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

Hi. Good afternoon, everyone. My name is Jose Cravo, and I'm the Head of IR at Neinor Homes. Thanks for joining us in such a short notice in what we believe is definitely an exciting day for Neinor. As you've seen yesterday, we have announced the absorption of Quabit. And during today's webcast, we will cover the transaction rationale, where we will explain the key aspects of the transaction. Then we will provide an overview of Quabit and show how Neinor pro forma will look like. And lastly, we will finish with key takeaways and address any question you may have. Now over to our CEO, Borja Garcia-Egotxeaga.

Thank you, Jose. Before jumping into the presentation, please let me give you some initial remarks. It's been almost 2 years since I took over the role of CEO of the company. Our focus has been to deliver in everything we committed, and it's been 2 years of exceptional performance. Bear in mind that last week, we communicated that despite the pandemic, we were able to achieve our 2020 objectives and that we reinstated our dividend. Also, you will not see in the presentation because today, we just want to give the message that we are buying land and actually very cheap land. But on top of this, the transaction is giving us the potential to increase our Neinor rental business. We launched it a year ago with 1,200 units, and the objective is to reach 5,000 units. In today's world of negative interest rates and the rest of the sector becoming a top big, this is a big catalyst on our company. We are going to be delivering our initial units in the first half of this year. We acquired the best operating company, which already has 2,500 units under management. And today, we have the potential to double this business. And we are not going to give much details today as we want to work and come back strong. But this is a big catalyst, and we were the first ones to make this move in what we believe is the biggest real estate opportunity in today's market. With regards to the acquisition, we already received calls from analysts concerned on acquiring land today with all the issues generated from the pandemic. My English may not be great. But if there is something that I know, it's this business. In 2019, when everyone was buying land, we were net sellers. I have no doubt that today is the right moment, and this is the right transaction for us. And we are excited to be here today presenting it to you. It is basically a once-in-a-cycle opportunity to acquire a significant land bank at a discount to market rate. We are continuously analyzing the market, and this is a great opportunity to buy land today in Spain. We see a listed company running under huge financial stress and with very low market value. Our Neinor can do a very accretive deal. We are getting more than 7,000 units, which will see our visibility and cash flow increase out to 2024, and all this for a very conservative equity price of EUR 62 million. This should see us deliver a contributing profit in excess of EUR 200 million over a 5-year period and a target equity multiple in excess of 3x. Quabit is heavily indebted for its size. And we are pleased that our lenders, as part of this transaction, are taking a haircut of between EUR 45 million to EUR 50 million. As a result, the transaction and our business plan is fully funded, and we feel very confident that this will generate plenty of value for our shareholders. So please let's move to Page #6. Okay. I have covered off some of these points already. But as mentioned, we are getting this land at a significant discount, 75% to its NAV, to the net asset value, 75%. On the key features of this transaction for us is that Quabit operates in the same geographic regions as we do. So we know their business well, and we understand the dynamics of these markets very well also. Another key piece for us is that it provide us an entry point into the more affordable housing segment of the market. As a reminder, we operate at the upper middle end of the marketplace, Quabit at the lower middle end. So it opens up a new area for us, but one that we are still familiar with. We have identified synergies from this transaction across the whole spectrum, from improvements in operation, in our fiscal position and financial synergies. And we have structured this transaction in a way that allow us to capture all these synergies. All in all, while keeping a conservative capital structure, this transaction provide us with a great opportunity to consolidate our position as the leading residential developer in Spain. With this, I will give the word to Jordi to go into the key highlights of the transaction.

