Ladies and gentlemen, good morning. Thank you for holding, and welcome to MRV's Analysts and Investors Video Conference for Resia Day 2023. Today with us, we have MRV&CO's CEO, Rafael Menin, the CFO, Ricardo Paixão, Resia CEO, Ernesto Lopes, Resia COO, Ricardo Blas, and Resia CFO, Thiago Caixeta. We would like to inform that this event is being recorded and simultaneously broadcasted on YouTube. After the company's presentation, there will be a Q&A session, when further instructions will be given. Now, I would like to turn the floor over to Mr. Rafael Menin, MRV&CO's CEO. Mr. Menin, you may proceed.
Good morning, everyone. Thank you for being with us in another event. This is a new event. We have never done this before. We'll speak about Resia, which is a subsidiary in which MRV has acquired an important interest of more than 90% in the beginning of 2022, three years ago. Since then, we've been delivering outstanding results, and looking on the very short term, there is a challenging scenario in terms of interest rates, and the dynamic will be different from now on. But what's most important is what we've accomplished recently so far, because Resia is a company that has an amazing potential, operating in the main world market at the world most organized economy with a very, with lots of legal certainty.
So this movement that we made three years ago will be essential to the future of MRV&CO. I say that Resia, with its organic growth, it will become a new MRV in terms of size, and some years from now, we'll be able to look back and be sure that we were very assertive in purchasing Resia three years before. Now, I would like to turn the floor over to Ernesto, Blas, and Caixeta. The three of them will speak in detail about what Resia is and why we believe so much in the subsidiary. Good morning, Ernesto, Blas, and Caixeta. The floor, the ball's on your court. Okay.
My name is Ernesto Lopes. I am the CEO of Resia. I'm here with the COO, Ricardo Blas, and the CFO, Thiago Caixeta. We're speaking to you directly from the floor of our plant close to Atlanta.
It's a very cold day, and we are at the final stages of assembly of this plant that will start its operations in mid-January, producing parts for the apartments that will be built this year. So it's always a pleasure to talk about Resia, especially today, in this single opportunity to explain what the company is about, how we've come so far, and what is the outlook. Before starting the presentation, I would like to play a video that shows what the company is today, the level of innovation and modernization that we've reached. So please, let's watch the video... and we'll be back soon.
Efficiency, sustainability, technology. Manufacturing has always inspired innovation, and now the time has come for a new major revolution that not only reinvents the multifamily business model, but also enables us to provide affordable housing, the Resia Production System. This system streamlines development and construction to address the current housing shortage that affects the entire country. With a sophisticated, innovative, and technological process, Resia can complete much of the building before construction even begins. The result? Higher quality, less waste, savings that are passed on to our customers. How does it work? An intelligent design allows Resia to assemble a versatile selection of modular floor plans, ideal for all types of families. By starting from the same model and thoughtfully assembling different modules, Resia can create compact or large apartments to meet the needs of different residents.
In the architectural study, apartments are organized to create the most efficient layout for each site. Combining modules with access points allows for layouts of 12, 16, or even 20 units per floor, depending on the size of the building. Resia uses artificial intelligence as an essential tool in the land acquisition process. In a matter of minutes, our AI technology can calculate the optimal layout for each property. From start to finish, we monitor our projects using revolutionary BIM technology, which enables us to share critical data digitally with all parties involved in the process. Generating takeoffs and construction drawings automatically and accurately directly from our 3D models, bringing efficiency and precision to cost estimation, which leads to significant cycle time reduction using lean construction and line of balance methodologies. The ultimate result, a more efficient production process.
We manufacture off-site at our own facility, the pods and prefabricated components that will compose the apartments. Their functional design ensures easy transport and efficient on-site assembly. The use of aluminum forms enables us to build concrete walls and slabs up to 12 stories high, and subsequently install all the construction elements simultaneously, making everything ready for the assembly of the units. After the building structure is finished, the pods, walls, and other off-site elements are perfectly fitted to complete construction and bring the building to life. Resia Production System delivers units made with great attention to detail, modern, clean design, and state-of-the-art architecture. This is how we are revolutionizing the multifamily business model. Optimizing the entire cycle of real estate development, building efficiently and sustainably, delivering housing at more accessible prices. We're writing a new chapter in the history of American housing. Welcome to the future. Resia.
Very well. Now, if you could look at the next slide to start the presentation, please. This video shows a major development, not only in the product, but in the business model of Resia. This is a result of almost twelve years of development, and the company has started as a regular company, and throughout this time, we enhanced our product. The Resia Production System is an operating system that includes from the plot identification, design, and production. It is divided in two parts now: construction itself, that goes from infrastructure, site, and the foundations that are specific to the site, and then the building of the structure of the project that is made by concrete walls, and then we start the assembly stage. Everything that goes inside a unit is produced off-site. That's why this plant, where we are today, is so important.
The root of Resia's product today is based on this, on standardization, extreme standardization. Resia has three types of apartments, and with these three types, we make all the real estate developments in all cities, in all markets we operate. It's always the same apartment, the same door, the same windows, the same bathroom, the same kitchen. Our floor plans, as you could see in the videos, I now go and explain that more in detail in the, during the presentation. It starts from a modular system. We have three modules: the central module that includes the kitchen, the living room, and the porch, and then two bedroom modules, closet, a walk-in closet, and bathrooms. With that, we can build one, two, or three bedroom apartments.
This is the basis of the entire system, and it enabled us to bring to the United States concrete wall systems that's been used in Brazil for so long, not only by MRV, but also by other companies. However, in the United States, it was not used. So the standardization allowed us to bring the system to the United States with efficiency. Changes were made in the molds to adapt a concept that was developed worldwide, to be used in places where labor is cheap and equipment is expensive. And Resia was able to change that and adapt it to a market where labor is expensive and materials are cheap or inexpensive. So we modified the system to make it efficient, generating major productivity gains in the project and design of Resia.
To the point that our contractors for hydraulics, mechanicals, drywall, and electricity could not keep up with the production of the concrete walls. This ended up creating another issue in the company. We were not being able to capture all the efficiency generated by the concrete wall system. So we looked at the hotel industry, that's had been using this concept of prefabricated bathrooms that are made off-site. They've been using this concept for a long time, and with that, we could advance the process a lot, and not depend so much on our contractors. So we made this first test only with the bathrooms, buying it from third parties. We visited plants in the United States, Brazil, Europe. We have identified three suppliers from these prefabricated bathrooms in the United States, and then we started using these prefabricated components.
We realized that there was a gain in efficiency, but still, the plants themselves were not automated, or the automation level at that of those off-site plants was too low. And the reason is that each project has a different plan, a different floor plan, a different layout, different types of bathrooms. So it's very inefficient to automate, to build 50, 30, 100 bathrooms, and having to remodel them in the production line.
