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

Good day and thank you for standing by. Welcome to the Neinor Homes Full Year 2023 Results Presentation. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Jose Cravo. Please go ahead.

Hi. Good afternoon, everyone. My name is Jose Cravo, and I'm the Head of Investor Relations at Neinor Homes. Today, we are going to go through the results of the fiscal year 2023. And as usual, we are here with Borja Garcia-Egotxeaga, our CEO; and Jordi Argemi, our Deputy CEO and CFO. We will start the presentation with the key highlights of the year and then we will update and review the fundamentals of the Spanish residential sector on Section 2. On Section 3, Jordi will review financial performance for the year '23 and the revised guidance for the coming years and we shall finish with the main takeaways. After the presentation, 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, Jose. So please let's start, follow me to Slide #4. I would like to start this presentation with 4 key messages. First, for the fifth year in a row, we have fulfilled our operational and financial targets. As for the second message, I would like to recall that it has been almost 1 year since we presented our new 5-year plan and execution has been our #1 priority. Not only we have been able to provide visibility on our ambitious shareholder remuneration plan but we have also been able to grow the company through equity efficient deals. Third, I am pleased to say that thanks to our new capital allocation strategy, which combines the highest dividend yield in Spain with our ambition to keep growing this platform, Neinor shares have delivered a 30% total return to our shareholders through a combination of dividends and capital gains. And the fourth message is that Spain continues to consolidate its image as one of the safest residential markets worldwide as it is undersupplied, underleveraged and underpriced. Please follow me to Slide #5, so that we can go deeper on these ideas. Here, you have a snapshot of our operational and financial results from the year '23. Jordi will review this in greater detail later in the presentation but let me highlight the following figures. On deliveries, we have notarized more than 2,500 units, slightly above our expectations. In terms of our operational activity, we have finished '23 with nearly 6,000 units active and more than 4,000 under construction or finished, which means we have good visibility for the coming 3 years. With regards to commercial activity, we have sold almost 2,000 units while still increasing prices by 4%. Capturing additional HPA and controlling the pace of sales has been critical to protect margins. On the financial side, we have recorded more than EUR 700 million in revenues and EUR 136 million in EBITDA. On the bottom line, we have reached EUR 99 million, which is 10% better than what we guided to the market last year. In terms of leverage, we have finished the year with EUR 211 million net debt, which is equivalent to a conservative loan-to-value ratio of 14%. Please let's go now to next slide. Here, you have a summary of deliveries, EBITDA and net income since 2019 and we couldn't be more proud of these results. On deliveries, we have exceeded the 5-year target by 9%, delivering more than 11,000 units. In terms of operational results, we have been able to beat our estimates by 11%, thanks to better margins as we have been able to protect the value of our assets in a cost inflationary environment. And finally, on the bottom line, we present a beat of 20%. In summary, we have finished this 5-year period that presented multiple challenges with our best-in-class execution and financial results. However, the objective of today's conference call is not to focus on the past but rather to look forward and see how the dividends are a reality and how the core investment business is already providing a potential upside to our midterm guidance. Please follow me to the next slide. As you know, shareholder remuneration is a key part of our value proposition in the short term. During '23, we took important steps in this direction, such as the refinancing of our green bond and the EUR 250 million asset disposal program. In the coming 24 months, we shall distribute EUR 325 million to shareholders, which is equivalent to more than 40% dividend yield, the highest in the Spanish market. So the good news for investors is that visibility of our Neinor's shareholder remuneration targets keep increasing and these cash flows are just around the corner. Please follow me to the next slide. On top of the attractive shareholder remuneration proposition, we also want to keep growing this company under an equity efficient strategy. If you recall, as part of our strategic plan, we said we will invest EUR 1 billion in new land over the next 5 years, of which EUR 500 million will come from new partners. As you can see on this slide, during '23, we have closed 3 JVs with renowned investors, raising a total of EUR 300 million out of a 5-year objective of EUR 500 million. This higher-than-anticipated interest is extremely good news for the company as our financial guidance does not consider this upside. The important news today is that we already have almost 800 units from our JVs in different launching stages, which already makes this business a reality. Later in the presentation, Jordi will provide more guidance on this. Now please follow me to section #2, where we will review the Spanish residential market, which, as I said in the beginning, is clearly positioned as one of the safest residential markets worldwide. First, on the macro front, I would like to start by highlighting that the Spanish economy expanded by 2.5% last year, significantly above of European peers. Looking ahead for '24 and '25, the market expects this outperformance to continue. And the Spanish economy should continue to grow at a pace of 1.6% annually. Let's go to next slide. On the job market, we have seen a very solid performance in Spain. The Spanish economy created nearly 800,000 jobs during '23 and sits well above the levels of 2008. For the upcoming 2 years, this trend will continue as economies expect further job creation and unemployment to keep coming down. Both these metrics, GDP and employment growth are obviously 2 positive indicators for the housing market outlook for years '24 and '25. Please follow me to Slide #12. With regards to leverage, we would like to highlight the strength of the balance sheet of Spanish households. First, by saying that Spain has a lower household debt to GDP than Germany. And this is the first time since 2005 that this is happening. If we look at the evolution of the mortgage debt stock, in Spain, it is nearly 70% lower than what it was during the financial crisis. So overall, this is an extremely solid equity position by Hispanic families and banks. Follow me to Slide #13. In addition to lower leverage, the cost of mortgages in Spain is one of the lowest across Europe, which explains why the overall affordability picture is not as stressed as it is in other countries. Furthermore, adding to the positive macro outlook for the upcoming years, interest rate expectations by central banks have started to decrease as inflation is quickly normalizing. For the next 24 months, the market is expecting ECB to cut rates by nearly 2 points from 4.5% to 2.75%. 1 year Euribor is already reflecting this forward expectations and has already corrected by nearly 15% since the maximums in last November to around 3.6% today. Please follow me to the next slide to see the evolution of the housing deficit in Spain. This chart clearly explains why residential fundamentals are so healthy and resilient in Spain. Net household creation has accelerated significantly after the pandemic to levels above 200,000 households per year, while new homes finished stood at around 80,000 per year. With this forecast, the housing production deficit, which has been accumulating since 2013 is expected to increase by a further 40% until the end of 2025. So overall, we see a supporting fundamental backdrop for the next years in a context where interest rates are expected to come down. And now I pass the presentation on to Jordi for the financial results.

