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

Good day. and thank you for standing by. Welcome to the Neinor Homes 1H '23 Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jose Cravo. Please go ahead.

Hi. Good morning, everyone. My name is Jose Cravo, and I'm the Head of Investor Relations at Neinor Homes. Today, we'll go over financial results for the first semester of 2023. And as usual, we are here with Borja Garcia-Egotxeaga Vergara, our CEO; and Jordi Argemí, our Deputy CEO and CFO. We will start the presentation by doing a recap of the strategic update we presented 4 months ago. Then we will update you on the fundamental's front and reinforce our view that Spain is one of the safest residential markets in the world right now. Jordi will review our value proposition with the context of all the milestones we achieved recently and we shall finish with conclusions and the Q&A question. Now I hand over the presentation to our CEO, Borja.

Thank you very much, Jose, and welcome, everyone. In 3-4 months since we presented our strategic update, so I would like to start by recalling the most important messages we gave back in March. First, we said that for the last 5 years, we have been executing our business plan flawlessly. We delivered nearly 9,000 units, generated EUR 2.3 billion in revenues, EUR 500 million EBITDA and EUR 350 million net income. The second message was that the Spanish market is today one of the safest residential markets worldwide as it is undersupplied, underleveraged and underpriced. Third, in spite execution, a healthy balance sheet and solid fundamentals, we keep trading at significant discounts. So we decided to launch a strategic plan where the capital allocation is designed to solve the biggest challenges we have in front of us today, valuation discounts and growth. Please follow me to Slide #5, so that we can elaborate further on these 2 pillars of our strategy. First, on shareholder remuneration, we have announced a plan to distribute EUR 600 million until 2027, where EUR 450 million will come in the next 2.5 years. We are doing this to put the company in value. And today, this is by far the highest and most attractive dividend yield across Spain and Europe. Our second objective is to pursue equity-efficient growth. And to achieve this goal, we have designed a program with EUR 1 billion investment target for the next 5 years, of which 50% will come from new equity partners. We are firm believers on the Spanish real estate sector. And to date, we are seeing attractive opportunities in our core build-to-sell business, but also on the emerging living asset classes such as senior living or co-living. Furthermore, I would like to add that the feedback we have received from capital markets regarding our business plan was very positive. As we plan to distribute the best dividends in the Spanish and European real estate sector, while we ensure a sustainable growth of the company. But investors and analysts did also raise some questions. We will be able to distribute such dividends with the bond that Neinor had raised a couple of years ago. We will be able to crystallize the value of our rental platform in a net scenario of higher interest rates. We will be able to find investors that want to join us on the co-investment business when the real estate sector is suffering in other European countries. We will be able to continue protecting our margins from the construction cost inflation seen in recent years. In the next slide, #6, you will find the answer to all these questions. So what did we do in the last 12 weeks. Starting on the upper part of the slide, which includes all milestones related with Neinor's EUR 600 million shareholder remuneration program. The first thing we did in April was to refinance our bond by a green loan, while we effectively reduced its cost from 4.5% to 4%, with important financial savings for our shareholders. And at the same time, thanks to changes in the covenant, we guarantee that we are able to deliver on our shareholder remuneration strategy. The second task was to unlock and crystallize value in our build-to-rent platform. We have already successfully sold 5 assets, representing 700 units for nearly EUR 200 million. With these sales, so far, we have executed and exceeded our yearly targets by more than 50%. Third, we would like to take this opportunity to say that following the asset disposal program implemented during the first half of the year, visibility on 2023 objectives has improved significantly. So today, we are reiterating our 2023 targets of EUR 140 million and EUR 90 million of EBITDA and net income. As a consequence of the increased visibility, we are also announcing an EGM to approve EUR 126 million distribution to shareholders. Then on the bottom part of the slide, we have the milestones related with our equity-efficient growth strategy. As you know, in our business plan, we announced a EUR 1 billion investment target for the next 5 years, of which 50% will come from partnerships with new investors. In just 4 months, we announced 2 joint ventures with renowned investors worldwide, such as AXA and our main shareholder, Orion Capital, for a total of EUR 150 million. This implies a 50% overachievement versus our EUR 100 million yearly target. These agreements will play a key role for Neinor in the next years to come and we are just getting started. So to sum up, I am extremely proud of all the work and the achievements we have made in such a short period. 