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

Good day, and thank you for standing by. Welcome to the Neinor Homes Business Update Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand over the conference to your speaker today, Mr. Jose Cravo. Please go ahead, sir.

Hi, everyone. My name is Jose Cravo, and I'm the Head of Investor Relations at Neinor Homes. This morning, we have published a business update that we will review with Neinor's management team. We are here today with Borja Garcia-Egotxeaga Vergara, our CEO; Jordi Argemí, our Deputy CEO and CFO; and Mario Lapiedra, our CIO. This presentation is divided in 5 sections. First, we will review Neinor's performance over the last 5 years. Second, we will explain why today Spain is one of the safest residential markets worldwide. And then we'll see how despite execution and fundamentals, Spain's residential developers continue to trade with significant discounts. Then we will analyze how the company will optimize its capital allocation through shareholder remuneration and equity efficient growth. Now I hand over the presentation to Borja Garcia-Egotxeaga Vergara, our CEO, for the initial remarks.

Thank you, Jose. As Jose said, with this strategic update, Neinor is leading and will continue to lead the transformation of the Spanish residential sector. Let me explain briefly how we are going to achieve this goal with 5 key messages. First, over the last 5 years, we have had a flawless execution, accomplishing every operational and financial target in our business plan. Second, in the current market environment, Spain is one of the safest residential markets worldwide where we don't expect capital values to go down in the coming years. Third, capital markets are currently overlooking the group perspectives of our business, from our fundamentals and execution standpoint. And today, we are trading at significant discounts to both valuation and capital invested. In this scenario, it is extremely complicated to pursue all the growth opportunities that we are currently seeing, and therefore, we are launching a plan designed to crystallize value for shareholders where we also tackle growth. To do this, we are going to do 2 things. First, we will optimize our balance sheet and remunerate shareholders with EUR 600 million to be distributed over the next 5 years. And second, we are launching a very ambitious land investment plan by deploying more than EUR 1 billion in new land acquisitions so that we can maintain the growth trajectory we had over the last 5 years. Now let's move into the presentation so that we can analyze all the aspects in greater detail. In this section, we are going to review Neinor's operational, financial and non-financial performance since 2019. Follow me to Slide #5, please. In this chart, you see the evolution of Neinor deliveries. Between 2019 and 2022, we have delivered 8,671 units and generated EUR 2.7 billion in revenues, which means that we have exceeded the lower end of our guidance by 11%. Let's move to Slide #6. Here, you have the EBITDA by year, where we are very proud to say that despite a challenging macro environment with COVID, war and inflation, we have been able to generate more than EUR 500 million EBITDA and beat our guidance by 15%. Please follow me to Slide #7, and here, at a net income level, our performance was even stronger as we have earned EUR 344 million, beating our guidance by 22%. This is a strong performance. As you should not forget that in year '21, we absorbed COVID and we had to refinance this debt thus increasing financial expenses. Please follow me to the next slide. In this slide, we show our performance versus peers. Starting on the left side, between '19 and '22, we delivered 8,671 housing units to our clients which implies 33% more than our peers. On total EBITDA, we generated EUR 518 million, 15% more than peers. But we have not only generated more EBITDA in an absolute level, but also in relative terms on average unit basis. On net income, we generated EUR 344 million between 2019 and 2022, 55% more than peers, and again, more in consolidated and relative basis. Going to Slide #9. We are extremely proud that we have been able to put together profitability and sustainability, reaching a global bottom line return to shareholders and society as a whole. Here, you see the major achievements over the last years. With regards to BREEAM certifications, an assessment that evaluates sustainability in 90 areas such as evaluate energy consumption, mobility or water use, we have delivered more than 8,000 units, which represents 21% market share for the whole Spanish market. Furthermore, since last year, we are doing and performing an exhaustive life cycle analysis report on each new development and information we are getting from analysis will form a key part of our carbon footprint reduction in years to come. But we are not only worried or concerned about the environment, reducing our carbon emissions. In 2021, we are one of the few developers in the world, if not the only one, to measure our social footprint through a [ compressive ] report in development-by-development where we see and measure our value add to the society. Now let's move to Part 2, where we will discuss the underlying fundamentals of the Spanish residential market. So I pass the word to Jose Cravo, again.

