Earnings Call: Q2 2021

Jul 28, 2021

Good afternoon, everyone. My name is Jose Clabo, and I'm the Head of Investor Relations at Nynor Homes. As usual, we are here with our CEO, Borja Garcia Bautiaga and our Deputy CEO and CFO, Jordi Arzemi. Today, we are going to go over the first half twenty twenty one results presentation. And we shall start by the key highlights of the semester, and then we will review the financial and operational performance of each business unit of Nainor. On Section 3, we will go through the main acquisitions announced year to date, such as Quavit, Carriles or Aremonteza. And finally, on Section 45, we'll move into some strategic considerations about Nainor Residential Platform. And then we will finish with the conclusions. Afterwards, as always, we'll be available to take any questions you may have. And with this, I hand over to our CEO, Borja Garciago Chaga. Thank you, Jose. Good afternoon, and welcome, everyone. So let's start with the highlights of this first half of the year, which you can see in Page 5. First thing is our financial results and numbers that speak by themselves. For the first time in our history, In our first half, we closed with €70,000,000 EBITDA and €50,000,000 of net income. We have a strong cash position of €315,000,000 and we keep our prudent loan to value of 23% and we do not have any relevant maturities after the 300 Green Bond we issued recently. On operations, we also exceed record levels in our commercial activity with almost 1500 units results. And on top of that, we were able to increase prices by almost 2.5% in this first half. On our rental platform, we are going through intensive letting activity. We relate almost 40% of our operating portfolio and we were able to increase 12% the rents. On the acquisitions side, You will see that we dedicate a full section in this presentation. As you know, the physicians are a very relevant part of our business. We have proven once again our capacity to read the market. We have launched and executed our most aggressive investment strategy ever that has allowed us to double our land bank well ahead of today's commercial strength. We have invested €600,000,000 in good land and good property assets at a good price, all transactions that are very accretive for our shareholders. We are now sitting in a top quality land bank of 18,000 units and therefore we are more levered to the cycles recovery. And all these when the residential sector is the best performing asset class coming out of the crisis. Today, we will also see with Jordi some strategic considerations. As you can see, We have 8% increase in our net asset value versus December. But most important, We will give you some color on how we will focus on crystallizing the value that our rental platform is already showing. And now, I give the word to him, to Jordi, to start with the first chapter on the financial snapshot. Thank you, Borja. If we jump to Slide number 7, you have a brief summary of the financials for the 1st semester. Basically, we have closed with €327,000,000 of revenue, positive EBITDA of €70,000,000 and positive adjusted net income of €50,000,000 Both EBITDA and adjusted net income includes 2, I would say unusual impacts. On one side, EUR 11,000,000 at EBITDA level and EUR 8,000,000 at net income level after deducting the tax obviously due to the positive impact from the change in fair value of the rental portfolio. Important to say here that from this year onwards, given that we are going to deliver units for the rental platform, we will record at EBITDA level The developer margin embedded once we sell the rental units from the developer to the ADAS. And below EBITDA, the change in fair value once they are finished. So the evolution of the rental portfolio value will not impact the EBITDA and guidance of this company. On the other side, non recurring expenses that basically refers to the growth. This means acquisition of Huawei, portfolio of service and the tender of Barcelona, HNV mainly. In any asset deal, these expenses are always capitalized. So the impact is embedded in the gross margin when they are delivered, which means in 3 or 4 years since the acquisition. But given that these deals have been shared deals, we cannot capitalize them based on the accounting rules. Having said this, on the right hand side of the slide, you have the year on year growth that is justified by a step up in deliveries. As you can see, we have multiplied by 3 times the revenues, thanks to have delivered around 1,000 units, multiplied by 5 times EBITDA and by 7 times the adjusted net income. So this Set of results are very solid and strong and gives high visibility on the full year target. On top of this, And last comment in this slide, you will see that in the balance sheet and also in the appraisal, we have significantly grown. This is Garcia Bolteaga. The aggressive investment done in the last 6 months that Borja have just mentioned, but still with a prudent loan to value of 23% and with a good debt quality given that green bond issued a couple of months ago, which implies no relevant corporate debt maturities in the next 5 years and a half. And with that said, Borja will jump to the operational snapshot. Thank you, Georgi. So moving to next slide here. Here you have the key operating figures of our 3 business lines. I'm just going to highlight the most relevant ones. On the development side, we have sold almost 1500 units. This is a record