4 months ago, analyst and investors asked for execution. Now I hope we have clear all the doubts. Please follow me to Slide #7, where you have a snapshot of our operational and financial performance. Here, you have a summary of our performance during the first 6 months of the year. On commercialization activity, we have sold more than 1,000 units, 3% more than in the same period last year. Our order book is worth more than EUR 700 million and we have above 90% presales coverage for the year '23, which means we are nearly fully sold. In terms of prices, very important to highlight that we keep pushing and we have recorded a 3% HPA as we strive to maximize margins and the value of our land bank to shareholders. On deliveries, we have notarized more than 700 units during the first half of the year, which is completely in line with our business plan. On a pro-forma basis, if we include the sales of Europa Homes Joaquin Lorenzo, our revenues stood at EUR 277 million. Sky Homes is not included here due to our continuous standards but contribute with EUR 66 million of gross cash flow. All in all, EBITDA and net income were respectively EUR 52 million and EUR 30 million. By the end of June, net debt position were EUR 345 million, continuing to show a healthy loan-to-value of 20%. Please follow me to next slide. Here, you can see the pro- forma results with the impact of the disposals announced whose accounting effects will take place during the second half of the year. In addition, you can see that including these asset sales, we have already fulfilled 37% and 33% of the EBITDA and net income targets for the year. While deliveries from the core build-to-sale business will accelerate during the second semester as it was expected. In the meantime, we keep progressing and improving visibility as we did last week with the sale of [indiscernible], which is not included in the pro-forma figures. Now let's move to Section 2 on Slide #10 to review the Spanish macro and residential sector fundamentals. In this chart, you see 2 things. First, that the perspective of GDP growth for Spanish economy in the year '23 have doubled since January. In fact, 2 days ago, the International Monetary Fund announced its new forecast for the Spanish economy. And right now, it is expected to grow by 2.5% this year. And second, that Spain will lead the economic growth tables in both '23 and '24. Please let's go to next slide. Here, we see that from 2023 to 2027, which is the scope of Neinor's new 5-year business plan, Spain will create more jobs than other economies. With employment market that is not as tight and a significantly lower energetic exposure to Russia, inflation data in Spain is one of the best ranges of the all European countries. In May, inflation was already at 2%, which, as you know, is the target of the Europeans Kutxabank. Now let's shift to the fundamentals of the Spanish residential market. We start with the supply side by showing that Spain is producing 50% less new homes on a per capita basis than the U.S., U.K. or Germany. Spain is clearly undersupplied. In the next slide, we can see the house demand. On the demand side, the chart with the OECD data is self-explanatory. Spain is one of the few countries where young population is still growing, 30% growth in the next 15 years. This is a very important for housing demand, as the millennium generation is only now approaching its prime buying age. And not only that, as you can see in the Slide 14, net migration is also a key driver of housing demand for Spain. Again, on OECD data, Spain is one of the countries in the world with the highest flow of immigrants as a percentage of its population. These growth are coming mainly from European and Latin American countries. And remember, that Spain is being affected also by a huge interest of tourists that are buying houses in Spain since COVID. So far, 15% of house sales in Spain are for foreigners. Follow me to Slide #15. Here, we put together a demand and supply in one picture. Over the coming years, CBRE expect supply to be stable at around 100,000 per year, while new household creation has accelerated to levels around 200,000. If these estimates prove correct, the balance between demand and supply will keep compounding year after year, making more and more attractive our business. And now I hand over the presentation to Jordi.

