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

Hello, good morning, and welcome to this webcast on Metrovacesa results for the full year 2023. My name is Juan Carlos Calvo. I'm Director of Strategy and Investor Relations. In our session today, we also have Jorge Perez de Leza, Chief Executive Officer of Metrovacesa; and Borja Tejada, Financial Director. We are going to present an overview of our operating activity and our financial results for the full year 2023. The slides of this presentation have been released to the market earlier this morning, and they are available through the CNMV website as well as the company website. We have also sent it by e-mail to our usual distribution list for analysts and investors. At the end of this presentation, there will be a question-and-answer session. [Operator Instructions] If you are participating via webcast, you can type your question directly in the webcast platform, and we will read it out at the end of the presentation. Now I hand it over to our CEO to start the presentation. Please, Jorge.

Yes. Thank you, Juan Carlos, and good morning, everybody, and welcome to our full year '23 results presentation. Let me start with the highlights that you can see on Page #5. In terms of housing demand, we see that it still remains solid. It remains solid in the second part of '23 and also in the beginning of '24, as I will comment later, supported by demographics, GDP growth that has been better than expected. And despite the higher mortgage costs that we have seen in the market, sales performance has been quite solid and has supported well our business. That's why we've had a significant growth in our presales and the backlog in our BTS platform, plus 11% in 2023 and plus 36% compared on a quarter-by-quarter basis. The backlog is now at EUR 1.1 billion in revenues, which is 9% higher than what we had at the end of 2022. We've been more active in land rotation, and I will comment about that later, with revenues of EUR 84 million in P&L with a pickup in demand, especially in the commercial segment and also more active in land acquisitions in the second half of the year, where we acquired significant investment in Los Cerros in a very strategic position in Madrid. We've achieved our operational and financial goals for the years with housing deliveries being within the guidance that we said at the beginning of the year with higher margins than expected. We've had a record EBITDA of EUR 74 million with a growth of 62% compared to last year. And adjusted pretax profit before impairments of close to EUR 50 million, which is 25% higher than last year. And our operating cash flow is right in the middle of the guidance that we gave, between EUR 100 million and EUR 150 million, so meeting the guidance comfortably. Moving on to Page #6, just to highlight a few of our really landmark projects that are in -- I would say, in process, but already are beginning to be reflected in the P&L. The first one being in the Málaga Towers that some of you visited in the last part of the year. And as you all know, we have 2 towers there with close to 150 units. We have started delivery and almost finished delivery of the first tower, Living, in -- initiated in 20 -- in December of last year and then almost finalized in January of 2024 with 74 units with an average price of close to EUR 1.5 million, EUR 7,000 per square meter. Important to highlight that the second tower, Vision, is already under construction. Delivery is planned for 2025. We are going -- again, construction as planned. And the units are 70% presold, so going on an excellent rhythm. Second landmark development for us is Palmas Altas in Sevilla or Isla Natura, where we will start the first deliveries in the second half of 2024 with more than 300 units. In total, we've launched 20 projects already with more 1,200 units in commercialization and more than 50% presold. In this case, we are following a strategy of blocking units and releasing units to actually maximize prices and margins in the development. And finally, the Oria Campus or the old Clesa factory, which is our largest commercial development project to date, where we have signed with Vita the second turnkey building project, so which means that in total we have 42,000 square meters, so almost half of the square meters in the -- in development already committed with one of the towers, still in housing, already construction started and the co-living or the combination tower set to begin in the second part of -- in the second quarter or third quarter of 2024. Moving on to the business update section, I will now hand it over to Juan Carlos to give us a brief comment on the housing market.

