Neinor Homes SA

MAD:HOME

Earnings Call Analysis

Earnings Call Transcript 2022-Q4

[José Francisco Cravo, executive]

Hi. Good morning, everyone. My name is Jose Cravo, and I'm the Head of Investor Relations at Neinor Homes. Today, we are going to go through our Results of the Fiscal Year 2022. As usual, we are here with Borja Garcia-Egotxeaga, our CEO; and Jordi ArgemÃ, our Deputy CEO and CFO, who will start the presentation with the key highlights of the year. Then we will review the operational and financial performance of the business, and we shall finish with the main takeaways. After the presentation, there will be a Q&A session to answer any questions you may have. Now I'll hand over the presentation to our CEO, Borja Garcia-Egotxeaga.

[Borja Garcia-Egotxeaga Vergara, executive]

Thank you, Jose. On my first message, I would like to note that 2022 was a challenging year, marked by a war, inflation running at double digit, and an unprecedented tightening of monetary policy worldwide. Even so, we are proud to announce that once again, we have accomplished our targets.Jordi will give you more details in Section 3, but since 2019, we have delivered almost 9,000 housing units, and we have been the most profitable player in the Spanish market, generating EUR 500 million EBITDA and more than EUR 350 million net income. In the year '22, we have also distributed EUR 120 million to shareholders with a dividend yield of 12% yield, one of the highest in the European real estate sector, while we have maintained a conservative loan-to-value of 19%.My second message is that the fundamentals of the Spanish residential sector remain intact. Later in the presentation, we will explain why Spain today is one of the most attractive residential markets in the world. In '22, even though we increased prices, our net absorption ratio stood at 5.7%, which is an extremely healthy level. This implies Serena development in only 17 months on an average, and this is a clear evidence of how strong demand for new homes is in Spain.The performance in our rental portfolio was even stronger. We have finished the year with a 97% occupancy level and 15% rental growth. Furthermore, we have executed the first two sales of build-to-rent assets for EUR 40 million at a premium to December 22 apprised house. And this is rather unique. In today's market, very few companies sell assets at book value and yet, we continue to trade at a significant discount to a price help.Now please follow me to Slide #6. Here, you have a summary of our operational and financial KPIs after delivering 2,700 units during full year '22. As of December 22, between build to sell and build to rent, we had 8,715 units active and more than 5% units under construction are finalized. Since then, we started construction in 425 units, and we have another 754 with building permits where we have delayed the beginning of construction to optimize the descent of projects and to protect the margins from cost inflation. Soon in the coming months, we expect to start the construction of these projects.Please move to Section 2, where we will analyze our business performance. As I said in introduction, commercialization environment continues to be very healthy. Despite macro uncertainty and price increases to fully offset cost inflation of 10% to 12%, the fourth quarter was the best of 2022 with almost 600 presales recorded. As of December 22, circa 80% of presales for 23% and 20% of 24 were achieved.For the full year and excluding rental, new presales were recorded at an asking price of EUR 309,000 and we expect this figure to keep going up in coming quarters due to a higher pricing in the product mix launched. Furthermore, we delivered almost 1,000 units during the fourth quarter. The cancellation rate remains at historically low levels as Neinor clients have a strong equity position and didn't have problems in obtaining mortgages from the Spanish banks.Moving to next slide on acquisitions. As we have always said, Neinor follows a very disciplined strategy, and we have a proven track record in reading and anticipating the investment cycle. We have finished the year '22 with the second largest land bank of our history with 15,500 units. During 2022, we concentrated the land acquisitions in regions with a strategic interest for Neinor and targeting IRRs above 20%.Please follow me now to Slide #10. Here, we have a snapshot of our rental portfolio. As you can see, we have made a significant progress. And today, we have 3,500 units that should generate a stabilized income of more than EUR 40 million per year. 2023 will be a key year for our rental portfolio as we expect to deliver more than 1,000 units.On Slide 11, you can see the financial performance of our JDM portfolio, which continues to be excellent. During 2022, we have seen some rotation in the portfolio with 156 contracts renegotiated. And on this, we have been able to increase rents by almost 15% and still finished the year with occupancy levels at 97%, which is remarkable. This performance shows that there is a clear potential to keep increasing rents in our portfolio, but also that there is a very strong demand for brand new rental homes in Spain.Now I hand the presentation to Jordi to review Neinor's financial performance.