Thank you, Borja. As I said in the beginning, in this section, we will explain why Spain is currently one of the safest residential markets worldwide by being undersupplied, underleveraged and underpriced. Please follow me to the next slide to elaborate on these factors. First, on the supply side. It is important to note that Spain has reduced its supply per capita by approximately 90% since the year 2007. And today, it is producing only 2 new units for each 1,000 habitants. This is significantly less than other developed countries, as Germany, United Kingdom or United States. And more important, these lack of supply in the Spanish market has been compounding year-after-year, throughout the last decade. Please follow me to the next slide. The other major change in the Spanish market was leverage. Households in Spain today have less debt than in Germany. The Spanish banks have a healthy ratio of loan-to-deposits and no longer give mortgages with more than 70% net loan-to-values. On the other hand, developers have a much lower loan-to-value, and they no longer borrow against land. So at the end of the day, the Spanish market has a lot more equity than before, and the impact is what you see illustrated on Slide #13. By constraining demand through lower loan-to-values, banks have pushed low equity buyers to the rental market. And therefore, in this cycle, we didn't see a routing in house prices as we saw in other countries. Please note that in many residential markets for the last couple of years, buyers didn't need much equity to buy a house. And at the same time, interest rates were at historical lows, therefore, boosting housing demand. Please follow me to Slide 14 to see how this translates into effort rates. So the sum of lower house prices, lower leverage and lower mortgage costs translates into better affordability. Today, effort rate in Spain stands at 34%, which is in line with historical average and is helping to sustain housing demand. On the other hand, other countries such as the U.S. or the United Kingdom, we have seen a spike in effort rate, taking it to levels around 40%. Please follow me to Slide #15. In this slide, we show the evolution of last 12 months new mortgage approvals, which is a good proxy for housing demand. Since the beginning of the war, new mortgages on a 12-month rolling basis has been roughly stable in Spain. On the other hand, we can see on this chart that the German market is already 27% down versus pre-war levels with a steep decline after the summer. While in the U.K., it is 15% down. Please follow me to Slide #16. And finally, on the macro front, we show that the Spanish solid residential fundamentals will also benefit from a stronger macro outlook. GDP growth expectations for '23 and '24 show that the Spanish economy will be growing at a pace that is 2x faster than its peers. Now I'll hand over the presentation to Jordi so that he can complement our analysis of what happened over the last 5 years with a capital markets perspective.

