Metrovacesa S.A. (MVC) Earnings Call Transcript & Summary

Hello. Good morning, and welcome to this webcast for Metrovacesa on the full year 2022 results. My name is Juan Carlos Calvo. I am Director of Strategy and Investor Relations in Metrovacesa, and today, we will present an overview of our activity and key developments during the year 2022, led by our CEO, Jorge Perez de Leza and as well as our CFO, Borja Tejada. In light of this presentation having been released to the market this morning and they are available through the CNMV website and on the company website. We have already sent by e-mail to our usual distribution list for analysts and investors. [Operator Instructions] Now I hand over to our CEO to start the presentation. Please, Jorge?

Thank you, Juan Carlos, and good morning, everybody, and welcome to our full year 2022 results presentation. I will start with the highlights on Page 5 on key 2022 targets accomplished. We delivered 1,700 new units within the range that we gave as our guidance. Our operating cash flow was close to EUR 152 million. We paid, as you well know, an outstanding dividend in 2022. It was EUR 250 million or EUR 1.65 per share, representing a dividend yield at closing prices at the end of '22 of 26%. And despite the apparent slowdown and uncertainty levels that we are seeing in the market, we experienced a resilient demand for new housing. And also, we have not stopped or slowed down in launches. Okay, sorry for the technical problems. I'll start again with Page 8 on the sector dynamics, and I was saying that the demand was somehow strong at the beginning of the year, followed by a slowdown in the second part of the year. However, what we see is that the new housing is proving to be more resilient than used homes in the context of limited supply. We still don't have the final official figure of construction starts last year, but our assumption is that it will be quite below 100,000 units, even below 80,000, which will help those of us who are continuing with our strong operation. In terms of -- and I have to say as well that the beginning of the year, so January and February of 2023, in terms of presales have shown a bit of a strength and more than what we expected, so actually, we started the year better than expected, which is kind of good news, and we will have to wait a bit to see how that consolidates. In terms of house prices and construction cost index, we see both of them in a way moderating. And with a deceleration in selling prices, still in some development's prices are going up. And in others, they will in a way probably stay flat, but we do not see any selling price decreases. The same in construction costs where at the end of the year, we already showed some normalization in those costs. And also, all the general contractors that we work with are coming back to the fixed term, fixed price contract at some point during the year. Last year, they were uncomfortable signing. In terms of mortgage rates withdrawal, we have seen that there was a surge, which obviously with the increase in interest rates, mixing or increasing the affordability ratio of the client, for on average in Spain from 32.6% to somehow 36%. What is true though, is that in the market, this is according to a report from Idealista, but we see something very similar in our portfolio of clients last year, we saw we had about 31% of our clients buying with equity and then an additional 28% to 30% of clients buying with a mortgage also less than 80%. That means that we have about 60% of our clients that are not so let's say affected by the increase in interest rates, and that could explain also why the demand is more resilient. Moving on to Page 9. in terms of presales, we sold 1,837 units in the year, of which 178 units were a BTR deal that was signed in December as we already announced at the end of last year. The fourth quarter presales momentum already at the end of the year and also in January and February. And with an average selling price that as you can see is in 2022 EUR 315,000 per house, and this is mainly due to product mix but also due to the HPA that we had in our portfolio during the year of around 5%. Our absorption rate measured as the number of units, net units sold divided by all units under commercialization, sold or unsold, stood at 2.6%, which is very similar to our historical average of 2.5% and very close to the 3% that we always see as the range of 2.5% to 3% as an ideal target. Moving on to the next page, in terms of residential deliveries, as I mentioned at the beginning, we delivered 1,700 units in the total of the year with an ASP of around EUR 260,000. And this is due to the product mix. Again, it will increase in 2023 and 2024 due to the product mix that we will be delivering. In terms of margin, the gross margin for our residential development stood at 21.2% and stable in the low 20s that we have been giving last guidance. Moving on to the next page, Page 11, operational activity. We have right now presales backlog about 3,171 units, which represents a 4.5% increase compared to last year. And this represents close to EUR 1 billion in future revenues, which is 16.5% growth in year-on-year, and that represents that we're sitting at, as I mentioned before, with the higher average selling price of around EUR 312,000 per house. Units under construction, we started construction of 1,800 units and of which about 1,000 were started in fourth quarter. As we mentioned last year, at some point we stopped the construction start due to the market uncertainty in construction and then the construction companies not willing to sign a fixed contract. But we caught up in the fourth quarter, bringing our figure next to 2,000, where we want to be. Units under commercialization, 2,500 units that we have under commercialization with an average unit selling price, again, higher of EUR 328,000 per house, which will mean again higher ASPs in future deliveries. In terms of presales coverage and construction progress, more than 80% of our sales for 2023 are done and more than 60% for 2024 deliveries. Same for construction progress. Everything is already started for construction projects for 2023 and 2024 deliveries. Moving to the land pipeline, Page 12. Our land management or transformation is gaining relevance with new launches. For 2023, 2024 and 2025, we will transform an additional 5,000 units, which will be our major source of land for new project launches in the coming years. And we will see also a better mix with some of our portfolios becoming fully permitted in Madrid, Barcelona, Valencia, etc. We will be spending about EUR 200 million in urbanization for CapEx in 2023 - 2025, so some of the cash that we have available right now in our bank accounts will be used for this CapEx requirement, always for sure within an LTV, reasonable LTV below 20%. We're also combining this with -- you may have seen in the press some recent plan purchases. We use this as a top-up to complement our land portfolio. It means we're not buying 2,000 or 3,000 units per year. We're just buying 200 to 500, basically with the idea of combining our transformation of land into fully permitted with some additional units to bring us closer to our target run rate, targeted run rate of 2,500 units per year. Moving on to the next page, land sales and commercial deliveries, in the P&L at the end of last year, we had about EUR 34.4 million of land divestments. With our big catch-up in the fourth quarter, we are selling mainly residential land and commercial land still being slow. We also have binding sales contracts for EUR 18.9 million that will be most of them transformed or signed the material deed during 2023. And then we also delivered the Monteburgos 2 building office development to an insurance company that was our client for this bid. Moving on to the commercial assets in Page 14, so as I mentioned, we delivered already the Monteburgos 2 building in Oria, which is our main development target now in the commercial part. As you probably remember, it's 89,000 square meters of buildable area within the M3 in Madrid. Here, we've already signed 20,100 square meters for student residence with Vita, and we are very close to signing a second deal and working for the remaining part of the building. And so that is progressing adequately despite the uncertainty in the commercial segment. Moving on to the next page in terms of ESG. We are advancing towards and basically carrying out our 2022-2024 ESG plan, getting different certifications and working in terms of energy efficiency. In launching, we are going from BB more towards AA in most of our launches and also obtaining certifications for 100% of our projects. We're also moving into this year to measure the Lifecycle Analysis of all power developments in order to know and understand where we are at and then be more let's say demanding in that trend in the future. We are being right now certified or reviewed by S&P and Sustainalytics. S&P, this was the first year that we actually did this review by S&P Global Sustainability Assessment and with a result that is quite encouraging. We are in the 88% percentile of the real estate industry globally. Also, with Sustainalytics, we are in now what is called the low ESG risk coming from a medium ESG risk in 2020. So progressing adequately, and we will continue to enforce this even more in the coming years. And with this, I hand it over to Borja Tejada, our CFO, for the financial review.