Thank you, Borja. As said in March when we presented the new business plan. Neinor had a unique value proposition for our shareholders. This value proposition is based on 2 main concepts. On one side, strong shareholder remuneration, actually being the highest dividend yield amongst listed real estate companies in Spain but also in Europe. And on the other hand, a strong growth based on co-investment that will lead to a stabilized return on equity of 15%, and this compares to the 12% achieved in the past. If you go to Slide 17. You will remember from March that these 2 concepts should imply a total future valuation between EUR 1.3 billion and EUR 1.4 billion. And the valuation has 2 relevant concepts. On one side, the shareholder remuneration, EUR 600 million, which will be completely tangible, not subject to volatility or credibility of the equity markets. And on the other side, between EUR 600 million and EUR 700 million of value for the platform after having an invested capital of EUR 500 million. All in all, and considering that our market cap was in that moment, EUR 0.7 billion, investors could multiply by 2x the investment in just a few years. This is what we explained in March. And now just after 4 months, we have done a big step forward in likes visibilty of these 2 value drivers. Regarding the visibility of the dividends, let's go to Slide #18. Here, you have the snapshot of 2023, 2025 deliveries. The first aspect is that we have already more than 100% of the product to be delivered underway. We have almost 90% under construction and with approximately 900 units -- additional units with licenses received where we should break ground in the coming months. Also, with our solid performance in build-to-sell and build-to-rent sales, we have almost 45% of the total product sold providing us excellent liquidity for the coming years. If we turn to the next slide, you will see the second aspect. We are one of the few companies in real estate that is not struggling with the interest rates for refinancing products. As we try to illustrate here in the slide, we don't have any refinancing risk until 2025, as we expect to partially repay the corporate loan with cash flow proceeds originated by our activity. But also very important, 1 year ago, we took the decisive action to mitigate interest rates by buying stocks to protect us for scenario where a Euribor is above 2%. Today Euribor is at 4% approximately. So we took the right decision. And as a result, we have protected our values. Third concept of the dividend visibility is the [indiscernible] investment in Slide #20. These [indiscernible] investment supports our shareholder remuneration plan of EUR 600 million. Borja said that before, many of you told us, it was too good to be true and that the weakness of our business plan was our capacity to monetize this business line. Today, after a successful disposal program of EUR 200 million, and with selling prices close to GAV, I hope you no longer question our dividend plan. Through these sales and treasury share cancellation, we have already secured EUR 160 million, which means already 35% of the shareholder remuneration target over the next 2.5 years. And all this with only 4 months after we have presented the new business plan.Thanks to it. Today, we are in a position to anticipate the shareholder remuneration for this year 2023. In Slide 21, and as Borja commented in the introduction, you can see the details of this anticipation. We are calling an EGM for the 1st of September to approve a payment of EUR 75 million in dividends that will appear in 2 different tranches, EUR 35 million in early October and the remaining EUR 40 million that should come between December and March. And all this together with the first payment to all this together, we will cancel EUR 51 million of treasury shares and this represents 6.3% of the Neinor share capital. Please follow me to the next slide to provide visibilty on the second value driver of Neinor, the growth and platform value. In just 4 months, we have been able to sign 2 JVs in the build-to-sell segment that worth EUR 150 million. On one side, we have AXA, Tier 1 investor worldwide and on the other side, we have Orion Capital, one of our relevant shareholders. This EUR 150 million already implied at 30% of the total target for the following 5 years. Remember that we estimated EUR 500 million investment through co-investments. Thanks to this action plan, we are putting in place a shareholder remuneration, the reduction of the number of years of land bank and these JVs, we are targeting to increase our stabilized return on equity to a level of 15%. In the coming quarters, we will continue to update the market regarding our growth strategy. And as I said before, in the meantime, dividends will start flowing to our shareholders. Now I hand over the presentation back to Borja for [indiscernible].