Thank you, Borja. Now we are going to review in further detail the set of financial results we have published today, as well as the perspective for the business in the coming years. If we move to Slide 16 and before we zoom into details, my first message is to note that over the last 3 years, we have faced multiple challenges but we have been able to stay ahead of the curve. In early 2021, we anticipated the investment cycle after the pandemic and we doubled the size of our land bank. In 2022, we saw the interest rate increase coming, so we took the measures to protect, on 1 side, the operating profitability and that means gross margins and EBITDA since and is safe to remember that the interest cost is capitalized and recorded in the cost of goods sold and on the other side, our balance sheet in terms of refinancing. And here, remember that we signed a cap for EUR 300 million nominal at 2% in August of 2022. And all this with double-digit cost inflation on the background. And even with these circumstances, today, we are presenting better-than-expected 2023 results based on solid margins and strong cash flow generation. Now let's go into details. On this table, you have a comparison between the guidance we presented last year and the results we have finally achieved. First, I would like to start on the top line where we have delivered more than 2,500 units and generated audited revenues of around EUR 600 million, which are aligned with the guidance we gave. Having said this, remember that those build-to-rent assets that were transferred to [ Renta ] which means that they were reclassified from stock to fixed assets do not generate revenues in the P&L when they are sold to an investor. Only the margin is recognized in the P&L. As you can see in the full notes of this slide, we have sold 3 assets: Sky, Hacienda and Amatistas, whose exit price has been EUR 111 million. So from an operating point of view, you should consider that total revenue generated with the divestment of build-to-sell and build-to-rent has been EUR 705 million, which is the data point at revenues line that you can see in this slide. Second, our adjusted EBITDA, or in other words, our build-to-sell EBITDA was better than initial anticipated EUR 129 million versus that EUR 100 million roughly guided and this is due to several factors. On 1 side, a positive impact between house price growth and cost inflation. Second, a tight grip on OpEx and structure costs. And third, the divestment of Europa and Dual that initially were build-to-rent assets but they were being transferred -- that -- we sold them before being transferred to [ Renta ]. So instead of being build-to-rent, they have been, from an accounting point of view, build-to-sell finally. And thirdly, if you look at EBITDA caption, we recorded EUR 136 million. Remember that here, we consider the revaluation of build-to-rent assets when they are internally transferred to [ Renta ] which is the previous step to sell it to an institutional investor. Here, we guided with up to EUR 40 million and finally, it has been significantly lower, as you can see in the slide. And this is because of Dual and Europa, already commented that there is a kind of reclassification. And also because we have decided not to transfer to [ Renta ] and don't recognize the margin of [indiscernible] that amounts to EUR 12 million. And the reason not to recognize it is to be more efficient from a tax perspective. And given that we already reached and exceeded the operating targets, we took this decision. Including [indiscernible] which would be the real like-for-like comparison, we would have generated EUR 148 million EBITDA which means 6% above our expectations. If you look at the bottom line of the P&L, you will see the net income. We have recorded EUR 99 million, which is a 10% better than our guidance to the market. And again, if we do the like-for-like comparison with [indiscernible] included, the net income would have been EUR 110 million, which is basically 20% above our guidance. And fourth, net debt position. We have finished the year with a loan to value of 14%. And if we include the EUR 14 million dividend paid this week, basically on Monday, it would have been 17%. But in any case, it's better than the range of 20%-25% guided. So all in all, we have exceeded all targets and KPIs, both operating and financial. Now follow me to the next slide so that we can review our guidance for the coming years. On this slide, you see a table with the same guidance we published last year but we are now including the impact of the co-investment business. First, I will note that for the years 2024 and 2025, we don't expect any significant change as we expect our margins to continue resilient. However, from 2026 onwards, upsides starts to emerge as we expect a gradual guidance uplift in EBITDA of up to EUR 10 million, which implies up to a 10% increase versus previous forecasts. This increase should translate to the bottom line, which implies our earnings guidance will also grow by up to 10%, which in absolute terms means almost EUR 80 million per year. From 2028 onwards, we expect the JV business to stabilize and contribute at EBITDA level around EUR 20 million per year, which means that assuming EUR 110 million of total EBITDA, the JV's contribution would be almost 20% over the total result and that build-to-sell would imply around 80%. So overall, we see our quality guidance uplift for EBITDA and earnings that is earned through the fees in the JVs. It is a steady service business in the same way, it was our contract with Kutxabank in past years, and therefore, it has a much lower execution risk, as you know. Together with the optimization of our balance sheet, this potential guidance, I believe, is a decisive step to improve shareholder returns towards the level of 15% return on equity that we were targeting since last year. With that said, please follow me to the Slide #18. Finally, I would like to provide an overview of operational visibility for the coming years. On this slide, at the bottom of each column, you see the deliveries we have accomplished in the year 2023 and above, the units we have active, under construction or sold by December of last year 2023. As you know, this company has a target to deliver 6,500 units during the first 3 years of this business plan. And just with 2023 results, we have achieved around 40% of this target. We have finished 2023 with almost 6,000 units active, which means that the product to be delivered in year 2024 or '25 is nearly 100% launched. With regards to WIPs, we now have more than 4,000 units under construction, which provides full visibility to cover 2024, 2025 deliveries. And finally on sales, we currently have an order book of almost 1,300 units, which means that we need to sell 2,700 units over the coming 2 years in order to achieve our targets. This 2,700 units break down as follows: 1,100 are from build-to-rent, buildings, which are only sold when construction is completely finished in order to protect margins. Remember that we have divested in 2023 around EUR 200 million of this product at a very good prices. So this question mark should not be on the table anymore. And the remaining 106 -- sorry, 1,600 units are from build-to-sell product. So these figures imply that we are today 50% presold for this product in the coming 2 years, which is completely in line with our business plan and historical results. Remember that we normally have 60%, 65% coverage for 1 year forward and 30%, 35% for 2 years forward. But on average, normally, we are in the 50%, taking into account the 2 years. Now I hand over the presentation back to Borja for conclusion.

