Nexity SA (NXI) Earnings Call Transcript & Summary

Good day, everyone. Welcome to the Nexity Q1 2021 Business Activity and Revenue Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Julien Carmona, Deputy CEO. Please go ahead, sir.

Thank you. Good afternoon, and thanks for attending this conference call. I'm here today with the CFO of Nexity, Eric Lalechère and with Véronique Bédague, Deputy CEO, who will be formally appointed as CEO of Nexity immediately after the AGM on May 19. We suggest to walk you briefly through the slide show, and we will be pleased to field your questions afterwards. Let me start on Page 3 with a summary of the quarter's key figures and major events. Q1 '21 was a very dynamic quarter. Business activity was very strong. Our turnover has really jumped, and we announced 2 significant disposals, Ægide-Domitys and Century 21 France. So 14 months after the start of the health crisis, Nexity is showing a very good performance. Starting with our key business indicator, reservations of new homes in France. The first quarter of '21 was in line with the second half of '20, running at full speed. The strong business activity resulted in approximately 3,900 units booked by Nexity in France, 7% higher than the first quarter of '20, representing EUR 882 million, plus 11% in value. In a challenging market, challenging in terms of supply and not of demand, but Véronique will elaborate on that shortly, Nexity once again managed to outperform. On Commercial Real Estate, we booked EUR 300 million of new orders. That's largely due to the final sale of Reiwa, our large off-plan project in Saint-Ouen, very close to Paris, which is set to be Nexity's future headquarters. It was pre-signed last year, but we naturally waited until we had the certainty that no appeal would be lodged against the building permit before booking this sale. Within 1 quarter, we actually achieved 75% of this year's goal, EUR 400 million of new orders, but we don't expect to go much above that goal given the current situation in the office market. The total development backlog is stable at EUR 6.8 billion, a very high level, representing about 2 years of future secured revenue, whereas the pipeline is slightly down but not alarming. It's partly a consequence of the health crisis. But it's also a sign of a difficulty of our market environment in terms of setting up new projects and obtaining building permits. This is the main caveat we want to add to our otherwise excellent results. The revenue for the first quarter of '21 reached EUR 1.132 billion, up EUR 345 million from first quarter 2020, plus 44%, due to favorable base effects and therefore not completely representative of the growth projected for '21. Eric will explain it to you in detail. The 28% growth in turnover over the last 2 years is probably more representative of the underlying trend. Nevertheless, this very good start to the year obviously gives us confidence in our ability to achieve our turnover and profit targets for this year. Moving on to the strategic review. Concerning the sale of Ægide, we issued a press release 3 weeks ago, and we have a detailed slide later in the presentation. So the key takeaways here are: first, the confirmation of the price, enterprise value of EUR 375 million for 100% firm price and also the fact that we expect to close this deal by June 30, thus effectively deconsolidating Ægide-Domitys from this date. Century 21, which is the second and last disposal, follows another logic. It's a small, profitable, high-quality business based on managing a network of franchise real estate agents. We had no pressure to sell it, but the connection between this company and the rest of Nexity, of a service platform of Nexity, the connections were very limited. And we couldn't extract meaningful synergies given the fact that these agents are independent entrepreneurs and not Nexity employees. So when we received a good offer from Arche, the company owning Citya, valuing Century 21 at EUR 84 million, which is roughly 20x the EBIT of 2020, we took the opportunity. Likewise, we expect to close the deal before June 30. Overall, these 2 sales allow us to close our strategic review and asset sales program, which we had announced in December 20. We are pleased with the result, pleased with the speed of execution and pleased with the quality of the partner. At this stage, I will hand it over to Véronique.

