Echo Investment SA

WSE:ECH

Earnings Call Analysis

Strong sales growth and strategic asset management highlight prosperous outlook.

In the latest earnings call, Archicom reported a robust 19% growth in Q3 residential sales, significantly outperforming a sluggish market. The company aims for 4,000 unit sales annually in the coming years. Its residential segment maintains over 30% gross margins, buoyed by strategic asset disposals such as React, sold for EUR 32.5 million. Additionally, Archicom is expanding its Resi4Rent portfolio to over 6,000 units and targeting 10,000 by 2026. With a commitment to return net proceeds from asset sales to debt reduction and dividends in 2025, the company remains on a solid path for profitable growth.

Strong Performance Amidst Market Challenges

In the recent earnings call, Archicom reported impressive growth, particularly in their residential sales, which surged by 19% year-over-year in Q3. Notably, while the overall residential market faced a downturn, Archicom's resilience allowed them to exceed sales targets, already surpassing last year's total sales to date. The company remains committed to achieving a sales target of 4,000 units annually in the near future, indicating a strong pipeline and robust demand for their products.

Solid Financial Metrics and Margins

Archicom's financial stability is underscored by consistent gross margins over 30% in the residential segment. The company experienced a net profit within consensus expectations, supported further by successful property sales, such as the recent disposal of the React office building for EUR 32.5 million. This transaction reflects Archicom's effective capital allocation strategy, which includes reducing debt and preparing for dividend payouts in 2025 and beyond.

Growth Strategy and Land Bank Expansion

The company is strategically increasing its land bank, particularly in major Polish cities like Warsaw and Wrocław. Their approach includes converting commercial land for residential development and enhancing their offerings for first-time buyers, which is projected to rise from 30% to 50% of their sales by 2026. This aligns with their growth trajectory, expecting to sell between 2,300 to 2,400 units next year, reinforcing the company's focus on affordability and accessibility in housing.

Student Housing: A Growing Segment

Archicom has also ventured into the student housing market, with a significant aim to deliver 5,000 beds over the next three to five years, of which 1,200 beds are already under construction. This strategic move caters to the growing demand for student accommodations in Poland, particularly as the market sees a deficit of approximately 400,000 beds, positioning Archicom to capitalize on this opportunity.

Future Guidance and Strategic Outlook

Looking ahead, Archicom is focused on maintaining its competitive edge, anticipating a stable property market and increasing demand. They plan to reduce their indebtedness significantly in 2025, utilizing net proceeds from asset disposals to enhance liquidity and reinstate dividends. The maturity profile for their indebtedness appears manageable, further solidified by declining short-term debt and successful project launches.

Conclusion: A Balanced Approach

Archicom's latest earnings call reveals a company executing its growth strategy effectively while navigating market challenges. With strong sales performance, healthy margins, and an expanding land bank, coupled with plans for debt reduction and strategic asset disposals, Archicom presents a compelling case for investors. Their commitment to delivering dividends in the coming years further enhances their financial attractiveness.

Earnings Call Transcript 2024-Q3

[Weronika Ukleja-Salak, executive]

Good morning, everyone, and welcome to the quarterly results of Echo Investment Group. We're going to summarize today 9 months of our activity this year and give you an insight of what's going to happen in the following months. My name is Weronika Ukleja-Salak. I'm the company's spokesperson. And as usual, I'm here with the management of our group. And please welcome Nicklas Lindberg, our CEO. Hello, Nicklas.

[Nicklas Lindberg, executive]

Hello.

[Weronika Ukleja-Salak, executive]

CFO of our company, Maciej Drozd.

[Maciej Drozd, executive]

Hello.

[Weronika Ukleja-Salak, executive]

And we're going to start with the presentation, then we're going to host a quick Q&A session. As usual, so stick around until the end, and Maciej, the floor is yours.

[Maciej Drozd, executive]

Thank you. So let's start because we have great info to share with you. I would like to start from saying that yesterday, we signed an agreement to sell React, that is office building in Lódz, 15,000 square meters, great location, fantastic tenants and we sold it for EUR 32.5 million, which is consistent with our book value for this asset. So we are happy because it shows that we are leading the market. As I think everybody knows, investment market in offices was slow during last year, but it's getting accelerated, and we are part of this wave, and we expect more to come this year but mainly next year, and we'll talk about this a little bit more later.