Thank you, Jorge, and good morning, everyone. In terms of profit and loss account, here are some key figures. Revenues from Residential Development ran about EUR 519 million and Land Sales & Commercial Development, close to EUR 78 million. If we think about gross residential and development margin, about 21%, exceeding our guidance of low 20s. In terms of EBITDA, around EUR 46 million and net profit minus EUR 23.5 million, meaning EUR 43.6 million of recurring pretax profit, representing 17% year-on-year. On Page 18, concerning our net debt, very solid position of the gross as always, 9.4% of loan to value, a comfortable ratio and below our reference of 15% to 20%. Gross debt of EUR 351 million and net financial debt of EUR 227 million. In terms of gross rate, EUR 125 million available [indiscernible] after the distribution of our dividend in December. Finally, and due to an increase of interest rate, we put in place a hedge for more than 90% of our corporate debt. On Page 19, in reference to our free cash flow, just 2 figures. EUR 151.8 million of gross operating capital, above the initial guidance of more than EUR 150 million. This is the figure that we use usually as reference for dividend calculation. Finally, in the Slide 20 about asset appraisals, EUR 2.4 billion of GAV, of which 77% represents our residential portfolio and 22% commercial one. Flat like-for-like versus 2021 with an increase of 1.3% in our residential portfolio and a slight decrease of 4% in commercial one. Finally, in terms of net asset value, slightly above EUR 14 per share after the distribution of EUR 1.65 during 2022. Now I will hand over to Jorge with closing remarks.

