Nexity SA (NXI) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening. Welcome to the conference for Q1 2023 of Nexity. This call is being recorded. [Operator Instructions] I'm now going to hand over to Jean-Claude Bassien, Deputy CEO, to begin this call today. Over to you, sir.

Thank you. Well, first of all, good evening to you all. I'm very pleased to have you with us on this call. And apologies for Véronique Bédague. You'll see that she has a period of intense media activity, focusing on our business and the industry as a whole. So she's excused. I'm with Pierre Pouchelon, who replaced Nadia Ben Salem as Head of Finance, is in charge of Finance; Eric Lalechère, CFO; for the Investor Relations team, whom you also know very well. Before handing over to the team, I'd like to just say a few words to set the stage. I won't be long, just 3 comments and then I'll hand over to the team to present the various items on the financials, and of course, I'll be available to take your questions. So just for the comments on Slide 4, 3 points that I'd like to underscore. Firstly, as you know, Q1 is traditionally a quarter that's not representative of the expected activity over the year. No change this year. However, we can nevertheless see that this quarter in every respect is in line with our expectations. And I would say even more, we look at revenue that's stable and we look at the progress rate, we're at the usual milestones at this point of the year. What's worth underscoring, however, is the environment in which we operate. Now this quarter confirms what we indicated at the close of our 2022 financials is that '23 is a year of transition and real adjustment to the market to the new macroeconomic framework. It's a macroeconomic framework that you know well, has very impactful effects. Firstly, the sharp rise in interest rates led to a sharp decrease in spending power for real estate by individuals. And we see in reservations of the property development sector. We've seen the gradual paralysis of institutional investors, not all, but in large part, with -- owing to the interest rate environment that is different and sharply up. They've lost their benchmarks in terms of valuations and the expected yields. So it does disrupt considerably decision-making. Second comment on the scope of activity. Firstly, on development -- real estate development. It's a follow-on of Q4 '22 reservations in line with our expectations are down by 19%. That's for the residential and for commercial real estate in a market that's really stalled, we're not recording any significant order intake. But in spite of that, there's a fine increase in revenue because of the construction sites that are progressing on commercial in real estate. After the Q4 last year with a decrease of 49% in investment, Q1, the decrease recorded totals 49%. So this is a business scope that's very impacted by the environment. Turning now to our management against that context what you need to bear in mind in such unfavorable -- the compass is clear, very strict management of our commercial offering. We said this when we met for the close of the '22 financials. Also the depth of our backlog, we had ahead of us 2 years of activity, which gives a degree of security going forward. The relevance of our strategic road map fully confirmed by our assessment of the crisis and the prospects of a gradual recovery in the business. Of course, you're going to ask me when? But what certain is there will be a recovery at some point in time because of the structural needs for housing. As regards service activities, in Q1, they continue to demonstrate a recurring performance, notably through operational activities, up 24% on the fine growth rates of Studea and Co-working. And lastly, the third point that I wish to comment upon an opening this call is in these challenging times for our business sector, we can welcome the robustness of our financial structure, strengthened by the renewal of our recent banking pool moving from EUR 500 million to EUR 800 million of engagement capacity, and that gives real security and confidence at this point in time. And as I said, our backlog and its debt contributes to making us confident to address the low point in the market cycle that we're going through. Whatever its scale and its duration, we're ready to confront it.