Hi, everyone. Thanks, Julien, for your introduction. So now please, let's move to Page 4, which concerns itself with our environmental targets. As we want to keep our leading position and sustain our value creation strategy over the long term, we are very much engaged in managing our carbon footprint. As I mentioned last time, this is core business for Nexity. So 2 years ago, we took a major step in deciding to join the Science Based Targets initiative, SBTi, to demonstrate our willingness to engage further on the climate transition issue on very solid ground. As you might know, SBTi is a most renowned independent body which validates carbon intensity reduction targets. Back in January this year, we submitted our new targets concerning Scopes 1, 2 and 3. You have to keep in mind that on a service platform such as Nexity, more than 99% of the emission are on Scope 3, primarily real estate development emission. That's why I told you earlier that it's core business for us. So our target between 2019 and 2030 are twofold, as you can read on the slide. On Scope 1 and 2, we aim to reduce our carbon emissions in absolute term by 28%. And on Scope 3, which is really our main target, we are targeting to reduce our carbon emission per square meter developed by 22%. So last month, we were pleased to receive the SBTi validation of our targets, which is an important step in the carrying out of our strategy. Please go to Page 5, which focuses on the French market supply. So on the left-hand side, we can see the gradual decrease in building permits, which is, of course, one of our main concerns. Indeed, a 17% drop in permits granted is intensifying the supply shortage and limiting our own supply for sale. This drop, which is regularly seen in the context of local politic election cycles, is now approximatively 50% lower than the usual drop probably due to the sanitary crisis and new councilpersons. On the right-hand side, we can see the housing starts, which are consequently impacted by the building permit decline. The situation should improve in the upcoming months, we hope, or quarters, the sooner the better because this trend would lead to more inequality and exclusion with rising prices and lower housing stock renewal. Against this lackluster backdrop, Nexity is outperforming the market, as we see on Page 6 where we show a good level of activity on new home reservation, as Julien described earlier. So this -- during the first quarter, the demand continued to be solid. Thus, we have sold around 3,900 new homes, up 7% compared to the first quarter of last year. In value terms, this reservation reached around EUR 880 million, up 11%. The activity abroad was dynamic, with international new homes reservation rising by 51%, continuing the ramp-up. So now please turn to Page 7 on the client mix. On this chart, we see our individual investors reservation have increased by 15%. The Pinel fiscal scheme remains very attractive for people who are -- who were able last year to accumulate savings. On the other end and despite the easing recommendation of the HCSF, banking -- which is the French banking body -- council, with longer debts and higher affordability rates, we have fewer first-time buyers probably because of the global economic uncertainty. Regarding institutional investors, the low 5% share doesn't reflect the pattern over the course of the year and should increase over the coming quarters because basically, the bulk sales are not linear. Would you please go to Page 8, presenting Nexity supply for sale. Here, you can see the supply we provide remains low, around 7,000 apartments, relatively steady over the quarter. This situation is a direct effect of the decline of building permits. We are continuing to fill building permits twice as many in the first semester this year than last year, which is a lot, which projects adapted to the local authorities' needs. Thus, we are well positioned to benefit from the recovery of the building permits when it happens. To finish on the residential development section, please go to Page 9 regarding the pipeline. As you see, our backlog is stable. Our business potential is punctually affected by the building permit bottleneck and has been contracting by 7% over the quarter. Let's go on to commercial real estate development on Page 10. Starting with our future headquarters named Reiwa, this is the project Julien talked about earlier. We closed this project deal with Aviva earlier this year. It will be delivered late 2033 (sic) [ 2023 ]. And it's another -- and is another example of how Nexity is able to perform to provide the highest standards available on the market. It's a really great project. Now to conclude this component concerning commercial property development, please turn to Page 11 presenting the pipeline. The Commercial Real Estate pipeline totals about EUR 2.8 billion and is barely unchanged over the quarter. The backlog is rising 10% at the expense of the business potential, minus 11%. It is mainly due to the Reiwa project moving from business potential to the backlog. So even in the 2021 target looks easily attainable, it is important, I think, to keep in mind that we are not expecting any other large projects for 2021 to arise and that, as you know, the office market continues to struggle due to the current sanitary measures. So I will now give the floor to Eric to discuss the services activities.