[Jordi Argemí García, executive]

Thank you. As Borja said, we have accomplished our annual targets. But in this slide, I would like to call your attention to the last column that basically summarizes Neinor's financial performance since 2019. When remember, we presented a new business plan and new targets.This performance has four key elements: operational, profitability, leverage, and shareholder remuneration. Starting with operations, you can see that we have delivered almost 9,000 units, which is in line with the guidance we gave in 2019. And this despite there has been a COVID situation or now a macro situation with a lot of uncertainty. Also, this level of units delivered is the best trend record in the sector.Second, regarding profitability. We are the leaders in the sector with more than EUR 500 million EBITDA and EUR 350 million net income. This means that we have exceeded the guidance given in 2019 that was EUR 460 million, EUR 480 million. Third, we have maintained a prudent approach to the leverage throughout the cycle with a loan-to-value always below 20%. Today, we have a strong cash position of above EUR 200 million and the second biggest land bank in our history of around 15,000 units.And finally, over this 4-year period, we have distributed $230 million to shareholders in the form of dividends and share buybacks. So it is clear that this company has delivered what we promised 4 years ago despite all the external turbulences. And we, as a management team, are proud of it.Now let's move to the next slide where I will focus on the position and strategy. Over the last 12 months, we have implemented a number of actions to optimize, protect, and also adjust our balance sheet to a scenario of higher interest rates. On one side, we anticipated the labor increase. And with the objective to protect the margins in our build-to-sell business, we acquired in August EUR 300 million nominal interest rate caps at 2% until 2026. This hedge basically allowed us to be 100% protected of the [indiscernible] revolution in the coming 4 years.On the other side, we have also executed a leveraged bond buyback in the market and acquired EUR 27 million nominal value at almost 9% yield to maturity. And this basically generates or should generate EUR 7 million of financial cost savings. Also, we have announced this morning a voluntary parcel tender offer on our green bond for a maximum of EUR 100 million at a minimum price of 90% nominal value. This decision was driven by the strong cash position of this company at the year-end and the objective, obviously, to generate additional savings in the financial expenses over the coming years.Depending on the sector of this tender, we could save up to EUR 25 million. So if you consider these three financial levers already commented, the potential savings for the company could be above EUR 40 million pretax, which means EUR 34 million post-tax, and this basically means EUR 0.5 per share. I think that there is no doubt that we are also creating value for our shareholders from the financial side.And finally, in this slide, you can see that in terms of maturity, I would like to note that Neinor doesn't have refinancing risk until 2026, but also that our corporate debt has a fixed interest rate at 4%. So I would say we are very well covered. With that said, let's move to the next Slide 15.Now allow me to spend a couple of minutes in our nonfinancial performance, where we have a best-in-class performance. During last year 2022, we have been selected for the second year in a row by Sustainalytics as the developer worldwide with the lowest ESG risk. Let me give you a few examples of the main actions implemented this year.Starting on the environmental side, we continue to be the Spanish developer with the highest number of BREEAM certifications. In total, we have delivered 8,000 units spread over more than 133 developments. Also, in 2022, we have reported our alignment with the European Union taxonomy and 39% of our revenues and 55% of the CapEx of 2022 deliveries meet this criteria. But also, we have taken decisive actions at the social front. In 2022, we have published our first social impact report, and we are one of the very few developers doing this worldwide.And with this, I hand back the presentation to Borja.

[Borja Garcia-Egotxeaga Vergara, executive]

