Nexity SA (NXI) Earnings Call Transcript & Summary

Good evening. Welcome to the half year results announcement for Nexity. [Operator Instructions] I will give the floor now to Madam Véronique Bédague, who is the CEO of Nexity. Over to you, madam.

In the months ahead, this means that we have to navigate tightly and think long term. You're well aware of the context sharp interest rates rise over the last 18 months. This is with effect -- reduced the affordability of some households. Individuals have lost almost 20% of their real estate purchasing power. Mortgages are more expensive. Our figures show that at the end of June, rates, on average, excluding insurance costs, stood at 3.45%, and probably soon to rise to 4% by the end of the year, whereas they were around 1% in early 2022. They are also much rarer. The production of real estate loans fell by almost 40% in the first half of the year compared with the same period last year with an acceleration in the second half compared to the second quarter of last year. There's also the fact that this has diverted institutional investors who are now achieving much higher returns in other secure asset classes. This includes government bonds or investment-grade corporate bonds. Further to this rise, there has been a change in the paradigm of our market. Therefore, the new home market is slowing sharply. Forecast for less than 100,000 orders for 2023 versus 124,000 last year and more than 162,000 in 2021. And in the commercial real estate market, investment has ground to hold, mainly in the Paris region, and we will be going back to that a bit later. So we have to keep in mind that in this market, which is down sharply, the profitability of completed projects is under greater pressure. Selling prices to individuals are falling. The proportion of bulk sales is rising, and you will recollect in July of last year, we decided to step up bulk sales, which is much bigger. And on average, it's less profitable than retail sales. And I know you're going to be asking about this. So what I can say is that we are no longer -- although they are no longer rising, neither land prices nor construction costs are falling significantly. We may find -- we're not seeing this. We're not seeing any clear move on land prices or construction cost, which was significantly risen over the past 2 years. And we're no longer able to pass on this increase in prices to our customers. We have, therefore, entered a period of transition that is very clearly going to weigh on our profitability. Our revised outlook for 2023 is that we expect revenue at EUR 4.3 billion, excluding international business, with operating profit of EUR 250 million. You will recollect that in February, when we last met, the consensus was that the sharp increase in rates by central banks meant that inflation would be contained fairly quickly, and somewhat even forecasting interest rates that could decline slightly at the end of the year. Well, this no longer applies, and market consensus is that interest rate increases are to be expected after the summer break, at least one, and we no longer expect a decline in interest rates before the second half of 2024. Against this backdrop, we are emphasizing control over the debt load and cash flow generation. We need to preserve the agility and flexibility of Nexity. And we have a paradigm change to which we have to adapt. As far as the dividend is concerned for 2024, this will reflect net income for 2023. Nevertheless, and I've said this on several occasions, Nexity is accelerating the implementation of its strategic plan, which enables us to respond to the paradigm change. And we are focusing on services, which enables us to manage more effectively manage products. However, the prolonged deterioration in the economic situation will lead us to revise in 2024, the financial targets announced in September '22, which were based on our initial 2023 outlook and on a new home market of approximately 130,000 reservations per year. Our nonfinancial targets remain unchanged, of course. Now given this paradigm change, we -- first of all, we are steering tightly. That's the first absolute must, which we're doing across the whole of the company. We are containing our overheads. We are freezing job creation, not replacing staff, reorganizing. We have started -- so we're continuing with this plan. We are actively managing our development risks. So we have increased our sales costs, sales commissions before purchase of land. And we are keeping tight control over our WCR and therefore, our debt. And we are implementing, as fast as possible, the land is currently under management. And we are implementing our international divestment plan as announced. We have just sold our Polish subsidiary to a Polish developer. This has been achieved in Poland with a sale price of EUR 100 million, which will contribute to reducing Nexity's debt. And we are continuing with what we had committed to, which includes the sale of the Portuguese subsidiary expected by the end of the year. At the same time, we are thinking long term. We gave details of this in September. We are confirming and stepping up the implementation of our strategic plan with managed products, enabling long-term income. We're working with the services teams and sales to investors. So we are rolling out our entire managed product offering, which appears to both users and investors. Of course, our Studéa student residences, we will be -- the occupancy here is 97%, which is very good. Of course, our senior residences, Domitys and Aegide, and we have redesigned them. These are much easier to integrate in city centers. Our co-living offering with urban campus, our intergenerational residence with complicity and other offers will be released by the end of the year. In the medium to long term, we have optimized our cost price but we need to further lower our production price because the purchasing power of our clients is going to increase very gradually. And we have a role to play here. And with Stephane, we -- as you have seen, we have announced in June a partnership with a U.K. company. This is a tech company which sells a software which enables the design and offering of products where an architecture steps in, and this means that we can customize the product for our projects. We hope through this modular production, we hope to achieve 15% of our production with this product, and we think we can reduce the production costs of modular homes by -- this is being developed at the 2031 level of the RE2020. And we are coming up with a very appealing project for municipalities. We're also positioning ourselves as a major driver for urban regeneration in association with Carrefour. And we have this product in city centers and in suburban areas. And this is focusing on 76 sites, which will enable us to roll out our whole offering hotels, office space, et cetera. And the -- we have a -- we're going to set up at the beginning of 2024, a joint venture, 80% owned by Carrefour and 20% by us. Now we are seeking to come out of this transition period in the best possible condition. Now looking at our business activity, we had a second quarter in line with Q1 2023 and Q4 2022, and we are continuing to outperform a new home market downturn of nearly 40%. Residential real estate is down 20% in volume and 28% in value. We have sold extensively to subsidized housing authorities. We will -- our services activities show that the occupancy rate is at a record high. Nexity's ability to constantly fill up its pipeline is unchanged and the visibility remains important, since the pipeline stands at 6 years of activity with a backlog representing 2 years of activity. Business potential represents revenue to completion and purchase agreements. And we can say furthermore that we are not yet taking into account our partnership with Carrefour that will be further business potential in 2024 as each of us moves forward in that operation.

