Nexity SA (NXI) Earnings Call Transcript & Summary

Good day, and welcome to the Q3 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nadia Ben Salem-Nicolas. Please go ahead, ma'am.

Thank you very much. Good afternoon, everyone. Nadia Ben Salem-Nicolas speaking, Co-CEO in charge of Finance. Thank you for joining us for Nexity 9 months revenues. I'm here with our CFO, Eric Lalechère; and our Investor Relations team, Géraldine Bop and Thierry Cherel, for whom it is the last vacation before [indiscernible] comes back next month from maternity leave. Thank you, Thierry. We'll go with Eric through the presentation together before taking your questions in a second step. Please note that to ensure everyone can read the performance on a sort of like-for-like basis, most of the numbers in the presentation will refer to the scope, excluding the activity disposed in the first half [indiscernible] since [ January '21 ]. Let me start with Slide 3, which highlights the key figures and messages for the quarter that we will detail in a minute. The main takeaway for me is that the third quarter is confirming the good recovery momentum that has been underway since the beginning of the year. All our key indicators on the left side of the chart are well oriented. It is our third consecutive quarter of double-digit revenue growth, not only against the low base of 2020, but also against 2019 before COVID. Our new home reservation are back to growth in Q3, reaching at constant scope, a value that is higher than the one recorded 2 years ago before COVID began. Demand continues to be structurally strong, both from institutional and individual investors. On the supply side, we are seeing for the first time after many months of permit shortage, some signs of improvement. The rise of construction cost and scarcity of land are, of course, a challenge for everyone in the industry. But first, we're confident the overall impact on Nexity's bottom line at the end of the day, will be fully absorbed given the way we manage our business; and secondly, our solid financial capacity allow us to accelerate our selective land bank investments consistently with the active resumption of bids that we're currently seeing in the market. So all in all, this is a strong set of numbers and encouraging signs for the future. Short term, we are focusing our energy fully on delivering our target for the year that we are reiterating today and working in parallel with my colleagues from the Executive Committee team on the updated strategic midterm road map. And with this introduction in mind, let me now hand it over to Eric to go through the details of the 9 months revenues.

Good afternoon, everyone. On Slide 4, revenues. Revenue for the 9 months are up 26% compared to '20. Q3 is 1 more quarter of growth after Q1 and Q2. Q3 is up 12% compared to Q3 2020. As Nadia said, we are talking here about the new scope, that is regarding the contribution of the activity saw in H1 '21, 2021 [indiscernible] which has amounted [indiscernible]. With the disposed activity, revenues reached EUR 3.3 billion, up 20% compared to 2020. The growth in revenue was particularly driven by the increase in residential real estate activity, which rose by almost EUR 600 million over the 9 months. Half of this increase was due to the base effect of the [indiscernible] of Q2 '20 which has helped construction and recognition of revenue. And as to the increase in reservation from previous years at a higher backlog at December 31, 2020. Revenue from service activities are also up sharply, plus 10% compared to 9 months '21, with increase in all business lines. The increase is around 20% from distribution activities, [indiscernible] with the interest of individual investors and also co-working activities, which are taking advantage of the decrease in working at home and the change in office is used to have more flexibility. For the next quarter, revenues are expected to be lower than Q4 '20, mainly due to the base effect of commercial real estate revenues, which will not benefit from [indiscernible] such as Ecocampus in La Garenne-Colombes, which represented revenues of EUR 400 million in Q4 2020. And for residential real estate, forecasts for notarized deals and completion rates that are expected to be lower than the last year, given the portfolio of operation and economic condition, especially [indiscernible]. However, we expect revenue for full year '21 to be more than '20 as [indiscernible] cut at least EUR 4.4 billion.