Thank you, Jean-Claude. Good evening, everyone. Let's move on to Slide 5. Before talking about the market and business in Q1, I think it's important in this quarter to really focus on our nonfinancial performance. We attach great importance to this at Nexity. First of all, to talk to you about our CO2 emissions, as per our stay on climate, which was passed in -- at the AGM 2022, our certification by SBTi is very much in progress. Remember, we are very much online in our trajectory of minus 42% CO2 emissions by 2030. And then shorter term, milestones will be 2 years ahead of the RE2020 regulations. In 2022, all of our building permits have included the RE '22 requirements, and we're doing better -- 10% better than RE2020. To other point, we heard about our strategy road map. These are prerequisites for our IMAGINE 2026 plan. In summary, it's about, what I call, a symmetry of attention, our employees and our customers. For the second consecutive year, Nexity got the award, Best Workplaces, 6 out of 10 winners in our category of about 25 -- 2,500 employees, which is and we're giving the best organizations where it's a good place to work. This is the real source of satisfaction for us and our teams. Our employees, if they feel good at work, that's going to have an impact on customer satisfaction, which is also up 9.1 points, especially in residential real estate business, thanks to improved delivery process. Slide 7 have now the economic situation -- talk about the Q1 economic situation. Look at this from the left to the right of the screen, the knock-on effect. The first effect still adjusting is the increase in mortgage interest rates. Haven't stabilized yet. They were multiplied by 2.6 in a 1-year period, up 70 basis points since this quarter of 2023. This mechanically leads to a drop in loans by 41%. It means the lending applications are held back and on the wait-and-see attitude, which is thus created. That leads to a decline in market reservations. That was 2022. We couldn't disclose them in February since the figures from the industry came out later. Minus 38% retail reservations, minus 38% retail, minus 36% in Q4, and we think it will be the same trends in the next quarter. We'll get the figures from the French Real Estate Federation later. Now Slide 8, we mustn't forget the underlying. The fundamentals are still with us. In spite of the economic situation, there are real housing needs for both renovated and new starts, more housing needs due to demographic factors, boosted by another factor where people are living to get [indiscernible]. We're seeing a reduction in the size of households. Also poor housing, which is a real scourge. Over 400 persons are poorly housed. In addition, they're 10% households living in overcrowded situations. Our CEO, Véronique Bédague, referred to this recently saying the housing crisis is a slow, but sure poison. There is a large number of highly energy inefficient housing units. Climate and Resilience Law will require that these units be renovated. Otherwise, it can't be rented out. This adds to the complexity in the rental market, the further drop in rental supply, minus 17%. There have been a drop in rental supply in the previous year in 2022. Rental demand continues to go up, though. Rental demand going up by around 50%. All this reinforces increased need for housing in France. For quite some time, we felt that there will be a need for around 500,000 per year. The entire industry would agree and more recently the Head of the Employers' Association said this as well. And yet we just reached barely 367,000 housing starts from February '22 to February '23. We're expecting the figure will be continuing to decline in the next few months. Let's look at Slide 9 now. Here as well, we're using as a basis the most recent FDA figures from 2022. Market dropped 25% in 2022 versus 2021, and the 121,875 reservations, it's a lower figure than reservations during the COVID year of 2020, which is meant there are gains in market share for Nexity, first of all, gaining 2.6 points market share in this context. Furthermore, the top 6 markets in development were gone up. So we are seeing greater consolidation of players underway. There is a size advantage currently, which is one of the strong points in our strategic road map. Slide 10 now. Our Q1 housing, which is very much in line with our expectations. This quarter is right in line with what we saw in Q4 2022. Performance is minus 33% in retail sales, the market is down 38%, minus 27% for first-time buyers. They're having difficulties in obtaining loans due to a lack of upfront contributions, minus 40% in investments linked to problems with granting loans and bulk sales, a slight improvement, up 2%, which is impossible. Thanks to the strategy we started fairly early on as of H2 2022, reducing -- shifting some of the reduction to bulk sales. As I mentioned earlier, Q1 is not representative of the full year. The mix is balanced in this quarter as a heavy weighting on social bulk units. That's the difference for value, minus 19% in volume, minus 25% in value. But as I repeat, the mix isn't representative of the full year, in progress. Slide 11, as you know, 2023 will be all about commercial offering. At Nexity, we have carefully controlled supply-for-sale. As for 2022, we adjusted our commercial offering to the new context shifting to bulk sales as of the second half, which continued in this beginning of the year, working on our offerings, increased selectivity by strengthening our pre-marketing rates, reaching henceforth 60% for any operation launch. This means that we have a low-risk offer, look at the right-hand side, under 100 unsold completed units, that's down versus 31 December by 6%. 34% of the offer is under construction. Importantly, 65% of projects are underway. And in each operation, our teams use every single day, basically every day, fine-tune the operations and make sure that we'll reach premarketing with a new boosted threshold of 60%, initiate land renegotiation as necessary and negotiate a best if possible the works contracts. Slide 12. Commercial real estate development, Jean-Claude gave us the backdrop. Commercial real estate, you've got the market context. It's almost halted. It stands still, minus 44% in commercial investment in Q1, minus 39% in Greater Paris, minus 49% for Q4 2022. Nexity didn't sign many new orders, has benefited from some of the operations in progress, that was quite emblematic, iconic such as the La Garenne-Colombes, which we deliver it in '24. La Garenne-Colombes campus $200 million in revenue to advance on 2023 and 2024. It's a big operation. Furthermore, the delivery scheduled for the next few months for Deloitte, and that will be Q2 2023. [ Bailly-Romainvillers ], it's a new training center for Deloitte, which will be operated, 23,000 square meters and many conference centers and campus rooms. We received an award for this at the most recent meeting. Slide 13 on services. Services. Here, we'd observe, of course, that today provide us with recurring revenue, which is very important during the current context, stable. But services revenue from Q1 '22 to Q1 '23 show differing performance from one service to another. For instance, management -- property management here, we see stability in the units on a like-for-like basis. It's a good performance in that business line. Rental and brokerage are suffering [indiscernible] rental, but the baseline 2022 was very far from standards normative in this activity. We almost are not having any tenants give us notice, so not much movement, minus 10% in brokerage. The preexisting units suffering from the wait-and-see stance and problems in returning -- receiving loans. Serviced properties increases here. Studea organically up and we saw changes from the quarters. We're seeing increases made possible, thanks to record occupancy rates, 97.5% occupancy at end of March in Studea. Average sales price slightly up by 2%. Morning, seeing strong [indiscernible] growth, 3 new openings, [indiscernible] and Beaurepaire. Distribution on this side suffered from the drop of investor reservations in the same proportion as housing and for the same reasons as those given in talking about housing development. Now I'll give the floor to Eric Lalechère, our CFO, who will be presenting to you Q1 revenue as well as our outlook.

