Confidencias Inmobiliarias Prinex - Jordi Argemí - CFO & Deputy CEO en NEINOR HOMES

With the deeds, it was just what we commented. There were no cancellations in those deeds, and with that, just a year later, the sector's own or less main players who report are able to deliver that goods letter, even exceed objectives, so it was reasonably good. And here are the results of all the companies that came out boasting about the two, the developer sector to the detriment of other sectors that have been affected by the mobile. So apart from that, I didn't say any nonsense, Jordi, and I wouldn't value the past. As for the pre-sales leg, that did not really get fulfilled. The reality is that we understood that there would be an economic impact, and the impact has been fully produced as we expected in negative terms. It is a reality, but that doesn't mean we haven't seen our demand impacted. The reality is that there has been an increase in appetite for the type of product that large producers like us are producing. That is, in a city mainly, it's enormous. With homes of 110 square meters or more, more space than the standard in the main city centers, with common areas, terraces, sustainable, we understand that the greatest increase, the greatest appetite is for this type of product. This has compensated for the natural negative impact of an economic crisis. So demand, due to positive and negative factors, has compensated and we have not seen an impact. And there is a second very important factor that has pushed us not to see this impact, on the contrary, I can practically say what is happening now in terms of pre-sales, which are record-breaking compared to previous years. And it's the supply. From October to December, what we did see was that supply had been reduced by around 30% in the areas where we are. When supply was already lower than demand pre-COVID, and if it decreases by another 30%, what happened is that the supply-demand gap not only maintained but also became larger. That larger gap has led to what we are living now. The news is coming out that the main producers in Spain are giving record pre-sales figures. We in the first half of the year made the same pre-sales as the entire year 2020. And we have also not only obviously continued the same product on the market but increased prices to try to reduce that volume which is being excessive. We are not the only ones; other developers in Spain are doing the same, and that higher margin will allow us that if there is any cost inflation, which there surely will be, to compensate, so that we will increase our margins but at least we will be able not to reduce our profitability. So this is what has happened in the short term. At the developer sector level, it is very favorable and with very good prospects.

No, the truth is that in the long term, what I said at the time is that the fundamentals of the sector are there. We were reaching that cruising speed of stabilization, and we are at a volume level that has nothing to do with the past, so that's logical in Spain. The only thing I would say is that temporarily, around 1-2 years, due to that impact on supply, it may be that we are in a more positive situation than we should be in a normalization situation. So, through stabilization in 2021 or at the end, it may be that this occurs until 2023. That interim period, well, for those of us who have solvency and capacity, we have a good moment compared to the rest. I think beyond that 2-year interim and the future bonanza, there is a very relevant impact on supply. The key is that supply does not rebel, demand does not exceed, and what has happened with the COVID issue is that banks are still lending but realize they wanted to be in more shelter with developers that had more size and diversification. That characteristic has led to a reduction in product launches by smaller developers. Without wanting it, what has perhaps happened is that banks have indirectly implied more consolidation in the sector, and this makes large developers demonstrate this situation and not diminish that stabilization in the long term. Not only at a management level can we imagine but there is a living reflection in the stock price of any listed developer. It reflects that the investors are visualizing that recovery, that residential moment, and stocks have gone up, with a performance in the last six months of this year.

Yes, we reduced and paused, I would say, our launches because in April 2020 there were many unknowns, nobody had a crystal ball. No one had seen anything like it. Faced with uncertainty, any developer or any company management is obliged to protect its balance sheet to avoid illiquidity. That factor made us pause launches like the vast majority of large, small and medium developers. What happened is that once we visualized and had more visibility of what was happening, that we had some impact, we were more immune to what was happening outside. The big ones were able to launch that product again because we had access to debt, while small and medium ones that decided to launch already had more barriers to access debt. So now it's a normal association in terms of launches and production. Some losses, the idea now is that we are in the process of adjudicating debt on developments we are going to launch in the next six months. We are looking at around 2,500 to 3,000 homes that we are going to launch. That's no joke. So we have recovered that level, with a pause of about 4-5 months due to uncertainty.

We were being consistent with what we had in mind. Obviously, we have to be common in the fact that there is a crisis situation but we had a medium-term horizon that was very positive, it was the time to buy. In fact, we had gone almost two years without buying land because we understood that land prices were relatively high in our view, incapable of achieving the margins we had bought, so we were very disciplined. We didn't buy from 2018 to end of 2019 practically. What happened in August 2020 until the end of the year: we were very active in land buying. When you are negotiating daily, yes, prices dropped for about 4-5 months, and many deals finalized. Looking at the first semester, we counted that we have said 600 million investment in land, which is quickly said, and that implies 10,000 implicit homes. We at Neinor have doubled our land bank, and it has been done in two ways: through the plans we consolidate from via, but also buying individual land as we always do. We have bought more than 2,000 homes of that typology, in Madrid and Barcelona mainly, not only have we bought, we have doubled the size of Neinor, but we have also been able to replenish in the cities where we had less exposure because we had delivered a lot in recent years. And that implicit price, both in Madrid and Barcelona, which is more important to me, is at the same prices per square meter that we bought in 2014-2015.