We are continuing work on Towarowa, which is a fantastic destination project in the city center of Warsaw. The first office building is under construction is actually closed. It's financed. It's leased in around 70%. So we are very, very happy with the progress here. We also started recently building of first residential building. It's being done by Archicom. It's around 150 apartments. The sale process is going great, and we are very, very happy with the product that we are going to deliver to the market. And again, Nicklas will talk a little bit more about this project in detail because it's a huge project and fantastic project that he would like to share with you more info on that.

We are very happy how Student Space is developing. It's our joint venture where we intend to build 5,000 beds within 3 to 5 years and we started very, very fast. We are already building 1,200 beds to be delivered next year and more is coming. We have many, many projects in preparation. And again, there will be more details about that. We are very excited how the progress -- how it's progressing quickly and according to our plans.

Commercial segment, as I already mentioned, Towarowa is performing very, very well. We have also some other projects which are under construction and which are being leased. And we are happy with how the leasing activity goes and also how the assets are performing overall. And again, Nicklas will share with you more details on the performance of office and retail assets.

Resi4Rent, the largest PRS operator in Poland is progressing very, very well. We will have over 6,000 units completed and yielding and operating at the beginning of 2025, and we are on track to have over 10,000 within 2 years, which is a plan, and they are being leased fully at very good rents. So we are very, very happy with the performance of that project. We also started a sale of individual units in our first project at Warsaw Brewery and we do this to boost returns. And again, Nicklas will give you more details on that project.

Residential wholesale market, that's very interesting because we are doing extremely well. Archicom sales grew by 19% in Q3 compared to last year, which is against the whole market much, much weaker performance because actually the whole market dropped. And the whole market stabilized with sales at lower level than last year, but we are overachieving, we already sold more this year than we sold last year in the entire year last year, and we are on track to have fantastic best ever result in sales.

We are also committed to achieve our target of 4,000 units sold annually in the next few years. Of course, in the more challenging market, that will take a little bit more time than we planned a year ago, but we are confident that we are getting there because as I mentioned, our growth is unprecedented and compared to other developers -- of other residential developers, we are very, very happy with the results.

We are also working on developing existing land bank that we have. And in particular, to convert land, which is currently zoned for commercial purposes to residential purposes. And again, this is a project that we'll share more details later during this presentation.

So again, what were the highlights for the third quarter? Strong residential sales with a high growth year-on-year, as I already mentioned, very good handovers, again, much more than a year ago, start of Student Space projects with 1,200 beds and with very good progress and very good outlook to realize to implement our plan of building 5,000 beds in 3 to 5 years. Towarowa is progressing extremely well. It's being financed and it's already recognized by tenants and clients as the landmark project, which it will be.

On the financing part, we already rolled over during this year, bond issues maturing in 2025. The only issue, which was not rolled over, will be repaid in January. So we have a very, very clean space ahead of us in terms of our financing needs in 2025.

What happened after end of the quarter because it's already a few days that passed. We continue to have strong sales in residential and we continue to start new projects. Archicom started its activity on the new market in Katowice with very good results, very good response to this new project. We continue to sign leases and as I mentioned, we are happy with the performance of leasing activity in all our projects. We sold React, which is very, very important because the market was not really that active for the last year, but we see that activity is coming back, so investment market is getting more and more interesting. And also in Q3, we already repaid bonds expiring in the last quarter over PLN 200 million, which is a part of our plan to deleverage -- to reduce our indebtedness, which will go -- which will follow the disposal of the assets that we own. I mean, the commercial assets that are completed yielding and they are ready for sale.

If we look in a little bit more detail on our segments, once again, residential for sale. What we see in the market is that the prices did grow a lot. They stabilized recently. What we expect is that the prices will stay on the current level, except that there will be more and more promotional activity coming from developers. And this will be a tool to incentivize clients to buy more, but we don't expect overall repricing despite of the fact that the market is -- overall is not performing that great, but we are doing very, very well because our sales are growing.

What we are doing again is we focus on pushing the sales up on starting new projects, which is very important. We keep our eyes on the target of selling 4,000 units per year in the coming years. We focus on, of course, on all projects, but in particular, on Warsaw projects and Wroclaw projects, which produce very high margins and contribute a lot to the result of this segment. And we are looking for new projects as well. At the same time, we are converting the land we already own, which is currently zoned for commercial purposes to residential use.

Resi4Rent is a clear market leader with a very good performance in terms of rental of project completion because we are delivering many, many projects this year and will continue to deliver during next year. That's extremely important that we keep our position of market leader in terms of market share, in terms of number of units operating under construction and we want to keep it that way for the next couple of years.

So our target of over 10,000 is something that we want to achieve in 2026. And we are very, very close to actually hitting even 11,000 in this year.

