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

Good afternoon, everyone. My name is Jose Cravo, and I'm the Head of Investor Relations at Neinor Homes. Today, we are going to review results from fiscal year '21. And as usual, we are here with Borja Garcia-Egotxeaga, our CEO; and Jordi Argemí, our Deputy CEO and CFO. We will start with key messages and figures from the year '21. Then we will move to Section 2 and 3 to review the operational performance of the development and rental businesses as well as financial figures. In Section 4, we will unveil guidance and outlook for the year '22. And afterwards, we will finish with a Q&A session. And now I'll hand the presentation to Borja.

Thank you, Jose, and thanks, everyone, for joining. As Jose said, we are here today to present the results corresponding to the year '21. And I would like to start with one key message. The set of financial results and company activity that we are going to see here today are exceptional consolidate Neinor in the top of the Spanish developers. But before we start, I want to take a minute to remember what we said to you 3 years ago when this team was taking the lead of the company. We promised that we would work hard to fulfill and accept company targets and your expectations. And we gave you a guidance for '19, '20 and '21. And today, 3 years later, we can say proudly that we have not only met but save targets for deliveries, EBITDA and margins. On top of the business plan, we have been the first movers in consolidation, and we have created the only rental platform amongst all the Spanish developers. Today, this platform is a reality and will create a lot of value for shareholders in the years to come. We have finished this 3-year period with a EUR 300 million cash position, a product leverage and own a quality land bank of nearly 17,000 units. And very important, not only Neinor is in great shape today, but fundamentals of the residential sector have never been stronger in Spain. And after this brief introduction, let's move to Page #5. So I can give you the main highlights from the fiscal year '21. Here, you have a summary of our performance. Starting with deliveries, we have consolidated our leadership position with more than 3,000 units, growing 90% year-over-year. This is an absolute record that shows very well the capacity of this company. Our revenues stood above EUR 900 million, and EBITDA reached EUR 158 million. On the accumulated basis, we have exceeded EBITDA guidance for the period '19 to '21 by 16%. This represents EUR 50 million more than what we had estimated. In operational terms, we had an excellent year too. We have presold more than 2,600 units. This is 11% above our annual target. With regards to land acquisitions, 21 was a vintage year. In an environment of good opportunities, we invested EUR 650 million, which is roughly 3x our normal target. Let me also highlight what we have done on the rental business, which is remarkable. In 2020, we told you that we had a target of reaching 5,000 units. Today, this is becoming a reality because we already own these assets, and most of them have financing in place. On the leverage side, despite the cumulative investment in build-to-sell, build-to-rent and share buyback of EUR 750 million, we have finished the year with a loan-to-value below 20%, a record EUR 300 million cash position and no refinancing risk at the year '26. Remember that we always said that the impact of Quabit on EBITDA was a small but significant in terms of cash flows. In terms of NAV, we have seen a strong uplift of 15% that was driven by the accretive merger with Quabit and Neinor’s rental strategy. And the cherry on top of the cake, Neinor has been recognized by Sustainalytics with the best ESG rate out of all the developers worldwide. This shows that we have been able to beat all of our financial and operational targets in a responsible manner. So now please let's move to Page #6. Here for your reference, you have the summary of the key operational and financial metrics that we shall review in Section 2 and 3 of this presentation. Please follow me to Section 2, where we will see the operational review -- in Slide #8, here, we start with the development business. On sales, even though we have increased prices by an average of 3%, we continue to sell according to our internal estimations. In December, we already had 80% of the 2022 target deliveries result. This is a very solid market for new houses in Spain. In the upcoming months, we will keep adding HPA to offset cost inflation and to protect margins as we have done in previous years. By regions, Madrid, Malaga and Corredor del Henares are the top 3 performing ones. Please move now to Slide #9. As I said before, '21 was our vintage year for buying land. We have fully replenished our land bank with a mix between cherry-picked deals and the opportunistic merger with Quabit. We continue to see a significant consolidation opportunity in the sector. But as always, we will remain very disciplined in our decisions. Please follow me now to the next slide where we will review the operational performance of the rental business. Here, you can see the huge progress we have made during year '21. We have finished the year with 542 units built, 1,200 under construction and a further 800 already launched. We expect this to be delivered by year '24 and to generate a stabilized GRI of EUR 30 million. Let me remind you that until now, we have raised EUR 220 million to fund construction purpose for build-to-rent. Furthermore, we are already launching the first phase of HMB in Barcelona whose first deliveries will take place in year '24. And already, the whole project is fully funded. On the left side of Slide 11 -- you can see the evolution of our GRI and occupancy, including Hacienda Homes from December onwards. Specifically, on the Sardes portfolio, we have completed our turnaround strategy in just 1 year, increasing at the same time, occupancy levels and rents. Today, the portfolio is 95% occupied. On the other hand, Hacienda Homes in Malaga has a 70% occupancy level in just 3 months, and we are already increasing rents. Now next slide, 13. We have the financial review. Most of the things and the items that you have seen is the slide I have already gone through. You have much more detailed information about financial in the appendix and later on, Jordi Argemí will be happy to answer your questions in the Q&A session. So now let's go to the last slide of this presentation, and let me finish with 4 messages. The first one is that with regards to the financial guidance, we expect an excellent year '22 in line with '21 with a target of reaching again, EUR 150 million EBITDA. To achieve this, just highlight that we have a great visibility. Over 80% of the target deliveries are already presold and all the construction sites are progressing well. Second, we have full visibility and other risk business for the next 3 years with our replenished land bank. The third message is for build-to-rent. Over the next 10 years, Spain will need more than 1 million of rental hubs. So today, I will finish by repeating what I said just 2 years ago. Build-to-rent is the most attractive investment opportunity of the Spanish residential sector. And Neinor is very well positioned to deliver on this secular growth opportunity. And last but not least, like always, shareholders' profitability and dividend distribution is one of our main priorities. So this year, on shareholder remuneration, we will pay EUR 100 million dividend. Of this, EUR 50 million belongs to the fiscal year '21 and will be paid in April. And thanks to our cash position of EUR 300 million and our objective to be as equity efficient as possible, the company has approved to anticipate another EUR 50 million corresponding to year '22 results that will be paid in July. Thank you very much for your time. And now let's move to the Q&A session.

Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions] We have one question from Alvaro Soriano from BNP.

A few ones on my side. On the dividend. Given the current stock price, seen a lot of value to come in the coming years. Can you explain or can you elaborate a little bit on whether distributing cash instead of doing other actions like share-buyback, that would be the first one. And then in terms of what to expect for 2022 in terms of acquisitions and disposals, if you could give a little bit of color of what are your targets, especially after the unsuccessful transaction that the market was expecting this year. So it would be also great.

Alvaro, I'm here with Jordi Argemí and Mario Lapiedra, so I'm going to give now the turn to Jordi start with a question about benefits.

Yes, you are right. Obviously, share buyback is very, I would say, even [indiscernible] and given our discount over net asset value, that's true. You know that we have always done share buybacks, but it's true also that we committed with the markets to give a dividend, and this is what we are doing. So as of today, we are not increasing the dividend. What we are doing is basically commit and deliver what we said in the past and just accelerating because we delivered more free cash flow than expected through Quabit deliveries. And as a result, we anticipate that fact, we are not changing. In parallel, we will see during the year, it makes sense to put on the table a share buyback. It's not in the business plan. It's not planned, but we always consider this kind of stuff.

Good. I take then the question regarding the investment strategy. The first, I would mention that after the exceptional year that we closed in 2021, we see more than 600 million and 10,000 units replenished the short, the mid and the long-term. We start with a very solid land bank on 2022. So that allows us to even have more discipline and opportunistic strategy for the year. And we see opportunities. But as we always said, we will only do what is accretive for our shareholders and -- by the regions. So in general terms, we are very comfortable for the 2022 and coming year.

Okay. So we could assume another like between EUR 100 million and EUR 200 million of land bank acquisition, if I'm correct, for this year.

Yes, but we will keep our disciplined strategy. So we don't need to invest that for replanning the land bank of the short- and medium-term. So we will be adapting our investment strategy to the opportunities.

Okay. And then on Slide 8 regarding sales, it is a nice chart. Could you just elaborate a little bit on how the market is right now, I mean, looking for the next year? And also, if the current sale speed is consistent with like 600 units per quarter or we are above those numbers or below?