We have identified different ways to become more efficient as we built these prefabricated components. From there, stemmed the opportunity to build our own factory. The project for this factory, the feasibility study, started being developed one year ago, and now we are at the final stage. We're deploying the equipment. You can see that behind me, these are the first robots that have arrived. They will go live in January, probably. They will be used to fabricate not only bathrooms, but all the units, whether they have one, two, or three dorms. They will all have the same bathrooms, the same kitchens, the same cleaning areas, laundries. The walls will also be the same. In our system, the structure goes around the apartment. Is a concrete structure, and everything that goes inside the apartment is fabricated off-site.
Some of these elements will be manufactured inside this plant, and some other elements will be purchased from contractors. This is part of the Resia Production System. Another aspect that was an opportunity for us to increase efficiency were the external panels. A lot of time and labor was wasted before, as we thought of these components in our units and buildings. So in the Houston project, we are already using these prefabricated panels with different finishings and textures, which helps us increase our productivity. The fact that we standardized everything, the fact that we are now using the concrete wall systems and prefabricated systems all together, helps us have all our buildings have a pre-design to them. So the executive project, the electrical part, hydraulic part, AC systems, well, they're all the same, and they've been developed already.
That is to say that we currently have a platform. We work with partners such as Autodesk, TestFit, Sigma, and other software partners... We customize their platform to our projects, which helped us gain efficiency. From the moment we start the feasibility study in a project, when we're looking at land, in a matter of minutes using the app, we can tell whether or not the land is appropriate to our projects, what is the expected return, and therefore, we gain a lot of efficiency when it comes to assessing the feasibility of the land we intend to purchase. We do away with time that would otherwise be wasted in land, in assessing land that is not appropriate.
Now, since all these projects are standardized, if we think of the traditional multifamily market, when a project is developed, when the layout is created for the hydraulic, electrical, and structural part, it may take maybe seven or eight months from the moment a traditional developer looks for an architect that will therefore build a project from scratch. We now have that project ready to go. 80% of our design is already developed, and it's part of our library. We can do everything in one month, which is to say that in six months, well, that's the project's life cycle, which is important for our ROI and so that we can better use our capital. Now, since the project has already been fully designed, we can go think of the budget of a project in a matter of minutes.
We can just push a button and tell exactly the amount of material and the cost. We got roughly 5,000 lines in our budget spreadsheet, and we can be very assertive when estimating expected costs for such a project. Our software, nowadays, automatically calculates the final cost of the project. software also creates the timeline. We know exactly what is going to be done step by step. We use the Lean Construction approach, and we can control the execution timeline. Timeline is broken down into modules of four units each, which helps us balance out the way the construction will be executed, and the total construction time can be shortened by six months. We already see such outcomes. The Resia Production System can only work when all those elements are in place. It works as a bicycle wheel.
Every element out of these 12 elements will be parts of this bicycle wheel, and for the bicycle to work, all of them have to work at the same time. We have patented different elements of this system. We're talking about prefabricated elements, but also the way all those elements, I mean, the concrete wall, prefabricated elements, the software platform, and the control system during the construction site and during the construction work, well, all that has been patented. We've got the IP over that. We're the only company that has such an IP because we have standardized everything thoroughly. And that is also due to the fact that our company has been verticalized. I'm not aware of any other company, may that be in the U.S. or around the globe, that has such a system.
Moving on to the next slide, I wanted to show you what that means in practical terms, and what returns we can expect for the company. On this slide, you can see that before we used the RPS, our yield on cost was a bit below 7%. Cost was roughly $260,000 per unit. As we deployed the Resia Production System, it's already in place, by the way. We're going to show you how that works. This cost goes down to $220,000 per apartment. That is a 15% reduction, and there is a 17% increase on yield on cost, amounting to 8.1%. This is already a reality. This works, and on the next slide, you can see some more figures.
You see how resilient these projects are and how resilient this makes our company. On the chart, you can see the cap rate variation. There is a 6% variation. It goes from 6%-5% or maybe 4%. At the 6% cap rate, the margin of the product is approximately 20%, and as the cap rate goes down to regular levels, this margin can more than double. As we get back to normal. We hear the news, and in the past few days, we can tell the situation has been more favorable to us. Interest rates are starting to go down. Some say that there may be 3 points of reduction in interest rates over the next years that should bring cap rates to normal levels again. We are under a stressed situation nowadays, but still, we can see a 20% gross margin.
Even if we consider the average yield on cost at 7%, we're not even considering a full capture of the Resia Production System optimization. So there is space for even greater gains because of this verticalization process and because of all those improvements. An image is worth a thousand words. On the slide, you can see one of our projects. This took place in Houston. This is the second generation of one of our projects in Texas, and there are some important highlights I can tell you about. This is the first high-rise project. 12 floors were built based on this system. This is a unique project. The competition usually builds these buildings using wood, and their efficiency is very bad. They can get to up to 8 floors only, which brings about great competitive edge for us. The picture at the top was taken in November last year.
The picture at the bottom was taken one year later. The three buildings are all ready to go. Fully ready. The first building you see, well, that's not only the structure. It will be open, inaugurated in March. People will move in in March. We're talking about 573 units. Yield on Cost is above 7.5%. So the figures I have just mentioned to you a few slides ago are already a reality. Now, these pictures are a bit more recent. They were taken more recently. You see that the buildings are now being finished. The first dwellers should move in in March to this first building to your right-hand side. Leisure areas, which is, by the way, the small building you see at the floor. Well, it's going to be ready to go. The garage is already fully built.
There is a neighboring building close to this real estate development. They are building 300 units, four stories in wood. They started construction work eight months prior to us, and it will still take them another nine months to deliver the first unit. So the efficiency of Resia's production system is unbeatable in our market. That happens, or that is valid for both time and cost alike. It's also important to highlight another important aspect. This did not come into fruition overnight. This was a process. It took us 12 years to develop this system. As MRV joined or acquired Resia, we could grow very fast. Growth is hard. Growth in terms of size and growth in terms of our geographical footprint is hard. We had to burn some cash. There was an important learning curve at first.
The initial projects in Texas and in Georgia, well, they were somehow inefficient as per expected, but Resia is an innovative company, and it shows that we can learn very fast. This is the second generation project located in Texas, and all the inefficiencies of the initial projects were sorted out. Everything was properly solved. This project is more efficient than our most recent project delivered in Florida. So outstanding results, really, this is proof that our team is learning and improving on the go. The fact that we have standardized everything is truly useful. It helps because we basically repeat the processes over and over again, and now we're going further and improving continuously to increase efficiency even further for the next projects. Now, this is how we got here. How do we see the future?
