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

Hello. Good morning, and welcome to the webcast on Metrovacesa results for the first semester 2024. My name is Juan Carlos Calvo. I'm Director of Corporate Development and Investor Relations. And as usual, we also have in the call, Jorge Pérez de Leza, the main speaker as CEO of Metrovacesa and Borja Tejada, Financial Director. We are going to present an overview of operating activity and financial results for the first semester of the year. The slides of this presentation have been released earlier to the market. 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. Now I hand you over to our CEO to start the presentation. Please, Jorge.

Yes. Good morning, everybody, and welcome to our midyear '24 results presentation. Let me start with the highlights on Page #5 of the presentation. And in terms of market, we continue to see a strong sector fundamentals with the panel economy remaining a strong recent upgrade of 2024 GDP and a strong labor market, which for us is really a good sign also. The imbalance of supply and demand continues to be strong due to favorable demographics with more than 200,000 to 250,000 households being created every year and a supply that doesn't even cover half of that. Also, transactional mortgages are showing signs of improvement as the interest rate scenario starts to be -- to have a better outlook. In terms of operations for Metrovacesa, we had a strong commercial activity in the first half of the year with over 100 -- sorry, 1,000 presales, which represents a 15% growth compared to the previous year and also surpassing the EUR 1 billion market being at EUR 1.2 billion in terms of backlog. The absorption rate, as we measure it, continues to be strong, 2.8%, very close to what we consider optimum, which is 2.8%, 2.9% to be sold in general. And then also land sales, growing pipeline of binding contracts. We have EUR 58 million in binding contracts, part of them to be finalized or to be authorized in the coming years versus 45% that we have -- that we had last year in December. In terms of financials, as Borja, our CFO, will explain later. We continue to have positive earnings in the first half of '24, with revenues of EUR 235 million, a 42% growth compared to last year. We delivered 65 units with higher gross margins, above 24%, very strong in terms of gross margins and the EBITDA of EUR 31.3 million with a positive recurring pretax profit of EUR 22.4 million. We will go into a bigger details later on -- on each of these metrics. Let me hand it over back to Carlos to just give you a brief view of how we see the market.

Yes. Thank you. Just a few charts and ideas here. Essentially, the market is performing very well in the start of the year, in the first 6 months of the year. We are highlighting the evolution of the economic growth. I mean in the first quarter, the actual GDP performance has been 2.5% growth, and that has been more positive than expecting has led to further upgrades by most analysts with a picture here, Bank of Spain forecast, which is now 2.3%. That is 60 basis points higher than at the beginning of the year. And the Spanish economy is growing faster than the average of the European Union. Secondly, about demographics. Recently, the INE has revised the forecast of household growth for the next 15 years. The new figure is greater than the previous forecast. Now they are forecasting 43,000 new household creation on average annually for the next 15 years. This is higher than before. So this is stressing even further the imbalance between demand and supply. And as the supply is really covering less than half of the needs to simply cover the household ration. And finally, we have recent data about transactions and mortgages. Volumes in this -- in this case, we are picturing the statistics from notaries as of May, where we see after some volatility on a monthly basis. But this is back in relatively positive territory after declines evidence throughout the year 2023. We see some discrepancies here between the in and the notaries statistics in this case. But in both cases, the both statistics are showing an improvement versus the declines that we saw during last year. So this is a positive element that confirms the recovery of the Spanish housing market. Now back to Jorge.

