Neinor Homes, S.A. (HOME) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Jose Cravo, and I'm the Head of Investor Relations at Neinor Homes. Today, we are going to go through our first half results from the year '24. As usual, we are here with Borja Garcia-Egotxeaga, our CEO; and Jordi Argemi, our Deputy CEO and CFO. We'll start the presentation by reviewing the fundamentals of the Spanish resi sector and then we'll move into Section 2 to go through the most important value drivers of the business. On Section 3, Jordi will review financial results from the first 6 months of the year, and we shall finish with the main takeaways. After the presentation, there will be a Q&A to answer any questions you might have. Now I hand over the presentation to our CEO, Borja Garcia-Egotxeaga.

Thank you, Jose. I would like to start this conference call by repeating the same 4 messages with which we have concluded our full year '23 results presentation. The first message is that today we see unbeatable fundamentals with regards to the macro and the residential sector in Spain. We will show evidence of this during the first part of this presentation. The second message is on visibility for results of the next 2 years in which we will distribute EUR 325 million, as we announced last year. This represents a 31% accumulated yield. The third message is on our JV business. In February, we told you that we were seeing more interest than what we had initially anticipated. Today, thanks to the JV signed with Octopus on senior living, we have already reached our 5-year target. As a consequence of this, the fourth message I would like to repeat is on earnings growth. As we move forward in our JV business, you should have increasing visibility on the targets we published earlier this year. Now please follow me to Slide #4 to review the key figures from these sets of results. Here, you have a snapshot of the operational and financial results from the first semester of the year 2024. On deliveries, we have notarized more than 582 build-to-sell units in the first semester. And as you know, during the last weeks, we have closed the sale of our 6 build-to-rent project with another 300 units. With regards to future deliveries, we have finished the semester with nearly 7,000 units active, of which more than 4,000 are currently under construction or finished. On commercial activity, we have sold 1,173 units, and we continue to push for price increases to capture SPA to maintain well protected our margins. On the financial side, we have recorded EUR 182 million in revenues, EUR 22 million in EBITDA and EUR 12 million in adjusted net income. In terms of leverage, we have finished the semester with net debt practically unchanged versus December, and this is equivalent to a conservative 14% loan-to-value. Please follow me to the next slide so that we can provide an update on the macro situation in Spain. In 2023, the Spanish economy grew at 2.5%, well ahead of other European countries. According to Bloomberg consensus, this trend is set to continue over the years '24 and '25. The key factor behind this outperformance is not the post-pandemic touristic recovery but rather, the strength in private consumption in Spain. Moreover, I would like to note that potential decreases in interest rates should also have a positive impact in the consumer and overall economy and especially in the real estate segment. Please follow me to Slide #7 so that we can look more closely at demographics. In this slide, we show the evolution of the most important housing market KPIs in the last 5 years and how these are expected to evolve until the end of the decade. In the last 5 years, from year '19 to '24, Spanish population increased by 1.6 million, while the number of new households created stood at 700,000. However, during this period, the number of houses finished was less than 400,000 units, further aggravated the housing deficit that prevails in the Spanish market. In the next 5 years, the scenarios that the Instituto Nacional de Estadistica and the Bank of Spain are managing consider an acceleration in population growth and household creation, while the house supply will remain basically unchanged, further aggravating the imbalance between supply and demand. Please follow us to the next slide so that we can see how this population growth figures compare with other European countries. On a European perspective, we see that over the last 5 years, the Spanish population grew faster than the U.K., France or Germany. And if we look at forecast at city level until the end of the decade, Madrid and Barcelona will be amongst the fastest-growing metropolitan areas in Europe, a positive factor that will drive housing demand. Please follow me now to Slide #9. Other than a strong outlook for the economy and housing demand, we continue to see that Spain is one of the safest residential markets in the world as it is both under supply and under leveraged, as you can see on these charts. Please move to the next slide. And the biggest conclusion is that even in the periods of high uncertainty, cost prices don't behave erratically and have been showing a steady performance. Please follow me to Slide #12 so that we can analyze the most important value drivers of our business. In this chart, you can see the velocity of sales which has increased significantly year-to-date and is currently above 5%, a rate that we deem ideal to push for price increases. Other than fundamentals, we attribute this pickup in the sales space to the fact that today there is more certainty on the direction of monetary policy and this should have a positive impact on housing demand. Please follow me to Slide #13. In this slide, you can see the evolution of house prices for new homes in Spain versus construction costs. You can see that for the first time in many years, house prices are growing while cost inflation is showing signs of stabilization. This is naturally positive for the outlook of the upcoming years. Please follow me now to Slide #14. Here, finally, the other key value driver of the business is the land market. Today, we no longer see the big private equities buying land in Spain and this is an advantage for us as the market becomes less crowded. So even though the market remains competitive due to the lack of fully permitted land, we still see good opportunities to deliver high-double-digit return for Neinor's shareholders and core investors. One of these opportunities is what we will show in Slide #15. As you know, we have recently signed an agreement with Octopus Real Estate to invest EUR 200 million in independent senior living. This is the single most attractive opportunity in the Spanish residential with an estimated market of EUR 45 billion in the next decades to deliver opportunistic returns that shall create a lot of value for Neinor's shareholders. As soon as we start deploying this capital, we will come back to the market with more details. And now I hand over the presentation to Jordi for going through the financials.