Thank you, Borja. And moving on to Page 22 with shareholder remuneration, just as a reminder, we paid EUR 250 million in 2022, EUR 1.65 per share. And in total since we started paying dividend in May of 2019, we've paid EUR 432 million or EUR 2.28 per share, sticking to our commitment to return 80% of our cash flow generated each year. The dividend figure for May, or second quarter of 2023, will be decided in late March as usual, as we have done in the previous years for AGM approval, as it will most probably come also through a capital decrease, as a form of capital decrease. So again, we will decide this in March and then will be subject to approval of the shareholders meeting later in the year. Also, we canceled the share buyback program. And we signed a new liquidity contract that has been in place since January 2023 to help boost the liquidity of our shares. Moving into Page 23, again, I want to reiterate that we have a strong visibility for 2023 and 2024, as I mentioned before, with a strong coverage in completions and construction starts. And we don't see as of today any reason why construction should enter any let's say traps along the way. But we will see and monitor closely the construction and sales progress. We have higher ASP than in previous years, as I mentioned. We also continue to follow our operational targets of being midterm in the range between 2,000 and 2,500 units annually with the strong cash flow conversion that we've been having until now. Our cash flow target for 2023 will be between EUR 100 million and EUR 150 million. This will be very dependent on really on land sales. I think in terms of housing deliveries, we will have a similar figure to what we had in 2022 and even with a stronger sales coverage. However, in land sales, and that's why we give a range to maintain a little bit up from EUR 100 million to EUR 150 million. That will be dependent on land sales that we will do and especially on commercial land. We are working on that with strong determination and with a lot of flexibility in terms of how we can sell that land. And then again, we will aim to be at the higher end at the higher part of the range. However, we want to be cautious in guiding this figure. And of course, we will maintain our dividend policy that we had had until now, which is 80% of payout on the cash flow limited to the LTV range between 15% to 20%. And with this, I finish my presentation, and I hand it back to Juan Carlos.

Thank you, Jorge. We are now ready to start the question-and-answer session. We will start from the audience in the conference call. [Operator Instructions] The first question comes from the line of Ignacio Dominguez from JB Capital.

I have 3. Basically, how many deliveries do you assume in your full year 2023 and full year 2024 sales coverage ratios? Secondly, your loan-to-value target is 15% to 20%, but you are at 9.4% in December. How should we think of your capital allocation strategy going forward? Should we expect more extraordinary dividends or perhaps you have some investments in mind? Finally, within the equity transactions, how much are resident and nonresident? Thank you.

Thank you, Ignacio. I will take, Jorge here, I will take the answer on the 3 questions. 2023 deliveries, we will -- I think somehow it's in the Slide 23, but in a similar range to what we had in 2022, so 1,600 to 2,000 is where we are where we are aiming for this year. And for 2024, sorry, it will be higher than that, but we normally don't give guidance on 2 years down the road with the level of uncertainty that we have in the market. But if everything goes normal, it should be higher than that figure and getting us closer to being above 2,000 as we would like to be in our run rate. Our LTV target of 15% to 20%, basically, what's going to happen here is that we will be investing close to EUR 100 million of CapEx in urbanization that I mentioned. We will, of course, continue to distribute the dividends that we have as policy of 80% of the free cash flow generated. And with that, within a year, 1.5 years, we will be in that range of LTV of 15% to 20%. We are not expecting any extraordinary dividends. We did that as an improvement of our capital structure at the end of last year, and there is no room to do that anymore. And we are not planning any extraordinary transactions more than a few purchases in land, as I mentioned, as a top up here and there. And then your third question in terms of sales, domestic versus international, I would say the mix is for 25% international, 35% domestic. So [indiscernible] and Canary Island and some of the developments we have in Palma de Mallorca is mainly international, and this market is behaving very strongly, and the rest is domestic.

Okay. We don't have more questions on the conference call. We are turning now to the webcast. We have a question from Mariano Miguel from Banco Santander. He says, I have 2 questions. Can you give us a bit more granularity on your cash flow guidance? Which level of land sales or landing developments are you expecting? And second, regarding new launches and construction starts, which will be the figure you have in mind for 2023?

Okay. Yes, Mariano. I think in terms of cash flow guidance, we prefer to speak to that range of EUR 100 million to EUR 150 million. And I think if we are at the higher part of the range for the residential deliveries, and we also sell land about EUR 50 million, EUR 75 million, then we will be on the top part of the range. But if sales of land are lower, then we will be closer to the lower part. So again, I think given the level of uncertainty that we have, speed in the market in regards to land sale and specifically commercial, which I'm not saying is completely dead, I mean, we do have some deals that are being looked at and worked out and numbers being worked through, then basically it will depend on that. And then on your second question, in terms of launch and deliveries, sorry, launches and construction starts, commercialization starts, we are aiming for 2,000 or higher than that for the year.

Thank you. We have no more questions from the audience or the conference call. We can conclude here the presentation for the full year results. Obviously, as usual, the Investor Relations team will be available to take any follow-up questions that you may have. We thank you for your participation, and we hope we will be able to speak with you again next quarter. Thank you, and goodbye.