Thank you, Juan Carlos. So I think our operational activity reflects in a way, the good dynamics of the market of the residential market in Spain. Our presales in Page #9, we had net presales of 537 units in the quarter. And in total, for the semester, we had over 1,000 units in presales, which is really our best semester in BTS sales since 2018. I think also, this is important to note that we are carrying out a very active activity of raising prices and maximizing margins. So we're not opening the gates and selling everything we can. But rather, we are really monitoring each development on a weekly basis with the help of all the data that we have, blocking units and blocking units in order to maximize prices. And despite that, let's say, detailed analysis, we are still selling very well. So I think that points out what we're saying that the market is quite strong. Our coverage ratio or absorption ratio is 2.8%, which is what we consider optimal considering that we have to sell the whole of a development of 100% over approximately 3 years. If you divide that by the number of months, it gives you exactly this 2.8%. So we are right on target in managing that. And our client is actually quite solvent compared to the market. And we have -- from what we -- the data that we have from our clients, they have an average price to household income of 4.7 years. So quite -- again, quite strong compared to the national operator, which is more close to 7 or 8 years. Moving on to residential deliveries. We delivered in the quarter total of -- sorry, in the semester, a total of 675 units, which represents an 18% increase and also important -- more important than that is that we grew revenues by -- almost 39% to 2.2 to 6.7%. This is due to the fact that our ASP or unit selling price increased from EUR 286,000 per unit to EUR 335,000. This is a mix of -- this is due to a mix of product, but not only that is also due to the fact that we've been raising prices, I would say, in the year -- in the last year about 4%, we've had an average increase in prices of around 4%. Our gross margin stays stands -- sorry, at 24.2%, which is again quite I would say, strongest margin since 2018. And this is despite increase in -- slight increases in some areas in construction costs as well as higher financing costs now. And as I said before, this is due to the fact that strong demand coupled with a very detailed revenue or potential management for our teams on a weekly basis in each development. I would say that for the remaining of the year, if we are fiscal full year '24, we're right on track, and we will have a higher concentration in the second half as we normally are doing in the sector. And so, we will -- we stand at what we said that we will deliver, which is more units than last year. We have most of the CFOs of the 30 [Foreign Language] in place already and ready to start delivering to comply with our target for the year. Coming years, very strong coverage as well. So 2025, 73%, and 2026 has run now to 50%. So we feel quite comfortable of our coming years, '25 and '26. And finally, the client is financing 27% with equity or with [Foreign Language] and the average LTV is 71%, which combines well with what I said before, of the, let's say, financial stability or attitude of our clients. Moving on to Page #11 and talking more in general about our operational activity. We have a sales backlog of 3,100 units which is EUR 1.2 billion in future revenues. So a slight increase versus December '23. And the average unit price stays at EUR 324,000, well above 300,000 -- 300,000 mark. And with a high reliability in the sense that 79% are formalized in contracts, so close to 80% in contract and 20% reservation. We have almost 6,500 units under commercialization, 57% of that are sold and hence, our strong coverage ratios for the coming years, we have launched or started commercialization of 800 units in the first half of the year, and we have a potential of EUR 2.2 billion in potential revenues with higher selling price, EUR 345,000 per unit, which reflects the again, the price increases that we are experiencing in the market. Under construction, we have 4,000 -- almost 4,400 units with 512 construction starts in the first half of the year and in track to what we consider is necessary for deliveries in the coming years. In terms of plant activities, the P&L revenues, so that means authorization stays at EUR 83 million versus EUR 1.3 million in the first half of '23. 6 residential land plots. And I think this is a small figure, but will grow across the year as some of the binding contracts that we have in place will actually be authorized we formalized part in '24 part in '25. And again, so 8.3% is a small number. I think is still low to take any conclusions on gross margins and land sales, as what I will explain later. But I would say that the market -- we are confident in the market for land sales towards the end of the year. In terms of land investments, we've purchased a total of EUR 23.4 million 476 units in the first half of 2024. -- of which we've paid so far EUR 9.7 million. And in addition, we have EUR 39.5 million purchasing pending, which is part of purchases from last year, apart from this year. We are purchasing our purchasing strategy, as you know, is to top up our existing land bank in order to be able to launch around 2,000 units per year, and we are very focusing very much on prime locations with attractive margins and IRR and with a full -- with a team, which is fully operational now and able to locate or to find very attractive opportunities. Some of them, I would say, off market and let's say, that will improve our margins going forward. In terms of urbanization CapEx, EUR 22 million paid in the first half of the year, mainly between Los Cerros, which as you know is the urbanization is already in place to be finalized for Phase I next year and probably to allow what we call [Foreign Language] or construction at the same of the organization being carried on, I would say, in the first quarter of this year. And also, in Palmas Altas, Seville, where organization is conduced taxes into where we will start delivering our first units in the coming months. So that ties nicely into Page 13. And as I just mentioned, in Palmas Altas those for you who go to Seville, would recommend to go and see it. It's quite impressive to see how the whole development of the whole area has come into life, and we will start delivery of 6 projects, a total of 350 units in the second half of the year. But on top of that, we have more a total of 20 active projects with 1,200 units under commercialization of which half are already sold. And we have planned for an additional 500 units that we will launch between the remaining part of the year and probably all of them in 2025, the rest. In Oria, which is another key project for us, all the [indiscernible] as it was known in the past, the Clesa factory, the yogurt factory. We have turnkey in place for 2 buildings. As you may remember, approximately 42,000 square meters for 1,100 rooms with VITA. The student housing Oria Neo, which is already under construction. The work started in December 23, with expected finalization in 2026. And the second building Oria Pulse, which is the co-living with again close to 500 rooms and in which we are finalizing details for construction that should start after the summer and formalized formalization of the JV with VITA also in September. So again, I think Oria coming with this we would have almost half of the of the square meters of the area already under construction, and the remaining part, let's say, that we have a good prospect of deals in place to put in construction, the whole development in the government. In terms of ESG, we continue to make good strides. I think in order to be ready to comply with the European taxonomy and all the requirements on nonfinancial reporting as well as decarbonization attention as an industry for the not so long coming years in the future. So 100% of our launches are now AA Energy Efficiency Certificate. And I would say that 100% of our projects are also getting sustainable certificates for Green Building Council and again, now we are carrying, and I think this is most important because it is what we'll measure in the future. We are carrying out the life cycle analysis of 100% of our projects in order to be very sure of what is our carbon footprint and now starting to analyze in each project's potential improvements or potential measures to decrease that current footprint as we go forward. Also, we are increasing the monitor of voice management, which is another thing that we have to be done anyway compulsory in the coming years and promoting the use of circuit construction materials to reduce our carbon footprint. So I think in 2 years or 1.5 years, we really have shifted from energy certificate towards more life cycle analysis and all the measures that we need to put in place in order to in the coming years to reduce that footprint. In terms of also social, again, I think we are continuing our efforts in -- to contribute to the economic development and social worth of the areas where we work and with the measures that are listed here. In terms of corporate governance, where we've updated now our corporator mapa de riesgos, so corporate risk map, including the ESG risks and double materiality analysis, which is again something that everybody needs to do know. And then, finally, the adoption of the Responsible Artificial Intelligence Manifesto and our commitment to the United Nations Governance. With that, I now turn it to Borja to give us the financial overview.