Thanks, Borja. I would like to kick off this section by doing a recap on the most relevant questions we have received from investors since we published our strategic update roughly 1 year ago and also show what we have executed so far. The first question we received was how we would distribute EUR 600 million in dividends given the bond restrictions that we had at that moment. As you know, in April 2023, we bought the bond at a discount, generating around EUR 12 million profit and also an all-in cost embedded of 4%, which was below the 4.5% we had with the bond. The second doubt was regarding our capacity to monetize our rental portfolio. So far, we have sold assets for more than EUR 300 million at a contribution margin above the build-to-sell. So it's not only the cash we have generated and secured but also the value we have created. The third question or doubt was on the Spanish residential market and how it would perform under a higher interest rate environment. The reality was that new housing did not suffer as much as what people thought. And related with this, there were many questions on our ability to maintain the margins. Well, in 2023, we reported one of the highest gross margins in our history and the same has happened in the first semester of this year. And finally, some said that our strategy was a run-off exercise and this is the opposite of what we have done until now. In the last 12 months, and Borja has just commented it, we have signed co-investment agreements worth EUR 500 million. After all these milestones, we note that Neinor's shares delivered roughly a 70% total return to shareholders, which is a clear sign of credibility and recognition by the shareholders. With this recap said, please follow me to Slide #17, in which I am going to review the financial results of this first semester. Starting with deliveries, we have notarized 882 units. In terms of profitability, during the first semester, gross margins were 28% roughly as we continue to push for higher prices and controlled construction costs. The adjusted EBITDA, as you can see, and remember that it excludes the impact of build-to-rent divestments or revaluations, has been EUR 27 million; and the EBITDA has been EUR 22 million. The EUR 5 million negative impact between adjusted EBITDA and EBITDA is due to the divestment of a build-to-rent project that we have done in July. And the critical point here is that we have derisked the business plan and secured the cash with this deal, which allow us to anticipate 40% of the dividend commitment for this year 2024. This, by definition, generates more value for our shareholders than the discount applied in this specific deal. If we go over the bottom line, you will see net income of EUR 12 million, which implies 97% growth compared to the first semester of last year. And if you look at the details in our P&L or in the audited financial statements, you will see that we have had a relevant reduction on the net financial result, and this is mainly due to 3 concepts. The first one is that cash management that has implied around EUR 2 million positive income. The second concept is the equity tax instruments that we have implemented a couple of years ago and are now contributing with almost EUR 2 million for this period. And the third and the last one is the interest coming from the tax authorities of around EUR 1.5 million, and this is given the net operating losses claim that we did last year. Despite the dividend distribution in February, our cash position is strong, you can see, EUR 224 million; and the loan-to-value remains low at 14%. It will increase next year by 3%, almost since we are going to distribute EUR 0.5 per share. So overall, a good set of results as we keep protecting margins, strong cash flow generation in order to meet dividend distributions while we maintain a healthy balance sheet with a conservative loan-to-value. Now I hand back the presentation to Borja.