Thank you, Véronique. Now let's talk again about Q1 housing market. There was a deterioration of 34% compared to Q1 2022. There's quite a difference between bulk sales down 8%, and retail sales down -- very significantly, down 39%. We don't have the official figures yet, but it's very likely that Q2 will be a very similar trend or even a further deteriorated trend due to interest rates and difficulties for banks to grant loans as long as rates have not stabilized and a very strong wait-and-see attitude amongst individuals. In this deteriorated context, Nexity is outperforming in H1, posting resistance at minus 20% compared to H1 2022, with retail sales reservations, which pretty much follow the market trend, at minus 41%. Very good performance on bulk sales, which once again demonstrates our ability to redirect part of our offering, and most importantly, the solidity of our partnerships with institutional investors to delve into greater detail about our client mix, we see an illustration of the point I just made, namely an increase in proportion of bulk sales, 53% versus 37% in '22 and more particularly, an increase in sales to social housing operators that explains our increase of 5% in value, while we've increased by 16% in volume. With regard to sales to individuals, very good resistance from main residences, but a marked decrease in individual investors. Now the volumes have changed since '22. Most importantly, we've seen a marked decrease in individual investors who are suffering both from the increase in interest rates and also the granting conditions for mortgages that have been toughened, having to do with the rate of effort, no longer take into account some considerations that were previously. All these difficulties have created a wait-and-see attitude among this category of investors. Concerning our supply for sale, the control of our commercial launches has allowed us to reduce our supply for sale. Our prudential cautious policy concerning our presales rate, as Véronique said, before acquisition of the land also allows us to limit our offer in project face to 35%. That means 64% of our offer, we allow ourselves a possibility of reconfiguring the operation and changing our product mix as need be. We remain extremely vigilant looking at operation by operation, careful eye on time to market, which has always allowed us to limit our stock of completed homes to less than 100 units housing that is now available for sale in all of our Nexity agencies. Lastly, to talk about the iconic operation that really shows our ability to do major urban regeneration deals. The first one you heard about quite some time ago, the Athlete's Village for the 2024 Olympic Village in Saint-Ouen and Reiwa, 19 buildings, that are going to be used for the athletes accommodation. And after that, these will be housing units. There'll also be a nursery and stores. And a very low-carbon concrete being used here. Then this inauguration of the Fives Cail eco-district in Lille, 125 housing -- 124 housing units, mixed using project. There is a wood pellet boiler room to heat this, and the architecture is very beautiful. Now to talk about commercial real estate development, we can say that the market is in a trough, a low part of the cycle. In the first half of the year, investments were down by 51% in commercial real estate. H1 2022, -51%; H1 2023 -40%. In this context, intake -- order intake is low, but we've signed some good references out of Paris and in particular, operation Bordeaux. In terms of revenue 2023, driven by iconic operations that we have in Greater Paris and in other regions. In Greater Paris, we've got the La Garenne-Colombes, LGC, which will be half of the revenue for the year in this sector. And then regional activities. The Belvédère deal in Bordeaux represent a reproportion of our regional activities. These 2 operations are truly remarkable in terms of the low-carbon footprint, particularly the La Garenne-Colombes, the biggest biothermal operation in Europe. To talk about services activities. Here, what we've observed is a slight dip -- drop in revenue. This can be explained by a drop in distribution, which has to do with the lower property development momentum, down some 30%. This is offset to some degree by service properties and operations. If we look at this services activity alone, it goes up 9%, taking into account scope which includes operations and management, and that's remarkable. Operations activities see strong momentum, which we've already alluded to previously. Strong growth in co-working and student residents, where we can say that occupancy rates are above 97% as at end of June '23. Now property management, offsetting a drop in deals, activities and rental letting businesses. This just represents 20% of management activities. So the slowdown is offset by stability in core businesses, therefore, we can be pleased. If we're looking at the scope of services activities, we can say that things have really stabilized, performance nicely stabilized during this half year period.