sales figure for Nenorhomes. And in the same time, we were able to increase prices, as I have said before, by almost 2.3%. On the rental side, our current operating portfolio had very low occupancy and most of the leases were expiring this year. So our focus was to relet most of these assets. So it is important to highlight that we take up this semester. The take up this semester represents almost 40% of the total GLA and we're able to achieve 12% increase from previous contracts. So now our focus will be just to increase the occupancy during the second half of the year. Finally, on Residiential Services, we have increased our 3rd party development pipeline with the award we got from Filo de Barcelona and Air America Polytana de Barcelona to develop and operate 12% units of affordable houses. This product is for rent as you know. Important to mention that we own 25 percent of this sales call. This business adds to more than 1,000 units We are developing for a 3rd party now in Madrid. Going to next slide, we start on acquisitions. So now I'm going to spend a few minutes describing our recent acquisitions. Important to mention that acquisitions are the most relevant aspect for the development business. And along this, I am proud to say that we have taken once again a good read on the market. Last year, when the pandemic hit, a lot of questions were raised on our business. Some developers stopped constructions and most of them delayed new launches. In these situations, the biggest corrections of course, in the land market. So we decided it was the right moment to go out there to buy very cheap and accretive land. And good transactions require a lot of work. So we're very happy to say that we have managed to close these transactions during the first half. And we know it was a right move when we see the strong signs of recovery on our commercialization. So to be clear, we already invested and closed more than €600,000,000 Through this movement, we have doubled our land bank with a very cheap and accretive transactions for our shareholders. So So let's take now a quick view on the most relevant ones. If we move to next page, Kwabith. In April 2020, we began discussions with Quavit. And this semester in 2021, we managed to close this transaction. And most of you know that M and As and absorptions are not simple. But today, we have a firm that it was not only closed, it is also integrated and it is already generating P and L and positive cash flows. We do not only see synergies and economic of scale as you see in the many presentations. We are seeing real bottom line profit and cash flows given it was a very opportunistic and accretive transaction for our shareholders. And to give you a few highlights of the operation. Commercially, as you know, 90% of the active product of Kwabit is located in Malaga and Madrid, which are the 2 best performing regions year to date. Today, Wabbit represents 30% of our total sales year to date, a very strong performance. And we will still see better results as our marketing efforts get fully implemented. Operationally, we have launched and restarted constructions in many projects that were stopped due to the lack of resources in Q1. This is a quick example of how Nainor will be able to put in value Kwabic's land bank. In parallel, we have integrated the construction company, which is going to be focused on the central region, where we own 6,000 units and this should help Nainor to protect margins and their cost inflationary environments and to lower execution risks. Financially, we have refinanced Quavit's debt achieving financial savings of more than €50,000,000 per year. And to finish and most important, on the right side of the slide, You have a value bridge that explains very clearly how we have improved our initial underwriting assumptions. We are seeing €80,000,000 additional value from our purchase price allocation. A high profit implies, as you know, that we will have more tax credits. In next page, we can see 2 representative acquisitions, Cariles and Montesa. Here, I just want to highlight these 2 cherry picket Acquisitions which are the most relevant out of the €250,000,000 we closed this year, of which 75% of them are in Madrid and Barcelona. The first one is a relevant stake we bought in Los Cariles Sector. This is the primest asset not only in Madrid, but in Spain. It is in the north of Madrid between La Baradeja, Alpo Mendas and Castellanos. In this area, in Alpo Mendas, We have already delivered more than 900 units and all of them with very high margins. The last one was Avaya Homes, delivered end of last year, which is located just on the block right next to this area. We bought the land At similar level, we acquired those land plots in 2015 2016. And this was a very complex transaction, which involved more than 60 different sellers. The other one, the other operation is Ademontesa. We control this sector in the middle of Barcelona. So we will be developing almost 900 units in the best location of Barcelona. It is similar to San Just, a sector that is closed where we delivered more than 500 units. And again, We managed to buy land in Barcelona at prices below what we acquired in 2015 2016. Going please to next slide, we see the Acehneve project. So last but not least, we were awarded the Affordable Housing Project of Barcelona. This represents 4,500 units brand portfolio in the city of Barcelona that allows Nainor to take full advantage with