Thank you, Jordi. I would like to finish with a summary of the main ideas of this presentation. First, as I have been saying all along, the Spanish market is one of the safest residential markets worldwide. Over the last 4 years, we have faced the pandemic, a supply chain and energy crisis, inflation with prices going up double digit and in year '23, an unprecedented hike in interest rates. During this period, we have reiterated our view that the Spanish residential sector will resist well to these challenging conditions due to its fundamentals and this has been the reality. But now it's time to look ahead for '24 and '25, where the expert consensus start to see a brighter outlook emerging with further GDP growth, job creation and lower interest rates. Together, we expect these factors to drive stronger market dynamics. The second message is on the visibility for the coming 2 years. As Jordi has explained, we have 100% of target developments under construction and we expect margins to continue solid. So the EUR 325 million in dividends are just around the corner. I would like to note that these cash flows represent more than 40% of our market cap today. Third, I would like to reiterate that -- what we said in July. We continue to see a higher-than-expected interest by investors to co-invest alongside Neinor. We have in front loading execution on this front and we are committed to get our target of EUR 500 million assets under management. And finally, my fourth, last and most important message is that thanks to the advanced execution on our JVs business today, we are increasing our medium-term guidance EBITDA and net income guidance by up to 10%. This means going towards EUR 110 million EBITDA and EUR 80 million net income. And I would like to finish and reiterate that once the JV business is fully stabilized around year '28, the increase to guidance could even double. So now we are ready to take any questions you may have.