Thank you, Jordi. Allow me to finish with some key messages and try to summarize everything we did over the last couple of months. Starting with the macro. The forecast for the Spanish economy have held their ground during the first semester and despite unprecedented interest rate hikes, the Spanish residential sector has remained solid. The performance of our core build-to-sell business has remained steady. We sold 3% more units than we did last year when interest rates were significantly lower and cancellation rates remain at historically low levels. On the build-to-rent, we have proved the value of our portfolio. through EUR 240 million sales program, driving EUR 110 million in free cash flow to equity, representing 16% of our adjusted market cap. On the co-investment front, we signed the first 2 deals worth EUR 150 million, of which we have already deployed EUR 70 million in land acquisitions. We are currently seeing more appetite than we initially anticipated. And we are very enthusiastic about the prospects for this business line that should have a positive impact on our return on equity. And to finish, I would like to reiterate our annual objectives for 2023. This is EUR 140 million EBITDA and EUR 90 million net income. Today, thanks to the asset disposal program, we have a much better visibility on these objectives, and therefore, we decided to anticipate the first dividend payment of our shareholder remuneration program with EUR 126 million distribution. As always, we will keep working hard to bring more co-investment, more build-to-rent crystallization and great performance on execution. Thanks for your attention, and now we are ready to answer any questions you may have.

[Operator Instructions] Our first Question comes from the line of Ignacio Domínguez of JB Capital.

I have 2. Firstly, could you please explain what is your sales coverage ratio for full year '24 deliveries lower than in previous years? Do you have any targets to reach by the end of the year? Secondly, could you please explain the rationale behind the deal with Orion? They are already your shareholder. And now you also launched a joint venture with them. If you could provide some color, this will be helpful.

So I'm Mario Lapiedra. I am taking the coverage ratio. Basically, we are fulfilling the business plan. We have almost everything sold already for 2023 with a 90% coverage. For next year, if we take into account the just build-to-sale deliveries, we are in the range of 35% coverage, and we hope to end up the 2023 period with 60%, 65% coverage for 2024. And for the 2025 deliveries, we have a coverage of almost 10%. On top of that, you know that we have some additional rental buildings. But as we have anticipated most investment to this year, we will have more time, and we will see the best strategy to dispose that buildings in the next 2 years. Orion as a shareholder and as a partner of JV, we are very proud, to be honest, to have the main shareholders investing directly in real assets also with us. The strategy behind the co-investment and the JVs is the same for us, a holder that for a third-party investor. It's basically that on one way we are improving the return for the current share holders and the other way for the platform, we have been able to maximize the synergies and the growth alternatives for Neinor. So we really think it's a win-win situation for shareholders, for the company and for the co-investor partners.

Our next question comes from the line of Fernando Abril-Martorell Garcia from Alantra Equities.

I have 2 questions, please. First is with regards to demand. So how demand is going in July? And also, I don't know if you can provide sort of guidance about net presales for the second half of the year just to see your presales coverage ratio reaching your guidance? And also second question with regards to the net debt. So I don't know, but considering the large amount of deliveries that are back end loaded the monetization of the build-to-rent, which is, I guess, pending to be cashed in also in second half and the land plot sale as well. So a lot of proceeds coming out in the second half. I don't know if you can guide about the net debt for year-end.

Okay. I'm taking the first one relating the demand. Yes, we have seen a solvent demand. It's true that in this quarter, we can see that we have felt that the funnel of leads [indiscernible] and solvent buyers has been narrowing a bit. But the reality is that also the supply of new stock has been decreased during the last months. So at the end, the imbalance and the balance between a number of buyers with financial capability, number of units available in the market, we feel that it's even better than 6 or 12 months ago. So as of now, and the sales of July also are in that line. We are fulfilling with the sales cures that we have in the business plan.

And regarding the second question, I'll take it. The guidance, we don't change it. In terms of net debt should be close to EUR 250 million, maximum EUR 300 million is to what you are saying, that we have divested in the rent that we generated a lot of cash, but it is also true that we have some deferred payments that will flow to Q1 2024. So we don't consider this a [ prepayment effect ] as cash, as you can imagine, because we are conservative, so same numbers. The only thing is that we have the risk significantly the cash generation in 2024. As a result, we have more visibility to pay the dividend now than we promise to the market in that year.

Our next question comes from the line of Jose Maria Canovas from Global Income.