residential platform strategy and its developer investor operator model. This project has a double bottom line return. It has a 10% return on equity for our shareholders, while having a clearly positive impact on the society. So now, I'll give the word back to Jordi that he will go through some strategic considerations of the business. Thank you, Borja. This section is focused on understanding how we see Menor in the coming years and also how it should be valued from now onwards given that Menor is a residential platform and need some of the parts analysis. In Slide 15, you can see conceptually these some of the parts. On the left hand side, we have our build to sell business in which the main data points to understand the value are units delivered between 2,503,000 units. This implies revenues of €800,000,000 or €900,000,000 EBITDA ranging €140,000,000 €160,000,000 And basically, all this means net income of around €100,000,000 To get the equity value, we must assume a price earnings multiple, Whatever you as investors and analysts understand makes sense for this business. Here it's important to understand that we are not projecting growth for this business line, given that the last 12 months already shows these numbers of units delivered, EBITDA and net income that we are putting in this slide. So the risk behind the value of this business line today doesn't have to do with our ramp up strategy. On top of this build to sell business, we have the rental platform that as you know, we started in the beginning of 2020 and that we should stabilize in 4, 5 years from now. As you can see, we have 3 different buckets: Nino Rental, which has 2,400 units and has already been launched. Actually, this year, we will have operating units, and we expect to reach $28,000,000 of GRI for this bucket once stabilized. Then we have additional 1100 units Santiago Tiaga, in our balance sheet identified for this business and that we will launch in the coming months. The GRI expected for this bucket is EUR 10,000,000 And the 3rd bucket is HNV, the tender from Barcelona region just committed by Borja that we have won in the 1st semester. Total units of 1125 with a GRI of 10,000,000. All in all, once stabilized, which means in 4, 5 years, we would have 3,500 units and a GRI of €38,000,000 plus HNV that can take a little bit longer, but given the asset typology and the client segment that targets, there is no real risk on economics. The value of this business, once stabilized, will come from dividing the €48,000,000 of GRI that you see in the slide by the gross yield You understand it makes sense. And finally, obviously, deducting the net debt associated of €400,000,000 This will come up with a net asset value of this business line. But as you know, this business is less risky and more stable and therefore, Normally, the net asset value is similar to the equity value. Now, if we turn to Slide 16, you will see this analysis fulfilled. Important to say that this slide is just for illustrative purposes. With the only objective to show full calculations, We are not here to say and defend the multiple price earnings and the gross yield that are in this slide. This is not our job. You will see in the full notes 1 and 3 of this slide from where we have taken those numbers, being the discount on the recent transactions and comparables. So even being illustrative, we are being conservative. In this case, as you can see the bottom line, the equity value would range €901,000,000 for the B2CEL business €600,000,000 for the PRS business. In Slide 17, you can see the value of this company taking in 5 years period. Deal to sell business already commented €901,000,000 Dividends €250,000,000 plus. This means that we are going to pay €50,000,000 or in other words, a payout of 50% of the net result. This was our commitment. PRS business commented EUR 600,000,000 is stabilized, but today already has a value of this portfolio EUR 200,000,000 of value. And all this potential value is assets that are in our balance sheet. That's very relevant. If you sum these three columns, the total Value of this company would range €125,000,000,000 €185,000,000,000 which means a share price of €21,000,000 or €23,000,000 But obviously, we will have another 2 relevant market levers, which are HPA. The market is pushing very strong and we are increasing prices as Borja commented before. Every 1% increase implies around €40,000,000 So assuming 2%, 3% HPA net of cost construction inflation, The impact would be €80,000,000 or €120,000,000 And the second market level is the rental growth or yield compression. Each EUR 1,000,000 of GRI implies additional EUR 20,000,000 of value and each 0.25 percent less of yield implies €60,000,000 of additional value. All in all, if you look the last column, this implies in this scenario more than €2,000,000,000 the value of this company. And this is compared to a €900,000,000 of market cap. Today, while speaking, it's almost €1,000,000,000 Thanks to the results of today. This implies that the company has the capacity to multiply by 2 times the value of this company in the next 4, 5 years. And this means increasingly more than 20% IRR annual. Depending on your assumptions, I mean, the price earnings and the Brazil, the value can be above or below this illustration. But in any case, The value growth profile of Menor is strong and very attractive. So what shows all this is that focusing on a deviation at EBITDA level of €5,000,000 