Thank you, Jorge, and good morning, everyone. Concerning our profit and loss account on Slide 16. Yes, some key figures, EUR 235 million of total revenues, up 24% year-on-year, driven mainly by higher residential deliveries, up 18% year-on-year and higher average selling price up to EUR 335 case per unit, up 17% year-on-year. Good performance in terms of gross development margin up to 24%, 2% above previous year, more than EUR 31 million of EBITDA and having closed with a recurring pretax profit of EUR 22 million. Now with reference to our cash flow, free cash flow, EUR 66.2 million of gross operating cash flow. We're on track to meet our target for the end of the year of EUR 100 million to EUR 125 million. Concerning our net debt. As always, very solid financial structure, 13.8% of loan-to-value, a comfortable ratio and below sector average and our reference to 15% to 20%. Nevertheless, we are increasing this percentage in order to optimize the capital structure of the group and higher CapEx in ongoing developments. EUR 436 million of gross debt and around EUR 340 million net. As always, very diversified financing mix with good access to various sources of capital, a very competitive cost with no relevant maturities to 2026. Finally, -- and talking about our asset appraisals, EUR 2.5 billion in terms of GAV, out of which 83% represents our residential portfolio and 17% the commercial one. Positive growth, 2.8% like-for-like versus December 2023 with an increase of 4.4% in our residential portfolio and a decrease of 6.7% in the commercial one due to mainly this commercial one due to the interest rates and higher yields required by the sector of the market. Finally, in terms of net asset value, EUR 13.34 per share after the distribution of EUR 0.36 of dividend in May, which represent ex-dividend, an increase of 2.8% compared with December. Now I will hand over to Jorge with closing remarks.