Thank you, Jordi. So now I would like to wrap up with the 4 big conclusions from this presentation. First, on the market, we see a combination of solid economic prospects, housing demand accelerating on demographic trends, while supply will remain very limited. Second, we will focus on the main value drivers of this business. We expect house prices to continue to grow, cost inflation to remain under control and good opportunities to buy land in accretive deals. Third, we have prepared for this environment as we believe the next few years will bring us attractive investment opportunities and we have a lot of capital tied up to dividends, so we'll refinance our corporate debt to accommodate potential new acquisitions while we stick to pay EUR 325 million in dividends in the coming 20 months. And finally, we would like to note that execution of our strategic plan is moving forward ahead of our initial expectations and we are moving from a high dividend yield and value play into an equity-efficient growth story, targeting double-digit earnings growth. And with this, we conclude the presentation. And now we are ready to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Ignacio Dominguez from JB Capital.

I have three. Firstly, regarding the build-to-sell JVs, from the revenues coming from the fees that Neinor will receive, what margins do you expect to obtain from this division? When do you expect the first deliveries from this build-to-sell JVs to take place? My second question is on the senior living joint venture. Could you give us more color on this new joint venture signed? Have you already acquired the land plots? What can we assume for CapEx and rents per unit? And finally, my last question is what gross margins for the build-to-sell business do you plan to reach for full year '24 and '26?

Perfect. Okay, I'm Mario Lapiedra, I will take the first two. Regarding the margin in the build-to-sell co-investments, for our partners, we have on a blended basis between a 15% and 18% net IRR. For Neinor, obviously, it goes higher. It's a confidential figure, but we are plus 25% IRR and 2x multiple. In senior living, we have asset portfolio. We have not deployed or invested already the capital, had just signed the agreement. And regarding the details on the CapEx and rents, we will [ announce to the public ] potentially end of the year. But here, the returns both for the partner and for us, it would be higher as the type of investment is more opportunistic type of returns on the basis of JV. And the third one, I don't know if you'd take it, Jordi.

I'll take it, Mario. Thank you. Regarding build-to-sell guidance, in terms of gross margins, it's 24%. We are not changing the guidance. Let's see, at some point in time, if we can have some increases there. But as of today, we'll continue with our guidance.

Your next question comes from the line of Fernando Abril from Alantra.

Sorry, do you hear me? Okay. Just three questions, please. First, on the construction starts. I don't know if you could correct me if I'm wrong, but you started around 400 units in the first half of the year. What's your expectations for H2 for the core BTS business? Second question is with regards to the land investments. I don't know if you could give us a guidance around this divided by the land you expect to invest for the JVs and the land you expect to invest for your own balance sheet this year as well. And then a third question on the Alovera disposal. Correct me if I'm wrong, but you sold it with a very small discount compared to your book value. Is it fair to assume a similar discount or almost book value for the remaining portfolio you have in the balance sheet right now?

Fernando, I'll take the first one and then Mario will take the second and the third one. Regarding the construction that we have started during the first part of the year, I would say, it's quite normal. Now we are launching basically the construction of the deliveries for the year '26. You know that in year '26, more or less, we are expecting to deliver around 2,000 units. So more or less, we have already launched under construction like 25%, more or less. Then out of the total of the launches for year '26, we have launched around 80% of the projects already. We have more or less half of the licenses. So now for this, during the summer, we expect that we will be starting the construction of another 25%, 30% of the units of '26. And then during the second part of the year, we'll try to launch another 25%, 30%, and maybe we will still have remaining some launches for the beginning of year '25. This, I would say, is a quite normal situation for us. What will bring us is, again, we will have a tight '26, we will have a lot of deliveries at the end of the year, but similar as the years that normally you are seeing in Neinor. And now I'll take the land investments and the Alovera lower discount to Mario.