Yes. No. The current market is strong, both in volume and in terms of HPA. As Borja was mentioning before, we are adapting our sales skew to the targets of deliveries and with the -- being consequence to the strong HPA environment. So what we are doing is starting the 2022 with an 80% coverage of 2022 deliveries, close to a 40% coverage of 2023 and close to 5% of 2024. So our sales skew here shows a target of ending the year with 65%, 70% of coverage for 2023 and close to 30%, 35% coverage for 2024. And we will stick to the plan because in that environment, it's not good to sell more than needed.

There are no further questions at the moment.

Okay. So now we'll take -- I will address the questions coming from the webcast platform. First question is on the supply-demand environment on the sector, how we see the main risks coming in the coming years?

Yes. Well, following with the answer of the previous question, we see very strong fundamentals. We still see a very low supply coming to the market in the next years and a strong demand that it's allowing the new product to have a very good and sustainable affordability ratios because the demand that is getting access to the new -- or the few new units, it's in the high level of the demand. And in general terms, our forecast is very positive.

We'll continue with the webcast. The next question is with regards to the interest rate increases and the potential impact on Neinor rental returns. How do we look at this?

No, the same. I mean the HPA, we really see that is offsetting the inflation regarding the cost -- the cost increase on the construction and as I was saying, the affordability that in some locations and in some markets, maybe it's been a bit tougher, in our segment for our product of new homes in our locations, it's been stable. The market is in the region of the 7x price per earning. In our portfolio, we are between 5 and 7. And we believe that as the supply is being very low. The best demand is the one that would be acquiring our homes. So we feel comfortable with that.

Continuing with the webcast to questions that perhaps are related. The first one, if we could expect an acceleration on the run rate of the property development business, okay? Then the second question, I understand that you will distribute a full dividend for full year '22 of EUR 50 million. And why not using this capital to accelerate the development mix of the company by increasing the run rate targets if the Spanish market is booming?

Regarding the last question, I mean, I said at the beginning, we committed with the capital markets with a dividend, and it's now at the moment once we have reached a run rate to remunerate our shareholders. It's true that we could reinvest that and increase our run rate long-term, for sure, yes, but it makes sense if we have a discount on our net asset value. I don't know, honestly speaking, whatever we reinvest to increase our run rates, and we all have the confidence of the share price, I really believe that makes no sense. And again, we need to start remunerating and [ help ] to the shareholders as we are doing right now. And, the first question was -- Jose can you remember?

Run rate, yes, on dividends. Why not to use these dividends. We will use the dividends as the decision of our board.

Then the next question, what is the build cost inflation running at for current and new projects? And if we could split materials and labor on what we are seeing.

Well, on cost inflation, during the last 5, 6 months, we are seeing cost inflation in our constructions -- developments between -- I would say, between 8% and 9% as an average. And this is more or less taken our references from the last [indiscernible] of developments that we have been launching. Regarding how we see this cost increase or what are the reasons of this cost increase. Basically, all of it is becoming because of materials. You know that supply and problems after the Quabit has conducted materials to increase the prices. So the cost of material -- the cost increase for materials, more or less, it's around 23% in the last 6 months. Considering the percentage of importance that this has in the total cost of the construction. This is making, as I have said, a final cost increase of between 8% 9%. Really, the labor cost or the employment or the cost increase that comes from the workers is not increasing or it has increased low. I would say that less than 2%. So this is what we expect that will keep being during the next months of this year. So we think that we will close the year with a cost increase of around 8%, 9% all in all. We will see because we are assisting to this year with still a lot of certainty, but this is what the market is considering today.

Next question with regards to prices and EBITDA margins on the discount of coming years and taking into consideration the impact of Quabit.

In terms of ASP, once we acquired Quabit, we said that the ASP should be ranging to EUR 180,000, EUR 300,000. What is true is that we are increasing HPA, as Mario was saying before. And as a result, we really believe that in the business plan, we should be now between EUR 300,000 and EUR 320,000, EUR 330,000 per unit. So we are going to increase in that sense, the ASP. And regarding margins, it shouldn't change because when we underwrote Quabit, the assumptions behind that acquisition was to keep the 24% gross margin. So with the purchase price allocation that we did with absorption of Quabit, we shouldn't change the margins. So all in all, and in absolute terms, we have always said that EUR 150 million EBITDA plus we keep that.

