Sabadell Sacrifices Profits to Clean Up its Balance Sheet & Resolve the TSB Crisis

27 July 2018 – Expansión

Banco Sabadell has decided to sacrifice all of the profit that it obtained in the last quarter to clean up its balance sheet and leave behind the impact of the sale of its real estate portfolios and the complex IT integration of TSB.

The entity chaired by Josep Oliu earned €120.6 million during the first half of the year, a figure that represents a decrease of 67.2% with respect to the same period last year (€317.7 million) as a result of having recognised impairments amounting to €806 million. Nevertheless, if we ignore those extraordinary effects, the bank’s recurring net profit grew by 24.4% to €456.8 million.

The entity decided to take a hit on the income statement for the second quarter with a provision amounting to €177 million resulting from the macro sale operation of a real estate portfolio worth €12.2 billion and which was formalised in July, in other words, in the third quarter. In parallel, it decided to recognise a provision amounting to €92.4 million to deal with future compensation payments to customers of its British subsidiary, TSB, who were affected by problems caused by the connection of a new IT platform developed by Sabadell.

With this measure, the bank wants to shelve the technological crisis that it suffered in the United Kingdom and also leave its balance sheet almost completely free of the toxic assets that it accumulated during the economic crisis. Specifically, during the first six months of 2018, Sabadell decreased its problem assets by €7.012 billion, and by €9.547 billion during the last twelve months. Now, the problem balance amounts to €7.911 billion, of which €6.669 billion are doubtful debts of all kind (not only real estate) and €1.242 billion are foreclosed properties. Thus, the ratio of net problem assets over total assets amounts to 1.7%. The default ratio following the portfolio sales amounts to 4.5%.

As at 30 June 2018, the bank’s fully loaded CET1 capital ratio amounted to 11%, although that will rise to 11.2% following the transfer of the majority of the toxic assets, closed in July.

The bank led by Jaime Guardiola has sold the bulk of its non-performing and foreclosed loans to Cerberus, with whom it is going to create a joint venture in which the fund will hold an 80% stake. The entity has also sold portfolios to Deutsche Bank and to Carval Investors. Solvia has not been included in any of those transactions and will continue to be fully owned by Sabadell.

Between January and June, Sabadell increased the volume of its live loan book by 3.7% thanks to a boost from SMEs and mortgages to individuals in Spain. Customer funds increased by 2.8% YoY driven by demand deposit accounts, which amounted to €105.4 billion. Off-balance sheet funds also grew, by 1.2%, during the quarter, primarily due to investment funds.

During the first half of the year, Sabadell’s interest margin remained stable, given that the entity earned practically the same amount as it did in the six months to June 2017 (€1.81 billion). The bank has been affected by exchange differences and a reduction in results from financial operations (-51%); by contrast, fee income grew by 6%. Thus, the gross margin fell by 8.8% to €2.631 billion.

The reaction of investors to these results has been negative. Sabadell’s share price fell by 2.99%, the third largest drop on the Ibex, to €1.37. So far this year, the bank’s share price has depreciated by more than 14%.

Original story: Expansión (by Sergi Saborit)

Translation: Carmel Drake

Non-Ibex Property Developers Also Shine: Quabit, Insur & Montebalito

5 January 2018 – El Confidencial

The real estate sector is starting to show green shoots and that is being reflected in the Spanish stock exchange. In 2017 alone, 19 companies made their debuts on the Alternative Investment Market, taking the total number to 47. Beyond the five large Socimis (Merlin, Colonial, Hispania, Axiare and Lar), there are alternative real estate companies that have experienced positive growth and that represent good investment options.

Quabit Inmobiliaria could summarise its 2017 in two ideas: financial support from large firms and capital increases. And, at the end of December, the company closed a capital increase amounting to €29 million, most of which (77%) was subscribed by Cobas Asset Management (Francisco Paramés’ management firm) and Kairos Investment. In total, it saw its share price rise by 16% during 2017 and experts believe that its share price will reach €2.40.

“In addition to the push that it has been given by the fact that large funds are including its stock within their portfolios, the listed company owns a significant number of properties as it heads into 2018. Moreover, its debt has decreased, and so it can afford to invest more. In addition, another positive factor is the performance of house prices, above all in Barcelona and Madrid, where it has its greatest presence”, explains an analyst at XTB Manuel Pinto.

Another real estate firm to watch is Montebalito, which saw its share price rise by 43% in 2017. “In general, we expected more from this stock. Nevertheless, it managed to close the year with a gain, thanks to the sale of a property in Berlin for €10 million, a deal that allowed it to clean up its balance sheet”, said Pinto.

Nevertheless, its performance could have been greater if it had not been for the depreciation of the currencies in Brazil, the Dominican Republic and Colombia, countries where the listed firm owns a significant number of assets.