[Operator Instructions] Dear speakers, there are no questions on the phones. Please proceed with the webcast questions.

Okay. Thank you, operator. So we're just reviewing the questions. I'll start with the first one. Given the 100% payout mentioned in February '23, would the potential increase of 10% in net income for the year '26 and '27 translate into additional dividends?

I take it, Jose. From a technical perspective, yes, obviously, we have more net income. It will be translated into more dividends. Today, I think it's too soon. We are more at operating level now, being focused to generate this extra margin. Once we have it, we will tell you.

Thank you, Jordi. Second question, if we can give an indication of the presales coverage for the years '24 and '25.

Okay. This is Mario Lapiedra, I take this one. Regarding our target of deliveries for these 2 years, we have 4,000 units, out of which around 1,100 are build-to-rent units that, as you know, we will start working on the disposal of the buildings once they are getting to completion during this year. And the remaining 2,900 units that are the ones on build-to-sell, we have an order book of roughly 1,300 that is 45% for the 2 years, that is more or less 60% for 2024 coverage and close to 30% of the coverage of 2025, in line with the original guidance and cues that we have always maintained.

Thank you, Mario. Third question, what is the impact in working capital, namely on the book value sold of BTR deliveries?

I understand that there's a build-to-rent of 2023, okay? If the question is for next year, I will take it later on. For this year, as you know, we have sold [indiscernible] EUR 185 million roughly of build-to-rent, okay? The cost of goods value sold, basically, it's EUR 175 million, EUR 180 million. It's exactly the same or close to the same number because remember that we have Sky and Hacienda whose margins were already recorded in the previous years. So now basically, we don't have extra margin due to these 2 divestments.

Thank you, Jordi. And then for 2024 guidance, if the guidance is cautious when compared to what we have achieved in the year '23 or if it is realistic?

No, I would say -- thank you. I will say it is realistic. It's a guidance where we have fully visibility now on the guidance for year '24. Of course, all the units that have to be delivered are under different phases under construction. And basically, for this year '24, we are not so tight as we were last year in the deliveries. Last year, as you know, in year '23, we had a huge accumulation in Q4. For this year, we have more or less 50% of deliveries will happen in H1 and then rest in H2. So the year is realistic and both from margins and evolution in sales, cost in the construction and so on, everything is working normal.

Thank you, Borja. Then we have here a double question, go one by one. First, on the external service cost evolution. Why was it lower than in previous years?