Yes. Okay. Regarding the investments, the answer is whatever is more profitable. That's the reality. So we do not have any specific budget for a direct or a co-investment. We are pursuing the best opportunities and the best return for our shareholders. So we are quite flexible on that. And regarding the discount on the build-to-rent, yes, the reality is that we are working hard but finally finding the good investors to rotate our equity at the correct cost of capital. So we are proud of the type of sales that we are doing and the buile-to-rent and we hope to keep continuing doing that.

Just on the land investments you've mentioned, Mario. So the target was EUR 500 million for your own balance sheet and EUR 500 million for JVs. So I assume that most of it will be more, let's say, for the balance sheet, it will be very back-end loaded and JVs are now a priority.

JVs right now is a priority. But remember that we are in the year of resize of the balance sheet. So obviously, for us, this year, we have preference to the JVs because we need to reduce our working capital in terms of years of land bank and release that excess of cash to the shareholders. But as Mario has said, if we find a good opportunity out there and it's even more profitable than the JVs, we will jump. The third one? Well, actually, there was a third one, Fernando, regarding the negative impact on the build-to-rent project, correct?

Yes. Well, I think Mario already answered it, but if you want to add anything.

Okay. No, no, no problem. If it's enough, it's enough.

[Operator Instructions] Your next question comes from the line of Manuel Martin from ODDO BHF.

Two questions from my side, please. The first one would be a rather technical question on the P&L. I've seen in your financial statements that you had finance revenues of EUR 15.8 million. I'm not sure whether you partially answered that already, but maybe you can explain a bit the composition of these revenues, which is quite high I think. The second question would be a rather general one. It would be on the question on the sustainability of the private consumption and its drivers in Spain. Maybe you can give us some color on that.

Yes, actually, I commented that during my speech. I explained that in the interest financial result, there were a big positive impact in that caption. And I said that there was EUR 2 million positive due to treasury management, so interest coming from just managing the cash. There was also EUR 1.6 million, almost EUR 2 million, of equity tax that basically is [ IS ]. So there are instruments in which you invest and you have profitability in embedded. This is already recorded. It's something that we did 2 years ago and now we have the result, the positive result. Also, there is EUR 1.6 million of interest coming from tax authorities because there was a legal claim last year against the hacienda basically because we couldn't apply the net operating losses as we wanted. And now given the changes in the laws, we just made a claim and the auditor has only just to recognize this interest cost for us in the P&L. And on top of that, there is another positive impact at the audited financial statement, which is a debtor that was EUR 25 million, which is Alboraya. And we have reached an agreement with the City Hall of Alboraya to change this EUR 25 million for a land that is worth EUR 34 million. So the difference, obviously, is a positive impact and it's based on the interest. This debt basically comes from Quabit. So when we bought Quabit, we tried to start negotiations with Alboraya until getting this agreement as of today. And again, the auditor has only just to recognize this extra value that we have in cost, thanks to the negotiations. This gets to the [ other ] concept.

Okay, makes it clear.

And regarding sustainability, yes, it's one of the -- as we used to say, one of the top priorities of our company is to be well ahead the rest of our peers in the sustainability stuff in the building. So basically, today, what we have, we have the commitment that more than 75% of our buildings are having a certificate. So we are working a lot on energy from non-carbon footprint fuels in our construction and making...

I'm sorry to interrupt, but I think there was a misunderstanding in the wording. I was rather referring to the strong points of the Spanish economy that the private consumption is driving, actually also the housing business. And it would be rather the question to elaborate on how strong are the drivers and how reliable are the drivers. So can we expect this trend to continue? And what could be the danger, to get a bit of flavor on that? Excuse me, my wording, please.

