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

Good afternoon, ladies and gentlemen, and welcome to today's Neinor Homes Full Year 2019 Results Presentation. For your information, today's conference is being recorded. [Operator Instructions] I would like now to turn the conference over to your speaker today, Juan Gómez Vega. Please go ahead, sir.

Thank you. Good afternoon. We are here today with our CEO, Borja Garcia-Egotxeaga; and our Deputy CEO and CFO, Jordi Argemí. During today's call, we will present the annual results for fiscal year 2019. The presentation of today is divided in 4 sections. First, we will see the business and financial review of 2019. Secondly, we will present what we believe is a step to enter into the biggest residential opportunity, the launch of Neinor Rental, a new business line. Thirdly, we will confirm our guidance for 2020 and we will review our ESG efforts. At the end of the call, as usual, we will finish with a Q&A session. With this, I will leave you with our CEO, Borja Garcia-Egotxeaga.

Good afternoon, everyone, and thank you very much for your time. I want to take all of you back to April 2019 when I took over the role of CEO of this company. At that time, I gave you 5 very important messages. First, we said that Neinor was a profitable company with the objective to achieve an EBITDA of EUR 70 million in 2019. Today, I am proud to tell that we exceeded all our targets and we achieved EUR 104 million of adjusted EBITDA. We also mentioned that margin protection was a top priority for the company. And we were able to exceed our gross margin target too. And this wasn't an easy job. We deal with construction companies in tough situations or even going bust. We deal with cost inflation but we have the muscle and experience to handle these situations. The results are in front of you. We made more money, that is 30% gross margin, exceeding expectations. We also said that we have full visibility on our business plan. And today, we continue to do so. We have 80% of our land bank under different stages of development. We are a developer with plenty of visibility for the upcoming years. The fourth message was that we will keep our focus on investor's profitability and dividend distribution. Today, I am proud to tell you that we are anticipating our first dividend of EUR 40 million that will be paid on a quarterly basis during 2020, which means EUR 0.51 per share. And the last and most important message relates not to 2019, but for the future of Neinor Homes. We said and confirm today that we see plenty of opportunities to exploit the company potential. Today, this means Neinor Rental. We will go over this further down the presentation. But for now, I will just reinforce the message that we are making a big step to enter in the biggest residential opportunity out there. As you can see, we have been working hard and fully focused on execution. And today, it is a pleasure to show the solid performance reached by the company. So now we will take a look to the operating highlights of the company. Following this, I will give it over to Jordi and he will go in detail through the financials. Then I will come back with an overview of the status of our business plan and zoom into our land acquisition strategy. So now if you please move to Slide #6. Starting with the development activity, the company has the equivalent of 11,000 units of one of the best land banks in Spain with more than 5,000 units of work-in-progress and finished product. During 2019, we not only delivered close to 1,300 units, but we are also able to request and obtain licenses and start new construction to get full visibility for upcoming years. We'll see more information later on. On our commercial activity, we see strong demand in our markets. I encourage you to go through the Page 20 in the Annex, which shows demand and supply in our markets. Not only there is a big gap, but that gap is increasing. We are sitting in the growth areas of Spain. On top of this, we keep improving our innovative go-to-market and our Neinor Stores, the technology which allow us to get 85% from our leads online. All these allow us to have more than EUR 900 million of presales and allow us to exceed our presales targets in order to give further visibility to our business. The margin protection. I already commented on this. We have dealt with cost inflation, with problems with construction companies, and we resolved them all. And we're able to make even more money for the company. Moving on to our servicing business, it keeps generating great positive EBITDA, with EUR 22 million during 2019 and revenues of EUR 32 million, fulfilling our business plan. Moving forward to the next slide, Jordi will give you a deeper view on the financials that I quickly mentioned before.