I will tell you, Resia has the right product at the right place, at the right moment. Like I said before, our product is not only standardized, but it's fully modular. If you look at the top right-hand corner of the slide, you can see the three modules that make up our units. ... These are the three types of modules. You can also see the two-bedroom apartment. That's the result of these three modules together. If you remove the module to your right-hand side, it becomes a one-bedroom apartment. That's how standard the project is. It is exactly the same project, the same door, the same faucet, the same lamp, the same window, the same floor, the same bathroom, the same kitchen. In Miami, in Dallas, in Atlanta, in Houston, in Austin, everywhere. That brings about great efficiency and productivity.
That is something that's never before seen in the market. There's nothing like this. That allows Resia to deliver a product nowadays that has great quality at affordable prices, that to cater to low and medium income populations. We have great productivity in a market where supply and demand are quite unbalanced, and we're going to delve into that later on today. Now, this is the right product to cater to social classes that face difficult affordability issues. Now, we have activities in three states, in five different metropolitan regions. These states represent over $1.7 trillion in GDP, with a population of more than 28 million people. We expect to see positive internal growth due to internal migration in the U.S. There should be GDP growth way above the American average.
It should be more than twice as much as the American average in those states that have huge affordability issues. That is the problem Resia is here to solve. Therefore, there is a need for our product in those places. Many people are talking about oversupply. Many papers are published all the time stating that there is oversupply, but we can't go general about it, especially when it comes to the multifamily market. That's quite dangerous. This is quite a segmented niche. We're talking about the size of units, the places where they are, the regions where they're located. So one can't generalize. I think that's a dangerous statement to make. If we consider the type of product Resia manufactures, we can say that there is undersupply nowadays. There are more than 20 million families that spend more than 50% of their income on rent only.
That is not a sustainable type of situation. That is one of the main social problems they face in the U.S. Now, just to give you an idea, nowadays, we see situations where many two families will rent a two-dorm apartment. They will share the apartment because they can't pay rent themselves. That happens in the U.S.
So the problem that Resia is solving is a major one, that doesn't, there is no solution from the government or in an area in the U.S. policy to pass a social law for rental subsidies or, or housing subsidies. So most of the developers in the market try to solve the situation by increasing rental prices, betting that this imbalance between supply and demand will increase rentals prices. Resia doesn't believe that, in that. Our solution has to do with increased efficiency, with cost reduction to increase the yield on cost. So we'll solve this problem by making apartments that are affordable to these middle and low and middle income brackets population. So this is the problem, and this is the right moment to do it. This year, we faced many challenges, high interest rates, inflation, that increased costs.
Many projects that would be started this year did not work because companies did not have credit for those projects. So this situation of deep imbalance tends to increase even further, and the products that we'll start building this year will be ready and available to the market as of 2025, or will enter or be delivered to the market at the time of high demand, highest we've seen in the last 20 years. So this is the time to really benefit from all the work we've created in this last 12 years. This is something that didn't happen overnight. It required a lot of work, sweat, and learning curve. It's a unique system in the market.
I repeat, there is no other major company in the U.S. market, which is the largest market worldwide, doing what Resia does, how Resia does, and also for the population we serve. It's a moment of unique opportunity for growth. Something that I wanted to show you is that Resia delivers good quality products that has the same quality and basic amenities as luxury comps. So it's a luxurious product, and at a fair price. So this is Pine Ridge pictures that we just delivered in Florida, and the lower pictures are from another development in Florida, not far from ours. So you may see that in the outside of the building, as well as in the interior of the apartment, as well as at the entertainment area, our product has the same amenities as a luxury community.
Those luxury communities charge rentals that are 50% higher than those charged by Resia. There is no other company in the U.S. that provides products of this quality with this price. These population cannot afford to buy a home at the high interest rates and mortgage levels that are very high, so they'll have to rent, and they have no other option. Today, they are living in apartments that were built 50 years ago. Resia delivers a quality product at a very affordable price. Now, I would like to talk about our track record. In this 12-year successful track record, we've created relationships in construction, operation, execution, as well as in the credit lines, the way we fund our projects and the partners we have for that.
We've built very solid relationships in terms of construction loans with traditional partners, major banks, such as Bank of America, Santander, Regions, Wells Fargo, City National Bank. If these relationships had not been created by a delivery track record, companies that are now starting their operations have a hard time obtaining construction loans. Banks today give priority to companies with a track record and companies they have good relationship with. Resia has great relationships with the financial partners in terms of debt, construction loans, land loan, as well as equity. Recently, Resia started to bring partners for equity, equity partners, with a great track record of delivery, as well as good return rates. Now we are working on a project with Banco Inter, creating a fund for common equity. Thiago Caixeta will give more details about that later.
We have good relationship with these investors, and they continue to invest, including Bank of America, in a branch that's called BACDC. It has taken part in several projects with us, and also in this next project that started yesterday. BACDC is also our partner in that. In addition, the type of product we produce allows for other sources of funding, either through tax benefits or special loans such as specific federal and state incentives. Differently from luxury high-end products, Resia has other sources of housing funds. That's very helpful, and the project that we will start in Florida today qualifies for many of these incentives. Also important is something that arise from Resia Production System. This is a way to monetize all the intelligence and capacity that was built with the Resia Production System.
Since today we have intellectual property rights, we now start to see, in the United States, other investors that cannot generate a yield on cost above 6.5%, and that have come to us. Specifically in Houston and Dallas, they have visited our projects, and we can make a turnkey product, selling the apartments to them, at a price that will provide them a return of 100% on yield on cost, and Resia could capture all the benefit from the efficiency generated by the Resia Production System. These are not only developers. These applies as well to local governments. Vail, in Colorado, for example, has launched an invitation to bid last week, asking for developers to deliver apartments, because they have a hard time bringing workers from the tourism area to work in hotels and restaurants there.
So several local governments in tourist touristic places that are high-end communities with very expensive housing costs are looking for this type of development. Google is investing also. Tesla, for example, is investing in housing for its employees. Tesla has just opened a large factory in Austin, and Austin is a very expensive city to live in. And now Tesla is looking for partners to deliver housing for its employees. So that opens a major avenue for us, without the need for capital, without cash burn, asset-light model. So we'll explain about that more in detail, but this opens a major avenue for us to grow, without the need to invest our own capital or burn cash. In addition, it's important to highlight that we also have relationships with institutional buyers. Resia is a product that's well-accepted by institutional buyers.
There are cases such as AEW, which is a major real estate fund in the U.S., as well as Grand Peaks, that has more than 30,000 apartments in its portfolio. Harbor Group, they are institutional buyers, and all of them have purchased more than one project of Resia. They continue to be interested in the company. They want to make business with us, to do business with us, and this track record of solid relationships in with players in every area. So Resia has no difficulty in obtaining loan equity partners, in finding partners to buy our products, and given its track record, it qualifies to receive all the incentives that exist in the U.S. market. So that places us in a unique position to continue to grow and have access to all types of loans, equity, and different ways of providing project finance.