Thank you, Jordi. And before going into conclusions, please let me take a couple of minutes explaining why the residential market in Spain is in a completely different situation versus 2007 and in better shape than most markets.In the appendix, you have charts that illustrate the figures displayed in the table. Firstly, on the supply side and on a per capita basis, Spain is producing 41% less units than the average of Germany, the U.K. or the U.S. Secondly, household debt. One of the main problems in Spain during the great financial crisis has been reduced by more than 30% over the last 15 years and today is even below Germany. Third, Spain has a very competitive cost of mortgages. It currently sits around 3%, and this is 35% below selected countries.Fourth, due to the above-mentioned reasons, we didn't see a house price rally. And in fact, house prices are still 14% below 2007 versus more than 80% up in other countries. Finally, the Spanish economy is nowhere close to its full structural employment levels, and it is expected to grow at 1.5% over the next two years. That is 2x faster than other countries under analysis. Now let's go to the last slide.I would like to conclude today's session with the following messages. As I just mentioned, today, the Spanish residential market is one of the safest ones to invest worldwide as it is not expected house prices to come down. It is under supply, under leverage, and underpriced. Secondly, on this slide, we provide our outlook for ER23 for Neinor homes. In a nutshell, we expect financials to be broadly similar with 2022. This implies delivery between 2,500 and 3,000 units and generate an EBITDA that should be in the bottom range of the EUR 140 million to EUR 160 million range.As we did during 2022, we will remain highly disciplined on new acquisitions. And I would like to finish by saying that today, taking into consideration recent launches and wipes, we have more than 900 units up for delivery in the coming years, of which 600 units are already under construction, plus in this product, which should give us a good earnings visibility for the coming years. Now, we are ready to take any questions you may have.

[Operator]

Thank you. [Operator Instructions] We'll now take our first question via the phone line. This is from the line of Ignacio Dominguez from JB Capital.

[Ignacio DomÃnguez Ruiz, analyst]

Thank you. I have three. Firstly, our target of build-to-sell deliveries you used to calculate the sales coverage ratio for '24 deliveries? Secondly, could you give us any guidance for dividends you plan to distribute in 2023? And finally, what are the land purchase assumptions behind your EUR 300 million to EUR 500 million net debt guidance for 2022?

[Jordi Argemí García, executive]

I'll try to answer your three questions. Regarding the guidance of build-to-sell for 2024, which was for that '23. That was the first question, it should be around 2,000 units. This is our guidance. Regarding your second question, you know that we keep the guidance of 2,500 to 3,000 units, and this is the range that we continue showing to the market. We are not going to change that.And regarding the net debt, it's a huge range, the rational defined is because it will depend on the land acquisition opportunities that we find in the market. So if we don't find relevant good opportunities. You know that we are very disciplined in that sense, we should be sticking the EUR 300 million of net debt. If there is good opportunity, and therefore, we could have a budget up to EUR 200 million. It would be in by automatically to increase the net debt up to EUR 500 million. That's the rationale.

[Ignacio DomÃnguez Ruiz, analyst]

Okay, thank you.

[Operator]

We'll now take our second question from the phone lines. This is from the line of Javier Beldarrain from Bestinver.

[Javier Beldarrain, analyst]

So, three questions from my side. The first one on construction starts. According to the difference in units under construction and the presentation, you have started construction on several hundred units in 2023. So, can we assume that the construction pace is now back to normalized levels?Then the second one on commercial activity. Could you give us some color on how presales have booked during January and February. And then the final one on the sale of the rental assets, both of these assets are located in the same region. So would you say there is a higher interest in rental assets in that area in comparison versus the rest of Spain. Thank you very much.

[Borja Garcia-Egotxeaga Vergara, executive]

Thank you. I will start regarding the construction starts. Yes, as you know, the construction cost in Europe and Spain increased a lot during the period that went from the summer of '21 until the summer of '22. You know that basically, this construction cost did increase because of the way of materials. In the offers, that materials have an importance in a normal tender in construction of around 30% to 35% of the total budget is due to these materials.In fact, as you are saying, we have a very big increase referred to some of the materials that we normally were used in construction, basically iron and product that has a lot to do with energy, basically, bricks, concrete, and some other elements that we normally we use in the construction. So, we saw the tick of the cost of energy during the Q2 and Q3 of last year and that still made that the pressure on those costs was very high.Since last summer, we started seeing how prices were relaxing. There were two main reasons for this. One is on energy, and the other one is -- has to do a lot with the crisis in the residential Chinese sector. You know that the Chinese sector has a huge weight in the consumption of materials for construction and therefore, this was softening as the year was going by during last year.All in all, what we happened last year was that when we were having the request of new offers, where we were requesting offers to construction companies, we're having the first extra cost of around 20%. To decrease this, we had to take back a lot of projects, to take them back to the office to start new negotiations with constructions or even trying to sign long-term agreements with some of them to reduce those costs.After that, we've been able during last year to reduce the construction cost up to 10% to 12%. This was something that in Q4 of last year, we started to see a relaxation of-- a reduction in the cost increase of the construction. Therefore, now during the following months, we expect that launching new projects will be much easier and in that line, we are working.