But we don't get to the bottom of that drain as you comment precisely because there were economic policies of countries and central banks that adopted at that moment. There is so much liquidity in the sector that having the greens and extending the detention crosses subsidies make the activity continue in our states, and perhaps it wouldn't be reality if our economic aids didn't exist. So that part of the drop we have more or less passed, and I think we will not return to that situation nor much less. What I am not so clear about sincerely is that revolution of voice, we simply start climbing and we will be. I think that has been for 2021 is infinite. I think that at some point, when the aids are withdrawn, we will again have an extraction of so much bonanza at a general level. In my view, an impact has to come without a doubt, but it will be more controlled, or so we hope. The other thing would be the developer sector of the 90s always linked to the same old cycles, and we could not be linked to the market in the level of supply and demand. We are giving a niche from Neinor sometimes partially to choose what happens globally. The past happened like that because the developer sector was building homes up to an extreme, it was not a niche, so you were linked to a brutal macro. But well, that's the case, so everyone sees us impacted, but we believe that our impact will be that we are not able to increase the sales price. We have that application as I always said, we will see in the years but we will see it.

I remember I said that there was a lot of money sitting on the sidelines, clearly. It has poured into the residential sector. Obviously, our real estate segments are different because there it has been impacted by COVID. The only thing investors wanted to see in residential were two things: if execution actually followed through – that was important – and we delivered and over-delivered, Neinor and the rest of the developer sector. Also all the risks of pre-sales not materializing. Seeing that it didn't happen, that they were telling the truth as we talked about, not only did we not see a negative impact but on the contrary, very favorably. Capital has entered in floods, and as I said before, the living reflection is not my words but the stock of listed companies, which have increased significantly in what we call 2021.

This, no one can escape. Obviously, we are in a very fragmented sector, where there are increasing barriers to entry because of access to debt and capital. So, consolidation should happen more. As I said, we are the first but obviously we will not be the last, nor the last pressure at the level of developers. In fact, what I have published, I don't know if it was after Habitat, or Áurea... I haven't resolved or Habitat, the one from Áurea, if it wasn't in July... The one that cost you more flavor, we already had in front because now the beautiful woman in her lands and dedication to us. Effectively we didn't have so much the transaction of use of acquisition but rather more as a land purchase that simply goes embedded in a legal structure that is the company, but that is land that ultimately Área will have to develop. I am referring to real transactions of 300 million, federal, where the market share can increase and get concentrated because right now the main player in the sector is doing around 2-3 percent. Clearly, if they order and place them compared to the Anglo-Saxon world and the rest of Europe or any other market, I think there is an opportunity that will arise and will always be there. We have said that living 21 has been produced, we started to know and then it was done because we had said so, because we want that to happen and we will see the next 12 months, which will be an interesting sector to see those perspectives. I would like to see what I call the breaking of the glass ceiling of Spanish developers, who always seem to have a maximum production and delivery volume of 3,500 homes, very difficult – from the times of Reyal Urbis to even Urbis from the Flintstones. The units that come to land are not the same as what you would promote to deliver. In this country, more than 4,000 or 5,000 homes recurrently never, but I think more than 3,500. Note that it will be interesting to see if it is achieved. I have had some chats over dinner with a common friend Turkish, etc., and we talked about the famous glass ceiling. We said why doesn't anyone break it? Because a child doesn't come and say 'by my nose from now on I will deliver 5'. But it's not easy, you know.

A year ago we had a long-term objective of having 5,000 homes in that rental portfolio. 5,000 homes at a patrimonialist level. I remember the number, and also the medium-term objective of 5,000. Is the focus still there? Well, we already have almost those 5,000. We reported in June. Two months later, we have 4,600 units. So in two years since we started launching that leg, that business division, we attend to those 5,000 on the balance sheet mainly. It is operational already; we have almost 500 homes, and the rest will start to fall when we have 2023 we will have 12,000 homes in the portfolio, and the rest will happen in 2024. We are on that path, and the initial objectives are fully met. Clearly, for us to be at the top of the list of suggestions, we are good as three in design, we are producing, but clearly we did not have that experience in renting and maintaining the mobile management of the asset of the series of the property itself. That was very easy: either we internalize by hiring experts in the sector, anticipating that purchase position in 2023, and we saw that the best and quickest way was to buy a guaranteed company. And the truth is it is working very well. We go in two formats: for our own portfolio but also managing third-party assets. And we were very focused on Madrid, and now just before the end of the year we have that opening in the cities where we are in Malaga, Valencia, and Barcelona. So we have started an expansion that will not only provide us with recurring income – which is always good in a developer business and even better for liberty capital – but also will give us a lot of market information because if you look at the 5,000 homes we want to control at 30 units each plus the homes we can from third parties, we will be the player with the most information in the rental market in those cities. And that is very powerful, very powerful.

It is an advantage and we will decide. Our friend, I am exactly the same. Honestly, almost a year later, you know why I am the same? Because it doesn't depend on me. The reality is that when we have the patrimonialist part, the big unknown that we cannot answer is whether the capital market will understand and value the hybrid model perfectly with its benefits. It's the sum of parts: the rental for sale with its valuations and the patrimonialist with its valuations. If that happens, as managers, having the patrimonialist company that generates recurring income and the value reflects for shareholders, we are in the best possible situation. The good thing is that if for some reason the market values it well but not enough, we have the capacity and optionality to look for alternatives to create value. One of them is partial divestment but with cash money and being able to remunerate shareholders with that. That puts you in the value environment. There is another option: a spin-off basically, you list a SOCIMI, you take it to listing and understand again to unlock value. I believe that optionality will depend on the shareholders, not on us. The topic is the expectation of what happens. I tried with my preferences: I would like to maintain the patrimonialist because I think it is the right path.

Thank you for inviting me. A hug, Jordi. A hug.