Student housing, I already mentioned that we started 1,200 beds in Kraków. Why we do that? Because market is extremely interesting. There is a huge need and huge deficit of space for students. So what happens right now is that students are renting space, renting apartments, renting rooms from general market, but the limit that the offer for them in specific designated buildings is extremely limited. And when we compare Poland, Warsaw, Kraków to other cities in Europe, we see that the deficit of beds can easily be assessed at being at around 400,000 beds compared to what would be a more average European level. So we see a huge potential in this area. We see increasing rents, not only in Poland but everywhere. We see growing number of students, in particular, international students coming to Poland. So in this environment, we believe that our plan is extremely important and will be delivered on time or even before the time that we originally planned to implement it.

On the office market, as I already mentioned, the leasing activity is strong. There's very little development activity. So not many projects are coming to market, both in Warsaw and in regional cities. We focus currently on also Warsaw, Kraków and Wroclaw only. And we see a good response -- a very good response, very interesting demand from the clients. So we are very happy on that. At the same time, we are focusing on selling already completed assets, and that's a plan for 2025.

In retail, again, the performance is good. It's improving year-on-year for last couple of years. We see stabilizing footfall, stabilizing tenant results and very clearly improving net operating income, and that's our target to stabilize and achieve and maximize net operating income before disposal of these assets on a much stronger market that we see coming.

Construction is very favorable, and we expect it to stay like that for at least a few more quarters. Currently, the level of activity overall on the market is not satisfactory to the construction companies. So they are looking for jobs. They are very much willing to work for us. They are very much willing to negotiate because they really need to have something to do on the market that is not offering them many opportunities. So what it means to us is that we can build -- we can construct our buildings on good terms, at good pricing. And this is, of course, helping our margins in all the segments.

Let's look at high-level financial data. So what I would like to say is that our profit for the quarter was consistent with the consensus. So it is as expected by the market. Of course, we are working to improve the results. And this is going to come with more handovers because, as I mentioned, we are happy with the level of handovers that we had in Q3. But typically, Q4 is higher, and this is the pattern that we see in many years. So there is some seasonality, of course, in the results that we have.

I would like to spend a little bit more time on this slide which is showing how we look at different segments of our activities. So of course, currently, the most important segment in terms of contribution to the result, but also in terms of value from our shareholders' perspective is residential for sale. If we look how we presented on our balance sheet, it's presented at cost, which means that actually the value of the assets, the value of the business as such is not immediately visible on the balance sheet. So what we did on this slide, we revalued this business based on the market share price of Archicom, and of course, then we see that what is contributing PLN 1.16 per share at book value in the eyes of the market is valued at PLN 3.44 gross. So it's a huge uplift that we can see in this segment if we look at this from the market value perspective.

Other segments are being revalued, but of course, according to certain rules and principles, which really mean that we are actually before actual revaluation of Student Space and revaluation of Towarowa, where we only started to revalue the first office building, but of course, the project that Nicklas will explain in detail shortly, it's much, much bigger. So we only recognized a very small part of growth of pickup in value in Towarowa and much more is ahead of us. So clearly, we see potential of value creation next 2 years coming from resi for sale where, as I mentioned, we target to sell 4,000 units per year with maintaining good margins. Of course, in Resi4Rent, which is a clear market leader, Student Space obviously, because we are at the beginning of our journey, Towarowa, again, the first building only is reflected in its full year value, the rest of the project is at cost. And commercial assets, excluding Towarowa, these are mainly assets for sale. So here, we don't really see that much upside potential. We look at that more as a source of future liquidity. But I will talk about this a little bit later in the financial part, how we want to allocate the proceeds from the disposals. But before that, Nicklas will guide you through our segments in more detail.

[Nicklas Lindberg, executive]

Thank you, Maciej. I will now start from the living part of our segment of our business as we have 2 parts of our business: one segment, what we call the living segment. And in the living segment, we're having our resi for sale. And as Maciej highlighted before, we had a strong sales in Q3. We continue having a target of getting up to the 4,000 units in the future. And already next year, we will exceed 3,000 apartments being sold. And here, we see we have a strong land bank for many years ahead. We will continue filling up a land bank, both by buying land, and also, like Maciej said before, by converting land that is already today on commercial land bank that will be converted into residential land bank in a very good spot on the market.