Yes. I mean, this slide, we will highlight a few comments about the market. As we said before, we think that the market is relatively solid. It is actually performing better than other countries in Europe. And this is despite the concerns about the increase in mortgage costs and inflation, et cetera, in the context of the macro situation. So -- and the main reason, I would say, is probably the imbalance between supply and demand. We can see that in the first chart that actually in the last 3 years, we have seen a significant increase in the creation of household. This is a demographic effect. This is a population growth, mostly from immigration. But in the end, it translates into increase in households of around 0.5 million in the last couple of years, whereas the supply of new construction has stayed low at around 100,000 annually. And that means that the new construction is covering barely 40% of the housing needs by the demographic growth in the country. And that's a major impact because that's actually driving the demand. If you look at the volume of the transactions in the second chart, it is true that last year, we saw a decline of around 9% in the number of total transactions. But actually, that 9% is, I would say, a modest decline and leaves us with a figure that is historically still very sound, very solid, above the figures pre-COVID, as you can see there in the chart. And actually, it has been concentrated -- the decline has been concentrated in the secondhand market because actually the first hand or the new homes, because of the low volume of construction, has been absorbed pretty well. And that has translated into positive appreciation of house prices, modest but positive, in a context where also construction costs were moderating. And about mortgages, obviously, the increase in mortgage costs has been a concern, but actually has not had a great impact -- did not have a great impact on the market, firstly, because the increase in Euribor has only been transferred partially to the mortgage rates. But most importantly, the use of mortgages has declined. The percentage of transactions financed with the mortgage has dropped from around 80% to around 65% in the last few years as the cost was increasing. And this is a reflection of relatively healthy financial situation by families with low debt by households and relatively high -- historically high deposits level. Back to you.