or €10,000,000 either positive or negative in a total EBIT of €150,000,000 versus the guidance of market consensus He's completely, I'm sorry for the word, absolute. Since we are far away from the real value of this company, PRS today comes for free and has a value of 100 of 1,000,000. And last comment from my side. If we turn to Slide 18, You will see that the value of the Rent A platform will not come in 5 years from now. There is a clear path towards the value of this business line year on year. You can see that already in 2023, which means 2 years from now, we should have 36% of the GRI of the Nenor rental bracket. And in 2024, which means 3 years, we should have more than 70%. So we should be picturizing a relevant part of the value in the next 2 3 years. With that said, Borja will jump to the last section of the presentation, key takeaways. Thank you, Yol. So now we'll give a few messages before we jump to Q and A. The first one is that we are on track to meet our full year 2021 guidance of €150,000,000 EBITDA with total visibility on sales and execution. For year 2022, every development is progressing fine. We have great visibility and for the year 'twenty three everything is on track. The second message is on the market outlook. The residential sector is a clear winner out of the pandemia due to many factors and the market is coming back very strong. Given our good read of the market and the right timing and in our homes, we are perfectly positioned to benefit from this as we managed to close already €600,000,000 of very accretive acquisitions and double our land bank during the pandemia. 3rd message is on the rental platform. Almost 2 years ago, we decided to step on this business. This line of business is already a reality and we will keep investing as there is a big supply demand imbalance. So the economics will only improve. On top of this, there is a big investor appetite for this sector and some large portfolios have been traded recently at yields below 3%. This already represents a lot of value for our shareholders. Following this, my last message is that we will work very hard to put in value our unique proposition of our residential platform. Today, we are the only way to invest in listed Spanish PRS and you can access our platform for free. This means that from today, We will work to crystallize the value of our PRS platform and lever on the strong sector tailwinds that we have in front of us. So thank you very much for your time. And now we will move to the Q and A. Thank you, Borja. So yes, operator, we may start the Q and A session. Okay. Ladies and gentlemen, we will now begin the question and answer session. Okay. As of the moment, no questions via phone lines. Please continue. Bolteaga. We can start with the webcast platform. Okay. So we have here a question from an analyst. He's asking about whether the EUR 150,000,000 EBITDA target for the year 2021 includes the EUR 111,000,000 positive impact on the change in fair value. And the second question is on sales, how July is going in terms of presales. Okay. I take the first one then. I think it's important to refresh at least two comments in that same question. First is what we consider above EBITDA from now onwards and what we don't consider. As I said before, we will consider above EBITDA changes in the fair value of investment properties that are part of our developer margin. As an example, When we deliver Ascinda Cabello in the Q3, we are going to recognize the corresponding margin, developer margin above EBITDA. Remember that this development was included as a delivery on our 2019 business plan and the fact that we have changed into rental hasn't changed our target. 2nd concept, we will also consider above EBITDA, revaluation of acquisitions like Saredes in which we bought at a cheap price and then the appraisal recognizes the intrinsic value of this acquisition. But we will not consider any subsequent change in the value of these assets from rental growth, yield compression or any other reason. Apart from this, if you are concerned that part of the EUR 150,000,000 EBITDA is not cash and your DCF would show a lower value. This is not correct because we are delivering even more cash flow, thanks to the transaction of Cuave. So more than expected even also in the cash flow profile. But what is more important It's not what I have said until now, is that we have a lot of value in the PRS platform, as I said before, comes for free and therefore, euros 5,000,000 or euros 10,000,000 deviation positive or negative at EBITDA cash flow doesn't change the strong message that we are showing today that we have plenty of value in front of us, thanks to the PRS business. Okay. I take the second one regarding the sales, Manuela Berra. July came Santiago Tiaga. With the same trend as auction, we are expecting to close in the region of the 200, 250 unit. And for the H2, we forecast the same trend, capital in SPA Then the second question also from the webcast. If you can provide some more details on the pre sales coverage and construction standpoint for 20222023 on the build to sell deliveries. And then also if we could give more color on the time frame or the pace in which deal to sell deliveries will come from Qualys portfolio. Okay. I take the one off the coverage on pre sales. For 2022, we have already more than 60% coverage. So we will be focusing on maximizing HPA during this year. And for 2023, we have already 18%. We will