We're also looking now, how will we be able to adapt to all parts of the market. So now we are specializing a lot going forward. How we will be able to serve the first-time buyers with creating products that is very, very attractive to them where we see a potential of growing further in the segments of Archicom. What you see here in the market, you see stable sales in the big cities where you see a big demand from buying apartments. And what has happened over the years, if we go back, is you see that the land bank of Archicom is now much more centralized to the bigger cities. You see we have grown dramatically in Warsaw, where we see that the projects are the ones that are selling quickest with a high margin and with a huge interest where we are creating a lot of destination products that has a huge interest in the market to continue investing from buyers of residential.

What you see here, it's a little bit of our journey where we started from back in '23, '22, and before that from 500, 800 units, up now to 2,400 to 2,500 units, next year, up to 3,000 units. This growth has been dramatic overall this year. What is important to highlight, like me, Maciej always stressed out, we are keeping the profitability when we're growing. So it's still in line with our strategy of the profitable growth. So we grow and still keeping very strong margins on our projects.

For '25, '26, we will increase the share that we're having here in the first-time buyers part of the segment, which is for us very, very important. This is where we see a huge growth and we are adopting the projects to that part of the market, which means smaller apartments built at lower cost to be able to sell at a lower sales price. We have a lot of projects ongoing, and we continue buying projects all the time to be in line with our strategy of exceeding 4,000 units in '25 and beyond. You see here how the land bank is inside the sales of the Archicom Group. And here, especially what I want to highlight is you see the growth of sales that are happening in Warsaw. And this is something that will lead to future profits in our organization. As you know, we only take the profit in our books once the apartments are handed over. So all the sales we are today seeing also will lead to future good results going forward in the Archicom Group. Handovers is a consequence of the apartment being sold earlier. So as we will increase sales now going forward year-on-year, we will increase the profit for the coming years, which will also then be reflected in the Archicom books.

We have a strong offer in all our markets. We are selling very well in the market. We have a big offer in Warsaw. We have big offer in Wroclaw. And we have a big offer in Lódz. In all these 3 markets, we are really now pushing to take a stronger and stronger part of the market. We are the market leaders both in Wroclaw and in Lódz and we are pushing strong to take even more market share in Warsaw, where we have acquired this fantastic project like Empark, which is a destination project. We have Towarowa, another destination project. And this is what we see. This is really what the buyers are looking for, something unique, something different where you just not deliver a building. You deliver full lifestyle. You deliver a place where you don't need to leave this area for the full day.

You see the land bank, how we are keeping the land bank across Poland. We are focusing on continue growing our land bank in Krakow, where we are now putting most of our effort to buy more land that is happening already this year and early next year. We are still evaluating Tri-City, which we have set for some time, and we are looking for the right opportunity to enter that market. We will not enter a new market unless we see that it is fitting into our strategy, we find the right way to enter, and it will continue facilitating our growth, keeping the same margins as we are having today. So this is something that we will keep you updated, and we are constantly looking for the right time to enter. But at the same time, the focus is to continue growing already in the cities where we're being present today.

We are active on the 5 different markets. We just entered now into Katowice. And Katowice, which is a great example, where we converted a land bank that was earlier in Echo. We converted a zoning, transferred it to Archicom, creating a city center location that are selling very, very well. And that's how we've been able to relocate land within the group to get the best use of every individual land plot, which I think is a very, very big strength of the Archicom Group that you cannot find in many other companies on the market.

If you look at the second part of our living segment, Resi4Rent. We are, by the year-end now, up to 6,200 apartments under operation. We have another almost 4,000 under construction. We are leased 99% of the units like Maciej said before, the first project we started up, which is Warsaw Brewery. We are now selling unit by unit as the residential market for sale in the city center of Warsaw is extremely strong. So here, we are benefiting from that part of the market to be able to then even more facilitate the returns of our investors and shareholders to be able to give the ultimate return looking at every given point of the market. By selling off individual project doesn't mean that we are not focusing on the growth as we are starting 5 to 6x as many new projects as what we are selling off. So it's really a small part, and it's only to boost further returns. We will start another 1,000 projects in Q4 or early Q1 next year, and this is mainly Warsaw project. So if you look through all our project, all our pipelines that we're having in the segments. We are focusing on the big cities. And especially in Resi4Rent, we focus on getting more project in Warsaw, where we see we're getting the best returns of our investments.

Here you see the segments of the market. We are today on this slide, 5,000. If I show this slide at next presentation, we will be up to 6,200. So we are constantly keeping the market-leading position on the market. We are continuously growing, and we are focusing on always making sure that we give the best service to the renting community in Poland.

Here is what we talked about, like Maciej said before, we have almost 11,000 units already today in the pipeline. We will have by the year-end, over 6,000 on operation and another 4,000 in construction, which is showing like this is a really dramatic growth, and you're seeing that we continue delivering fantastic projects to the market.