Thank you, Pierre. Very good evening to you all. On the revenue, as we set out, revenue is stable in Q1, coming in at EUR 895 million. Development represents about 80% of the revenue, has differing performance. Residential development, a measured downturn of EUR 50 million, comes from a lower number of notarial deeds signed during the quarter, consequence of very dynamic activity at the end of the year. Customers who wanted to benefit from the P&L scheme and the condition in '22 more favorable than those for '23, but reflecting difficulties that customers are facing and securing [indiscernible] be strong watch point over the coming months. Integration of Angelotti M&A in '22. Property development in Occitanie is going well with a contribution of EUR 35 million for Q1 in the development sector. Commercial real estate, strong increase in revenue, plus EUR 50 million additional with a higher contribution of the iconic development of the eco-campus at La Garenne-Colombes given the progress of the project. That's going to continue over the coming quarter. Services stable, EUR 194 million, as said earlier. This development marks differing dynamics; a, management activity stable. Distribution down, consistent with decrease in the investments by individual investment, offset by operating activities, benefiting from the increase in the managed base and high occupancy rate. This revenue is in line with our expectation. Always Q1 representing less than 25% of annual revenue, that strengthens our forecast of revenue for the year of at least EUR 4.5 billion. The outlook, the group benefits from strong visibility on its future activity on its revenue. Firstly, with a backlog whose recognition of revenue will be secured by the amount of the backlog. Backlog stable versus December 31, EUR 6 billion, almost 2 years of development revenue. Midterm, the potential transactions underway represents 4 years business at various stages of development. We're vigilant to Romanian market conditions. Don't hesitate to renegotiate or reprogram transactions to remain in our margin constraints. Outlook for '23 unchanged at this stage. We're particularly vigilant on market changes going forward. Given the significant headwinds, we consider that we're in a year of transition in the property market with reduced spending power versus 2 years ago. Increased rates had to continue throughout the years [indiscernible] early of this year. We believe that Q2 will be in the follow-up to Q1 and the end of the year. Changing credit conditions will be key to give us more visibility to the end of the year. And if need be, update our forecast. Stabilization expected as of H2, depends on the position of central banks on interest rates containing inflation. That remains a central scenario. We'd maintain our outlook guidance for 2023 revenue at least EUR 4.5 billion, similar to '22 excluding international operating income, taking account adjustment needs but should be above EUR 300 million. More short term, we'll be pleased to meet you again during the next AGM, May 7, and it will be put to the approval the payment of a dividend of EUR 2.5 per share, stable versus last year. This reflects the confidence of the group and its outlook and its robust finance situation. This illustrates the ability of Nexity to deliver recurring dividend through the various property cycle. Thanks for your attention. And I'd like to conclude by thanking Domitille who's going to be leaving soon. She provided a vital contribution over the year to support us to animate the dialogue, Shareholding, whom you know well. We will follow up the relationship and will be equally effective. And we're now ready to take your questions.