Thank you, Véronique. Moving on to services, Page 12. In the condominium management, the portfolio totaled almost 871,000 units under management at the end of March '21, which is stable compared to end December '20. Regarding the property management, the volume of the floor area under management has also remained stable at 20.1 million square meters at end March '21. The performance of our student housing, Studéa, is still strong. The occupancy rate of residences remained at a high level, 92.3% at end of March, despite the retention of distance courses for students. For our shared office space activity, the occupancy rate remained stable around 70%, at the same level at the end of December '20, which is encouraging in the resilience of this market despite the strengthening of working at home for more than 1 year due to the sanitary measures. Distribution activities post 32% growth in the first quarter of '21, with 1,344 reservations related to the rise of individual investors not in our client mix. On Page 13, you can see Nexity first quarter '21 revenue. In the first quarter of 2021, Nexity recorded revenue of EUR 1,132 million grew EUR 345 million for the first quarter on '20. This is a very good performance, but it will not be extended throughout the full year. The first quarter of 2020 was impacted by the health crisis, suspension of construction sites, no notarial deeds and thus no more revenue. The slowdown of activities observed since 16 March '20 was estimated at nearly EUR 130 million for Nexity for first quarter on '20. Revenue for the residential real estate development amount to EUR 686 million at end of March '21, an increase of EUR 194 million compared to the first quarter of '20. And the increase takes into account the base effect with the shutdown of construction sites in 2020 for 1 half and the other half from the increase in the volume of activity that comes from the higher backlog and the brisk pace of the signing of notarial deeds in the first quarter of 2021. Revenue for the commercial real estate development amount to EUR 195 million at the end of March '21, a very strong increase, up EUR 139 million compared to the weak first quarter of '20, pulled this year by the high contribution made by taking the sale of Reiwa in Saint-Ouen. Revenues from the services activities amount to EUR 250 million, an increase of EUR 11 million, thanks to the growth of the distribution activities, high level of transaction and Domitys, increase of the portfolio of services residences. For the whole year, revenue from the development activities is expected to be at least equivalent to 2020. But first, revenue from the residential real estate development is expected to continue to grow in the coming quarters of '21, driving by the flow of high backlog to represent growth of more than 10% compared to 2020. Remember that revenue in 2020 was at EUR 2,900 million. On the other hand, revenue of Commercial Real Estate are expected to return to a level around EUR 500 million, about minus EUR 400 million compared to 2020, taking into account the construction planning of the current operation, while 2020 had benefited from the historic order intake of Ecocampus at La Garenne Colombes. I will now leave the floor back to Julien who will describe our confidence for the future of the growth pipeline and the 2021 guidance.

Yes. Thank you, Eric. And just before that, a couple of other points about the Ægide-Domitys disposal process. I'm on Page 14. So as we said back in early April on the press release, we currently own 63% of the capital. We're going to sell 45% to the acquirer, AG2R La Mondiale. So we'll keep 18% of the capital with a long-term put option. Keeping a minority stake is positive for us. It gives us an exposure to the potentially increasing value of this silver economy firm. And it also secured the real estate development strategic partnership, which we signed together with the sale agreement. What are the key points of this partnership agreement? First of all, it has a long duration, 6.5 years up until the end of 2027. Nexity is going to be the preferred -- nonexclusive but preferred real estate development partner. In essence, we are going to grant each other priority rights. We show all our suitable plots to Ægide, and they show us all their projects. And based on certain criteria, Nexity will target to develop about 2/3 of the total Domitys senior housing pipeline. AG2R La Mondiale is really the right partner. It's very long term-oriented. It has a strong focus on the senior clients. It's a life insurer, health insurer, pension fund. And they want to use Domitys to provide more services to their client base. They intend to keep a strong pace of development, at least 20 new residences per year, which is, of course, good for us as a preferred developer, and they are not impacted or very little impact by IFRS 16. Actually, it's not just an asset sale. It's a strategic partnership that Nexity and La Mondiale have concluded together. In real estate development, Ægide, of course, but possibly other asset classes, La Mondiale, as it said, is going to invest about 5% of Nexity's capital with a long-term commitment. And they already bought off-market 2.14% of Nexity's capital by buying a block directly from Newport, Nexity's manco, which basically solve Newport debt problem. So moving on to the guidance and concluding the presentation. We confirm the guidance given to the market with the annual results in February. And clearly, having such a strong start in Q1 gives us a good level of confidence, but the year is far from over. We can, however, be more precise now that we have indication of the prices and other time lines concerning our disposals. Assuming that both Ægide and Century 21 are sold by June 30, our 2021 turnover should be around EUR 4.6 billion, at least equivalent to 2020 on a comparable basis. The current operating income is expected to reach at least EUR 350 million before as well as after the disposal and at least 23% up compared with 2020. This means basically that the deconsolidation of Ægide and Century in H2 will cost us a loss of turnover but no loss of profit and will be accretive to the operating margin. The proposed dividend is unchanged at EUR 2 per share. Before answering your questions, please allow me a more personal note. This is the last time I host this conference call in my capacity as Deputy CEO of Nexity as I decided to take the opportunity to join Crédit Mutuel Arkéa, a midsize but very successful and innovative French bank, which is also one of the large shareholders of Nexity. For the past 7 years, I really enjoyed being Nexity's CFO and then Deputy CEO because it's simply a great company. I think that Nexity's market recognition improved during those years, and I know that I'm leaving the finance function and the company as a whole in good hands. So let me just thank all of you, investors and analysts, for all these great exchanges that we had over those years and the quality of your market insights. And now Véronique, Eric and myself will be ready to field your questions. Operator?