It's a very promising future ahead of us. We start now to see clear signs of change in the economic scenario of the country. Nobody's talking about recession anymore. The stock exchange has reached the highest level in history yesterday. 10-year rates continue to drop. Now, the phone is calling, ringing. There are partners calling us, so I am very optimistic about 2024. Resia has delivered, and I'm proud to say that Resia has delivered all it promised in this last period, and I'm very optimistic about it. Now I'll turn the floor over to Caixeta, so he can talk about the different structures we have for our business. Good morning. Thank you for attending this conference.
Many of you who are here today, we had a chance to see you together here at Resia, either to show land bank or construction projects, or even meetings at our office. We've also met others in the calls and videos organized by MRV. It's always good to talk about Resia. So thank you. Thank you for attending this event and reconnecting with us. As Ernesto mentioned, we have capital sources and partners to fund our projects. So I'll show how they can be combined, and the main structures, funding structures we use, and what is the difference between them, and the return we have considering the Resia Production System in place.
Now, so that we can use the same project and compare the structure, we are starting with a project of 250 units in Miami, at a total cost of $240,000 per door, an average rental of $2,200 per month. So the first structure, we have the preferred equity. You can see on the screen, 60% construction loan, partner contributes with 20%, and Resia comes in with the 20% equity. Resia places its capital first, then the partner, and then the construction loan towards the end. But it's a fixed return structure. Now we're talking about 14%-15% for the partner. That will decrease a bit in coming months and next year. This is a partner that has no upside. The risk and the limit—the return is limited.
The return, the yield on cost for Resia is 2, net proceeds is 2.1x 50% IRR. Then the next structure is hybrid JV, 20%, 20 and 60. This is a bit different because the partner wants to get some higher risk, pari passu in equity. On the other hand, it has an upside at sale. So the expected return for the partner is close to 20%. But the return for Resia is as robust as the preferred equity structure, 2x in equity multiples. The third structure of common equity changes a bit. The partner contributes with 80% of the equity instead of 20% of cost. And while the first two structures, it owns a 20% interest, in this third structure, it owns 80% of the interest in the project.
It's a pari passu equity investment with the company and an expected return of 20%. In this structure, Resia collects a higher fee and has a promote in when selling the project. So the more efficient we are, and we are confident in what we do, the higher the result collected at the end of, when the apartment is sold. So clearly, the returns are higher, the return of 2.5% terms times the equity, plus 55% IRR. The last structure doesn't require Resia's investment of capital. There are several different partners, and what happens here is that we sell the project with 7% yield on cost for the partner.
So the more efficient we are at the Resia Production System, so if we're able to deliver 7.5% or 8% yield on cost, this will not be transferred to the partners. It will be to increase Resia's return. That's a possibility that's now open to monetize the Resia Production System. That's very important for the company. These funding structures will coexist. We're not migrating from one to the other. They will all be available. We're talking about different partners, and we can look at our projects and understand which structure fits a certain project, and there are several possibilities to choose from, and potential partners, many potential partners. In the next slide, I will talk about the future. We are committed to not burn cash in 2024.
This has been established by us, and the base scenario is 1,000 units built and 1,300 units sold. Why do I say base scenario? Because Development as a Service that we just mentioned contributes with the production volume and only improves the cash issue.
That would therefore contribute for a better cash generation. So whenever we work with this approach, well, the better the outlook is. So we decided to go with what we have arranged, which is to burn zero cash to reach those volumes in 2024. Now, from then on, we have to go back to the history Ernesto told us. We have to look back at our 12-year history. Our Resia Production System has evolved and developed quite a lot in terms of systems, processes, and standardization.... The Resia product is ready to be sold. It's quite concrete. We've got people who've been fully trained, we've got different sources of funding, and now is the right time for us to start or maybe to harvest more out of this technology that is quite unique, unique, and that we have developed.
So 2024 will be an important year for us to monetize based on everything we have developed at a yield on cost rate above 7.5%. On the next slide, you'll see our long-term plan. The better our projects perform, the more margin we can achieve, the better will be our reinvestment capability. For 2024, we're thinking about 1,000 units, and here we've got three scenarios with 1.5, 2.5, or 3.5 spread. Now, based on the previous slide shown by Ernesto, if we think of yield on cost at 7.5%, then cap rate would be 6, 5, or 4%. In the first scenario, in five years, Resia will be able to build 2,400 units a year.
In the second scenario, 4,000 units a year, and under the third scenario, this would be exponential growth, more than 8,000 units a year. It's also important to highlight that this does not involve any additional capital brought into the company, so this would be additional growth in the company. Just to give you more concrete numbers. Now, this is expected news. I think everyone was waiting for this. In December 2023, we are selling the Biscayne Drive project, 216 units in southern Florida. We're selling this to Enterprise, Bank of America CDC is backing this transaction. The price was $54.5 million, yield on cost 7%, and Resia will still have 30% stake in the project, and both parties expect that by 2025, exit cap will be at 5.75%, and the proceeds should be $11 million.
That is the, you know, $11 million additional, of course. That's it on my end. Thank you very much. Let's move on to the Q&A session.
We'll now begin the Q&A session. If you wish to ask a question, please push the reaction button and click the Raise Your Hand button. If your question is answered, you can leave the queue by clicking on the lower hand button. The first question comes from Pedro Lobato from Bradesco BBI. Pedro, you may now proceed.
Good morning, everyone. Hope you can hear me. Yes, yes. Thank you very much for your presentation. I have two questions. One, according to Ernesto, you can correct me if I'm wrong, but I understood that the new projects are already being built using the RPS. What is the capacity of the system? How many sites can be under construction at the same time? How many units?
Can you give us some more color on the capacity of such a system? Second question is regarding yield on cost. For this first project, you gave us an example. When you look at the cost structure, yield was roughly 8%, and the estimates for 2025 were at 7.5%. I wanted to ask you, how much time do you estimate for yield on cost to be consolidated at 8%? Is 7.5% more of a conservative approach? Thank you.
Hello, Pedro. How are you? This is Ricardo Blas. With regards to your first question on the projects, Denise, can you go back to slide 4, please? Can you show us the wheel again? Slide number 4. The Houston project, we showed you the 573 apartments.
Out of these 12 elements that factor into the Resia Production System, I can tell you that we already have the modular system in place. We already have the building blocks in place. These are standardized projects, like Ernesto showed you... where we bring together the modules. We have standardized buildings. We're using the Florida layout in Houston already. We're using the concrete wall system and the molds, and we also have the insulated exterior finishes. These are the panels with acoustic and thermal insulation externally. Like I said, this is the second generation already, and this brings great gains to Resia by making use of the RPS. I'm not sure if that answers your question, but with regards to the number of units we can manufacture nowadays, as we know, Resia wants to be prepared to build 5,000 units in 2024.