Yes. Thank you, Juan Carlos. Now moving on to operating metrics, and I'm in Page #10. In terms of presales, we have sold in the year 1,836 units in total. All of them BTS, which represents an 11% increase in BTS and also with a higher ASP compared to what we had last year at EUR 322,000 per house, which is a reflection on not just only of the product mix but also of the price appreciation or the HPA that we have been carefully implementing in our developments. In terms of absorption rate, the way we measure it we are at 2.2%, which is above our average in the last quarters for 2, 3 years in the past. So a healthy ratio, as we will see later in the coverage for deliveries of '24 to '26. And also importantly, in the client profile, where we see that the foreign clients, especially in Costa del Sol are 22%, which is slightly higher than the long-term average. And this is a client that is -- continues to come and to really push for -- push the demand in developments in Costa del Sol. Also, close to 30% of the clients are still buying without financing. So it's a figure that, again, reflects that there is solid demand in the market. This is slightly lower than what we had in 2022. However, it still shows that there is savings and that there is a healthy buyer for the client segment that we are representing. And finally, a solvency that we measure in our clients of 4.6 years to repay the mortgage, which is really the -- much lower than what could be the 7.5 or 8 years that we could see on a more tense market. So quite a healthy client profile. In terms of residential deliveries, we met our target at -- on delivering in total 1,675 units. In terms of revenues, that represents a 14% increase compared to last year, mainly because of the -- also the average selling price which stands at EUR 300,000 per house and also an increased margin -- gross margin of 22% despite the lingering effects of the Ukrainian war in construction costs. So we managed to do a very, I think, active and successful management of price increases versus cost increase due to the Ukrainian war on the projects that were delivered at the end of the year. I think also important to highlight that we delivered 6 of the 8 active projects that we have -- BTR projects that we have. So 6 are delivered, 2 more to go, that will be delivered this year. And as we didn't sign any BTR projects in 2023 due to the fact that we had higher margin doing those as BTS. We will not have any more BTR. Once we have delivered these 2, we will see what happens in terms of new BTR projects during the year. In terms of operational activity, our sales backlog keeps on growing. We now have 3,330 (sic) [ 3,332 ] units as a backlog, EUR 1.1 billion in revenues, which is an increase of 9%, And the average selling price is slightly higher with EUR 325,000 per square -- per unit, excuse me. 4,500 units under commercialization, and finally, a slightly higher number of units in commercialization, close to 6,400 units. All this translates, I think, into what is the most relevant figure for a residential developer, which is what is our coverage ratio for the coming years. And as you can see, they are very healthy ratios with 2024 -- beginning the year with an 82% revenue -- sorry, coverage already achieved, but not only that, to 57% in 2025 and 31% in '26. Construction, obviously, everything for '24 and '25 under construction, are also 31% of the deliveries of 2026 already with construction initiated. So I think very healthy ratios, even slightly better than last year, which gives us a good visibility for the residential segment in the coming years. In terms of land acquisitions, in Page 13, I think we've been -- I think it requires mentioning that we followed our strategy of being active in land acquisition as a complement to our existing land portfolio, so meaning what we have had envisioned is to, to add between 500 to 700 units per year so that we could be comfortable -- comfortably in our run rate of 2,000 to 2,500 units per year. However, there was -- this year, we also did a strategic one-off investment in Los Cerros, again, an opportunity that came through the sale of the participation that [indiscernible] had in this development. And I think as an active resi player, a long-term player, we analyze this opportunity. And despite the fact that it's not the normal land acquisition strategy, we decided to go for it because we believe that it's going to bring returns in the -- close to the 20s or higher IRR return for our shareholders, and therefore, we consider that it was a great opportunity, not to be missed, again, for a developer that is here to stay for the long run. Other more normal land purchases that would fall in what we consider this normal land acquisition strategy of 500 to 700 units per year would be Distrito Z in Malaga, also Vinival in Valencia, where we have a strong position in this non-fully permitted land, almost in first row in beachfront location in Valencia. And also another development in Granada, closer to 200 units, where we are already under commercialization in one of the phases. In terms of land sales, our total land sales in P&L -- flowing through P&L is EUR 84.1 million with commercial land sales being 83% and residential 17%. As we mentioned in the last quarter presentation that we had, we saw a pickup in commercial land activity at the end of last year, and that's why we have this strong second half of the year. And this figure includes as well the Oria Neo student housing as well as Valdebebas, the hotel operator that bought part of our stake in Valdebebas; Monteburgos 3, where we sold this to a hotel operator as well. And then in residential land sales, 17%, we've been selling noncore assets in places like Jerez, Sevilla and Córdoba. And when I say noncore, it's either because of location or because of size of the development, where it's too small that it doesn't make sense for us or not as -- let's say, as efficient as selling the land. And we had a gross margin of 20% on these land sales, which is definitely above what we sold. All in all, if we look at the period '18 to '23, we've divested EUR 455 million in resi and commercial land. And we will continue in that effort to do so in the coming years, especially in the commercial segment, as we've been telling in the past. And we have a good start of the year because we have already -- we already have binding contracts for about EUR 41 million that are coming from deals that were signed in private contracts in the previous years and will materialize or will become -- the final notarial deed will be signed in 2024. Talking a little bit more about Oria Innovation Campus. I gave a brief highlight at the beginning of the presentation. but I think we've had a major boost for the -- for our largest commercial development project with 2 buildings representing 42,000 square meters and more than 1,100 rooms in total with a very strong operating partner and investor, Vita, that will be actually managing these units of these buildings once they are delivered. In -- as some of you that know Madrid well, in the rapidly changing and developing Fuencarral district that I think with all different developments that have been going on in the last couple of years and with the push of Oria now, it has become really a destination within the north of Madrid for what is, I would say, a student hub as well as life sciences and educational hub, so with good prospects for this development. Construction CapEx, important to say, is financed already -- with financing already in place. So it will not require any investment or any new financing on the balance sheet for Metrovacesa. And at the end, Vita will acquire ownership of the -- of all developments at -- developments in 2026 -- the delivery, sorry. And we will also collect management fees during the development process. In terms of ESG, and I go to Page #16, I mean, we continue our strong effort in the environmental part on our development process, with 100% of our projects now being A-A certificate, also with 100% of our projects being certified either by Green Building Council stamp or sustainability certifications and in some cases as well with BREEAM. And we are also measuring now our carbon footprint in 100% of the projects and already started implementing measures to reduce that carbon footprint. In terms of social impact, I would highlight here our land development efforts with our community engagement department and platform in where we are being very active in management -- managing social action in the -- with the different platforms and different stakeholders in all our urban development. And also, we've been active in pursuing also sustainable certifications in the different land developments that we are doing. Finally, in corporate governance, we are following our -- the highest standards in transparency as well of code of good governance. And we are also in -- I think it came to the press yesterday, but we are increasing in one our independent directors with Ignacio Moreno that previously was until now considered as other external, now being also an independent director. In terms of -- and with this, I will finalize the ESG certificate. We worked in 2023 to be certified by not only S&P where -- Global Sustainability Assessment, where we came in the 88% of the real estate industry, so very high in the ranking there. But also with Sustainalytics, where we are now with a rating of low risk. With this, I finalize the operating part, and I hand it over to, Borja, our CFO, to talk about the financial figures for the year.