Thank you, Borja. Being honest, we have analyzed this deal as an asset deal. And therefore, we have done a bottom-up analysis of the whole portfolio of Quabit. The result of the underwriting, which is the base to understand this deal, is in Slide 7. We have fully permitted land of more than 4,400 units, out of which finished product is bought at EUR 1,400 per square meter; work in progress, which means more than 60% for sales and more than 60% execution is bought at EUR 855 per square meter; and fully permitted land bought at EUR 130 per square meter. And on top of this, we have non-fully permitted land, where we have also been conservative in the underwriting assumed with an implied cost of only EUR 12 per square meter. So basically, 4 critical conclusions from our underwriting. We have been conservative, and this is the basis of this deal. We incorporate more than 7,000 units, out of which more than 4,400 units are fully permitted at a reasonable cost. The target operating cash flow of this portfolio will be roughly EUR 450 million, and the majority of this transaction is well covered by the cash flow generated by the most liquid assets, finished product and work in progress, which represents only 1,600 units of the portfolio. Turning to the terms of this transaction in Slide #8, a few comments. Quabit shareholders will receive a 7% stake in Neinor on completion of the transaction. Apart from the green light of the Boards, we have commitments representing 26% of Quabit shareholders as well as financing agreements in place on the debt with the main lenders, derisking this way the execution and completion of this deal. On top of this point, Quabit's debt will be refinanced. And as Borja mentioned before, they have already agreed to take a EUR 45 million to EUR 50 million reduction. So in practice, the real equity value implied in Quabit is almost 0, since we have compensated the EUR 60 million of debt equity with the write-offs achieved. In terms of how we will do this absorption, we will issue new shares as per the 7% stake that Quabit shareholders will have. But prior to this, and this is important, we will cancel our treasury shares, that, as you know, represents approx 6%. So as a result of it, our current shareholders will not be diluted due to this transaction, only 1%, which is completely residual. Thanks to this, we are doing this transaction without the need to increase the guidance. Given that we are not diluting our shareholders, we can keep the return on equity committed without changing the guidance. So whatever comes from this transaction should be an upside to Neinor results. A last comment on this slide is that this transaction is conditional upon Neinor and Quabit AGM approval, 50%-plus quorum in first call and simple majority is required. If we turn to the next slide, #9, we have the enterprise value of this transaction. Basically, EUR 62 million will be the issue of new shares. And again, remember that this does imply any dilution for our shareholders, thanks to the cancellation of the treasury stock. Then we have the net debt of the company as of November 2020, which is almost EUR 270 million, negative working capital of EUR 59 million and preferred shares of EUR 25 million nominal. This implies a total bill of EUR 415 million. But once the haircut has been applied to the net debt and pref shares, it brings a total enterprise value to this transaction out of EUR 365 million, EUR 370 million. Borja, the floor is yours. Borja, are you on mute?

Yes. Yes. Can we go to -- please to the next slide? Okay. Thank you. In the following slides, I will give you a few highlights on Quabit. We can give more details on one-to-one meetings, and we're happy to address any questions at the end. As we have said, the company has land for more than 7,000 units. This is more or less 5.5 million square meters with a GAV of more than EUR 500 million and a NAV of EUR 267 million. Note that 65% of this land is fully permitted, and 3,500 of these units are active, which means they are already going to the development machinery. As you can see, it has an expensive cost of debt, something we have already addressed. Also bear in mind that the NAV could potentially increase as we negotiate it at the haircut. If we go now to the next slide, you can see here the geographical distribution of this land portfolio. Most of the land bank is in Madrid and Malaga. Among this, it has a good concentration in the Corredor del Henares. Corredor del Henares is closed to Madrid. It's an area that we like very much, and it's an area that is being consolidated as the most important logistic hub for Spain. This area is already receiving a strong demand for housing units, a trend that will keep improving. If we go to next slide, then we can see us notch up under 2,500 units active land bank. 1,600 units are in construction or finished product with level of presales close to 70%. These units will generate strong cash flows very soon in the coming years, 1 or 2 years. On the commercial side, it has a strong order book of close to 1,500 units, which represents more or less EUR 250 million. Also, it is a good quality order book since 70% of fee of this book is made of private contracts. So going to next slides, you can see just some pictures of the developments that are under construction of this company and that we will finish, as I have said, in the next 1 or 2 years. So let's go to next slide to see the financials, please.

Okay. In Slide 18 onwards, actually, that's Section 3, this is how Neinor will look like. The main data points are in Slide #18. Yes. On the left-hand side, you will see that Neinor will have more than 1,600 units (sic) [ 16,000 ] of land bank, out of which 7,000 units are under commercialization and 6,000 units are WIPs or finished product. Total presales order book is 3,500 units, which means that the presales coverage over the units under commercialization is roughly 50%, a very healthy ratio. And 75% of this portfolio is fully permitted, whilst 25% is non-fully permitted. On the right-hand side of this slide, you can see the geographic breakdown: 35%, Centre; 21%, South East; 15% Levante; 12%, North; 10%, East; and 7%, South West. On top of this, you know that we have the rental portfolio that were 1,200 units that will target a yield on cost between 6% and 7%. This year, 2020, we have done a great step forward in this business line, having the financing committed or pre-committed for these units, 450 units already with cranes and also having acquired Renta Garantizada, which implies that we control the whole value chain of the rental business. If we move to the next slide, 19, we have the same information commented but with a map that visually, probably, is easier to see our geographic presence. But with this said, let's jump to the next slide, #20, where we have the main financial metrics. As you can see in the last column, Neinor will have more than 1,600 (sic) [ 16,000 ] units of land bank, as I commented just 1 minute ago; GDV of EUR 4,500 million; GAV of almost EUR 2,000 million; net asset value of EUR 1,400 million; and adjusted net debt plus the write-off of around EUR 400 million, which will result in a loan-to-value between 20% and 25%. So we will keep the same loan-to-value reported in our last communication in September. We have a conservative financing policy, and we will continue with this commitment. Remember that we have always said that we wanted to be below 35% loan-to-value. And finally, in Slide #21, you have the illustrative pro forma net asset value, by which it will jump from the current EUR 1,200 million to EUR 1,400 million, implying a direct increase of 15%. And also, the net asset value per share will increase by this 15%. Since I commented before, shareholders of Neinor will only be diluted by roughly 1%, thanks to the cancellation of the treasury stock. So it is a clear accretive deal. On top of this, there will be synergies and also the capacity to increase the rental platform pipeline. In the coming weeks and months, we will be working in the integration of Quabit. And therefore, we will have the capacity to further analyze the value behind these 2 levers. But as I said at the beginning, whatever it comes, it will be on top of this. All yours, Borja.