No, sorry on my English. I thought you were asking about sustainability, sorry. Now about the drivers of the Spanish market. You said it's your question, I understood. So if this is correct, the answer is that we see very strong market. Basically, it's general data in Spain. Today, there are being created every year, 250,000 families, while the house creation is only 80,000 houses per year, more or less. So there is a deficit that now the Bank of Spain is estimating to be more than 1 million houses. However, it's a slow process to get the final land plots, the ready-to-build land plots. And this is the reason why we think that, in the next years, the construction of new houses is going to be very limited and will remain basically in the numbers that we have today, around 80,000. And this is why we feel very safe that every single house that we are constructing, we have been able to sell it at the price that we decided to do it before we launch it.

And you're not afraid of cooling down of the economy? I mean, today the climate indices in Spain and France, which were pretty gloomy. So Spain, the sun shines always in Spain, it seems to be like that.

Not really. I think that Spain suffered a lot during the last financial crisis because the developers were taking a lot of leverage from banks. As for the families, the construction of new houses was around 700,000 houses per year, while today it is 80,000. And you also have to consider that the price of houses in Spain didn't increase as much as in other cities in Europe. If you look at Paris, Dublin, London, you will see that the house price has doubled since the financial crisis. And today, in Spain, in nominal terms, we are reaching the value or the price of the houses in 2008. But if you deflect the inflation effect, then we are still 22% below the prices from those years. So I think that in Spain, we went from being the riskiest country in the world to invest in residential state to be one of the safest or the safest in the world. Basically, you have to realize that before we start development, before we start the construction, in the case of Neinor, we need to have 30% of pre-sales. But if you look to smaller developers, they need to have 70%, 80% and even 100% of the pre-sales done before they start. So it's like you are making the houses for people that have already bought those houses. One thing that we could see was if we will have cancellation rates above the normal figures. But even though, during the year '23 when we saw the increases in interest rates, we didn't see an increase in the cancellation rates in our company and neither in the market. So we feel that the Spanish economy is growing well. All the estimations from international projections are saying the same that the growth will be above 2%. So we don't expect to have more unemployment. That could be one of the reasons why we could suffer. And we don't expect a big financial crises in the world either. And then from that point of view, we feel that our market is very, very safe.

There are no further audio questions, if you wish to proceed with your webcast questions.

Thank you. I'll take it from here. So we will start with the first question, which is with regards to the pre-sales coverage for the coming years. Maybe you can take this Mario.

Yes. We have plus 80% for 2024. So for this year, we are almost done with a target as always of ending the year with plus 90%, 95%. For next year, we have already circa 40%. The target for the end of the year is to reach the 60%, 65%, trying to maximize also the HPA capture. And finally, for 2026, the coverage that we have is in the region of 15%, with the target of ending 2024 with around 30%, 35% of the total coverage of the deliveries of 2026. So as we have said, the absorption of our product is very healthy and we are more obsessed in trying to capture all the HPA that we are able to.

Thank you, Mario. The next question that we have received is with regards to the co-investment guidance, if we expect to continue to close deals in the coming months and years and if we can give any color on the pipeline.

Yes. Well, I'll take it. We have been focused on raising the partners and the equity. Now we are shifting the focus in deploying the equity. Last year, we invested close to EUR 150 million. We have closed a couple of good positions with almost 400 units in Estepona and Cordoba and we will keep focus in deploying in the second semester of the year, both through individual deals and portfolio.

Thank you, Mario. The last question we have received is on the dividends for '24, '25 and '26, if we can give a reference.

Okay. I'll take it. Remember that the guidance was EUR 200 million for this year, EUR 125 million for 2025 and EUR 70 million, EUR 75 million for the 2026. In terms of payment, remember that we committed since last year that we had the strategic update that we are going to pay between December and the following 4, 5 months. And the rationale is because there is always concentration in the cash reduction in the last months of the year. That's the rationale. Having said this, as we did last year, if we see that we have visibility enough and that we generate more cash, we anticipate our [ build-to-sell ] business, we normally try to anticipate the dividend. We accelerated last year with it. This year, because we have already committed to anticipate 40% of the EUR 200 billion, 20% will come next week and the 20% left will come between October and November. We still need to define the exact date. So be sure that if we can do it, we will accelerate it.

Thank you, Jordi. So we have no further questions on the webcast. So operator, we may finish the conference call.