Student housing, which is the third leg of our living segment is something we started up as early. We started to tell you about this in March, April when we signed a JV with Signal. Now we are already now up and running with 1,200 beds, which is really, really a quick ramp-up, which I think we have never seen before in the Polish market. This 1,200 beds will be delivered in September next year, which will be that we are exactly at the right time to hit the school season for '25, '26.

During '25, we're going to start another 2,000 beds, that will be ready to be delivered in September '26 to be -- for the season '26-'27. So it's really here what we're focus on here, rapid growth. You're also focusing on delivering it by using construction methods, that are more including prefab and other element to be able to deliver a very, very good quality in a very short timing.

You see on the Polish PBSA market that there's a lot of students. And it's both domestic students, international students coming into the Polish market. When we saw you started the semester of '24, '25, there was a dramatic lack of beds for people who want to study in Poland. And what we are delivering is a unique quality that we have not seen in the market, and we will be able to facilitate this. Today, we are starting a project in Warsaw in Krakow, which is the 2 cities where there's the biggest lack of beds. So I think going forward, we're going to tell you much, much more about the growth here. But we are just in the beginning of the journey, but this can be a very interesting segment for us to continue growing. And here is the same target as we having in Resi4Rent to be able to come up and take the market-leading position in the market.

And you see here as well is another one, how much potentially is in Poland to continue growing up both with international students, but also to be able to grow up and taking a stronger leader in this segment of the market to be able to come up to other big cities like U.K., Germany, France, Turkey and Netherlands. There's a very, very good education system in Poland that we think that we will benefit for a lot growing our Student Space organization.

Here you see the pictures of the projects that are either started or planned to be started that you see now going forward and it's super interesting here what we will be able to deliver, and this will also be a new quality on the market. Here you see the projects that we have under construction. One of the projects are here with traditional construction on Krakow Wita, on the 29 Listopada we're doing with prefab. And this is very, very interesting for us because we will be up with full structuring prefab in 6 months, which is we cannot be able to do it in the same pace with traditional construction. So this is something that we're going to look much, much closer in how we do it in student housing and why we do more prefab in student housing than versus other parts of our business is student housing is much more standardized as every room is exactly the same.

If you look from our commercial segment, office and retail, Towarowa leased up to 70%. We will hand over the building in April next year, March, April. And here, you will see that at that point, it will be close to 100% leased. We have a lot of interest for the remaining 30% of the building. We are starting up 2 more projects in Wroclaw and Kraków. And here, you will see already -- here, you will see LOIs and leases being signed during Q4 to be able to deliver this project as well going forward. Even in these local markets where you see there's very little construction ongoing, but there's a strong interest from tenants to move into the newly built buildings that we're delivering with totally new standards and up-to-date with the requirements of the tenants of today. You see tenants are moving from bigger space to smaller spaces that they're having today are still they're working from home is a part of the business that we're going to continue living with. But we see really our buildings is attracting people back to the office. And also we are delivering the fit-out and the community around that you're looking for.

And if also looking at, Maciej said at the beginning, we had a successful sale in Lódz, which shows that investment market is living in Poland. We are selling in the regional cities and to be able to sell our first building in Lódz make sure that we are having big things ahead of us, and we're looking here for how to be able to continue divesting like Maciej says before, to continue getting this commercial standing assets to be generated into cash and then do the best use we can out of the free cash that we are freeing up for these sales. We had a big interest, like Maciej will talk later about, about financing Towarowa, that is a fantastic project that both banks and tenants are looking very optimistic on.

There are -- what we are doing is less of the stand-alone projects. We do more of the destination projects. And we see here the unique strengths of the Echo Group is that we can deliver more than one use on each one of our sites. So what you will see here now is that the tenants are looking for spaces where they don't only have an office. They have so many other functions. So when you come there, there's a restaurant, there's a coffee shop, there's somewhere you can live. So what we are creating is really the places that we've been talking for many years about places where we both work, live and entertain. And that is why we see a lot of interest in our offices and our assets that we are delivering.