Thank you, Borja. Now moving to the last page of our presentation, the closing remarks. I would clarify what I've been talking through the presentation, which is that the solid market trends at the end resulted in a good start of the year and also having good positive prospects for the near term, I would say, not just for the remaining part of the year, but also for the 20 -- for the next year '25 and '26, as you can see from our sales coverage of the deliveries for those years. Our improved operations resulted in increasing sales backlog both in housing development as well as the gain sales. And with a platform, like I mentioned before, that is able to sustain and maximize margins going forward. And I'm sure some of the questions will come later as to what are our margins going forward, and we've always been diving with this low 20s, low 20s is very precise. As you can see, we can say now that probably we are more on the 22%, 23% at rather than 21% that we were aiming before. And finally, we are reiterating our guidance in terms of our cash flow generation for the year, which stood at EUR 100 million to EUR 125 million for the year. And with that, I have finished and hand it back to Juan Carlos.

Yes. Thank you, Jorge. We are now ready to start the question-and-answer session. starting -- we will start with our participants in the conference call. And Peter, we will move to the webcast questions [Operator Instructions]. Okay. So for now, we don't have questions on the conference call. We do have some questions on the webcast, so I will be reading them. Starting from -- a question from an investor. A question on legislation and the topic of alternative uses for the lung classified for office or commercial use into residential. I understand the legislation pass in Madrid region only allows residential use for social housing or protected housing. Is this correct? And if that is the case, is this an interesting option for you or not enough financially, not attractive enough financially.

Well, thank you, Miguel, for the question. Let's see, I will try to make a short answer which is probably not easy. But in terms -- let me talk first, in general, about what the legislation means in very general terms, and this legislation that has been passed for Madrid for the community of Madrid, the region of Madrid allows to build residential use, when I will talk about what that means seen, commercial land that has office use. So therefore, in those lines that have use of offices, you can build residential. What kind of residential can you build? The residential has to be public housing protected and for rent for the next 15 years. So from the time of delivering 15 years, you have those units to be rented at protected rents -- and after 15 years, they become free housing. So therefore, after 15 years, you will be able -- you should be able to either sell them at market prices or to rent again at market prices are not protected. So you have like 2 periods, 15 years, which is protected housing for rent and then afterwards it, it becomes free housing. In whether that is attractive or not in general, I would say that it is. And obviously, at the end, it will depend on the land location and the module that you can apply the module, I mean the pricing module for rents, but in general, I'm now talking more about the case of Metrovacesa we have several plots that would carry log on that. Actually, let me just finalize before in general talking about the law. This is a law that was approved by the community of Madrid, but the municipalities have the, let's say, the ability or the right to either approve it in all areas or in some areas. So one municipality could say, I'm not going to approve this in any of my locations or they could limit it in some areas. And in order to do that, they have 4 months since the approval of the law. So I would say that after the summer, let's say, mid of the next quarter, the municipalities will have had to say whether -- in which areas they approve this change, okay? Whether it's attractive or not, I think that it is attractive. Obviously, it's, I think, not for a private equity seeking super high IRRs. But for funds that are already investing in affordable housing rent, you have, let's say, a product that will have a reasonable year for 15 years. And then suddenly, you could have, for example, in one of -- in some of our areas in a good neighborhood of Madrid, suddenly, you find yourself with hundreds of units that have become free housing. So I think that has an upside potential that makes it attractive for investors. And there are several inquiries for the customers.

Okay. So moving to next question from Javier Díaz from Biente Quatro. Good morning congratulations on the results. Thank you for taking my question. Please, can you give us more color about the margins regarding land sales?

