment

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You wouldn’t guess it from looking at the country’s average of over 8% in annual GDP growth in the past few years, but economic conditions in Argentina are about as gripping and imbalanced as a glass of over-oaked Malbec wine.

Rising inflation, high export taxes, and a lack of (or perhaps wariness toward) credit and controversial government fiscal policies have taken a bit of the shine off the relatively wealthy South American country’s recent rebound from its 2001 to 2002 economic implosion.

Amazingly, however, these factors have done nothing to slow the boom in building houses, condos, shopping malls, hotels and office buildings that the crisis set in motion. In fact, the real estate sector grew by an estimated 8.3% in 2007, and the best part of it is that it’s all being driven by private investment from individuals with soaring incomes rather than through mortgage lending (unlike certain other recent housing bubbles).

One company that has diversified broadly in this capital-driven building bonanza is the profitable emerging markets fund darling Buenos Aires-based IRSA Investments and Representations (NYSE:IRS) — a dual citizen of the U.S. and Argentine stock markets and parent of shopping mall and credit card operator Alto Palermo S.A. (Nasdaq:APSA).

The $825-million market cap company has a range of real estate businesses and subsidiaries that buy, sell, develop and renovate retail, commercial, office and residential properties in high-growth and upscale areas of the country. It boasts occupancy rates over 98% in its shopping center and office holdings and has building projects in affluent neighborhoods too numerous to detail here. Suffice it to say, business is booming.

On the top line, at least, IRSA’s results for the nine months ended March 31, 2008, do indeed reflect impressive demand. Revenues for the development and sales segment were up 338% to $55.8 million compared with the same period in 2007, while office revenues climbed 93% to $23.2 million, shopping center revenues added 27% to $80.3 million, and the hotels segment was up 22% to 36.7 million. Overall revenues were up 59% to Ps828.5 million, or $264 million,. Underlying some of this is the nearly 30% rise in year-over-year shopping center and supermarket sales in Argentina.

But by the time you wind your way past operating costs and investment losses from the company’s 11.8% investment stake in one of Argentina’s largest mortgage banks, Banco Hipotecario, which has been hammered by changes in the valuation of long-term government securities and lost 95% of its stock value since February 2007, you’ll notice that IRSA’s bottom line has shrunk almost 80% compared with the results from the nine-months ended March 31, 2007.

Analysts at Auerbach Grayson have the stock rated at a “buy” but overall analyst opinion on the company is scant, probably reflective of a lack of comparable companies and the general wariness by the investment community to take on exposure to the country’s politically driven volatility.

So just what mischief is the Argentine government up to anyway? The most recent move by President Cristina Fernandez de Kirchner to combat food price inflation by imposing a steep export tax on soybeans — a commodity that has recently soared in profitability and planting in Argentina as global demand has surged — backfired and resulted in striking farmers.

In a very Parisian turn of events, the protesting farmers choked the streets of the Paris of South America (as Buenos Aires is often called), creating shortages and sending food prices even higher. Not exactly the kind of effective economic policy maneuvering that wins the hearts of the world’s financiers.

All that aside, the real question facing the Argentine real estate market is just how long can growth can be sustained without outside investment and the use of debt financing (i.e., the way the rest of the world does it)?

For its part, IRSA doesn’t appear too worried. It issued $150 million in debt in early 2007 and $170 million more through APSA. On Feb. 1, Fitch Ratings upgraded IRSA’s international credit worth to B+ from B and its national credit rating to AA- from A-, noting strong cash flow capacity and its strategically valuable real estate holdings.

That cash flow momentum is truly compelling when you consider that demand for IRSA’s high-end square-footage still outstrips supply and that many of its upscale residential building projects are already fully-reserved even though they have yet to come on line.

Additionally, the company noted in a recent conference call that its average office rental price is at least 38% below the market averages, which leaves room for huge upside potential. And let’s not forget the tourist boom that’s filling up all those new hotels.

Even if Argentina pulls back from its tremendous growth rate, its cash-infused real estate market still appears to have a lot of runway left. With its strong position in the sector and its ability to draw international investment, it looks as if IRSA’s stock just might use that extra runway space to take off.

About the Author
Matt Bierce previously served as a news writer and bank and thrift sector beat reporter for SNL Financial, a niche financial data and news provider in Charlottesville, Va. Read More