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

Good day, and thank you for standing by. Welcome to the Neinor Homes 9 Months 2022 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I now like to hand the conference over to your speaker today, José Cravo. Please go ahead.

Thank you. Hi. Good morning, everyone. My name is José Cravo, and I'm the Head of Investor relations at Neinor Homes. Today, we are going to go through our 9 months results of the fiscal year 2022. As usual, we are here with Borja Garcia-Egotxeaga, our CEO; and Jordi Argemí, our Deputy CEO and CFO. We will start the presentation with the key highlights of the 9 months, then we will review the operational and financial performance of the business, and we shall finish with the main takeaways. After the presentation, as usual, there will be a Q&A session to answer any questions you may have. Now I'll hand over the presentation to our CEO, Borja Garcia-Egotxeaga.

Thank you, José. Welcome all to this Q3 results presentation. And my first message is regarding 9 months results. We have delivered 1,500 afforded units and recorded total revenues of EUR 506 million, an EBITDA of EUR 81 million and adjusted net income of EUR 53 million. As of today, we have delivered more than 2,000 units. And therefore, we are happy to reiterate our guidance of between 2,500 and 3,000 deliveries and an EBITDA of between EUR 140 million and EUR 160 million. The second message is that we keep executing our business plan, putting a big focus on the derisking of cash flows. By December 2022, within our 2 business lines, we should have 8,400 units active, 5,900 units under construction or finished product, which provide us a good visibility for the coming years. Our commercialization performance remains resilient with a net absorption rate of 6.1%. This behavior is justified by the quality of our development, its location in the tough situations of Spain, where there is both population and household growth and a lack of new homes product. With the objective to protect margins, we have increased prices year-to-date, but we are also working on the cost side with a tight control of CapEx, OpEx and overheads. Furthermore, on corporate debt, we have no refinancing risks until 2026, and we have a fixed cost of 4%. Whereas for development loans, where we are exposed to variable rates, we have recently acquired interest rate caps at 2% to the risk on the CapEx finance we needed until '26 and '27. So we have no refinancing or interest rate risk until the year '26 and '27. The third message is on Neinor's strong and unique cash flow generation profile. Year-to-date, we have distributed EUR 120 million to shareholders through dividends and buybacks and still we expect to finish the year with more than EUR 250 million cash position. If we move to Slide #6. Here, you have a summary of our main operational and financial KPIs, which we'll review through the presentation. Now please follow me through the section #2, where we will analyze our operational business performance. In Slide #8 and as I said in the introduction, commercialization environment remains resilient. Despite macro uncertainty and price increases, our net commercialization absorption rate remains above 6% and that is significantly above our historical average of 4.8%. I would also like to highlight that cancellation rates are historically lows, and with more than 2,000 units [indiscernible] today, our clients are not having problems in getting financing from Spanish banks. Moving to the next slide on acquisitions. And as we have always said, Neinor follows a very disciplined and opportunistic investment strategy, and we have a proven track record in raising the cycle. During the third quarter, we have decided to jump on some opportunistic deals and close the acquisition of 600 new units. Still, today, our main focus has shift to execute and derisk our business plan and generate cash flow. So please follow me through Slide #10. Here, we have a snapshot of our rental portfolio. As you can see, we continue to launch new rental projects and we now have 3,861 units in different stages of development with potential rent of EUR 42 million and gross asset value of EUR 900 million. Neinor's strategy is to create a portfolio of prime assets in a deeply undersupplied market, where there is a virtually no new housing product available. We will follow an opportunistic strategy with our portfolio or flexibility. In the Slide #11, you can see operational performance of [ Hacienda ] portfolio, which reflects the strong demand for rental product in Spain as well as the unique characteristics of our build-to-rent portfolio. Occupancy is stabilizing between 96% and 97% as we see some tenant rotation. Year-to-date, we have renegotiated 121 contracts of which 12 are renewals and 109 are new leases, on which we increased rents by 15%, a very strong figure that demonstrates the fundamentals of the rental business. As we have said in the previous presentation, we are getting closer to the deliveries of the rental portfolio over the coming months. We have 3 new projects to be delivered: Sky Homes, Buena Vista Homes, and Europa Homes with more than 400 units. For these 3 assets, we have seen interest by a total of 1,659 potential tenants, which give us a lot of confidence on the listing course of these assets and potential rents to be achieved. Now I'll hand over the presentation to Jordi, so that he can review the financial performance.