[Jordi Argemí García, executive]

Okay. I'll take the second question on the third one. The second, regarding the sales performance on January and February. The numbers has been very solid. We have closed with a solid win slightly above and keeping the net absorption rate circa 5%. So in general terms, leads, visits, and sales has performed in the same way we saw in Q4 of last year.Regarding the rental crystallization, we keep with the various lines of value crystallization with negotiations on -- with investors in both sides in individual asset sales and in portfolio or programmatic deals. The case that the first two assets that we crystallize where in Malaga has been a casualty. We are under negotiations of additional crystallization in assets in Madrid, Valencia, and in general, in all the regions where we are performing.What we can say is that we have seen an increase in appetite during this beginning of the year for these asset classes. As we see that the capital value inflation and the rent increases that has been very strong, as you can see in our portfolio has been at 16% last year are offsetting the impact and uncertainty on the interest rates. So we will comfortable with the performance on the rental for this year.

[Javier Beldarrain, analyst]

Okay, thank you very much.

[Operator]

Thank you. [Operator Instructions] no further questions.

[José Francisco Cravo, executive]

Okay, operator. So I'll go now to the webcast. We have received a couple of questions. One of them on the announcement of the bond buyback, if we can give some more details.

[Jordi Argemí García, executive]

Well, actually, it's what I was saying. I mean, we believe that the best investment alternative from a cash management perspective is the bond. We have prepared this up to EUR 100 million, it's kind of 98%. The center is open for 1 week. So in 1 week, we will now know the success of this tender. So let's see. But for sure, given that we have more than EUR 200 million is the best alternative to optimize the cash.

[José Francisco Cravo, executive]

Thanks, Jordi. Second question on land acquisitions. Given the amount invested in the year '22, what can we expect for '23? And essentially, what is the strategy that the company is following?

[Borja Garcia-Egotxeaga Vergara, executive]

Yes. Well, we keep with our disciplined strategy. As we have mentioned, we have a very strong land bank. So in that sense, what we are doing is keep analyzing the best opportunities in the market. We are ready, and we are also analyzing the best structures that could arise in the coming months. So we will keep active, but disciplined as we have been in the last years.

[José Francisco Cravo, executive]

Okay. Then a couple of more questions here on the webcast. With regards to the delivery mix for the year '23, how many units are expected on the build-to-rent segment.

[Jordi Argemí García, executive]

Well, you know that the global guidance is between 2,500 to 3,000 units, I said before, not that the build-to-sell should be close to 2,000 units, it will depend. You can deduct the build-to-rent guidance depending on the build-to-sell units. But again, it's something that we need to -- I mean, the month in front of us, we will see at the last part of the year, how much will be build-to-rent. Just consider the guidance and that's it.

[José Francisco Cravo, executive]

Okay. Then on build-to-sell deliveries, if we can give some color on the gross margins for the years '23 and '24.

[Jordi Argemí García, executive]

Well, I think that we keep similar now to what we have always guided. This should be between 22%, 24% gross margin. But in any case, what matters is EBITDA and EBITDA is clear that EUR 140 million, EUR 150 million of guidance. It's true that this year, as you can imagine, we have more pressure than ever because of the Euribor increase. That is put we have the hedge and it goes a lot, it's not -- I mean we have an impact there. And I would be in the lower part of the range being condensed. So let's see how we finished the year, but actually more than EUR 140 million rather than EUR 150 million.

[José Francisco Cravo, executive]

And then one question on the rental -- on a rental, if you can give some guidance on the potential or the number of projects to be sold in the year '23.

[Borja Garcia-Egotxeaga Vergara, executive]

Well, here, as I was mentioning before, we see an increase in appetite, so the amount of crystallization of value is going to depend on the negotiations. As we did in the last deals to achieve very accretive returns in each of our assets because the reality is that the operating market of the build-to-rent, it's improving on a monthly basis. So we are not in a hurry, and we will see during the year and the negotiations, how much we can crystallize.

[José Francisco Cravo, executive]

Okay. Thank you, Mario. We don't have any further questions. So operator, we can finish the conference call.