That's what we established in the previous plan. We've got molds and a team that, if we don't change a thing, we can develop 10-12 projects a year, 3,000 or 3,500 units a year. So we're sure that it's going to be of great contribution to the company. Now, with regards to the yield on cost rate, Pedro, with regards to your second question, you've heard us run some analysis using the 7.5% yield on cost, because we want to be conservative, and we want to be clear on how robust we can be, even with this rate. That's the strength of the RPS. So that was the main point, just to show you a conservative approach.
Now, it's also important to remember, Pedro, that when it comes to pre-design, project development to reduce costs and delivery dates, well, that hasn't happened yet, because that is something that is going to be deployed to the projects we start as of now. In the Houston project, the RPS hadn't been implemented, so there's a huge potential of getting to 8% or 8.1%, and we are going to see that in the projects we develop from now on.
Great. Thank you very much, everyone. Have a good day.
Next question by Gustavo Cambauva from BTG Pactual. Gustavo, you may now proceed.
Hello, everyone. Good morning. I have two questions. I know you mentioned some initiatives you have in place to cut down your production costs per unit and increase yield on cost. I wanted you to give us some more color on the competition in the U.S. We're talking about a very competitive, innovative country. What would be the main differentiators of the company as compared to the competition? You always talk about using mods. Not all companies do that. You talked about the verticalization approach that makes you get to better margins as compared to the competition. So as far as I understand, this is yet one more step you're taking to be ahead of the competition. We know that not all players can manufacture with such a high yield. So when you map the competition, how can you manufacture with better profitability as compared to other market players?
The second question has to do with sales and the exit cap rate, which fluctuates a lot according to interest rates. Back in the day, the scenario was better. We're facing more difficult times now, but in the past week, we've seen especially positive news in the U.S. and in the macroeconomic scenario with regards to interest rates. So here's my question: How much time do you think it takes for this interest rates change to be reflected in sales prices? We see that there's a close in the chart in Treasury. Can we believe that in one or two weeks, the type of conversation you had with investors will change already, or will it take longer for you to adjust your sales price? Thank you. Have a good day.
I can try to take this one.
Gustavo, first and foremost, it's important to say that the difference between Resia and the other companies begins from the very moment the company was created. The multifamily market is quite segmented, and it's segmented according to the way the project is created. We're talking more of a financial play than an engineering project, per se. Developers are agents here. They do not have a vertical approach. There is one person who will buy land, then this investor will get all the permits and approvals for the land, and he will sell that whenever he's got it. And then developers will purchase this land that has already been approved for multifamily developments. They'll take this to a local architect, who will then develop a project for that according to the way he thinks....
It's the best approach for such a site, then he will establish prices and then go for a construction company to execute the project. Then they'll go to market and acquire equity, and then there will be a fee on top of that, and that's how the project ends. When you don't have a standardized project, when you don't have a vertical approach, and therefore when you don't control the construction work, and if you don't have a real estate developer, then you can't invest in those molds, because you won't have proper labor to execute the project with the molds. If you're a developer, you also won't buy these molds because you're not sure you're going to use them in the next project. That's when things go south.
If you're not a builder, if you're not a developer, then the project can't be standardized, and if you don't standardize, you can't increase efficiency. Efficiency comes from repetition. So from the very moment Resia was created, this has been part of our DNA. We are builders. That's part of our blood. We've been building for 45 years. We've been in the U.S. for 25 years. So the way we see things, well, this doesn't pose a risk to us. This is actually a competitive advantage. And I think that traditional developers see construction as a risk. They prefer to pay so as not to be at risk. So there are many elements that factor into this process, many different choices that were made that led us to use this unique model.
Now, for a company that's already well established in the multifamily market, if this company decides to change their business model, their system, that is a very hard thing to do. This business comes in cycles, so for them, it's easier just to keep up with their business plan, wait for the peak of the cycle to start building units again. I am not sure this answers your question. Can, can I add something to that? Gustavo, in practical terms, if you compare two vertical companies, Resia and another player, why are we more efficient? Number one, because according to our production system, we can shorten the construction time by 20%-25%. That impacts costs, and we can be- we can work in a 100% standardized fashion.
If you go to a multifamily developer, they've got two, three, or four types of two-bedroom apartments, five types of three-bedroom apartments. The swimming pool varies from one project to the other. Here, everything is standardized. You know, project approval, all the cycle can be shortened really, because everything is standardized, and that helps us gain efficiency. Also, when you use the same window in Texas, in Florida, you know, the same type of door, the same finishing, then you can buy bulk. In our factory, we buy a lot of parts that are the same, so we can negotiate with these contractors and with different families, and we do away with middlemen. Regular developers can't do that because they buy different types of materials all the time.
So standardization helps us improve our efficiency all the time, and that is something that we also did and still do at MRV. Now, the second question he had was with regards to exit cap rate, how long it takes us for us to get there. You know, Gustavo, I would love to know the answer to that question. I could tell you if I knew that, but I don't think anyone does. The past week was great. We heard great news, and I think... Well, I expect cap rate will begin to go down soon, but there is a lag time. There is a lot of capital on the sideline. We know that they're waiting for more assertiveness and more certainty from Fed, while the signal they gave us yesterday was great, and we believe that this 10-year time will go down.
We can't say anything for sure this year, but in the first quarter next year, I think it's going to be great.
Sounds good. Thank you very much. Have a good day.
Thank you.
Next question by Fanny Oreng from Santander.
Good morning, everyone. I hope you can hear me.
Yes, go ahead, Fanny.
I have some questions, actually, two questions.
... A yield on cost of 8.1%. First and foremost, yield on cost at 1.1%. I remember last time I came to the company, I talked to Mr. Blas, and I think these pods can help you as you gain scale. My question is, how can you get to YOC at 8%? Does that depend on accelerating the time, the construction time at Resia? In your plan, you showed us three stages Resia could get to, but under which scenario would you gain enough scale so you can reach the 8% or 8.1% YOC? That's the first question. Now, question number two, it's actually a follow-up question. Under which growth scenarios at Resia do you think this will be more feasible, considering the multifamily market scenario, considering your expansion plans and the macro scenario in the US?
In a few years, Resia will be building maybe 5,000 or 8,000 units. What will be more feasible according to your model? These are the two questions I have. Thank you very much.
Okay. Well, I think that to reach 8.1, the efficiency of the plant is needed. This is a plant that has the capacity to produce pods for 8,000 apartments per year. The more we produce, the cheaper the pod will be. So reaching 3,000-4,000 apartments per year in production, we'll be able to reach the top of RPS. We would. The plant has this capacity, so with 3,000 apartments per year, we would reach the full level. Just adding, with 1,000 units we have this year, we can use most of our production capacity. All the projects, we also intend to start other projects in 2024, and we have planned the use of the production of this plant. And the other question is about the most feasible growth scenario.