All of this data is being supported by the boom in the real estate sector, which has managed to increase in value by more than 360% since 2012, according to the latest report from ‘Bolsas y Mercados Españoles’ (BME). “All of Spain’s real estate companies are very healthy, mortgages are rising, the sector is cyclical…In general, all indicators are still positive for these companies to continue growing during 2018”, says an analyst at Orey iTrade Roberto Berzal.

Moreover, Inmobiliaria del Sur has also joined the party, given that it managed to increase its share price by 35% (in 2017). “This company is improving its turnover and income, above all in the construction sector. Nevertheless, results from the last quarter mean that we are being cautious with the stock and waiting for its performance over the medium term”.

Original story: El Confidencial (by C. Alba)

Translation: Carmel Drake

Meliá Generates Profits Of €45M In H1 2016

2 August 2016 – Expansión

The hotel chain earned €45 million during the six months to June and reduced its net debt by €213 million.

The hotel chain Meliá, which will join the Ibex next week, replacing FCC, doubled its profits during the first half of the year, to €45 million. The company has highlighted that the 123% improvement in net profit has been generated even without the sale of any assets.

The company owned by the Escarrer family increased its average revenue per room (RevPAR) by 9.4% – or by 14.2% if we include the assets under management in its portfolio – and whereby recorded six years of consecutive quarterly increases.

The company closed the first half of the year with operating income of €856 million, 0.4% lower than in the same period in 2015. If we strip out the effect of gains from the sale of assets last year, operating income increased by 5.7%.

By geographic region, RevPAR in America was lower in H1 2016 than in H1 2015, which the company explains was due to the impact of the depreciation in the Canadian dollar, the economic deceleration in Brazil and Argentina, changes in reservations due to the Zika virus and the good temperature in the USA and Canada, the main issuing markets. By contrast, the company highlighted the strong performance of hotels in the Mediterranean and Caribbean, with a RevPAR increae of 30.9%.

In terms of the financial situation, Meliá decreased its net debt by €213 million during the first six months of the year, bringing it down to €556 million at the end of June, thanks primarily to the early conversion of a convertible bond issued in 2013.

The Vice-President and CEO of Meliá, Gabriel Escarrer Jaume, stated that the repositioning of its hotels, investment in assets and strategic markets, as well as financial strengthening have allowed the group to return to the Ibex thirteen years later.

The company is “optimistic” about the performance of its hotel complexes during the third quarter and its urban hotels during the second half of the year. In the same way, it forecasts a favourable “albeit unequal” performance across its “European hotels”, influenced by the world environment, especially France, in the face of the heightened terrorist threat. In terms of America, the firm expects a boost with the opening of several new hotels: Innside New York Nomad, ME Miami and Meliá Braco Village (Jamaica).

At a conference with analysts, the company made reference to Brexit explaining that it does not expect any impact in the short term, given that Britons have already booked their holidays for 2016, and some have even booked for next year.

Original story: Expansión

Translation: Carmel Drake

Deloitte: Hispania & Lar Are The Most Profitable Socimis

7 June 2016 – El Confidencial

They have been accused of: buying up assets expensively, skewing the market by paying stratospheric prices, heating up the market on its way to recovery, when it still needs time for supply and demand to adjust…the Socimis have been accused of many things, but for all their successes and failures, the reality is that they are all managing to generate more profitability than other types of investments, such as fixed and variable income, with average operating yields (net gain over initial investment) of between around 4% and 6%.

And the story goes on and on, because if we add to those figures the fact that Socimis have an easier time when it comes to obtaining financing from financial institutions – they are being offered spreads of just 1.5% – such as in the bond market – an area that several Socimis (Colonial, Merlin and Lar) have already ventured into and which Hispania hopes to explore soon, – the final yield on their investments will amount to 10%-11%.

A recent study by Deloitte, which was published last Wednesday in the Foro MedCap organised by the Spanish Stock Exchange and Markets (BME), highlights the success that these investment vehicles are enjoying, after it has analysed the gains that they are making on their investments from several perspectives. As the table in the article shows, Hispania and Lar España are, in that order, the two companies that are achieving the highest operating returns in the sector with respect to their initial investments.

Colonial, the only large listed Spanish real estate company that has not adopted the Socimi structure yet because it has tax credits from prior year losses, appears slightly behind, with an operating yield of 3%. But as Alberto Valls, Partner of Financial Advisory at Deloitte, explained, this figure is distorted by the high weight that Colonial’s French subsidiary SFL has in its portfolio. SFL is an authentic jewel in the crown of this group but because it focuses on the high-end office market in Paris, it offers lower yields in exchange for holding better assets and it does not include the exchange operation with Finaccess, which the Group will approve on 28 June.