Yes. As I mentioned, Javier, thank you for the question. As I mentioned during the presentation, I think the results that we're showing for this first semester are not representative of what our land margin should be. I think we are -- as I mentioned in other calls, always targeting to be close to 0, so meaning that in our sales price is around the net value or the book value of the land. But in some cases, as I've always mentioned, if we need to sell with a slight discount to that, we will, if it's land that is not strategic for us. we are ready to sell with some discount to our book value in order to monetize those loans that are not strategic for us.

Okay. Thank you. We don't have any more questions from the conference call. We do have a question from the conference call from the line of Ignacio Romero from Banco Sabadell. Please, Ignacio.

Yes. My question has to do with [indiscernible]. I mean given the imbalance between supply and demand that we are having in the housing market, how come the land market is not stressed as well, it won't be supposed even the need to build new housing. How do you see the land market going forward?

Well, I think in -- well, thank you, Ignacio, for the question. I think we can talk in general about the market again and then specifically about Metrovacesa. I would say that in general in the market, the -- you have like 2 different pathways the areas of Tier 1 or Tier 2 cities where the demand is super strong and everybody wants to build there. And I would say that in those locations, the market is tight, margins are adequate, but you have to really find off-market opportunities to -- that really work. And so, it's -- I wouldn't say it's impossible, but it's not easy. And I think the pressure is mainly on fully permitted land where all the, I would say, a lot of the funds or new equity that has been raised for co-investment is really looking for fully permitted land in order to start construction as soon as possible and reach the high returns that they are expecting. In other locations that are more Tier 3 locations, then the market is not as strong. In the sense of now talking about Metrovacesa, I would say that we've been buying -- first of all, we don't need to buy 3,000, 2,000, 1,000 units. I mean we are as before we said, we're buying 500, 700 units per year in exceptional cases, a bit more if there is a super attractive opportunity. And for those kind of opportunities in Tier 1 cities, we're able to find off-market opportunities that gives us good margins. If we have to 3,000, I would be a little bit more concerned. Now in other locations what we sell is you could say why aren't you selling more residential land world because the land we are selling is in locations where we're not developing, we don't want to develop because they are Tier 3 markets or they are very small in terms of units. If you can see our revenue this year of this semester of EUR 8.6 million is 6 plots. So the average amount per produce is not very big. Also -- and then, also commercial land, I think you were more referring to residential land, but I just chip in here with residential land. I think the market has improved, not for office use. What I would say there is really limited. I think now unfortunately, as we all know, market, office market is kind of more limited with uncertainty, but rather in the commercial lands with commercial use that allows or office use that allow different uses like, for example, PSA or co-Living. I think there is demand for that, strong demand I would say.

Okay. Thank you. Back to the website. We have a question from an investor. Well, done for the great semester. What is your maximum level of units under construction that you think you can get to into 2025 or 2026, while maintaining your current financial discipline?

I'm going to answer -- I'm going to answer theoretically, but ratios that I basically have in my head at a high level, which is you normally should have of 2x the number of units under construction that you want to deliver per year. So if we are targeting to deliver around 2000 a little bit more than 2,000 units, then we should have under construction 4,000 roughly. That should be the target. In the same in commercialization, but then in that case, you have to multiply by 3. So if you want to deliver 2,000 units per year, you should have around 6,000 under commercialization. Those are very rough ratios in order to be stable, I think, very high-level ratios. But when you're analyzing the operational data of our developers should give you a rough quite a good -- not a rough quite an accurate view of what's going to happen in the future okay? And we're already there.

Okay. I think this seems like the -- all the questions that we have for both the conference call and the webcast. So I think we can finish the conversation. We have this the webcast at this point. This -- Therefore, this concludes the company presentation for the first semester of '24 of Metrovacesa. As usual, the Investor Relations team will be available to take any follow-up questions that you may have. And we thank you for participation. We look forward to meeting you next time. Thank you.

Thank you. Bye-bye.