Thank you, Eric. Let's now give some color on each of our 3 businesses and starting with the residential real estate on Slide 5, for which the good news of the quarter again is the encouraging signs regarding the refiling of our supply for sale. On the graph in the left part of the slide, you can see that the number of building permits for apartments rented on a national basis has continued to improve from the low point of March 2021 to reach 250,000 permits end of August, which is a level that is 7% higher than 1 year ago, even though still 6% behind the level of 2019. Nexity managed to outperform this, as you can see on the right, with numbers of granted permits not only up against last year with 28%, but also against 2019, plus 8%. This has been made possible, as we discussed during our H1 results, only because we've been able to solicit and file about 50% to 70% more permits as we normally do. This will have positive effects on our supply for sale in the future, already visible as of end of September, with a supply for sale at 7,700 units, still behind the levels of 2019, but up 6% compared to end of June, which gives us confidence to deliver our target of around 20,000 new home reservation for the full year. So the bottleneck in permits is progressively easing. As we are entering in the second year of term of office for [ mayors ], and we are observing actually an active resumption of bids, primarily around existing sites in City Center to conform to redevelop in the context of changing the urban and environmental expectations. And Nexity is, therefore, intensifying its investments towards those land bank opportunities, which should lead our level of debt to reasonably increase to a level close to the one of 2017. Moving now to the demand on Slide 6. New home reservation reached 13,180 units, on track to deliver the 20,000 new reservation expected for the full year, as I said. While retail demand continues to be very strong, with demand from individual investors up 17% compared to 9 months last year. The bulk sales continued to grow as anticipated, up 10% over the quarter, driven primarily by social land loans. Bulk sales -- so that you can see in purple in the graph, represent around 40% of the reservation year-to-date and should continue to accelerate in the rest of the year. We see this diversified and balanced, multichannel client base as a key strategic strength for Nexity, contributing to the resilience of its model on top of its multiproduct, multibrand portfolio and its extensive national coverage. Now moving to the prices on Slide 7. Prices grew on average flattish, slightly up 0.4% over the first 9 months, but primarily as a result of client mix rather than anything structural in the market. The reality is that selling prices are actually up for every client category. On the retail side -- so on the left, average prices are up 1% in France, driven by the regions outside Paris, plus 6%. And on the bulk side, on the right, prices are up, both for institutional investors, plus 7%; and social land loans, plus 4%. So this one for selling prices. When it comes to cost prices, which is not covered in this slide, the rise of construction cost is a reality for everyone, as I said in my introduction. But keep in mind that the way we build our projects and contracts actually covers these inflation risks. And notably, our minimum margin requirement always integrates a buffer for every project for that purpose of risk management. And we can also say that we did not experience any major project halt to date because of a supply chain issue. And we are not foreseeing any major extra delays versus our original scale for projects. So all in all, we have on one side selling prices that are still up, we have cost prices that integrate cautious inflation risk management, meaning that we are pretty confident in our ability to deliver a sustained level of margin going forward. To conclude this part on Slide 8, and as all the world leaders are gathering in Glasgow for the COP26 Climate Summit, let me say a word on the flagship Lyon Confluence project. It's a large-scale mixed-use urban projects, for which Nexity is proud to have been selected as the winner this quarter. Developing for the first time in France, a pioneer architecture called [indiscernible], which is a real revolution for energy standard consumption as the building is designed to work without heating, without cooling and using bio-sourced materials. So I think a concrete way to highlight how we, at Nexity, are trying to lead the way to fight against global warming. Eric will now give some color on the commercial real estate and service activities before I conclude on the outlook.

Thank you, Nadia. On Slide 9, on commercial real estate, the office market still has low volumes of activity, marked by the COVID-19 crisis, but the recent trend is towards recovery in activity. These markets are constructed by region, particularly the regional market remain actually well above the 10 years average and like the Paris region. Nexity business potential is balanced between the region and the Paris region, which will enable the group to take advantage of these market trends as well as investor expectation for new buildings with a smaller energy footprint. With EUR 355 million (sic) [ EUR 335 million ] at the end of September, the EUR 400 million target has almost been reached. However, the group does not anticipate any significant order intake in the coming months. I'll turn now to services. The service activities are well oriented in this period of [indiscernible], and particularly, the following points can be [indiscernible]. Property management for companies, new mandates will surpass revenue growth next year. In student residence, the success of the marketing campaign in the '21, '22 academic year has enabled the group to achieve an occupancy rate of close to 100% at the end of September. This rate reflects the good stable demand for this type of accommodation, the high occupancy rate all over. We anticipate a good level of activity for the next 12 months. The occupancy rate for co-working activities has improved significantly to 79% from 69% at end of December '20 and June '21. This increase can be explained by a stronger demand from user from work flexibility in line with changing usage. And that activity is particularly well placed to take advantage of this trend. This business will continue to grow strongly, thanks to the dedicated offer that the group is proposing with Nexity at work, with new offers and the design and layout of office spaces. Lastly, the distribution business is benefiting from demand from individual investors, who are [indiscernible] savings after the slowdown in activity during this crisis. And I give the floor for the conclusion of Nadia.

Thank you, Eric. So in conclusion, a sharp increase. We are happy with those solid numbers and achievements. They confirm the trajectory of recovery, good market fundamentals and improved visibility. They are in line with our expectations, and they put us on good track to deliver our targets for the year that we are pleased to reconfirm today. So again, in terms of revenues, we expect EUR 4.4 billion revenues for the full year, implying, as you know, a revenue growth of around 10% versus 2019, with a Q4 lower than Q4 last year for all the reasons that Eric elaborated previously. In terms of current operating profits, without underestimating the rise of constructional cost, we are fundamentally confident to reach EUR 360 million, representing an operating margin about 8% back to our 2019 level on the same scope. So moving to the last slide, our global pipeline is worth 5 years of activity; our backlog is worth 3 years, and it keeps growing. It's plus 1% versus end of last December. So again, without underestimating some challenges and uncertainties ahead and notably around the economic context, the return to normal in the supply chain, the development of inflation and the upcoming elections in the country, we are fundamentally confident with this high visibility that we will continue to see revenue and profit growth ahead. And with that, we can now open the floor to Q&A.