The other side of the coin: the stock market.

Merlin, Colonial, Hispania, Axiare and Lar have an aggregate net asset value (gross value less debt) of €7,576 million, in line with the combined market value of these companies, which stands at €7,655 million. Nevertheless, if we look at each company in detail, we see that Axiare is the Socimi that has managed to best to gain the trust of investors, listing as it does with a discount premium on its NAV of 11.5%, followed by Colonial, with a discount premium of 8%. In exchange, the stock market value of Lar is 8% lower than its asset value, a difference which amounts to -3.5% and -1.5% in the cases of Merlin and Hispania, respectively, figures that indicate that those companies still have some way to go on the stock market.

Despite that punishment, if we compare the evolution of these companies on the stock market over the last two years (all of these Socimis debuted on the stock exchange in 2014) with the performance of the Ibex, we see that, according to Deloitte’s report, whilst the sample of companies increased their values by 18%, Axiare’s share value rose by 34%, Hispania’s by 22%, Merlin and Colonial by 18%, and Lar by 6%. Despite this improved behaviour, the Spanish companies in the sector are lagging behind their European counterparts, given that the EPRA index, which groups together the main real estate companies in Europe, reported an (average) increase of 23%, exceeded only by Axiare.

From this international perspective, the experts agree that, far from heading for another (real estate) bubble, there is still a long way to go in our country and that the phenomenon unleashed in the last two years with the eruption of Socimis in the stock market, is also being experienced in other countries, encouraged by the real estate recovery, surplus liquidity and the need to find returns of around 4% with controlled risks in a zero and negative interest rate environment. (…).

Original story: El Confidencial (by Ruth Ugalde)

Translation: Carmel Drake

Merlin & Testa: Birth Of A Giant With Assets Worth €5,500M

10 June 2015 – Expansión

For background to this story, refer to the article published yesterday: Sacyr Sells Its Subsidiary Testa To Merlin For €1,793M

(…)
The union of Testa and Merlin will create a giant, with assets worth almost €5,500 million; gross annual income of €290 million; and a market capitalisation that currently stands at €4,400 million.

Specifically, Merlin, the company led by Ismael Clemente and controlled by UBS, Marketfield and Gruss Capital, has a market capitalisation of €2,275 million and a real estate portfolio of €2,594 million, which covers a surface area of 680,000 m2 and generates annual income of €132 million.

Meanwhile, Testa is one of the leading real estate companies in Spain. It has a portfolio of real estate assets for rent, mainly in Madrid and Barcelona, which have a combined leasable surface area of 1,043,000 m2 and a value of €3,180 million. Its assets include one of the four skyscrapers at the northern end of the Paseo de la Castellana in Madrid, the Torre Sacyr (pictured above).

Merlin consolidates its position as the largest Socimi in Spain

Merlin Properties, which acknowledged its intention to invest in Testa’s share capital in April, has consolidated its position as the largest Socimi (listed real estate asset investment company) in Spain.

(…)

Phased sale until June 2016

The sale will be carried out in several phases and through an “accordion operation” over the next few months. The first phase was completed yesterday with a capital increase through which Merlin took a 25% stake in Testa’s share capital.

To this end, Testa undertook a €669.7 million capital decrease and distributed an extraordinary dividend of €527.7 million, through which Sacyr generated revenues of €238 million.

Thus, €1,793 million is the amount that results from adding the aforementioned €238 million to the €1,555 million that will correspond to the sale of the remaining 74.6% stake in Testa, which Sacyr owns following the capital increase. This operation will be executed “in successive tranches and phases, which will be completed before 30 June 2016”, according to reports by the company to Spain’s National Securities Market Commission (CNMV).

Once this acquisition has been completed, Merlin plans to make a public tender offer (OPA) for 100% of Testa’s shares. However, Sacyr has agreed to “irrevocably immobilise its shares in Testa and not participate in the process”.

Lazard has advised Sacyr in the deal and Morgan Stanley and Goldman Sachs have acted as financial advisors to Merlin.

Sacyr and Merlin’s share prices increase; Testa’s decreases

Sacyr, which is one of the best-performing securities on the Ibex so far this year, has received a boost from this operation – its shares were up by 4.3% yesterday, to €3.756 per share, leading the increases on the market. Investors also applauded the behaviour of Merlin Properties, whose shares increased by 1.58% to €11.54 per share.

Meanwhile, Testa returned to the stock market with a negative tone. By the end of the session, it had recorded a loss of almost 3%, to €13.15 per share, after the CNMV suspended trading of its shares between 12:00 and 15:00.

Original story: Expansión (by M.L.)

Translation: Carmel Drake