[Operator Instructions] First question comes from Emmanuel Parot from Gilbert Dupont De Bourse.

Yes, good evening to all. I hope you can hear me well.

Yes, very well.

Good. I had a few quick questions. The first, a rather general question on the real estate sector. You mentioned commercial activity, Q1, broadly in line with your expectations. Would you say that the real estate context is, as you expected, versus 2 months back when you set your annual targets? Or would you say that things are tougher than feared? That's my first question. Second was on the rising rates on the savings plan, the Livret A savings plan. Is there a risk that social housing players? Well, the -- it leads in a position to buy from you that is you, property developers to buy housing because there's been an impact on the resilient rate of your reservation. Last question linked to initial discussions on possible government announcements. What avenues we might explore that would satisfy you in the challenging context that everyone is experiencing currently?

Also, thanks for the questions, Emmanuel. I'll respond on the context. Well, the context is clearly that we were facing when we adopted our forecast for '23, and we clearly stated that it was a year of transition and a year that could be changing. And so things may indeed see more challenging in the way the year is unfolding to date. But yet, and yet in the way we steer our activities at this stage, we can maintain the same trajectory. Yes, it's a challenging year as expected. And as expected, we're not subjecting ourselves to it. We're adapting, and that's the vital compass that we must have, not to submit to conditions, adapt our commercial steering adaptor offering so to constantly offer our customers an affordable offering in all its forms so as to trigger the intention to invest in spite of the challenging situation and the changing wins. Maybe on the second question on the social housing players. The mix that we have on reservations that are balanced in Q1. But on the bulk sales is heavily weighted towards social bulk sales. And it's a question that we constantly have the ability to sell to social landlords. And the third point, of course, we can't speak to the government enhancements, but what we can say that there seems to be a clear realization about the housing crisis that's emerging, and there was -- recently Prime Minister spoke this evening about the housing crisis. And of course, we're in favor of everything that might facilitate access to loans for our customers, and it's on that front that we're fighting. But of course, the realization of the housing crisis and the need for additional housing because the figure of the 500,000 by the MEDEF share is one that is percolating across the government. And all these give some openings to the fact that housing will be addressed over the coming days. Well, Emmanuel, if I were to make a forecast is, of course, that measures that might unblock the situation where there's a volume, notably for first-time buyers, but these are measures that cause reduced VAT, reduction in interest rates, tax rates. But there are measures that don't cost but require the will to act and that will be access to loans. And in that respect, we don't despair. That measures will end up by being taken. There are discussions between the finance ministry and the Bank of France to give a boost in these very constraining market conditions.

That's clear. Thank you. Maybe just one final point on international activities. Where are you at with the disposal halting of those activities?

Well, the process is underway and going according to plan with the IFRS 5 ranking indicated that program for the coming months.

We have no further questions at this point in time. Back to you to conclude. I believe we do have a further question. Christophe Chaput from ODDO BHF.

Christophe from ODDO, 2 quick ones, if I may. The first, just wanted to make sure, sorry -- well, if Emmanuel asked it just before me, in the current context, does it give you some leeway for acquisitions? I mean, there are small players facing difficulties, for example, that come and see you and the beginning talks with you. Second question on the price of land. Are you seeing greater flexibility? Shall we say on the part of owners to renegotiate the price of land and to acquire plots and to make the economic equation easier for you and for your clients?

Well, as you've seen, we've shown you, there's a consolidation process underway.

Will this process prompt a number of players to consider deals or combinations and envisage a future different to that which they're facing today?