Thank you. As Borja said, as of today, we have more than 2,000 units utilized, and this means an EBITDA close to EUR 110 million, which means that we are well on track to deliver our guidance of 2,500 units minimum for this year with an EBITDA ranging EUR 140 million, EUR 150 million -- excuse me, EUR 160 million. And with this, it will be the fourth year in a row accomplishing with our guidance despite COVID, the war and the current macro situation. With said, in Slide #13, you have a summary of the key financial figures. First, on the top line, higher development revenues have fully offset the termination of the servicing contract. The [ EBITDA ] margins, recall that the servicing contract had a significant contribution, and it is, we see a slight decrease in margins. As you will see next page, the development business continues to operate with strong margins. If you look at EBITDA on the first 9 months of this year, we reached EUR 81 million, and this means 3% below year-on-year. And if you look at the bottom line, net profit, you can see a 14% decrease year-on-year, but it's mainly to the fact that in 2021, we recorded almost EUR 12 million of build-to-rent developer margin. In this year, 2022, we will see only this effect of the build-to-rent developer margin in the last quarter. If we look at net debt, we see an increase compared to the first semester, and this is mainly due to the EUR 50 million dividend paid in July and also EUR 20 million of additional deferred land payments. In any case, as you can see, we still remain at a comfortable loan to value of 25%. And in this fourth quarter, the last one, we expect net debt to decrease, thanks to the strong deliveries we will have. But here, it was important to state that we don't have any refinancing risk on corporate maturities until 2026. But also as Borja said before, we decided to acquire [indiscernible] would increase interest rate caps at 2% to hedge all the CapEx to be invested we need to sell, but also in different business until 2026. So I would say we are well covered here. With that said, let's move to the next slide to see a zoom per business line. In the first 9 months, we notarized almost 1,550 units, and this means 5% above last year with an ASP of EUR 310,000 per unit. Development revenues are up by 3%. However, revenues, as you can see, are down by 48%, and this is due to the termination of the servicing contract I was commenting before. As explained -- this really explains the decrease in the margin by 1.4% and also had a direct impact on the gross margin in actual terms obviously. In relation to the rental business, the excellent performance -- operational performance is translating into financial results. Average occupancy, as you can see, 92% and only rents are increasing. This implies that the gross rental income stood at EUR 3.3 million, significantly above last year. And this is a combination of the higher occupancy, but also the higher rents. And the last data point is in the net rental income that you can see that we have a very strong growth. And this is, again, also based on the commercial rate but also on the tight control of property expenses. The result, as you can see, 68% margin, and we expect to keep increasing this percentage over the coming quarters. With that said, I hand back the presentation to Borja.