Thank you. Now we talk about the half yearly results, 2023. We see this shows the robustness of Nexity in a deteriorated market, over EUR 2 billion -- EUR 2.4 billion in revenue, up 4%, which is an increase, excluding international business, demonstrating like-for-like stability. We acquired something toward the end of the year. EUR 82 million in operating profit. The margin rate is improving by around 2 points, thanks to some development business in the first half. Our debt is under control, EUR 900 million after the disposal of Polish subsidiary. WCR looking good after taxes, we'll talk about this later, up 4%, reaching 1.358 -- EUR 1.385 billion. And that's the figure for the first half. No change in revenue. Here, we can see there's differences in the various business lines development, which is 80% of the group's total revenue. Residential revenue, slightly down by 1% due to a fall in number of deeds signed and postponement of some operations. Commercial real estate revenue, on the other hand, was up, boosted specifically by progress made on the La Garenne-Colombes program, representing around EUR 100 million in revenue in the first half. Services represented 20% of total group revenue in the first half, posted a limited decline of 3%, but there are major differences between the various services. On the one hand, the distribution business, which is cyclical and exposed to the new homes market. On the other hand, recurring property management and service properties activities, which are driving growth. These are occurring. Excluding distribution, services revenue was up 9%. Operating profit from residential real estate in H1 stands at EUR 46 million. The drop is due to a decrease in revenues, as mentioned, and an increase in construction costs weighing on a few projects under construction as well as the slowdown in business and the dropout of projects. Commercial real estate operating profit rose very slightly, thanks to the contribution of La Garenne-Colombes, which is around 65% complete. Margin rates are back to more normal levels and include contingencies on LGC. Services accounted for more than 25% of the group's H1 profit. This is recurring and stable and countercyclical. WCR pretax rose EUR 50 million in June. This is contained to 4% compared with historical figures, which normally put an increase in WCR in the neighborhood of 20% in the first half due to the seasonal nature of real estate development. This clearly demonstrates our ability to control our supply for sale that we talked about previously. The following analysis can be made at June 30. No completed homes. WCR secured particularly regarding receivables. And the land bank is down due to all new commitments since the beginning of the year, and this will continue being improved by the end of the year. This means the group's net debt is contained at the end of June, net debt reaching EUR 900 million, up some EUR 4 million. WCR being contained makes this impossible to contain this. We get debt under control. The ratio is 2.5x EBITDA, substantially below bank covenant limits. Gross debt contains mainly fixed rate, debt 49%, limiting the group's exposure to rising interest rates. At June 30, the average maturity of debt remained high at 2 years and 9 months. This is an average cost of debt of 2.8% given the weighting of fixed rate debt taken out prior to 2022 rate rises. In February '23, the Group renewed its corporate credit line for a period of 5 years with an enlarged banking pool and for an increased amount EUR 800 million. Group's financial position, therefore, is very solid. Total cash and cash equivalents over EUR 1 billion -- over EUR 1 billion plus the EUR 520 million in confirmed undrawn credit lines to date. To date, it also specified, we have no significant maturities before March 2024. So in conclusion of what we heard, this is a good summary, I believe, of what we're doing precisely moving forward and preparing the medium and long term. Henceforth, we are a property operator that's recognized responsible operator. We, at long last, got the green life in SBTi on our carbon trajectory, 1.5 degrees. We're very pleased. If we look at the various competitions, where we're active, it's very well seen that we're clearly committed to sustainable development, and that enables us to be top ranking and often win out. If we look at the first half, the building permits, we have an average rate 25% higher than what's called for by the RE2020 regulatory requirements. We're very determined to move in this direction and rolling all of this out, making sure that the subs boost revenue and the services help us sell the products that we are producing. We're very much committed to urban renewal because definitely, this is a buoyant future promising market. We've had a great deal here. We'll continue working in this area. It's a very important market. As I said to you, we're not letting go of any production. A part of this will make it possible for us to, once again, see more flexible market. We're moving forward with various programs. I want to thank you one and all for listening to this presentation.