And then another question with regards to M&A, what we are seeing in the market?

Well, we have always said in the last 2 years that M&A or consolidation, [indiscernible] Consolidation would happen because there are no natural shareholders in the market. You know that we acquired a Quabit, it's also public and we said that we were in negotiations with Via Celere. We stopped that, it's true that we didn't reach an agreement in the conditions that we wanted. And as we said in December, we want a deal to be accretive for our shareholders. If we don't find an accretive deal, we will not do it. And this is what happened with Via Celere. So let's see in the next months if we have opportunities, but we will be very disciplined if we find something to jump.

Okay. Operator, you may now go back to the phone questions.

The question is from [ Inyasso Romell ] from [indiscernible].

Yes. My question has already been answered. So no questions on my side.

We have then the question from Alvaro Soriano from BNP.

Yes. I'm going to take the opportunity to ask more because this is interesting. On your rental platform and given the 15% like-for-like NAV growth that you reported, how a price are reflecting the value of the units that are now under the build-to-rent pipeline that were before on build-to-sell, that would be interesting? And also, do you have any target in terms of GRI for 2022 to try to make more accurate model? And also on the Valencia development that should be delivered in 2022, I guess, Q3, Q4, how the construction process is going?

Okay. I will start with the last question about construction cost in Valencia. Well, this -- so far, we don't have any negative news from this site. The constructions are progressing well. And basically, you know that this is a very big complex the Sky Homes, these are 4 towers with more than 400 units. But basically, all these buildings have been already contracted and the subcontractors -- all the contracts were signed up a long time ago. And basically, all the materials are already on the site. So there is no delivery progress or there's no supply products, and there is no big extra cost that could affect this construction. The sites that have been more impacted by this cost increase other ones that have been contracted during the last 6 months, I would say. So we are working more with those sites that we are just starting construction in order to control prices more than in the old ones like this Sky Homes that was contracted 2.5 years ago.

And I take your first 2 questions. On the evaluation of the rental -- build-to-sell and build-to-rent, it's almost neutral what we have recorded in our accounts. Actually, you might think that once we finish the asset, we directly transferred to [indiscernible] and is when we do this new evaluation. Given that we have tenants, we will have more visit in that sense. There is no positive rental on the numbers. What will happen is that in the next 6 months -- in the next 6 months of the -- so I don't know if it's myself and echo or it's another person talking. Well, in the next 6 months, once we put the tenants and therefore we show to the evaluators, the rents that are higher than expected and also probably not NOI with a better [ leakage ], there will be an increase on the evaluation that we will reflect on the accounts, obviously, but below EBITDA level. So we never consider this extra value coming from the build-to-rent to our -- inside our EBITDA. And regarding your second question, the GRI this year, we have yielding Sardes and also in [indiscernible]. And with these 2, let's say, building projects, we should have like EUR 4 million GRI for this year. We will also deliver Sky. So the one from Valencia as Borja mentioning before. But from a GRI perspective, we will have a limited impact this year.

Okay. Thank you. So just to clarify on EBITDA level for the coming years, all the revaluations coming from putting those assets into operation and referring -- I'm referring to Neinor Rental, they will be recorded as fair value changes, but always below EBITDA, right?

Correct. Correct.

Okay. And that has also happened during full year 2021?

Yes, the same. Actually, if you look at the accounts, you will see that is almost EUR 1 million, and this comes from Sardes and the last evaluation of Sardes. So it's below EBITDA.

So this year, there hasn't been an increase in value of EUR 16 million in the rental platform, right?

It's EUR 16 million, but again, this is once we finish the product and we transfer the product to [indiscernible]. This margin method is assumed inside the EBITDA, but then any further revaluation apart from this, it's below EBITDA. So in other words, this year, once we deliver a...

Jordi, correct me if I'm wrong. But Sardes was a standing portfolio acquired -- already finished, right?

Yes. Sardes is different compared to the others. This is an exceptional one, but we include that in EBITDA. But this was set...

But this year, you included that...

But this was from day one of 2021, from January. So no changes.

Okay operator, I guess there are no further questions waiting. So thanks, everyone, for joining this conference call. And if you have -- as always, if you have any follow-ups or doubts, you know you can write me. Operator, you may now disconnect.