Thank you, Jordi. Okay. So now if we move to the Slide #20, we can see the takeaway. And I would like to conclude today's session with two main ideas. The first one is about the Spanish real estate sector. Today, we are seeing generalized increases in interest rates worldwide. These circumstances will provoke the prioritization in some countries affecting the speed of our sales and in some cases, even price corrections. Regarding Spain, all the forecasts reflects that the GDP growth rate for coming years will be between 1% and 2% and without employment destruction that as you know, is one of the main worries of the Spanish economy. For the last decade, the Spanish real estate sector has been producing half the new homes it needs and developers in Spain have already pre-sold most of the deliveries for coming years. And as such, we don't expect price corrections. My second message is on Neinor's unique capacity to generate a lot of cash flows in a short period of time. First, on our build-to-serve business. As of the third quarter of 2022, we have 5,600 units of which nearly 50% are already pre-sold. With this, we expect to generate an operating cash flow of more than EUR 700 million. Second, on the build-to-rent, as we explained, we are creating a portfolio of prime assets in a deeply undersupplied market. Today, we have almost 4,000 of which 2/3 are located in Madrid and Barcelona and expecting to generate more than EUR 42 million in rents. An affordable value of EUR 260,000 per unit, this platform is worth more than EUR 900 million. Then I would like to finish by saying the following. Since the new management team took over, we have been delivering on our business plan targets for 4 years in a row. We don't see major changes in fundamentals of sales, costs and financing. Still, we have been preparing to face these challenging times as we reduced land acquisitions, we have plenty of cost in our balance and very good financing conditions. And finally, there is a huge disconnection between the real value of listed real estate companies in Spain and the current market capitalization. So we will work hard to correct the situation in the coming months. So thank you all very much. And now, we can move into the Q&A session.

Thank you, Borja. Operator, you may start as usual by the phone line, then we'll go to the webcast platform. Thank you.

[Operator Instructions] First question is from the line of Sofia Ballarat from CaixaBank.

My first question would be on the evolution of presales in the quarter. We understand that the performance was partially due to having fewer you sold deliveries in the short term and to the company's focus on protecting margins. But could you elaborate on the underlying trends you've seen in the quarter, particularly as presales coverage seems somewhat low when compared to the level at which this was last year? We saw that at the 9 months of 2021, you were at 70% presales coverage on 2022 deliveries. And this year, it would be around 55%. So just to understand this. And if you see any -- the deliveries in 2023 or 2024 in jeopardy. And also, then on your cash flow generation and shareholder remuneration focus. If you could be more specific on what has changed in your strategy? And if this will involve a more conservative land acquisition and M&A acquisition policy, or maybe other alternatives? So please if you could elaborate on that. And maybe if this could imply that we could see just to mention because you mentioned the cash flow position by the end of the year, if we could see additional dividend payments on 2022 earnings as we understood that the dividend was brought forward to July, but maybe there's -- you could have additional dividend payments. So that will be from my side.

Okay. Thank you very much. We are here with Mario Lapiedra also, our Chief Investment Officer, who will take the first question to give you more detail on sales and how we are working this year. And I will take later the second one.

Yes. Okay. Regarding the sales, the two concepts coverage first and then the general trend and how we see the market as of today. In terms of coverage, our target for 2023 was to end up the year in the 65%. Previous year, we had bigger than enough order book, but our target from the beginning has been the 65%. As of September, we showed 55%. As we speak, we are already in the 60%. So we feel comfortable to end up the Q this year in that region of 65%. Regarding the 2024, we have also most of the product in the market during the second half of the year and the absorption has been very good. So we feel comfortable also in the next months to reach that 30% that was the original target. And going to the second concept on the general trend, I think the best data and fact that we can comment is on the net absorption rate that we are showing. We are still above 6%. It's an extremely well absorption rate. In other times, we were talking about being more conservative and driving demand for the HPA. But in any case, we are well above the 4% that would be the general normal for an absorption in 24 months. So our feeling as of now for our product in our niche markets in the top cities in Spain, it's a good demand. And in general terms, we do not expect in the next 2 months any change.

And regarding the second question on shareholder remuneration. As we have said so far this year, we anticipated a EUR 50 million dividend that was to be paid in 2023. And we also bought -- or took a share buyback of EUR 20 million. No further decisions have been made so far, but we will keep having good health in the company. So whatever decision should be taken will come in the following months and will be taken by the Board and communicated at that moment.

It's from the line of Fernando Abril from Alantra Equities.