[Operator Instructions] We have a first question which is going to be asked now.

I'll ask my question, several brief questions. First one on -- when deals are abandoned, given up, could you give us some numbers here and tell us some of the costs involved when you have to give up some deals? Another question on the Carrefour deal. Could we get an order of magnitude of the potential revenue, possibly a range here and the time line? Then third question I have. I saw that you sold a studio to AXA and Bry-sur-Marne, apparently significant figures. We didn't see in the presentation. Could you possibly comment on this? Lastly, could you talk to us about net debt on EBITDA end of '23 so we can get an idea as to what the lending should be in our projections?

Answer. [indiscernible] will be fielding these.

Emmanuel, regarding the discontinued operations, I will give you the exact number of projects that were halted in '23. According to initial estimates, we thought the number of discontinued would be similar to 2022. But if you look at the new estimates that Véronique alluded to, we've had to increase these possibilities. There are possibilities. These are estimates possible further discontinued operations in the second half. We're looking at this line by line, even and the teams carefully look at this, that will be for H2 and possible discontinuations depending on the parameters of the various operations. On Carrefour, no, we can't give you revenue figures or margin or what have you. As you've seen, it's a significant deal, around 802,000 housing units, 800,000 square meters. So it's quite significant, and it means a real step-up in our urban renewal. And what Veronique talked to us about, we didn't have all these figures yet, of course, because we're working with Carrefour within a vehicle. And each of us will have our programs, and we'll be developing our various themes and getting our permits and so forth. There will be a recognition of potential backlog. We consider we'll start in '24, and we'll start seeing some operations. Now I believe we didn't talk about the divestment. We haven't given any figures, no specifics. There's land and operations. We sold the land. We're not in any way involved in operations. As to net debt, last point, no, we don't give guidance on net debt, which you will have understood. Tightening things up means we are working very hard on containing debt and ensuring liquidity. EUR 230 million reduction -- continual reduction, we're keeping WCR in check. So tight management, tight navigation means we're sticking on track and keeping things in line. And our dividend policy, as Veronique has said, also goes in the same direction.

And we have another question from Societe Generale.

On the dividend point, I'd like to know what's the payout rate going to be? When you say the dividend will reflect the level of profits, can we assume the payout rate might be fairly good? Or might it be token payout? Next, I'm wondering for Edouard, what's business activity looking like? Might there be an impairment of goodwill on that acquisition, which is fairly recent. Last question regarding your guidance on current operating income of EUR 250 million. As I understand, this includes discontinued projects, more discontinuations than you expected originally. Are you also making any margin corrections in this? Last question on commercial real estate. Could you tell us specifically, can we still think of EUR 400 million in revenue for fiscal '23? What will the level be in 2024? I suspect you have a good visibility now, particularly with La Garenne-Colombes.

There are any answers regarding the dividend, we'll see. Nexity's dividend policy has always been to give a good return to shareholders to the utmost of our ability. We will see towards the end of the year. That's all I can say at this juncture.

Edouard Denis, we've got a new President. They are top quality in various areas, including distribution, there's a shared area there broadly. They adhere to the same reservation trends that we do. No concerns -- we need to have no concerns whatsoever with Edouard Denis. And we're counting on the multi-brand strategy to continue winning market shares in cities and to continue developing our operations.