Thank you Jorge, and good morning, everyone. In terms of profit and loss account, just some key figures as always, 13% revenue growth year-on-year, out of which 14% from development and more than 8% from land sales. Very good performance in terms of gross margin, up to 21.7% divided in 22% from development and 20% from land sales, meaning a margin expansion of 3% year-on-year. 62% of increase in our EBITDA up to a record figure of EUR 74.2 million, having closed with an adjusted pretax profit of EUR 50 million from the figure. Now in the Slide 19 with reference to our free cash flow, EUR 131.6 million of gross operating cash flow, meeting our guidance of EUR 100 million to EUR 150 million for the full year. In the Slide 20, concerning our net debt, as always, very solid financial position of the company, 13.8% loan-to-value, a comfortable ratio and below our reference of 15% to 20%. Nevertheless, increasing in order to optimize the capital structure of the group and higher CapEx in ongoing developments. EUR 440 million of gross debt that once deducted the billable nonrestricted cash, we get over EUR 332 million of net financial debt. As you can see, very diversified financing mix with good access to various sources of capital at competitive, called my point of view, cost with no relevant maturities up to 2026. Finally, about our asset appraisals. EUR 2.4 billion of GAV, out of which 82% represents our residential portfolio and 18% the commercial one. 1% like-for-like versus 2022 with an increase of almost 4% in our residential portfolio and decrease of 9.6% in commercial one due to interest rates and higher yields required in the market for these type of assets. Finally, in terms of net asset value, EUR 13.33 per share after the distribution of EUR 0.66 of dividends during 2023. Now I will hand over to Jorge with closing remarks.

Thank you, Borja. And I finalize with our closing remarks in Page #23. And as I mentioned, I think 2023 was a good year for Metrovacesa meeting our goals with execution according to plan. We maintain our midterm activity of 2,000 units per annum in residential development and progress in portfolio rotation towards a more optimal size and mix. That's how we would summarize our performance of the year. In terms of shareholder remuneration, we did an interim dividend of EUR 50 million, paid in December of 2023. Our final dividend proposal to be decided in March -- in the Board of March with the annual shareholders' meeting call and will be a balance between a strong cash flow generation and dividends and also investments with attractive in medium-term returns. The outlook for the year, we have good visibility at the start of the year. As I mentioned in the resi development with very strong sales coverage and construction coverage for housing delivery with a strong sales land -- land sales pipeline in binding contract with EUR 41 million already to be -- already in place and signed and to be signed -- notarially signed and with the final price collected at the end of the year. And we also see from the market point of view, with the potential cuts or at least the uncertainty of big hikes or noise in the ECB rates, could be supportive for a stronger second part of the year. And we put an operating cash flow for 2024 in the range of EUR 100 million to EUR 125 million depending on land sales and acquisitions that we do in the year. And with this, I finalize now the call and hand it over back to Juan Carlos for Q&A.

Yes. Thank you, Jorge. We are now ready to start the question-and-answer session starting with participants from the conference call. [Operator Instructions] We will mute the line for a few seconds so that you can register your questions. Okay, we have no questions from the audio conference call. We will -- we do have some questions from the webcast. The first question comes from Ignacio Domínguez, analyst at JB Capital. He's actually had several questions, so we'll ask them one by one. Firstly, on the outlook, how much land acquisitions and land sales are included in your guidance for operating cash flow in the year 2024?