Yes. Sorry, we have some problems with my mute. Thank you. So now I will go into conclusions with 3 key messages. First, today, we are presenting you the best accretive opportunity for land acquisition in Spain, our unique operational, financial and fiscal synergies. Second, we will always keep focus on shareholder remuneration. Despite the pandemic, we had a great performance in 2020. And thanks to that, a few days ago, we reinstated a EUR 40 million dividend. We are canceling the shares that we have on treasury, which represents close to 6% of the company. And we feel very confident that this operation will allow us to increase the shareholder remuneration going forward. And finally, we maintain a conservative balance sheet with a low level of debt, and we still have EUR 200 million cash on our balance sheet that will allow us to grow and to tackle good opportunities going forward. So this is it. Thank you very much for your time.

So thank you, Borja. So now operator, you may begin the Q&A session.

[Operator Instructions] Your first question comes from Sofia Barallat of CaixaBank.

So 2 questions on my side. Mainly, are you planning on revising upwards your deliveries target? Or are you instead going to focus on building the units for your rental platform? And also, on the target 200 -- target profit of EUR 200 million from this acquisition, could you give us more color on the operational, fiscal and financial synergies you're including here? And then -- well, more details mainly on those synergies, the time line of these. And also, if -- are there any restructuring costs attached to them?

Sorry, Sofia. Could you repeat the first question, please?

If you are planning on revising upwards your deliveries target or any color on that front?

Yes. Okay. With respect to the delivery targets, what we can announce here today is that, first, regarding Neinor, our delivery target for this year 2021 is unchanged. Last year, because of the COVID, we had a very small impact in our construction sites, as it has been proven with the deliveries that we just made last month. So all the construction sites, all the work in progress that Neinor was doing for the deliveries of this year 2021, they go on time, and everything is fitted in the agenda for the deliveries that we had scheduled. On top of this, of course, we will have some deliveries that we will add to our normal business plan coming from Quabit. We will make a detailed exercise on this during the month of February when we will make our business plan for this year '21, and then we'll probably give more details, okay?

And regarding the second one, the EUR 200 million potential profit that we foresee to do with this portfolio, the vast majority is -- say, is operating because as again, I said before, this is an asset deal, in our view. But obviously, the company target has net operating losses that are relevant. So whatever the profit we make obviously will have a shield from a tax perspective. So embedded in these numbers, I would say that roughly EUR 40 million of tax positive impact is assumed.

[Operator Instructions] There are no further questions coming through on the audio, sir.

Okay. So let's jump to the webcast. We have a first question from an investor. "Can you talk about your deleveraging plan? How do you foresee the evolution of the EUR 400 million net debt pro forma? It seems high on certain short-term metrics."

You know that Neinor has always had between EUR 250 million and EUR 350 million net debt. So there is no big jump. Actually, if you compare these numbers that we are presenting today to the ones in September, even in the last 12 months, are quite similar. The only thing is that in Neinor, there has been a significant deleveraging in the last quarter because we have done a great job on the delivery side, and we have generated a lot of cash. That's why we keep the same loan to value as we had as of September, despite we absorbing this company. This is, on one side, conservatively speaking. On the other side, the EUR 450 million cash generation that this portfolio will generate in the coming 5 years, we have like EUR 150 million positive, if you consider EUR 300 million net debt plus working capital that we will have to repay. So obviously, in the next 2, 3 years, the acquisition of -- or absorption of Quabit will directly repay the debt completely. And we will keep with that EUR 150 million, EUR 200 million normalized net debt from then onwards.