[Operator Instructions] Okay. And we'll take our first question from Emmanuel Parot from Gilbert Dupont.

Can you hear me?

Yes, we can.

Yes, okay. I would have 2 questions, please. The first one concerning new home reservation. In Q1, you disclosed a plus 7% in volume. That's quite a good performance. Your guidance is 20,000, if I remember well. So it's a flat guidance. Could we consider that you are cautious on this point? Or is it because the level of commercial offer is quite low? That would be my first question. And maybe the second one, concerning the building permits in France, quite a low level. You flagged this point. Could you give us more reasons about this low level in France? And maybe when do you expect any inflection in the coming quarters?

Maybe I will take the first question, and Véronique will take the second one. Are we cautious? Yes, we are as usual, as always. But Q1 is always the smallest quarter in the year, but based on the seasonal pattern on our French real estate market where a lot of business gets transacted around year-end. So just because of that, there's no reason to extrapolate. It's a good start. The retail clients and buy-to-let investors in particular are back. We have a low level of bulk sales. But as Véronique said, there's no reason to give too much interpretation on that. So it's a good start, but it's just a small quarter as usual, and it's too early to draw consequences. And you're right, you can see the level of supply diminishing. We are doing our best, and the teams are putting a lot of efforts into replenishing the supply. But in this context, it wouldn't be prudent to just change or increase the guidance. And on your second question about the building permits?

As I told you on the market, there was a very strong drop in permits by 17% between February '20 and February '21. It was a lot less for Nexity because we got minus 3%, so we definitely outperformed this drop in building permits. And I think it's just -- it's a question of political cycle. As you know, in France, where you have these local elections, you have less permits 2 years before the elections and probably usually 6 months after the election. As I told you, the drop was -- I looked at yesterday, the drop was 50% lower than usual political cycle. I think, of course, we have the sanitary crisis. And as you know, some urban departments, even in big city, we are closed for almost 2 months last year and probably not at cruising speed even now. Then as you know, we had elections, and the councilperson were changed in a lot of cities. So they are reviewing and reassessing all the projects, so it takes time. Honestly, I expect the permits to come back, honestly, we hope, in the second quarter.

Thank you, and especially thanks to Julien. I wish you the best for the future.

Thank you.

And we have a question from Nicolas Tabor from Stifel.

Can you hear me well?

Yes. Please go ahead.

Great. So first, congratulations, Véronique, on your upcoming nomination.

Thank you.