Well, I think it will depend a lot. I mean, obviously, we're growing without added additional capital, without burning cash. So Development as a Service will be key for us to reach that. The main bottleneck will be this, because there is a demand in the market. We do have the product, we know how to do it, and we have the technology. The point is, this decision on how to grow, we can grow without burning cash. The speed will be determined by that. The lighter we are in asset in our projects, the more we can grow.
Um,
Okay, thank you. I'll add to that answer. Please, could you open my screen?
Oh,
Okay, so Fanny, in our presentation, we said that sensitivity of the model regarding interest rates, okay, being asset light helps, but what changes the needle is the reduction of the interest rate in the U.S. With a cap rate of 4, it may take us some time to get there. On the other hand, we are now going through a high stress moment in the market. After many years, the world as a whole has been, has had very low inflation rates, very low interest rates. But we can assume that interest rate will reach a lower level some point in time next year. And saying that we'll have a cap rate on average of 5% or less than that is possible. And the growth of Resia will be driven by the cap rate.
So given that we have the modular construction model that's more efficient than the rest of the market, as Ernesto said in his presentation, that will deliver a yield on cost close to 8%. Looking at the history of cap rates and interest rates in the U.S., I think it's possible to have a cap rate below 5%. Then Resia, some years from now, could be a company that produces 5,000-7,000 units per year in the markets we operate. There is a combined population of 28 million inhabitants in those markets. The internal migration in the country is important, and so we can certainly have a much bigger company some years from now.
The main driver will be interest rates, and we have to continue to be innovative and more efficient than the average of the market. We expect the rule will remain to be without burning cash for following years, because you mentioned 2024, but also for further years. We've been said that this is our golden rule. We have invested a lot of capital in Resia in the last three years. This capital was essential to reach the level we are at today. So from now on, the capital allocation at Resia, we have said there will be no new capital. So with the gain and efficient, higher yield on costs and lower interest rates, which will lead to a lower cap rate, we can grow without investing additional capital and MRV&CO from MRV&CO. Okay, thank you.
Our next question comes from Aline Caldeira, from Bank of America.
[Foreign language] Good morning. Can you hear me? Yes. Okay, wonderful. I have two questions. First, I would like to go back on the economics of the increase on the yield on cost and this new construction system. How much of this increase projected from the yield on cost comes from reduction on the materials cost and the reduction, as opposed to the reduction in the time to build, since they are modular? And the second question is regarding this sale that you mentioned in the fourth quarter. Could you give more color on the structure of this last sale? What was the gross margin? Because I didn't see it on the slide.
I guess these potential gains for 2025, and I also would like to understand if there's a sales guarantee of the remaining part to the same buyer. Thank you. Hi, Aline. Let me go back to that slide number the cycle. One more. Yeah, that one. Can you see the slides now? Okay, so here we can see on the, the hard cost has decreased from $201 to $165. So there are $34,000-$40,000 per apartment. We believe that half of it is material and half is labor. So cost reduction and by 25% and the time to complete the apartment. So the factors that we control here, IP and VP, so and the material is the other half. And that's include-- That includes components, pods. That's basically it. About your second question on sale.
This is a project that has a gross margin of 12%. The $11 million is related to the promote we'll have in the future sale, with the growth, with the margin compression and slight increase in rental. The $11 million will partly come from our percentage of our stake in the project and partially from promote. We have a very aggressive promote structure, and there is no predefined exit. You asked whether we'll sell it from 2 years from now. No, we haven't agreed. Price that has the largest stake, this is not committed to buy this 35% of Resia. So this will be discussed further on. Okay, perfect. Just to follow up on the question, Caixeta, I understand this format of selling in tranches is new to Resia.
Do you think it makes sense to, in your model, to use this further on to make sales?
I think that, as we said, several presentation, this is the worst moment of the industry in the last 15 years. But, the margin was very low. We wanted to sell, and we believed in that the market would improve, so it was a way for us to hedge a bit. So that's a way of, recovering the price a bit. We had several offerings, and this is the one that allowed us to recover a bit of a margin that we're leaving on the table. Then, at the regular market conditions, I don't think it would be necessary to do this. We'll study on a case-by-case basis. There were cases in which we were left with a very low stake, 3%.
Well, a deal with six, our stake is very low, too, but that's on a case-by-case basis. This one was based on these conditions. We-
[Foreign language]
[Foreign language ]
Okay, reserve our condition. Thank you. That's very clear. Thank you very much.
[Foreign language]
The next question comes from Mariangela Castro, from Itaú BBA.
[ Foreign language ]
Good morning. Thank you for the question and the presentation. I have two questions. First, I would like to understand how much this RPS system will be fully applied to the operation, since you are in the middle of the cycle of the RPS, and what year you'll be able to see the system being implemented in all Resia's operation? And also the cash journey for 2024. You are committed to not burning cash, but what about that during the year? There will be no cash burn at all, or should we expect some cash burn in the beginning offset by the rest of the year?
Well, hi, Mariana. In 2025, all the projects that will start this year will have an RPS fully implemented. Second question about cash burn.
We're committed to not burning cash during the year, so it's a commitment for the year. In the first quarter, we are scheduled to make one sale per quarter during 2024. So in the first quarter, we could expect cash burn around BRL 50 million.
[ Foreign language ]
That's it.
[ Foreign language ]
Okay, thank you very much.
[ Foreign language]
The next question comes from André Mazini, from Citi.
Thank you for the event. My question is about the plant in Atlanta. How good is the travel by land? The things produced, the pods produced there can reach Texas. So in a radius of 1,000-2,000 kilometers, how far can it reach with its production? If the company goes to a fourth state, such as Arizona, could this plant still produce for that state? And also about CapEx, how much has been spent and the total CapEx of the plant? Thank you.
Well, regarding transportation today, there are three providers of the pods, one in Orlando and two in Texas, and they deliver. So the impact is being considered in the pod price, and it's not expensive. Different from the high volumes here, in which a lot of air is transported.
In our case, the pod has a very high added value because it's small in size. You can carry several pods in a truck. So in the markets we operate, the plant can meet all of them. In other markets, such as Arizona and Colorado, I also believe it will meet those the needs of those markets, but I don't have the figures here with me. The project to grow in the states we operate today, if we reach 5-6,000 units in the States, that will use the full capacity of the plant. So the possibility of reaching 8,000-10,000 apartments per year, where it's likely that we'll have to build another plant in another region to improve distribution. But this is more for the future. As for CapEx... Go ahead.
Well, what we can expect for 2024 CapEx for the plant is $3 million. All of that is leasing of the equipment, all things considered in the plan and the cash plan that you've seen. If you need further detail, we'll have to discuss that with you. But the main figures we have for 2024 is $3 million in CapEx.
[ Foreign language]
That's very clear. Thank you.