Thank you, Borja. You have the key data points of the P&L in Slide #7. As already commented, we have closed 2019 with revenues of EUR 489 million and EBITDA adjusted of EUR 104 million. This means EUR 34 million of additional EBITDA and is the result of the combination of the following 5 factors. On one side, the HPA capture and the control over the construction costs have implied a gross margin of 30% versus the 28% guided. On the other side, we have notarized almost 70 additional units versus the minimum target since we have been able to anticipate the delivery of 2 developments from the north, the Leioandi and Abra. Third, we have been able to achieve more profitability per unit notarized thanks to the OpEx optimization plan implemented during 2019. Fourth, we have sold a land plot in Catalonia, capturing full margin that was expected in the business plan for 2021. And fifth and last factor, servicing business line has achieved an EBITDA record of 68% versus the 50% to 60% guided. And coming back to the slide, last caption of the P&L. Positive net income of EUR 64 million. And here, it's important to say that it includes a voluntary impairment of around EUR 10 million for the legacy product. Excluding this impairment and just focusing on the core business, the net income should have been almost EUR 75 million. Now if you look at the right-hand side of the slide, you will see the comparison between these numbers and the results achieved in 2018. As you will see, we had increased development revenues by 41%. We have multiplied by almost 2x the EBITDA adjusted, and we have increased the net income by 28%. And excluding the voluntary impairment, it should have been 50% increase. So basically, from a P&L perspective, we have done a great 2019, accomplishing and even exceeding all commitments. And with a change in the mortgage law in the middle of the year, which has extended unfortunately terms by 1 month. This is definitely a big step to continue improving confidence from the market. Regarding the balance sheet, we have ended with a very strong cash position, EUR 130 million of cash, excluding the deposits received by the clients. We said during 2019 that we were not in a rush to acquire land, that good opportunities would come sooner than later. So as you can see, we are very well prepared for this 2020. Regarding leverage, only 16% loan-to-value. This is below our guidance and also below last year, 2018, that we had 19%. And this is mostly explained by the strong cash position in our balance sheet just commented. Also, every year, we perform a new valuation. This has resulted in a GAV of EUR 1.65 billion, NAV of EUR 1.25 billion and a net NAV of EUR 1.2 billion. As commented in the beginning, this means a net asset value per share of EUR 16.3. And this means more than 60% upside compared to our current share price in the market. And finally, shareholder remuneration. The good result of 2019 and the strong visibility in the coming years allow us to anticipate a dividend of EUR 40 million, which is added to the share buyback of EUR 50 million already deployed. And these are not words. Now these are facts. This EUR 90 million in total represents more than 1/3 of the total commitment of this management team at the beginning of the year. And we will continue working to achieve what we promised.

Thank you, Jordi. Now please let's go to Slide #8, where we show our high visibility for the next 3 years. The main message I want to give here is that in 2019, we not only generated the very good results that you just have seen, we were working on a daily basis on each one of the milestones we need to achieve to have full visibility for upcoming years. We keep the targets we communicated last year. We have a solid grasp on timing, revenues and risk control. We are on track for our 2020 deliveries, and we have very good other risk business for '21 and '22. As you can see, all developments for '20 and '21 are with all works in progress, and 20% on WIP for 2022 and another 42% already with licenses for also 2022. So now we go to the next and important topic in Slide #9, which is our land strategy. We always said and we continue to believe that we will only buy profitable and very accretive opportunities. At the end of last year, we started to see what we anticipated. The land market turning into a buyer's market. This disciplined approach now allow us to have more than EUR 110 million of acquisitions firepower in a market where we see new and better opportunities on a daily basis. With regards to strategy, we keep focus in our markets. As mentioned before, we see a strong sales in our markets. These regions are the growth engines of Spain. In these places, supply is still far from reaching demand, and the trend is for the gap to increase. So we will keep acquisitions in our core markets. Also, let's keep in mind that EUR 110 million is cash. We will make sure to do equity efficient acquisitions. Now we move to Slide #11. And this slide relates to the fifth and most important message that I gave back in April 2019. Today, we not only see plenty of opportunities to lever our platform, but we can confirm that we are going into full execution on a new business line. We are launching Neinor Rental, a rental platform with a goal to achieve 5,000 units in the next 5 years. The PRS sector is a massive opportunity today in Spain. Demand is growing at a fast pace and there is very limited supply of products. Neinor, with a strong development platform, is perfectly positioned to capture this opportunity. We will start with a seed portfolio of 1,200 units and grow from there in order to become a full-fledged residential platform. With this, I will give it over back to Jordi, who will go into further details.

The strategy and business opportunity that Borja has just said is very clear. Now how we will implement this new business line, let's jump to Slide #12. We are going to launch a seed portfolio of up to 1,200 units. And why 1,200 units? Basically because this is the result of cherrypicking in our land bank the best units for this business without affecting the business plan committed with the capital markets. And these units are in excellent locations with very solid rental market economics. What do we expect from this portfolio? We expect to achieve 6% to 7% gross yield on cost, which will represent a return on equity of 15% once stabilized. And these high returns means that we expect to multiply by at least 2x the profit of these developments compared to our business plan of build-to-sell in a similar period of time. And from 3x to 6x money should we keep these assets stabilized in our balance sheet. So there is no doubt on how accretive will be this new business line for the company and for investors, but always under 2 assumptions. The first one is that we are launching it fully financed. As you know, this business is highly capital intensive and this has always been one of the concerns on this business. And I'm glad today to announce that we have secured with 4 Spanish banks around EUR 100 million financing, which means 100% of the CapEx required. And second assumption and result of the first one is that we don't need to raise equity nor use funds from the build-to-sell to finance this business line. So as a conclusion, this business line is a clear add-on. We keep the business plan and shareholder remuneration unchanged, and the proof is that we have even anticipated 1 year the EUR 40 million dividend. And as a result, PRS will add net asset value for the company and for investor and will anchor the potential platform valuation. We will split these 1,200 units into 2 different portfolios. The first one is represented by 4 plots with 611 units, and you have the details in Slide #13. As you will see in the slide, these 4 plots are Hacienda Homes, Sky Homes, San Sebastian de los Reyes and Parla. These are in the most outstanding cities of Spain regarding the residential demand as they are in Madrid, Valencia and Málaga. These specific developments present contrasted sales demand and very high potential income with rents per square meter above EUR 9. And the deliveries will be during the years 2021 and 2022 and they will represent a total stabilized rent of around EUR 9 million and an FFO of around EUR 5 million.