And congratulations also, Julien, for your new nomination, and thank you for your great help with Nexity. The first question would be on Century 21, was the EBIT in 2020 down versus 2019, what [ mile it's in ] more or less versus, let's say, a normal year in 2019? And then my second question would be, let's say, more broad. I'm trying to understand, I mean, the strong performance in terms of individual real estate revenue back to 2019 levels -- I mean, for the reservations is back to 2019 level. And I'm trying to understand, we see that there is still a lack of building permits. So what helps you to be back so fast while you couldn't before? I mean is it new building permits you receive that increase your supply that you can deliver? So you've talked about -- so the notarial deeds, but it -- I guess it doesn't explain everything. So I'm trying to get the other part how that worked and how that backlog could be delivered but not before despite the building permit issue. And then on the third question, what's your mix right now in reservations and backlog that is linked to the Olympics overall? My take here is, I mean, how much of the reservations and backlog is like not really in the hand of individual mayors but are, let's say, such big projects politically that it's more the préfet or some other instance that will have the power, and therefore, you will not be hindered as others would be?

Maybe I will start -- sorry, I was interrupted. So thank you very much for your kind words. First thing about the backlog. The backlog is essentially secure. It's essentially made either of reservations, which were made, notarial deeds were signed, and we just need to make progress until we technically finish the building. So this is absolutely secure. I'm talking about Residential Real Estate. The other part of the backlog is made of reservations, which essentially, I don't have a figure, but over 90% were made with building permits, clean building permits, meaning no appeals, no claims. So if your question is, is the backlog secure? Or is it vulnerable to a change in the attitude of individual mayors or local councils? The answer is, no, it is secure, and we are not like other companies, I made a small hint, which puts into their backlog projects without building permit or without clean building permit. So in our situation, there's nothing to worry about. The backlog is very strong. And indeed, the conditions of last year created a situation where the progress and technical progress was hindered, was delayed. But this year, despite the health crisis, we are really strongly making strong progress both on the technical side and on the commercial side. And this means good revenue recognition. That's what Eric said. We expect a double-digit growth in the revenue of Residential Real Estate. So the question for me, for us is not the backlog. The backlog will flow into revenue, and you'll see a really good year for Nexity residential. The question is what happens afterwards. That's the pipeline. This is where we have this current challenging situation of the land market, but as Véronique said, the sort of low point in the political cycle, which is set to improve. I don't know if that answered your question, but these are the key points.

I'm sorry, that was very clear. It's me. I think I wasn't clear. I just wanted to say, so -- ask on the new home reservations in France, so you -- so the reservations, you are back to the 2019 level. And those new reservations, how could you be able -- so as you said, you are only making reservations and backlog out of clean building permits. So I guess to make this higher level of new reservations, you had to get new building permits, right? So what differentiates you and how were you able to get these very strong and impressive rebound in reservations, but the revenue is natural, yes, but more on the reservation side, so let's say, ahead of the curve. Sorry about not being precise.

No, no, no. That's clear. Thank you. We actually got more building permits than the market because as Véronique said, I mean it's an important indicator. When the market was down by 17%, we were down by 3% for Nexity residential as a whole. So we got much more than the market but not enough and a little bit less than last year. And the direct consequence of that is that the supply for sale is slightly diminishing. And we are selling very, very fast, but it cannot go to 0. We need more products to sell. So why do we outperform? I think it has to do with the very good diversification of Nexity, geographic diversification, both Greater Paris but everywhere in France and particularly the regional metropolis but also the midsize cities, which are back in fashion since the COVID crisis, who are everywhere and with a product range which is really unrivaled compared to the market. And particularly managed residences, serviced residencies, seniors, students, co-living and other formats, we're really very popular, and we are really not a specialist but the specialist of serviced residences in France. So that's an explanation. But of course, we cannot take for granted, but we will always be ahead of the curve, ahead of the pack. So Véronique and the teams, of course, are putting a lot of efforts into replenishing the pipeline and the supply for sale.

As I told you, we fill building permits twice as many in the first semester this year than last year. So I think we are very active. And as we told you, I think we have a very good track record in terms of obtaining our permits. We definitely -- I think we definitely know how to deal with the municipalities. That's where I come from, by the way. And as Julien said, we have a wide range of products, and we are everywhere on the territory. So I think it's a good risk management.

Great. That's very clear. And so what's your exposure to the Olympics at the moment? And where is it between reservations and backlogs and the Great Paris project? And how does that feed into the rest of the total group reservations?