Probably, but the priority for us today is, first and foremost, to correctly manage our debt as we committed to doing with a will to maintain our leverage at the level set, that's the priority and that -- in addition to that, we have mechanically a growth in our market share. And at this stage, that suits us fine. And currently, we don't plan to act differently. It's a real issue. It's a real issue in current market conditions. Very logically, there should be a favorable change in that respect. But clearly, the landowners today are not in that frame of mind and not in that rationale. So what we're doing on our transactions, deals that we're committed to, we've systematically renegotiation the terms and conditions of the transaction. Notably, the land, be it in its price or in the price and the conditions to recognize that price.

And just in the measures -- a bit naive by way of the questions, but in the measures that might be adopted by the government and other, for example, measures of densification that could be part of the process because it's very direct here. But if you have through planning permission, if you can build a 5-story building, can you move, say, the 6-story building, it doesn't cost the government anything in these measures that might simplify the economic equation. Is there a possibility?

In spite of Véronique's involvement in the C&R, I'm not privy to the decision-making process of the government. I don't know what's wrong. We'd have to wait for the 9th of May to see the conclusions of the C&R regarding the conclusions. But what I can say in our strategic road map, the first major pivot of transformation of our industry, everybody, that this pivot is underway [indiscernible] is to build the city on the city. So without densifying that doesn't make sense. So Nexity, we are defending density, a bearable desirable density. That means adapting the offering and making proposals in that direction. But yes, we're defending increased density. So if measures taken in that direction, then we can welcome in.

Next question from Laurent from BNP.

Two questions. First on reservations. Apparently, 58% in Q1 seems fairly low, had been more in '21 and '22. Another question, what about dividend changes? Would you drop your dividend possibly if H2 performance weren't in line?

Well, the 1,600 reservations you mentioned, these are reservations for housing and refurbishments. So in development, it's more in line with 800. Nexity is following market terms. In Q1, these wouldn't be represented to -- the 58% figure may seem low, but it's in the subsidiary's road map. Regarding the dividend, this is a subject to the comp in future months depending on the economy and financial situation. It will be up to the Board of Directors. Currently, we continue with our scenario. At the juncture, we can confirm our outlook and financial structure. Nothing is jeopardizing anything right now. This wouldn't be the time to discuss these points. We're focused right now on Q2, [indiscernible] commercial activity end of the year. These are the points that are the main considerations today. I can certainly confirm what Véronique already said to answer the same question during the presentation of the results -- end of year results. Yes, this is a decision that will be made by the Board of Directors. I'm sure they will discuss the overall environment and make their decision.

A question on services contribution in the mix. I'd like to know if distribution activities have a good margin?

Yes, margin rate and distribution activity, the commercial side of this margin is higher than average of other service activities.

Thank you. The last question from Marie-Line Fort, Societe Generale. Go ahead.

Good evening. I've got 2 questions. First one on the drop in reservations. Is it uniform, Paris versus the regions. That's the first question. Second point, I'm thinking of commercial real estate and recognition after the second operation. Can we assume EUR 400 million in revenue for '23. Could you tell us how this will look one quarter versus the following quarter?

Reservations are always related to commercial offering. You can't just think in terms of Paris, Greater Paris and the Provinces. We're not seeing any major market differences from one area to another. But it always depends very much on the products that we're selling in the various locations. It's the commercial offerings themselves that make for the results. Access to loans is what's really important now. We're having people having a hard time getting loans, and it's taking longer for them to get the loans, although that's really frozen the system. And the lending problems we're seeing throughout France, unfortunately, obtaining loans. Now commercial real estate revenue in '23, up by at least EUR 400 million. The phasing should be fairly uniform from quarter-to-quarter. The Deloitte operation we presented to you will be delivered in the next few weeks. That will make a contribution in Q2, but won't change the overall profile for the full year. It's very important for a beautiful operation. It got a [indiscernible] award this year in [ town ]. But in terms of its contribution to our revenue, it's around EUR 100 million, a relatively marginal impact on half yearly revenues. It's La Garenne-Colombes eco-campus is the bulk of the contribution. It should continue in a linear fashion over the next 3 quarters.

Thank you. There are no further questions. I'd like to give the floor back to you to wrap up to this meeting.

I'd like to thank all of you for taking part in this call. We will be meeting again soon. Have a great evening.

Thank you, ladies and gentlemen, for taking part in today's call. You can hang up now. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]