Towarowa is a unique product. This is -- we did Warsaw Brewery that was really transforming the city center of Warsaw. Now we're going to do the next one, Towarowa, that is twice the size of Brewery and it's just going to deliver a fantastic quality to the city center of Warsaw. Here, we have -- Archicom is owning the whole residential part of the project, which is around 50,000 square meters. And we have a JV on the remaining 150,000 square meters with AFI Europe, where we -- AFI own 70 and we own 30. And here is really what we're going to deliver state-of-the-art project in the city center of Warsaw. We own a 7-hectare plot where we have now got the master plan. So we were going to now go in full speed to be able to deliver this project to the market. And all of you remember when we did Brewery, but how quickly the construction went once we started, and you will see the same thing here on Towarowa. It's 190,000 square meter mixed-use project with a 2-hectare park. So we are not really going to do only a project here. It's really a park for inhabitants of Warsaw. There's old printing house from Dom Slowa Polskiego, where we are really going to deliver a new quality, both with exhibition of the printing from the past but also what we're doing in all our projects, really creating a space where people want to come. What we are doing here is really building the new city center Warsaw. The whole vola is where -- everybody today goes for office, they go there for Brewery, they go there there for [indiscernible] and now there will be another attraction to come to this area. We are just in the beginning here, and you will see quickly now for our coming presentations how we continue growing this. And like Maciej said, we have just started reevaluating this project. Going forward, there is so much more value in this project that will be released as we're going along with our development. So here, we're just in the early stage, but this is a fantastic project, but I am super excited what we're going to continue delivering.

We are doing 2 more projects, Krakow

Wita and Swobodna at our offices and where we're also going to do this in a mixed use and a function between the 2 different uses, both from residential and from the living segment. We have seen in all our project that is a very, very successful mix of doing both these things in one plot.

Here is Wita, another example, and all these things are ongoing and will be ready during 2025. So you see offices, you see student housing, you see resi for sale. And by doing what we're doing here, we are putting a new benchmark on the sale of the offices where we're selling at prices that are new benchmark for Kraków and offices, there's a huge interest for this locations and students are going full speed with the construction and will be delivered for September next year.

Here, you see that the buildings that we have shown you before, we have now sold out React. We're going to target to selling the remaining part of our projects during '25, '26. And here we're going in full speed to be able to sell off our buildings and then relocate this capital to where it's the best use for the company. As we want to continue growing, we want to continue being a stable dividend payout to our shareholders. So this is crucial for us, and this will be a big part of me and Maciej's focus for 2025 to unlock the capital here to be put into new use inside our organization.

City space continue growing in allocation, continue being a big part of our business, where the flexibility in office is more important than ever. As you need to have both, you need to have your office that is not adopted for everybody coming back to the office. So you need to have this overflow where you can use for people being office from time to time. And this is something that all our tenants are asking for in all our buildings to be able to have that flexibility inside your building. Libero continued growing and -- which is really, really nice to see. We have rolled over a lot of leases. We have signed TK Maxx instead of MediaMarkt, which is really showing a quality of the center and we continue getting this as really the best project that we're doing here for this convenience retail. We see we have playgrounds, we have activities. There's everything happening in this project. So we are really seeing that both in turnovers and footfall, it all is paying off.

Mlociny we're doing the same. We are all back now to record footfall. We have Saturday is close to 50,000 visitors. Turnover is going up. Tenant mix is improving. We are doing a lot of activities here. And this is really -- the retail is coming back on the market, and we see with all 2 centers that we're having here, we are facilitate the future growth of the retail part of the market.

The ESG part of our business is a crucial part of our business going through both the living segment, but also for the commercial segment. Here, we are focusing on implementing our ESG strategy. We are focusing on measuring emissions, and we continue having this as a very, very integrated part of the strategy of the Echo Archicom Group to be able to be the market leader in the market. And here, you can read more about the whole report on our home page to be able to learn more what we're doing because it's a very, very big work put behind all of this.

[Maciej Drozd, executive]

Okay. So once again, let's look at the financials. As I already mentioned, the net profit figure was within the consensus. You can see on the slide that we continue to have good margins, both in residential and commercial segment. I'm talking about margin on sale. That in residential segment in the third quarter was over 30%. The margin is mainly driven in particular segments -- in particular quarters by handovers. I mean in which projects this handover has happened because some projects are having higher margins, some are less strong. But overall, on average, our target is to maintain the margin over 30%. I mean gross margin because, of course, net margin is something entirely different. A fair value change -- fair value gain on investment properties, you can see here a negative figure, which is mainly impacted by exchange rate movement. You can see that the impact of the exchange movement was bigger than the number of fair value change. So it means this is the main factor that influenced this number.