In terms of backlog, it's 0, to my knowledge, but we'll check that. No reservation were signed. It's part of the pipeline. So it's a meaningful project, but it's extremely small compared with the overall size of Nexity.

And we are still at the beginning of the project. We just make the acquisition of the land. And so it will go in the next month, and it will contribute to the volume of reservation in 2021 but at low size.

And we have a question from Christophe Chaput from ODDO.

Yes. Just a quick question on reservation. So bulk sales are up by 4%. And I just wonder if you have booked further units from CDC Habitat or Gecina. And for CDC Habitat, could you remind us how many left from the initial agreement you signed last year? And obviously, Véronique and Julien, I would like to congratulate for your new position.

At the beginning of the year, we don't make a big deal with CDC Habitat or with Gecina. The studies and projects are growing. We are still -- have many things to do with these 2 big clients. And we think that we'll have a good contribution in the next step of the year. Of course, it also depends on the time we obtain the new permits to make the sales. So it will take some time, and it will come in the next period. For the global deal with CDC Habitat, we have this deal, but we have also lots of transactions with their many subsidiaries. So we make last year about 5,000 reservation with CDC Habitat in all components, and we think that we can do in this trend for next year. But of course, it is done project-by-project, and we will do that in the next month.

And we'll take our next question from Marie-Line Fort from Societe Generale.

I've got just a number crunching question. It's about the split of your Q1 sales between Ægide and Century 21. You mentioned EUR 104 million. If we could have the split, it will be great. Second question is about the building permits again. You mentioned a kind of normalization of building permits as soon as Q2. But aren't you afraid of any other delay that could occur from the national election in 2022 that could lead to another wait-and-see attitude on the building permits? And my last question is about raw material inflation. How do you deal with this topic? Have you some room to negotiate on the land price, for example, or better negotiation with your subcontractors? If you could give us some colors on that topic.

First of all, for the split of the revenue contribution of about EUR 100 million for the disposal activities, I can say that it's about 10% for Century 21 and all the rest from Ægide-Domitys. For the speed of building permits, of course, we have now the permits, so we are waiting for the authorization. Many things can happen. Something can make more time, and something can make them -- the permit faster. We have a very big demand of clients. So the municipalities, they have also to take into account the demand and they cannot only make their time to give us authorization. And for the election context, of course, it can happen. But the impact of the housing is not the top of the list of the debate. So of course, we can have some risk, but we are quite confident so that we can have [ good dream ] to have new permits for the next months.

Yes. And in addition to that, really in our business, it is the local election that matter, unfortunately, over last years, every 6 years, and the national elections, first of all, don't matter a lot. And then if I look at the last national election year, 2017, the business activity of Nexity was quite good. We were up by 15% in volume and 21% in value. So I don't know if it was a Macron effect. It was actually a very good year for Nexity. So the current environment is challenging. We didn't talk about normalization in Q2. We are talking about the challenge and our ability at the end of the day to obtain the building permits, which we are filing and signing in greater number compared with the previous periods, which is encouraging. But really, for 2022, the national elections are not a factor in our view.

Okay.

About cost of construction, yes, we have inflation in raw material, but a few, that is not only raw material in the price with a construction company. So we have a global discussion with them so that we can have a good equilibrium to meet our price. And yes, of course, you underlined that there is also the price of land and also component in our price. So we are quite confident that we can have a good level of margin for our next operation despite the inflation of raw material.

Absolutely. The cost of commodities is up, but the cost of human labor is down, and they tend to offset each other. And if you look at this slide about housing starts going down, that's more or less true for all the final markets of the construction industry. So in this respect, the construction industry is not in a great market. It's not in great shape, which gives us a little bit more leverage to negotiate with them compared to the previous years.

[Operator Instructions] And it appears we have no further questions. I would like to turn the conference back over to our speakers for any concluding remarks.

No, we don't have any other remarks. Our next meeting or next rendezvous is at the AGM on May 19 at 10:00 a.m., which will be broadcast, important meeting point with our shareholders. Unfortunately, distant video, but if you can join, you will be very, very welcome. Thank you.

Thank you.

And once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.