[Operator Instructions] Our first question comes from Emmanuel Parot with Gilbert Dupont.

I have 3 questions. The first one was about selling prices. I was quite surprised about your retailer selling prices, quite flat year-on-year. Are you expecting an increase in the quarters to come? That was my first question. The second one is considering the land, you want to boost the purchase of land. Can you share the amount of this -- of the purchase of land for this year? And maybe the last question, the confirmation of the full year guidance implied you are expecting a decrease of around 30% in Q4 for sales, if I'm correct? Or I understand you are facing a negative basis effect in the commercial business, but it seems that assumption is very cautious. Am I correct?

So I can start with the 2 first ones and maybe we'll re-elaborate the third one, but I think the last one is about the magnitude of the decrease in Q4 sales. For the first one, when it comes to prices for retail, if I understand the question you asked, as far as past sales price are concerned, we observed that there has -- the shortage of supply has led to an increase in prices that is lower than what we observed in the recent period, but still up as I said, plus 1% and clearly driven by the region outside Paris, it's plus 6%. So really showing the attractiveness of those regions in the post-COVID world, I would say. Going forward, for reasons of caution and to avoid speculating on the evolution of sales prices, we assume that they will remain stable. In the context of stable household income, sales prices are at a level that should level off, I would say. I don't know if you want to complete this answer, Eric?

No, I think it's okay. About our expectation for the fourth quarter, we still have -- still [indiscernible] to finish the year, and you know that it's already [indiscernible] to make all the revenue. This time -- this year was quite particular because we told you that we have an increase in delivering new permits, but it's come lastly. So after it's difficult to make the reservation and to have the notary debt until the end of the year. So that's why one part of our classical activity at the end of the year can be delayed to 2022, so that we think that exactly in consideration. But the main impact is clearly the base effect in the commercial real estate. We have more than EUR 400 million. That was only one shot case in 2020, with a big order purchase of EUR 1 billion in La Garenne-Colombes. So that explains the minor difference.

[Operator Instructions] Our next question comes from Pierre Clouard with Kepler Cheuvreux.

Yes. I have 2 on my side. The first one is on the reservation that you're expecting in 2022, I'm sure that in November -- that we are almost in November now, you should start thinking about your potential guidance for 2022. It would be nice to have more color of -- on your view on potential reservation in 2022, taking into account the fact that, yes, we will have elections in France, but also given the fact that the building permits are rebounded and should continue to do so in months going forward. So it would be nice to have more color on that. The second one is on your strategic road map that you plan to put on to investors in 2022. Can we expect anything major? Or is it just a confirmation of your strategy and your -- and the strategy of the group and what you are doing at the moment?

About the level of reservation for 2022, I think it's quite a little early to make some forecast about this guidance. We already told you that we have [indiscernible] a good potential, so that enables to have a good basis to have a good performance to -- 2022. And after, we have to be careful about external effects like inflation rate, solvency of the clients or even political effects so that -- I think we have to wait a little to be more focused about what we can do. But as for the fundamental of Nexity, we really have a good, nice potential and with the level of permits and other institution, it seems that we can have good potential to make a nice performance. But I think it's little early to make a better figure about that, so what we can see about the economic condition will evolve.

And when it comes to the strategic road map, it's in the making, I would say, but the way we're managing the business today is clearly in continuity with the, I would say, the essence, the DNA, the record of this company, so I should not expect any bigger U-turn in the strategy. It's more, I would say, an update of how this company is transforming to capture and to capitalize on the changes that occurred after during the COVID period. So it's going to be about how we continue to offer our clients an integrated real estate platform, our employees strong and meaningful culture and to our shareholders, a performing and responsible investment proposition. That's basically the essence, continuity in the philosophy and the strategic direction, but acceleration of the transformation to capitalize on trends post-COVID.

Okay. So we should not expect any acceleration, let's say, on the development outside France?

I can -- already give an answer to that. That's, for instance, [indiscernible] part of the strategic road map. As we consider that we -- of course, international is important, and we have a nice platforms here and there. But at this stage, we consider that our playground is in France, still has a lot of value potential. And it's going to be more the essence of this updated road map that's outside France.

[Operator Instructions] And it appears we have no further questions at this time.

Okay. So I presume this means that this call is indeed, been concluded. So thanks a lot for your attendance, for your interest in our company. And we're going to meet some shareholders in the following days. And obviously, Geraldine and the IR team remain at your disposal to follow up after the call, if there's any question you did not manage to raise during this call. Thanks a lot again. Bye-bye.

And once again, that does conclude today's conference. We thank you for your participation. You may now disconnect.