Well, I mean, we are not going to give the specific details, because at the end, I think the guidance on cash flow is a combination of deliveries as well as land sales minus land acquisitions. But our land acquisition strategy has -- still remains what it is, which I mentioned that it is to a top-up or a complement to our land portfolio in the sense that we would like to buy between 500 to 700 units per year. And if you take an average price of EUR 100,000 per house or a bit less than that, that would give you a rough figure of what is our standard strategy for land acquisitions per year. Again, as I mentioned, Los Cerros was an exception, and I think a very good exception for our shareholders, as we will see that we have a great piece of land in one of the best, I would say, areas to have development in Spain, in Madrid and in the Southeast developments, where we are already seeing very strong land transactions in terms of developers buying land from existing owners and also developments being launched. Now, will that be the case in 2024? We don't envision that. But nevertheless, we will be looking at strategic opportunities if they appear. If they don't appear, we will not buy, and we will stick to our normal strategy. But if we need to make an exception for exceptional returns, we will do it. And that's why we're a little bit more vague in terms of land acquisitions, but I would say our main strategy is 500 to 700 units.

Okay. The second question is about the housing development business. How many deliveries and average selling price do you expect in 2024? And about gross margin, do you expect it to continue in the 22% margin of last year?

I mean, in our deliveries, we will be getting closer to 2,000 units in the coming years, and that's where we need to be and where we will be. If you look at -- I don't know which page it is, but when you look at the -- what we have under construction right now, the units that we have under commercialization, et cetera, so that guides you towards 2,000 units, probably we'll not reach those 2,000 in 2024, but it will be more than 2023. In terms of loan margins, I would stick to the -- to our lower 20s, which is, again, a little bit more vague. It stands between 20-point-something that we had in 2022 and 22% that we've had last year. But we will continue to work, I think, selectively and intelligently in increasing prices in the developments that we can do so.

The third question from Ignacio is about the payout. Do you expect to pay 80% of the operating cash flow guidance for 2024?

Yes. Our policy has not changed, and we will continue to pay that 80%. And again, it will depend on what the final operating cash flow is. And I think in resi development, it's very predictable right now in terms of what we will deliver and how much cash that we produce. And I think in terms of land sales as well, having a good start of the year, and I think we are -- we remain positive in the commercial segment. I think, yes, we will stick to that policy of 80% payout.

Okay. So moving on to the next analyst. We have Javier Beldarrain from Bestinver. Given the high number of units acquired -- I assume he's talking about land acquisitions, units acquired in 2023, do you expect to buy less land in '24 and '25?

I think I already answered to that question, 500 to 700 units is the standard. Of course, it has -- it's not a set goal in the sense that it has to be excellent returns on development. If there are any strategic opportunities that appear, we will consider them, although as of today we don't see any and it's not something that is in our basic strategy. And I wouldn't say we would buy less. Buying less, I think what it means is that we have some extra units for development with high returns, but we also have units there or land pieces that we will sell as land in the coming years with an excellent multiple return for our investors.

Okay. Then next question from Gerardo Ibáñez, analyst from ABN AMRO - ODDO BHF. Partly answered before I think, but anyway, could you please provide some outlook on gross development margins? Do you expect similar levels next year? And regarding the guidance on gross cash flow, do you expect similar levels of land purchases and monetization as 2023? I think partly similar...

I think I answered all of them. I think gross margins we have already mentioned, low 20s, where probably, yes, where we've been. And land acquisition, I've already mentioned. It's pretty clear. We've already answered that.

Okay. We don't have any more questions from the webcast or from the conference call. So this concludes the conference call this quarter on the full year 2023 results of Metrovacesa. 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 look forward to meeting you again next quarter with an update on the activity for the first quarter of 2023 -- 2024. Goodbye.