Thank you, Jose. Until now, we have reviewed Neinor's execution over the last 5 years and also why Spain is today one of the markets worldwide with the lowest market risk. Now in the next 3 slides, we will see that there is a huge gap between fundamentals and the intrinsic value of the Spanish listed residential sector, which, at the end of the day, limits our capacity to grow. Please follow me to the Slide #18. In this slide, you have the evolution of the net asset value discount of the Spanish listed residential sector. And as you can see, since 2021, the sector has been trading at a significant discount, which today sits at around 50%. If we can turn to the next slide. When we say that we are a real estate company and that in this current environment of higher interest rates, we are saying at a significant discount to net asset value. You might think that it's a reality of the whole real estate sector in Europe. So why should Neinor be different is a key, one question, I would say. But the answer is easy. The difference of Neinor is that we have systematically realized our GAV and delivery. And we have been doing this for many years now. You can see on the slide, 1% above in the last 24 months. Another way to look at it is in next Slide #20. Doing a simple math, today, we trade at EUR 460 per square meter. This means a huge gap to our appraisal value of almost EUR 800. Also, when you look at the capital we invested in our land bank which is roughly EUR 1.3 billion at historical cost we have revaluations, it has been at EUR 590 per square meter. So in practical terms, every time we invest EUR 1, the market transform it into EUR 0.78. And it means 3 things: first, that new land acquisitions are value dilutive instead of being accretive. Second, that the market values at 0, all execution embedded in our land bank with on the cranes, with impairments, corporate sales that will be transformed into free cash flow. And third, that the market assumes that we will not generate any profit from the almost 9,000 units that we have in different stages of production. Remember that we have originated more than EUR 500 million in EBITDA and that we have been the most profitable player in the Spanish resi market. So as a way of conclusion in this circumstance, growing becomes a very challenging exercise, and growth is the main purpose of listed companies. Now if we turn to section #4, we are going to explain how we are going to optimize our capital allocation in an attempt to solve the 2 biggest challenges we identified. First, how we are going to crystallize value for our shareholders and as a result, try to reduce valuation discounts. And second, how we are going to pursue investment opportunities and grow the company. Please follow me to the next slide so that I can give you more details. Our strategy is based in 2 pillars: shareholder remuneration and growth. On the first, we are going to crystallize value for our shareholders, thanks to EUR 600 million remuneration which is equivalent to more than EUR 7 per share, and being between 80% and 90% of our market cap today. On the second, in line with opportunities we are currently seeing in the Spanish market, we are launching a plan to invest more than EUR 1 billion in a way that is equity efficient. These 2 pillars will allow us to optimize the capital in our balance sheet and improve shareholder returns towards a sustainable return on equity of around 15%. The next slide, you have finer details on these pillars. In the Slide 23, we show per year that remuneration of EUR 600 million, basically, between 2023 and 2025, we expect to remunerate with EUR 450 million, which includes the treasury stock calculation. This means 75% of the total remuneration package will be paid in the next couple or 3 years. And then between 2026 and 2027, the shareholder remuneration will be EUR 140 million in total. This remuneration I'm talking about is self funded by the capitalization of Neinor's different platform and the new investment policy. It is very important to have in mind that throughout this period, our leverage will remain prudent all along. If we come to next Slide 24, it can be seen the implications in terms of land bank and units. Basically, we are going to reduce the land bank from almost 6 years to 4.5 years which will make more efficient the balance sheet and the returns to our shareholders. And with the new land acquisition program of more than EUR 1 billion by 2027, this will be a company with around 9,000 units fully owned plus another 7,500 units through co-investments. In Slide 25, you can see our guidance for the coming years. A further remark is on this year 2023, where we confirm the guidance that we provided 1 month ago, that basically says that we will be in the lower end of the range with EUR 140 million of EBITDA and EUR 19 million of net income. Second, for the coming years, you should expect on average, 2,000 units to be delivered per year, which means EUR 100 million of EBITDA and EUR 70 million of net income. And as you can see and as I was saying, leverage will remain prudent always, around or below 25%. And at the same time, we expect the returns to improve from 11% this year towards 11%, 13% in the next couple of years as we optimize our balance sheet. And then to a stabilized level of 15% from this point onwards as the commencement starts to bear the results. Now if we turn to next slide, we present an illustration of how you should look at Neinor in the coming 5 years. First, we currently trade at a market cap below EUR 700 million. And in the coming 5 years, as I have said many times, we expect to remunerate with EUR 600 million. During this period, you should have other business lines that should be worth approximately EUR 100 million, which means that Neinor in [indiscernible], construction business, net operating losses, excess cash. And then apart from this EUR 100 million, you should have a land bank of 9,000 units, where we will have invested approximately EUR 500 million to deliver the results I commented before. Depending on the return on equity that we generate, we expect this to be worth another EUR 600 million to EUR 700 million, which is roughly speaking, the same market cap at which we trade today. So in total, we are talking of a company with a potential value ranging EUR 1.3 billion and EUR 1.4 billion in total. And with this said, I will hand over the presentation to Mario so that he can give more details on our co-investment business line.