[ Foreign language]
The next question is from Jorel Guilloty, from Goldman Sachs.
[ Foreign language]
Thank you for taking my questions and for the presentation. I have two questions. I apologize if I missed this earlier. When you say you're going to sell 1,300 units in 2024, I'd like to understand if you have an idea of timing or cap rates or margins for these projections, and where would it be? Florida, more in Atlanta? That's the first question. The second question is about funding, preferred equity, preferred JV, common equity, and development as a service. When you talk about the production, five years of 2,400-8,000 units, what type of funding are you considering? Thank you.
Okay, Jorel. About the sale of these projects, we expect to sell one project by quarter in 2024. That's what you can consider. The margins will depend. The scenario is becoming clearer, better. So we are confident that cap rates will drop a bit. But as Ernesto said, first, we want to sell projects in Texas, in Miami, and in Atlanta. So these are the regions that we'll sell the projects in. The first generation of projects had a cost, the learning curve, so we won't see the margins we used to see above 25 or 30, but that depends on how much the market will improve now. And we're not pressed to sell everything in the first quarter or leave everything to the end. We can distribute that throughout the year, so we can work better. Let's wait and see what the margins will be.
Uh-
You said that in five years, you could grow to up to 8,000 units per year in five years. So what type of funding do you prefer? Maybe it's the question, better question. When you look at the future of Resia, historically, it was more of a preferred equity. Would it be more preferred, more common equity, development as a service? So I would like to understand how you see the funding structure for the future, because you presented different ways of funding.
Well, like I said during the presentation, all these structures will exist at the same time. Then we'll have to assess the situation on a case-by-case basis or on a project-by-project basis. Depends on the best equity we have for the project. In that case, we will most likely not go for a common equity approach. We'll need more ownership to the project. There will be other projects, on the other hand, that, according to our pipeline, will be taken forward in the future, then we could work in partnership for Development as a Service, and that's the format we're going to go with in that case. There may be opportunities for partners that will buy land, so projects that are not in our pipeline, and we can work under the Development as a Service approach. Or we could even strengthen this partnership with Banco Inter.
There's more capital available, and then we'll be able to use the common equity structure. I mean, I don't have a one-size-fits-all solution. We don't have an algorithm to calculate that or to decide which structure is going to be used. We'll have to assess the market dynamics, the cash position, the company, and productivity of each project for each structure.
Okay, thank you.
Next question, Rafael Rehder from Safra. You may now proceed.
Good morning, everyone. I have two questions. Number one, can you give us some more color on the rent dynamics? On the first slide, when you showed yield on cost going from 6.9 to 8.1, 15% of that was due to cost reduction. So it seems to me that rent prices would come from this 2%. Under a conservative scenario, if we see higher growth, taking yield on cost above 8.1%, is that a possibility, or do you see the market will be more tightened? And then we could expect this $200,000, $200,000, $220,000 cost per unit. In terms of factory, you said you can manufacture up to 3,000 units a year.
Can we expect G&A growth or any cost increase would happen after this 3,000 units production rate increase?
Well, I can talk about rent. Like I said during the presentation, I think that the whole feasibility study is based on increase in efficiency and cost reduction. Resia, in its projections, does not consider any kind of increase above historical average data with regards to rental prices. 3% would be the inflation rate, not more than that. It depends on the market. Some places there should be zero growth during the initial years. So the 17% we showed you, the 2% difference is not due to rent increase only, but also because of the decrease in cost and in construction time.
That would lead to a reduction in those amounts, and of course, increase in efficiency in our operations, because NOI comprises two components: higher efficiency in the asset operations, and it's very little that is due to rent price increases. Now, with regards to your second question, G&A in the factory. What we can expect for next year is an increase in the factory G&A, because the factory is still being built, the support structure is being developed. So yes, we can expect a small increase in G&A. Now, when we look at Resia's G&A, of course, this is part of our culture. We're always looking to having more efficiency, not only in the production system, but also in our back office structure. We're always looking into that. We're always trying to optimize everything.
In general terms, for 2024, expected DNA will be in line with the one we found in 2023. There should be no surprises along those lines.
[ Foreign language]
That's clear. Thank you very much. Have a good day.
Next question, Tainan Costa from UBS. You may now proceed.
Good morning, everyone. Thank you for taking my question. I have two follow-up questions. The first one has to do with your competitive edge and the verticalization process you mentioned. What steps of your process have been verticalized, and how is your process to hire and train labor? Can that be a bottleneck moving forward? With regards to rent dynamics in the U.S., we've seen a trend of decrease in the U.S. Historically speaking, your values have always been lower as compared to the competition, but are you decreasing rent prices somehow, or have you been performing slightly better than the competition? Can you give us some color on that? Thank you.
Well, I can take the first question on rent prices. Well, Tainan, once again, we can't generalize.
When we generalize, then information is not that accurate. I think rent prices have been increasing. We can show the slide on that, but I don't think we need to. Rent prices have increased 5% average this year. We expect a 3% increase for next year. And then depends on the market. In Florida, there was an 11% increase for example. There's an oversupply, especially for Class A. We're talking about luxury products. That happened even in the Sun Belt. But we believe there are not enough products that are similar to what Resia is now delivering, so I do not think there will be a decrease in rent prices. There should be an increase. I also think there will be an intensification in the affordability crisis. The main problem is that there is no payment capability. Families can't pay more expensive rent.
But I don't see rent prices will decrease. We don't see that in any of the markets where we're present. Now, with regards to verticalization. So to answer your question, I can tell you that we are totally vertical nowadays. From the moment the land is purchased, all the way to the moment the property is delivered, everything is done by Resia. For example, architecture. In the U.S., developers will usually hire an external architect to develop the project, documentation, to get the permits from the city hall, while we do everything internally.
... Now with regards to labor, no, this is not a bottleneck. We got zero concerns on that. Everything we learned in the past has led us to better understand what the best team to work with was, and we're now fully prepared to deliver this 3,000 units without any issues with labor, training, or anything of that sort. We're fully aware that we know what's the right way to go.
That's clear. Thank you very much.
Thank you.
Next question by Alejandra Obregon from Morgan Stanley. You may now proceed, Alejandra.
Hi, good morning, Resia team. Thank you for taking my question. Apologies, I'm gonna do it in English, but by all means feel free to answer back in Portuguese. So I guess I have two questions. First, on the construction side. So if I understand correctly, you will continue to build to the extent that you find, let's say, the funding for the project. So it's all about you being able to find partners for you. I mean, depending, of course, on the different type of funding. So if you can talk about the appetite of these players to partner with Resia into new projects, especially with a market that, as you well mentioned, has been facing some level of serious oversupply.
So, that is kind of like my first question, and I'll make the second one in a minute.