Okay. Thanks, Jordi. The next question, also from an investor, "Can you talk more about the different product mix in each portfolio and the difference in the ASP for -- between Quabit and Neinor?"

Yes. I take this one. I'm Mario Lapiedra, CIO of the company. Regarding the portfolio, we see that as a very complementary portfolio. In terms of locations, the exposure is basically in the same regions that we are already in Neinor. 56%, it's in the central region, 16% in Malaga and 16% in Valencia. That makes the 90% of the total exposure. Maybe the add-on more representative would be the Corredor del Henares, but we see it as a strategic location with growth potential. As Borja commented during the explanation, the population increase in that region has been 3x higher than the average in Spain in the last 2 years. And from an economic perspective, that is one of the biggest logistic hubs in the country. So we feel comfortable with the -- getting Corredor del Henares. And the other point is the target client, as was asked in the question. Here, we are reinforcing the Neinor Homes position in the affordable products segment, that we really believe it's going to be a demand product. The ticket below EUR 200,000, it's going to be demanded by the mid class that today is more in the 300,000. We see there would be an increase in demand in that type of product and would be a very good complement for our ASP average of the EUR 320,000, EUR 350,000 that you already know. So we really feel it's a very good portfolio. And obviously, it's a matter of entry price. And we really believe that our entry price, it's really, really accretive.

Okay. Thanks, Mario. The next question also on the portfolio, if we can provide the regional mix of the non-fully permitted land. And what proportion of the GAV is represented by the non-fully permitted land?

Yes. Regarding the non-fully permitted land, it's below the 10% of the exposure. And in our underwriting, we have been very, very conservative. We have some of that with entry price at 0 and exit price at 0. So in that specific segment of the portfolio, we have been really accretive and conservative.

Okay. Thank you, Mario. Then we have here a question about the operational capacity of the combined group, if we can talk about the headcount-based integration. And also, together with this question, what will be the exceptional costs to be factored in '21 as a result of the deal?

Okay. Regarding the capacity of the combined group, we think that this operative is a -- as accretive. Of course, we keep all the operational capacity of Neinor. And then we are going to add a construction company integrated in Quabit, Quabit Construction or Rayet that actually, this company is executing the construction of most of the developments of Quabit. This is a construction -- a constructor company that is used to design affordable housing and also to build them. So we are sure that we will be able to use some of the capacity of this construction company in our rental strategy. But today, it's still soon. So this is something that we will analyze very carefully during the next couple of months as we will make an integration plan of the 2 companies. And we will come out with the results, but we are sure that this will be on top. This is not analyzed today as a quantity of the operation. The operation basically is based on the land acquisition, but this point is also very interesting for us.

And regarding the second part of the question, which is the potential cost of this transaction and when we will record, the cost that we foresee to have is roughly EUR 5 million. And in this number also, it has included the financing cost. And on top of this, we will have some integration costs that we will put a bucket there. But in any case, all of them should be recorded in the results of 2020. So there shouldn't be any impact into the '21.

Okay. A further question, what sort of price reductions have you budget in to monetize the finished product and the WIP of Quabit?

Yes. No, we have done a very detailed due diligence and underwriting. We have had access to the one-by-one flat order book and price sold in the last 2 years. As you know, there are 81% presales level in the finished product and close to 70% presales level in the work in progress. So our assumption has been to underwrite for the developments with higher presales levels, the same price as they closed transactions in the last 2 years or below. And in the case of developments with levels more in line with the 50%, the haircut has been between 5% and 15% in exit prices.

Okay. Next question, it's actually 2 questions, okay? Let's split them in 2 and go one by one. "Following the acquisition, should we expect a mark-to-market of Quabit inventory land plot to your acquisition price?"

Absolutely. You know that the level of enterprise value of EUR 370 million that is commented is below the net book value of Quabit. So as a result, obviously, there will be a purchase price allocation once there is completion of the transaction. And therefore, the past -- and the negative margins of the past doesn't -- nothing has to do with what is going to come in the future in our P&L. And actually, just to give you more color on that, when I explained underwriting regarding the cost, I will give you some color on that, even the margins that we expect to have in the future. If you go in the finished product or work in progress, what we are expecting or targeting is a margin between 10% and 15%, but remember that the finished product and also work in progress was 60% presales and 60% plus execution, okay? When you look the fully permitted land, we are targeting a 20% margin, which is the same that we have always assumed in our acquisitions. So obviously, there will be a PPA and mark-to-market, as you are saying.

Okay. Thanks, Jordi. And the next question is with regards to land acquisition. What should we expect for the coming 2, 3 years?