Thank you, Jordi. In Section 5 of the presentation, we are going to cover 2 main concepts. Why the living sector in Spain will keep being one of the top real estate investment destinations and how to play living sector in Spain. On Slide 28, we start with the "why." One of the reasons is because in the Spanish living sector, we are still on early stages in the creation of some of the most demanded and consolidated asset classes in other advanced geographies. This is the case of build-to-rent, micro living, or senior living, generating a huge opportunity for developers. Other important reason is that in this uncertain and volatile world, in the Hispanic living sector, we have a constant sustainable and long-term demand fundamentals combined with a various cash production. If we move into the next slide, you can see in the left-hand side, the huge imbalance between demand and supply by asset classes. In build-to-sell, the demand of the next 5 years will be 1.8x higher than the supply, in build-to-rent, 12x higher, in micro living 15x higher, and in senior living, where there is basically no supply, the demand is going to be more than 7x higher. If we look at the right-hand side, we can see that one of the reasons for such imbalance is that we are still in the middle of the concentration effect, meaning that the 6 top regions of the country concentrates 50% of the total population, 90% of the population increased and 50% of the total GDP, but this effect is exponential in the future. In the next 10 years, these 6 same regions will increase population by 10% to 20%, while the rest of the country will lose population in the same percentage. So this is why we consider that the living in Spain is one of the most resilient and well-based sectors across real estate. Let's go now with the "how," how to play living in Spain in Slide 30. The answer is simple. [ True ] Neinor homes are the leading platform in the country the difference is that until today, investors could only invest in main or through shares with all the benefits and limitations of capital markets. Now we are launching the co-investment business line allowing investors to co-invest with Neinor directly in assets of its business line, benefiting from the track record, solvency and professionalism of the living platform, allowing Neinor to create different equity-efficient pockets for its acquisition strategy and timing of the asset and market cycle. And finally, but not less important, allowing shareholders to maximize their return, while the company keeps growing. If you follow me in the next 3 slides, we will do assuming in each business line. In build-to-sell investment line, we will combine the direct investment and the creation of different vehicles of co-investment with various investors that will allow us to allocate different type of capital to different strategies. Target returns will range from 15% to 20% net IRR and we will be able to maximize synergies in acquisition, in production and in the operating company. In the build-to-rent investment line, main priority will be to keep crystallizing the value of the shipping portfolio through direct sales or partnerships. But in parallel, we are starting to pursue further scale and growth through co-investment. And finally, senior living. I would start with the strategic rationale of the business lines launch. Once past year, we start having stabilized both build-to-sell and build-to-rent business lines, we questioned ourselves, what's next on living? Clearly, the next mega trend in Spain was going to be the senior living. But how was the best angle for us to play it? We started as always from the demand. We hired a specialized international advisers, and we did more than 2,000 inquiries to target population, both in Spain and international to understand which were the levers, the desires and also the stoppers of the demand. Additionally, we analyzed all the comparable business models and peers around the globe. As a concession, we are launching a platform focused on LifeCare with a very efficient pack of services and focus on the mid high target segment of demand. The business line will have opportunistic type of returns with plus 20% net IRR and from a structural perspective, we are in discussion with the current investors that we'll add as equity partners. We have no doubt that the asset class will be one of the most demanded in the coming years. And from a supply and business perspective, we believe it has a great opportunity for Neinor Homes. With this I give back the word to Borja.

Thank you, Mario. So let's see now the main key takeaways of this presentation. With this plan, we expect to transform Neinor into a better company that will deliver higher returns to its shareholders where we implement a long-term oriented business model that provides an adequate answer to the challenges we are currently facing. Today, we have a unique opportunity to launch this strategy, thanks to the solid fundamentals of the Spanish market, our proven track record, an excellent balance sheet and free cash flow visibility for the coming years. And we are very confident that we will continue to lead the transformation of the Spanish residential sector. From an operational perspective, bear in mind that this plan does not imply any change, and we have, all the know-how needed for its execution already inside the company. On the financial side, in the current capital markets environment, the acceleration of dividend payments over the next 3 years will make Neinor Homes a very compelling investment proposition for shareholders. In parallel, as we have start to channel new investments through co-investment business line, we expect to generate a higher and more sustainable return on equity, which will make the company more attractive to investors in the medium to long term. Our plan is to keep similar activity volumes, but we are managing the cycle. Co-investment allow us to derisk the business plan with a smaller own land bank. Over the last couple of years, we have seen a clear interest by investors in the Spanish residential sector, starting with build-to-sell, then build-to-rent and now more recently, alternative assets such as senior living. The addition of the co-investment line will make the company more flexible, allowing us to tackle and pursue investment opportunities in a more effective manner and to leverage our status of leading residential platform of Spain. We are absolutely convinced that this plan is the right tool to transform today's challenges into opportunities, and from today onwards, investors looking to add exposure to the safest residential market worldwide can buy Neinor shares, but also co-investment alongside Neinor. So this is it. I'm now ready to take any questions you may have.

[Operator Instructions]

Thank you, operator. We'll just wait 1 minute to receive all the questions and consolidate them.

Sure. Thank you.

Okay, thanks for waiting. So I'll start with the first question for Borja, which is saying considering that the company is planning to distribute EUR 600 million in dividends in the coming 5 years and buying build-to-rent in the first few years. Could we understand that this is a sort of a runoff strategy to try to capitalize the value of your land bank versus the share price that is depressed?