I would like to focus on the balance sheet because I think looking forward, this is something very, very important for us. The size of our balance sheet increased compared to the last year and mainly in 2 positions. One is investment properties, including properties held for sale. And as we already repeated a few times during this presentation, of course, you see React, which will disappear from the balance sheet shortly. But you also see here Libero, Brain I and II, is project Kraków and City 2, and these assets are earmarked for disposal in 2025. Another area of growth is inventory. And of course, this is our residential segment where we show our projects -- our ongoing projects in that line. So we can see very, very rapid growth of that segment when we bought a lot of land and we started many projects during 2024. And that's why our inventory number is going up. I think that's very important to remember and to understand that we expect this number to continue growing. When you look at our -- other side of our balance sheet, then we see that our short-term debt decreased compared to the beginning of the year. But what is even more important to be highlighted that it decreased even more in Q4 because we did repay PLN 209 million of the maturing bonds in Q4, and the balance sheet is from Q3. So of course, it's not yet reflected, but this number will go down. And obviously, a long-term debt is including that linked to this project, so to React, Libero, Brain, et cetera, that will disappear together with disposals of these assets, but also it's very important that our intent is to use the net proceeds coming from the disposals. So net proceeds means value of the asset less that to be repaid. So these net proceeds will be allocated between reduction of corporate level of that. So that's one target. But we also intend to use these proceeds to pay dividends in '25, '26 and '27. So that is a very clear plan that we are determined to implement next year. And as I mentioned before, and Nicklas spoke about this as well, we see investment market really improving. We are part of this improvement, and we are leading that improvement with React and we expect the effect of that to be visible in 2025. And that's why we focus and we stress so much the importance of disposal of the assets that are ready to be disposed and that will be used. The proceeds of this disposal will be used both to reduce the debt, but also to pay dividends in the coming years.

I already mentioned this before, but I think it's good to see this like we presented here that in 2025 and 2026, our maturity profile of our indebtedness is quite flat. Actually, the biggest amount are corporate facilities that we are rolling over and the bonds that are in 2025 -- that are maturing in 2025, we intend to repay them. So we actually do not plan to have bond issuance next year. In 2026, you can see that, again, amount of bonds is small. But as I already said, with asset disposals, our intent is actually to reduce the indebtedness. So not to refinance the bonds but actually to reduce them. And this is, of course, one of the very important reasons is the cost because interest rates they stay high. Of course, we expect them to go down over time, but we want to be proactive and having liquidity coming from asset disposals, we will proactively reduce that and, of course, reduce financial costs as a result of that. So again, this is a very important part. It's not only about debt reduction, it's also about improving results and paying dividend out of these proceeds. And of course, also out of the improving results coming from more and more handovers because as you obviously understand, increasing sales in Archicom, in resi for sale means that within 1 or 2 years, we'll have many more handovers and with strong margins, of course, the impact on the result is very, very material, and that will be another source of income and dividend in the future years. So I think that's all from me.

[Weronika Ukleja-Salak, executive]

We are going to start the Q&A session.

[Maciej Drozd, executive]

Yes.

[Weronika Ukleja-Salak, executive]

Thank you so much. So -- we'll start off the Q&A session, and we'll start with our hottest news of React. And our viewers would like to know at what yield was the React projects sold?

[Nicklas Lindberg, executive]

We never comment yields. We comment sales price on this transaction. The yield was around 8%.

[Weronika Ukleja-Salak, executive]

Okay. Quick question, quick answer. Thank you so much, gentlemen. And let's talk about Towarowa for a little bit. We have a question that our viewers would like to know if we can walk them through our residential project that is owned both by AFI and Archicom? And would it to be the sole residential developer, the Archicom? And what is the AFI's contribution of this project?

[Nicklas Lindberg, executive]

Like we said before, Archicom is owning the 50,000 square meters that is for residential use on this project. And the remaining part that is on commercial use, which is Resi4Rent and offices is owned 70-30 between -- between Echo and AFI. So from the residential sales on the project is 100% Archicom, everything that is under commercial or what we call living sector with the PRS is done in the JV between Echo and Archicom.

[Weronika Ukleja-Salak, executive]

Thank you, Nicklas. Let's stay in a little bit for residential sector. Let's talk about it more. And can you comment how many handovers in Echo alone can we expect next year? Maybe this goes to Nicklas?

[Nicklas Lindberg, executive]

I wouldn't like to go into the detail. Actually, if you look at our accounts, you have all projects detailed with completion dates. So you can basically make that calculation. I wouldn't like to go through that. I think it's too detailed. But the answer is actually in our accounts, it's quite easy to look at that. Of course, it's mainly -- I mean the simple answer is really mainly Modern Mokotow and Wita, which are being done. And of course, we have still part of Fuzja in Echo. And that's right. So it's not many projects. It's quite easy to make that update.