Okay. Regarding land acquisition for the next years, we keep our agenda same or even with greater expectation as we had before this operation. As you have seen, this acquisition that we're announcing today is not consuming cash. So therefore, we have a big firepower. We expect a good year for land acquisition this year, and we will be able to see a lot of opportunities for both land for development and also land for the rental platform of Neinor.

Thank you, Borja. Next question, with regards to the debt haircut, it says an analyst that comes along with a land transfer that is worth EUR 32 million, if we can comment on this.

Regarding the big agreement, let's say, it's public. So it's Avenue. What we have done is to buy each exposure, and the exposure means debt, pref shares and also the warrants for EUR 85 million plus one asset, which is Las Lomas, in which in our underwriting, there is no real value allocated, which shows how conservative has been our underwriting if you compare this with the GAV that the company had. So for us, the write-off is significant because the total exposure of Avenue was EUR 130 million roughly without considering the warrants. And we are buying for EUR 85 million plus this land plot.

Okay. Next question is related with the previous one about our working capital investment for the next 2 years. Presumably, the land acquisitions will be lower now. And -- however, the analyst is asking if we should assume an incremental CapEx investment as the ramp-up of these new developments and particularly is asking if some of these new sites are suitable for the rental portfolio.

I think that Borja has already said that. Just to be clear, Quabit does not imply that we will reduce or stop our land acquisition program. This continues under the assumption that we are not burning cash, this transaction, I mean, to -- of Neinor. So we will continue working. This is an opportunistic deal that we have done. But 2021, we will continue buying land and buying good opportunities out there because we are sure that the 2021 will be one relevant year for us. And what was the second part of your question, Jose, I missed?

About whether there were units from Quabit's portfolio that are suitable for the rental business of Neinor.

Yes. Yes. And for sure, part of also the potential value and upside that we have here that we don't have -- put a value, it's obviously that part of the portfolio. And we really believe that 1,500 units roughly could be used for this rental platform, we could put in value, these plots. So combining what we have plus Quabit's suitable land put for the rental, we should be roughly 3,000 units.

Okay. Thank you. And as a related question about Quabit's portfolio, the analyst is saying that presales are relatively high in the WIP bucket. And should we assume these that are -- that should be completed and delivered in the next 6 to 12 months? Or what are the -- Quabit's schedule for the WIP delivery?

Yes. Well, we have analyzed the 18 WIPs that they have under construction, Quabit, today. And yes, the answer is yes, most of them will be delivered within -- more or less, it's between 6, 12, 15 months between this year and next year. We will make on cash. We'll make cash out of these WIPs.

Then we have here a question from an investor that is congratulating Neinor on the read of the market after not buying land for nearly 2 years. And he is saying that you are now buying Quabit nearly for free. And with the EUR 200 million extra cash that you have, do you think there could be more solid buying opportunities for the rental business?

Well, of course, with this acquisition, what we are getting is a big quantity of land. This has been a concern of a lot of analysts within the last months. We have been always saying that we will wait for the good opportunities to buy land. Now we find the best opportunity, also because of the situation of the market. So we are getting a lot of land with this acquisition, which give us more comfort and which give us a better view to invest in a specific rental land plots in the next months, for sure. So we will search for good opportunities, both in the development but also on the rental market.

Also a question from an investor. He's saying that Neinor, last year, it has announced the plan to get to 5,000 units for its rental portfolio. With this acquisition, it sums up almost 3,000 units. What could be the plans to grow this business as to the 5,000 target?

Yes. Well, I'll take this one. So yes, as we said in the past, we see a lot of potential in the PRS business in Spain, especially today that the resi sector is the top big asset class in the country and the rates will stay low for a long period of time. As you know, at the beginning of the year, we launched Neinor Rental with this seed portfolio of 1,200 units. That -- during this H1 of 2021, it could be a reality because we are starting having the first deliveries. Also, in H2 of 2020, we acquired the best operating company for rental in the country, that is Renta Garantizada, that it's already making money and doing asset management and property management for 2,500 units. And today, with the Quabit acquisition, we complete the first phase of the plan with this additional 1,500 units. That would round in that circa 3,000 units on our rental platform, and we have a pipeline to continue increasing this business by the first half of this year. And in the coming months, we will be reporting the advance in that sense. So we feel pretty comfortable with our pipeline and the steps that we have done in the last 12 months improving that business line in Neinor.

Okay. Thank you, Mario, for your answer. And with this question, we will finish this webcast session. Just as a reminder and as always, we will be available to follow up with your questions after this session. And thanks a lot for joining and participating in today's conference call.

Thank you very much.

Thank you very much.