Okay. Thank you, Jose. I'll take this one. Having asked that question already sometimes in the last 4 years. And the answer today is the same. No. In fact, I have never seen so clear the future of the company as I see it today. I will say that we are just in the opposite from a runoff. It's not just that even though we have 15% units, we are planning to invest EUR 1 billion in the next 5 years in land. Of that EUR 500 million will be invested by Neinor of a EUR 100 million approx to co-investors. But as we look it at today, we are increasing the types of residential users. We are putting the senior living on the diversifying strategy of products adapting to the markets in Neinor. And also, I will say that really, we are managing the cycle, and we are derisking the company through this co-investment strategy. So basically, we are putting the right seeds, I will say, to the future capital structure of the residential developers in Spain. And we are also improving the return on equity for our investors in the midterm, thanks to the high investment. So we are not only increasing the attractive for our shareholders in the short time through the dividend, but we are also ensuring the future of the company. All-in-all, I will say, I will repeat, this is not a runoff. This is the best. It's a strategic movement that can be done today in Neinor to ensure a bright future for this company.

Second question. Will this massive dividend payment put the company at risk when there is a very serious recession threat in the market? And if we can give some details on the evolution of the loan-to-value.

The answer is no. As we said during the presentation, even though the company is remunerating with EUR 600 million we expect to maintain our leverage ratios around or below 25%, and this is a proven leverage and consistent with our guidance since 2019. And taking to concession that the dividends will be paid at the end of the year -- this year, which means that we will distribute the dividend once the cash has been generated.

Thank you, Jordi. The third question we received he's saying that -- you're saying that you're trading at a 50% discount to now and that capital markets are overlooking execution and Spanish market fundamentals. But isn't this what is happening to all real estate companies at this moment of the cycle? Can you clarify why? What are the reasons why Neinor should be any different?

I'll take -- I'll take this one. This is correct. Nowadays, there are many real estate companies trading at 40% or 50% discount to the appraisals. However, I said before, there are many differences, actually there are 3 main differences. First, Neinor is being able to sell assets at GAV to our retail clients or in build-to-rent institutional players. Second. Most of the resi players are struggling with debt levels, and that's why they are cutting dividends. And third, we are in a better market environment where operational trends keep resilient. So all-in-all, the situation is completely different. And as a result, we shouldn't trade at the same kind as everyone else.

Thank you Jordi. Next question, on the consolidation front. Do you think it will become easier or more difficult to consolidate the sector after this dividend distribution of EUR 600 million?

I take also this one. It would be easier being [ consolidate ]. And this client has the objective to reduce discount to net asset value. And if this happens, is when we can explore consolidation opportunities in a more efficient way.

Thank you Jordi. Then on the investment side, -- we have one question here that -- he's asking, if we are being consistent when we say that there are plenty of opportunities of co-investment opportunities in the Spanish market and why don't we do it with our own equity?

Okay. I'll take this one. Yes, basically, 2 main concepts. So the first is that we see more opportunities coming than on equity available. And the second one, as we commented during the presentation, our strategic plan is based in 2 main pillars that goes in parallel. One is the balance sheet optimization as it is highly penalizing the capital markets. So that means that we need to reduce our current 15,000 units land bank to 10,000 units land bank. And in parallel, we do not lose any market opportunity launching the co-investment business line that would allow us also to improve our returns profile and keep growing in these business lines where we see that opportunities.

Thank you Mario. Then another question on the build-to-rent. How we are seeing the evolution of the crystallization process. And if we can comment, any further details on how the market, the investment market is evolving?

Okay, I'll take this one, too. Well, we have EUR 100 million close or in closing process and another EUR 100 million under negotiations. As we commented from the beginning of the year, we see additional appetite and investors are back into the build-to-rent. The main reason is that they are testing, and we are being able to demonstrate that the rental increases are beating the effect of potential effect of having the interest rates increased. So we feel that during the year, we will be able to crystalize much of the value in the rental platform and keep analyzing additional growth through the co-investment business line.

Thank you, Mario. With this question, we will conclude the webcast today. And as always, over the next hours and the coming days, we will be available to answer all of the questions you may have. All you have to do is to get in touch with the investor relations department. Many thanks everyone for attending and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.