[Weronika Ukleja-Salak, executive]

Yes. So I understand. But to give our viewers an exact number to come back to handovers and our target for 2024. How many handovers can we expect here?

[Nicklas Lindberg, executive]

I mean we keep the original plan, so we are not changing the guidance here.

[Weronika Ukleja-Salak, executive]

Okay. Thank you. And -- this is actually to both of you because it's a question about our plans for the future. Where are we going or if we plan to build more affordable flats? So you know that Archicom entered the more premium sector right now. So our viewers would like to know about the affordable segment.

[Maciej Drozd, executive]

We are doing -- we don't -- we are doing a lot more apartments now for the first time buyers in the market. And we are seeing that is a growing part of the market that is today not being served enough by Archicom, where we think we can both deliver excellent quality but also delivering products that is very well adapted to this segment of the market. We will do it on all the cities where we're being present, where we'll do it in different locations in the market where we'll serve different parts of the segments of the market. But what we have said, what we always said before, Archicom will stay in the popular segment of the market where we will serve rather 70% of the Polish population. Lately, what we are focused on seeing now is that we have not attracted enough attention to the first-time buyers that we are now working much more for '25, '26 to grow that part of our business. Today, this is roughly 30% of the sales in Archicom. Next year, we'll go up to 40%. And the year after, it will go up to 50% of the sales that we're doing in our business.

[Weronika Ukleja-Salak, executive]

And maybe last question about residential. Is the 2,600 sales target within reach?

[Maciej Drozd, executive]

We have changed that target like Archicom presented in their presentation 2 days ago. But it's -- the target is in the range of 2,300 to 2,400 apartments being sold, and that is something we feel confident that we will reach within that target.

[Weronika Ukleja-Salak, executive]

Okay. Great. We are actually receiving on the congratulations on the React disposal. So it goes to you. And we have a question to provide a little bit more color regarding investments in CEE. Nicklas, can you tell us more about how assets are looking to realistically sell next year?

[Nicklas Lindberg, executive]

We see -- well, first of all, you want to stress there will be many more transactions happening in Poland this year. So you will see a lot of transactions closing from now until year-end this year on the other segments of the market, which is a clear signal that the market is waking up from a pretty steady stage until where we are today in 2024. We see in 2025 that it will continue growing and there will be much more capital looking to be invested. We see here interest already today in the assets that we put on the market. We are now in the discussion with potential buyers to be able to produce transactions for being closed during 2025. And here, we are working full speed on all the assets that we showed on the earlier slides. And we will update going forward as soon as we have something concrete and when we're doing today -- yesterday like when we sold an asset, then of course, we will go out to the market and communicate directly to the market.

[Weronika Ukleja-Salak, executive]

Okay. Okay, we have sold a building and will we propose some extra dividends for this?

[Maciej Drozd, executive]

I mean there's no intent to do that in 2024. So -- but in 2025 and the following years, that's the plan, yes.

[Weronika Ukleja-Salak, executive]

Okay. So changing a little bit of subject to our PRS. There is a question about our intent and update on Browary [indiscernible] Resi4Rent project that went to for sale for individual clients. Can we comment on that a little bit more?

[Nicklas Lindberg, executive]

We have been now actively working on marketing both projects. We are now actively converting apartments on Brewery where we see a good interest. We see good sales happening. And what we have decided is, first, we're going to start now on brewery. And then after that one, we will continue with Kempa to continue delivering good sales here. We also see here going forward, we are focusing on continue growing our PRS platform. So at the moment, we have no next project that we're putting on the market for selling as individual units. This was 2 projects. We saw that the spread of selling them as PRS versus selling them as individual units was so big. So for us, it was the best shareholder return by doing what we did on these 2 projects.

[Weronika Ukleja-Salak, executive]

I think we have time for 1 last question. Maybe let's stick to Towarowa. And the question is, are we looking to use our put option for Towarowa 22 office house next year?

[Maciej Drozd, executive]

Yes, yes. We are, of course, discussing with our partner already. And there is a clear intent on both sides that, of course, our partner as part of the strategy, they are long term. They keep the assets and we are developing, we exit. So we are, of course, confirming that intent. So it's -- we do expect this transaction to happen as well in 2025.

[Weronika Ukleja-Salak, executive]

Thank you. So we are done with our Q&A session for today. Thank you, gentlemen. Thank you so much. I would like to thank our viewers for joining us today. And we'll see you soon in March, I guess. So we will summarize our whole 2024 then. So once again, thank you, and see you then.