Sure. I'll answer that. It's been a challenging year. I believe that if we didn't have the relationships that we've had, that we've built throughout the years, we would have been much more difficult. But we are launching four projects this year. We have the partners lined up. We have the project finance. The biggest challenge that I would say we'd had this year was on the sales side, just because it was more opportunistic than our traditional buyers, because of the availability of capital and what they're looking for. Starting having calls from partners on the equity side. Obviously, the banks are underwriting, were underwriting at a much higher interest rate, so the debt service coverage ratio was making us leverage a lot less, requiring more equity.
Those are the biggest challenge. It was not about finding partners, it was just how much equity you had to put in the projects to make it work, because they were underwriting at a 10 just for the debt service, and that has been the biggest challenge.
Gotcha. That's very clear. And actually, a little, perhaps a little bit into my second question, on the M&A activity in the Sun Belt area, in the multifamily space. So I guess that has not come back. So I kind of wanted to understand to what extent you go into building new projects, knowing that you will be able to exit, meaning that you already have some, let's say, demand for it, or whether you just build a project and then if the market is not there, then you will retrench on the growth strategy for the near and midterm?
That's a good question. It's a great question. And it's difficult to answer. I think it's... There's no guarantees we're gonna sell, although we've been talking to groups about REITs and funds. We have relationship with AEW and Harbor Group, for instance, that they want more of our product. Same with Grand Peaks. They bought four of our products. So they are potential buyers. They love our product, and I think it, we have, we're not having any difficulty leasing out the products. So I don't think it's, there's need for what we're doing, and the buyers will be there. The question will be at what caps we're gonna be able to sell and what's the margin.
Gotcha. Gotcha. Interesting. And one more follow-up, if I may. So thank you for the presentation. RPS is impressive, but I would like to understand how does that change your cost mix? How does that change your, let's say, cost in materials, labor? It seems very automated, it seems no cement, it seems more wallboard. If you can talk about how does that change your mix versus everything that is not RPS built?
Well, I can touch that. So, Alejandra, the... As I answered before, our hard costs without the Resia Production System, it's around $200,000 per unit, hard cost. When we implement the system, as we saw that, we have some projects that we have half of that or part of the system ongoing. When we do that, when we implement that, we're gonna be able to reduce at least, like, $40,000 per door. Half of that, it's labor, half of that's material. So, and labor will be mainly coming from the reduction of the in the schedule. 25%, I believe, in we're gonna be able to reduce in months to finish a project. So pretty much it's what you have today.
And there's also, if I may, the fact that we are producing a lot of elements off-site, has a significant reduction in head count at the job site. And this factory here is going to be 70% automated. Has a capacity to deliver one bathroom every six minutes at full production. So I believe that we're cutting a lot of the skilled labor, and somebody touched on one of the questions before about the availability. Skilled labor is a big bottleneck for future builders, and that's one of the problems we're solving with the off-site production of those items. And you're paying a factory worker salary, not a skilled labor at the job site. That's also reduces significantly the labor cost in our projects.
On top of that, on top of that, Alejandra, we, there's a hidden cost there. There's a soft cost, because the project is not only hard, but there's also soft costs. And we are forecasting a reduction of 25% in on that line only, with the standardization and automation of our design, our construction drawings. We're gonna do everything. We do, actually, today, everything in-house, so there's another component there that's very important.
Yeah.
Gotcha. That, that's very interesting. Thank you very much.
Okay. Thank you.
Next question by Fanny Oreng from Santander. You may now proceed.
Hello, everyone. I apologize. Just have one more question to Caixeta. Caixeta, when we look at the structure, you know, and as we attended the MRV Day, historically, you used 65% of your debt, and, you know, on your slide today, this figure was 60%. When you think we're going to go back to normal with regards to banks LTC for the construction market? And if I may ask you, on spread, how have the conversations been? Any visibility on possible improvement of spread for construction costs? Thank you.
Thank you, Fanny. Well, that was just an exercise. 60% of construction loan, we should be close to real numbers. As the scenario improves next year, we might go back to 65%. This is the figure we used before. But remember, even before that, Resia could get to 70% of construction loan for certain projects.
So we'll see. We have no crystal ball. We can't really tell where the market will head to, but I think the expectation is that the spread will go along with that. Spread has gone up from 2.25 to 3.25. That's a lot, but that's not a variable that hurts the returns on the project. If at the end, the Cap Rate goes back to regular levels, then that will not hurt. You know, the spread will, won't hurt the final result of the project. So I can't really give you an answer for that, but our expectations and perspectives are good for next year on both ends, in terms of leveraging the project with construction loans and in terms of reducing the spread.
Well, just to add to that, Fanny, here's what I think. Your spread-
is likely to decrease, and LTC is the role of the debt service ratio. When there is a lot of uncertainty, as there was in the last months, about a possible increase in the rate, when, how many increases, and so the Fed policy was very uncertain. The banks, in their underwriting, they use a very high interest rates, up to 10%, so they increase the spread in the underwriting even more, and that decreases. There are three triggers that drive the value of loan, construction loan. One is loan to value, loan to cost, and the debt service. And what has brought this ratio down lately is the debt service, because the underwriting has happened with an expectation on even higher interest rates.
With the outlook for lower interest rates in the future, this will go back to 60 soon and probably reach 70 until the end of next year. Of course, as Caixeta said, we have no crystal ball, but just to clarify that what has brought the LTC down is the debt service at very high interest rate is much higher than the actual rates.
Okay, that's very clear. Thank you, Caixeta. Thank you for the explanations.
This ends the Q&A session. For the final remarks, I would like to turn floor over to Mr. Ernesto Lopes, Resia's CEO.
...Well, this has been the first Resia Day, and we're very pleased to express our enthusiasm that, the three of us and the entire team of MRV has regarding the future of this company. We believe we have achieved something unique, and in a country that is the most competitive country in the world, with a potential growth that is immense. I'm very happy to tell all this to you, and I hope we have been able to show what is the Resia Production System and the potential that it has for a huge industry, with a product that is highly necessary to reduce a very big social problem that the United States has, and for which Resia has the solution.
Speaking on behalf of all the members of Resia, we are very proud to be able to solve this issue independently from the government and at very good returns for shareholders. So I am very optimistic about the future, and I hope to be here again next year to confirm everything we've said today. Thank you very much, and we remain available. Just adding to Ernesto's words, we are absolutely sure that Resia thesis is spectacular, that this decision made by the MRV board four years ago was the right decision, and given by the competitive differentials of Resia and the possible reduction of the U.S. cap rate, I am absolutely sure that this subsidiary will make a strong difference in the future of MRV&CO.
I would like to thank you again for it, those who are attended, and congratulate Resia for your work and today's presentation. Let's move on and continue to show every quarter how important and how right we were in our decision to continue with Resia's process. Good morning, and have a good day.
Thank you, everyone. Resia's Day has now ended. We thank you all for attending, and have a good day.