keep volume on HPA focusing in this H2.50 to 30% of our business for the year end. And regarding the contribution of COVID, we said that last quarter. This year, probably there will be some units, but obviously, the impact from an EBITDA perspective on margins will be very residual and impact will come in 2022 onwards. But given that we didn't dilute our shareholders with the transaction, We don't have to change the target. So we have more weapons to get the targets, and hopefully, we will achieve or even exceed them. Okay. Next question, it's about cost inflation environment, about whether we are seeing this pressure and if we are comfortable with the outlook on this side of the business. In the beginning of the year. So more or less what we are having is exactly what we expected when we made the business bank for this year. And we are seeing more or less increases in prices that the year will finish, we think, with an increase between 3% and 5%. This is the figures that we have been working with. Of course, this year is going to be a year of tendencies. It may be some peaks since the economy is restarting again, But we are not suffering cost increase in our construction sites, what we have activated today. We are not suffering either the deviations against our business plan. So for instance, in the last 6 in the last month, We have contracted 6 new developments and all of them are in the numbers that they have to be. And we don't expect bigger increases, as I've said, greater than 4% or 5% during this year. So we have to consider that this number was already, as I've said, some or considered at the beginning of the year, We'll be very much offset with the HPA that we are going to be able to introduce to the developments in the year. So no big deal here, we will keep the margins. Okay. One more question. It's with regards to the crystallization of the value of the rental business. The analyst is asking if we can share any particular way in which we are trying to complete this task, if we could sell a stake of the business or even spin it off. Okay. I'll take this one. Now our priority is execution. I mean, build the assets, deliver them successfully and then to let them. We are working intensively on the projects and all of them are launched and should be delivered from Ociaga, 2024 or 2025, as I said before. In parallel, we have seen recent portfolios like Bivenio and Acapol Mor to be traded below 3% stabilized yield. So this clearly shows there is institutional demand from investors for this asset class and we will look to crystallize the value of Nenor rental. To do so, obviously, we could consider many different alternatives. We can sell a mini stake, We can even float now the portfolio, etcetera. I think that we have a lot of optionality we will see in the near future. Okay. Thank you, Jordi. We have one more question coming in from the webcast platform. It's about the HMB contract. The analyst is asking about or how unique is this contract and whether this could be a more meaningful segment of business for Nainor in the long term or if there is more there is a pipeline of more opportunities here. Sorry, Jose, you mean the servicing contract? Santiago, the rental contract in Barcelona, the affordable. And what was the percentage, sorry, Adrian? Santiago. I'll repeat it. If there is a pipeline of opportunities like this one that we could be awarded in the future. Of course, there is going to be a vast area of opportunities in the future in Spain. As you know, Colombia de Madrid, it's Only in the first states. And we know that other cities like Valencia and some other cities are considering similar initiatives. So that may be a good way to increase revenues for the company, and we will be analyzing and studying all of that. Having said this, we will only enter those ones that we consider as very profitable for the company. Okay. So we have no further questions at this stage. And I would like just to clarify the message that was given on the presales on the commercialization side of the business. As I heard that he was not very clear the line. But essentially, what Mario said is that we expect The strong momentum of the first half to continue on the second half. And Mario said that we have a 95% coverage for the year for the current year, so for 2021 and plus 60% for 2022, okay? And essentially, what this means that in June as of June, we are in the point of sales coverage that we normally are by December. So the focus of the company in the next 6 months is to capture more HPA and to improve the margins. Just sorry, one more question that is coming on the webcast. With regards to the expected EBITDA margin, at which he will transfer the unit to the rental portfolio. What is the criteria followed? And when do you expect to open the rental company to new investors? And how would you consider payment in kind of sort options of other portfolios? The margin assumed that Quitterius basically has built to sell. So the same margin that we should know record for the built to sell business, we will record for the Built to Rain business. And obviously, there will be a third party valuation to justify this criteria. And regarding investors, again, we are focused on executing. Right now, there will be time enough to put in value the platform, thinking different structures in 1 or 2 years from now probably. Okay, perfect. I guess there are no further questions. And this concludes our first half twenty