I have two, both from the -- both of them with regard to your BTS business. So first is on the new WIP. You're still let's say, below run rate targets with regards to new WIP units year-to-date. I don't know if you can elaborate a bit on this, the reasons behind this, and also on your expectations for Q4? And then the other question is with regards to prices. So your order book is right now at EUR 270,000 average, and presales -- the Q3 presales has come with an average of EUR 280,000 more or less. So I don't know what your also expectations for your deliveries coming next year in terms of prices?

Thank you very much, Fernando. I'll take the first and the second question, and I'll give back the word to Mario for the third one. Regarding the WIPs, the number of WIPs that we have current on the company is similar to the WIPs level that we have in year '21 or year '20, and this is more or less 4,500 units under construction. Today, we have some hundreds of licenses to start soon new works. But this is something that we program every year. And as other years, we have been putting the calendar that we consider not accurate. For this year, the calendar that we are following has been during the first half of the year. But as you know, there was a big cost increments in the construction sites. So we had to work a little bit more in some of the projects that is nothing new. So I would say normality there. We have been portfolios delivering what we have said, and we keep working in normal climate for the Q4. And the third question, sorry?

Yes. No, it was regarding the ticket on the presales. Now as we have been commenting in other times, it depends a lot on the product mix, specific [ problems of the Qs ]. In the last month, we have launched projects like Matas or Las Rozas that will increase that average. But in any case, in the product of this EUR 270,000, EUR 250,000 per unit, we are seeing an extremely good performance. And actually, one of our top performance in terms of geographies, the Corredor del Henares where we are selling more than 20 -- between 20 and 30 units per month even this quarter. So in general terms, it would depend on the specific product mix of the cure. But in any case, we are comfortable in both segments. .

Just a follow-up on the first one, Borja. So you've mentioned that you had some issues in the first half as well as your peers with that closing construction budgets due to the cost inflation. But Q3 remained low. So I don't know is this because it was just temporary and should pick up strongly in Q4?

Sorry, I can't understand the question. José? Sorry, Fernando. Yes, since summer, we have started putting a little bit more on speed on the construction of our new sites and some other facts. In the last month, we already launched some -- a lot of new houses. And for the Q4 and the beginning of next year, January, February, we expect to launch a lot of new constructions.

This is from the line of Florent Laroche-Joubert from ODDO.

Some of very interesting questions asked on the current recurring business. So I would have maybe one single question on your WIP platform. So we can see in the Spanish press that some articles commenting your discussions to crystallize the value in your WIP platform. So my question will be as follow. Why should we consider your option to crystallize the value in your WIP platform as this your option?

Okay. I'll take this one. Well, regarding the -- what has been shown in the press, at this stage, we cannot do any further comment, only that we keep working. And regarding the value of the rental product as of now, we see 2 different impacts. One, potentially negative and the other very positive. The negative, obviously, is the evolution of the interest rates. And the positive is the rent increase that as Borja mentioned, we have experienced 15% year-to-date rent increase, well above the inflation. And depending on the type of investor, the leverage needs and the specific assets, the result on the values could be higher, the same or lower. So it could depend a lot on the specifics on an asset by asset basis. .

Okay. And in terms of momentum, so of course, so we watch this increase of interest rate, while in a macro environment that is maybe not very positive. So why should we consider that the momentum could be the wide momentum for you to crystallize the value of this portfolio. .

We cannot disclose concrete timing at this moment.

Of course, I can understand that.

Okay. Thank you very much.

Thank you very much. There were no further questions on the phone lines at the moment. So I'll hand over to you to take the webcast questions.

Thank you, Sarah. I'm going through here the list of questions that we were sent on the webcast, and I think all of them have been already answered on the phone line. So if there are any further questions, we will finish the session.

[Operator Instructions] No further questions coming through at the moment.

Okay. Thank you very much. So I guess that concludes the 9-month results presentation of the year '22. And if you have any further questions, we are happy to take it after the session. Thank you very much. Have a good day.

Thank you. That does conclude the conference for today. Thank you for participating, and you now may disconnect. Speakers, please stand by.