Thank you, Jordi. Moving to the next section in Page #15, I will give you the guidance for this year, 2020. First, you will see our target presales coverage which is 90% for 2020 deliveries, 65% for 2021 and 40% for 2022. We'll keep this as a top priority to improve cash flow visibility. In terms of profitability, we aim to achieve EBITDA of over EUR 100 million. We keep the dividend payout ratio at 50% of net income. And as we have said right now, we will launch 1,200 units for Neinor Rental, the first 600 you have seen previously in detail and another 600 that are in process to be launched. In Slide #17, you can find a brief review of the most outstanding items regarding our ESG efforts. It is important to mention that at Neinor Homes, we care for all our stakeholders, which includes shareholders, employees, customers, suppliers and the communities where we work. We keep improving our governance. We brought 2 international Board members with broad residential perspectives. We are the leading developer when it comes to sustainability. We are constantly looking for ways to innovate and to improve the quality in our business. And finally and to wrap up, I would like to leave you a few messages. We have outperformed in every aspect our achievements in 2019. And I would like to thank to all people that makes Neinor Homes for their amazing effort. Second, we will keep placing our shareholders as a top priority and has been demonstrated by the dividend anticipation. With regards to our core activity, we feel very comfortable and optimistic for the coming years since we have high visibility on other risk business for the next years. Our fourth message is that we are proud to launch and execute Neinor Rental, with a clear goal to become a relevant player in what we strongly believe is a massive opportunity. And we're able to execute this as an add-on to our core business with no impact in our business plan guidance. It is just in addition to our BP and it's improving the NAV of the company. Last but not least, I want to reiterate that we will keep working hard to achieve and exceed again your expectations. Thank you very much.

Thank you, Borja. Now we're going to go into the Q&A session. I encourage everyone connected through the webcast to submit questions in written form there. But now I will hand over to the operator to take the questions over the phone. Operator?

[Operator Instructions] We will now be taking our first question from the line of José Cravo from Santander.

Just 2 questions, if I may. So the first one, it is on your remarks about land acquisition. So you've said that you have EUR 110 million in cash to make equity efficient acquisitions. So could we think that, for instance, that the target of EUR 250 million that there have been exclusive negotiation could be feasible for this year? That will be my first question. And my second question is on the GRI that you are assuming for the 611 units that you've announced from the 4 plots today. Are you assuming to get this EUR 8.7 million of GRI, stabilized GRI in 2024? Are you assuming any inflation?

Mario Lapiedra taking the first one regarding the land acquisition and efficiency of the equity. We have that EUR 110 million of equity and is exclusive of EUR 250 million. We will try to do as much as possible to fulfill this EUR 250 million with the EUR 110 million, but we have additional pipeline. So we will select out of that deals under exclusivity, the best one, and we will keep negotiating additional exclusive deals in the next months.

And regarding the second question that was inflation embedded in the GRI that we are putting in place, there is, but we are extremely conservative on what we have assumed. It depends on the location, obviously. But on average, we are in 2.5%, 3% roughly.

We will now take our next question from the line of Flora Trindade from CaixaBank.

The first question I have is just a clarification. So you will keep the 2.5 target deliveries at run rate. And on top of this, you will add the rental units. Is that it and just to clarify. And I was just wondering if this decision to enter the rental business reflects any change in the view that you have for the homebuilding sector. So considering the deceleration, are you seeing re-entry into rental as a potential hedge, if you can comment on the sentiment in the sector, homebuilding, I would appreciate. And then secondly, the assumptions behind the 6% to 7% yield on cost, you mentioned. Does this include this 2.5% to 3% inflation you were mentioning before? Can you just give us an idea of what assumptions are you putting in this 6% to 7%? And also, how do you see the regulatory risk for the sector considering the increasing pressure we are seeing in Spain regarding rent increases?