Well, I mean, in the cost caption and you will have another version updated, we have separated overheads plus others, okay? Here, there is an impact of EUR 5 million, which comes from a build-to-sell WIP that we have finally divested. It was in the subsidiary embedded. So once we have divested this asset, which is from EBITDA, we record only the margin, not the sales, okay? The same happens as build-to-rent but in this case, build-to-sell, okay? If you exclude this impact of EUR 5 million, you will see that we have lower cost, OpEx and overheads and it is because we are -- we have done a plan during the previous year to optimize our structure and this will be recurring over the years. And we have like EUR 2 million, EUR 3 million of lower structure.

And then the second question, if we can provide more color on the breakdown between development gross margin of build-to-sell and build-to-rent segments in the year '23 and what could be expected for the years '24 and '25.

I also take it. Jordi. Regarding the build-to-sell business, we are always sticky at the 24% gross margins. We have never changed this gross margin. And regarding build-to-rent, it has been higher. It has been between 25% and it's close to 26%. But remember that here, if you look at the P&L, it's difficult and complex to see that because part of the margin of Hacienda and Sky was already recorded in the past, as I answered in the first question. But the reality, which is the real margin embedded is 24% of margin build-to-sell, 25% plus build-to-rent.

Okay. Thank you, Jordi. Then the next question is with regards to the potential impact of the recent decision by the Spanish Supreme Court on the usage of deferred tax credit. If you can elaborate on what could impact for -- could we have for Neinor.

It's a good point. This is a potential upside that can come. We have not updated that in our future targets because we prefer to be conservative. You know that the Supreme Court have stated now that is not constitutional, the restrictions and limitations to use the deferred tax assets but it comes from only 1 month ago. So let's see the reaction of the government. If this is finally within light, we should have some impact -- a positive impact instead of the typical tax rate of 18%, 19% that we were paying in the past, we could be close to the 15% roughly. You know that it's -- we have different tax assets but depending on the subsidiaries where we have no deferred tax assets, it's not -- the impact is not directly. But a reduction of 3%, 4% over the tax -- effective tax rates could have -- could apply.

Okay. Related with this question, on the evolution of year-on-year on taxes, if we can provide some detail.

Well, partially has been answered because, again, in the past, if you look, we have always used deferred tax assets because we have planned deferred tax assets coming from Quabit mainly. Our tax rate has never been 25%. It has been close to 18%, 19%, 20% depending on the year. This year has been even lower because based on the Supreme Court, the auditor has requested us to activate some deferred tax assets, additional tax assets. And we have put the minimum because we want to be very conservative with that approach and we have included like EUR 8 million of additional, that's why if you look the tax rate this year is around 8%, 9%.

Okay. Thank you, Jordi. And then on, if we can provide some visibility on the pending build-to-rent sales for the coming years. And now, how many of these could happen in the year '24 versus '25? What is the stage of the negotiation?

Okay. I'll take this one. We have 3, 4 developments, around 400 units that are getting to completion phase during this year. So we are launching, as we speak, the potential disposals and during these month, what we have seen is an increasing appetite for this type of product from different investors as they feel that the interest rate forecasts are positive and the rest of fundamentals remains very strong as the demand, the rent increase, et cetera. So we will keep working during the year and when we have something more advanced, we will let you know.

Okay. Thank you, Mario. Another question with regards to land acquisitions. What are we seeing or expecting for the year '24?

Okay. For this year '24, the land purchases that we are considering in the business plan is slightly above EUR 40 million through co-investment. This means that this EUR 42 million, EUR 43 million will be used by Neinor to attract other investors. And as we have been doing, some of our investments in the JVs, we have participation that it will oscillate between 10% and 20%. And this is the target for this year.

Thank you, Borja. And then a final question. With regards to presales in the build-to-sell business year-to-date, if you can give any color?

Well, the first month has been good in the same trend that we closed 2023, with good absorption ratios in most of the developments and with the same inputs from the demand. Strong, low supply and good perspectives potentially for the interest rates, that would also be a positive side for the sales.

Okay. Thank you, Mario. Operator, we don't have any further questions here. So if there are no additional questions on the phone line, we will finish this session.

There are no questions on the phone lines.

Okay. So we remain available to answer any follow-up questions you may have. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.