Polygon Concerned that Realia Business, S.A. Failed to Reflect Significant Valuation Uplift in H1 Results Despite Adoption of RICS Standard

LONDON, Aug. 6, 2019 /PRNewswire/ -- Polygon Global Partners LLP notes the release of Realia's first half 2019 financial results on 29 July 2019.  Polygon was concerned to find that the figures published by Realia in its H1 results continue to significantly understate the value of the company's land bank despite Realia's purported application of the RICS Valuation ? Global Standards 2017 (the RICS Red Book) (RICS) as of June 2019.

The figures in the Realia's H1 results show an increase in the value of the company's land bank from EUR 297.2 million in December 2018 to EUR 315.4 million as of June 2019, an increase of only EUR 18.2 million, or 6.1%.

The H1 2019 valuation has been carried out by external valuer, Tinsa.  This is the same valuer that has valued Realia's portfolio since 2012 purportedly using Order ECO 805/2003 of 27 March (ECO). Polygon notes that, as confirmed by Board of Realia in writing on 3 May 2019, the company has (despite its prior disclosures) been valued using ECO without the principle of prudence¹ from 2013 to 2018?a standard that is not recognised or approved for use in financial statements by any Spanish or international professional accounting body.

In 2011, Realia's residential portfolio was valued by CBRE using the RICS valuation standard at EUR 734 million.  In 2012, Tinsa valued the same portfolio using the ECO valuation standard at EUR 412 million, i.e. EUR 322 million lower. That valuation continued to decline year-on year according to Tinsa, until a low of EUR 297.2 million in December 2018.

The prices of new homes in Spain are now back to their 2011 levels, if not above, as can be easily seen from the official statistics published by the Instituto Nacional de Estadística.  Furthermore, mortgage availability and the number of housing transactions are at better levels than they were in 2011.  Polygon believes it is also reasonable to assume that the degree of urban development of Realia's portfolio has not deteriorated over the past eight years, but rather that Realia has continued to advance these developments, as is its corporate purpose.

Therefore, for a land bank that has remained materially unchanged, it appears unjustifiable that Realia's re-adoption of the RICS valuation standard does not translate into at least a mechanical reversal of the EUR 322 million impairment incurred by the company in 2012.  Realia has not provided any explanation to the market as to why the re-adoption of RICS has not produced this expected valuation uplift.

Polygon also notes that the 6.1% increase in the land bank value shown in the H1 results is inconsistent with advice Polygon received from Tinsa  in June 2018 that the difference in valuation of the same land using RICS vs. ECO would result in a value, on average, between 14% to 35% higher when using the RICS valuation standard, depending on the planning status of the plot.  Realia's land bank value increase by only 6.1% is therefore significantly below Tinsa's own calculations and is particularly difficult to understand considering that the price of new homes in Spain increased by 4.3% in the first quarter of 2019 alone, according to the INE.

As communicated in Polygon's open letter to the Audit and Control Committee of Realia's Board of Directors dated 19 June 2019, Polygon commissioned Sociedad Tascación to produce independent valuation reports on two plots of land owned by Realia (Retamar and Gudalquitón) using the RICS valuation standard.  These independent reports showed a significant valuation discrepancy of over EUR 70 million when compared to the total valuation published by Realia for these two plots (EUR 78.7 million vs. EUR 8.4 million). Given the EUR 70 million of value ascertained by analysing only two plots owned by Realia, it is difficult to reconcile the H1 valuation increase of only EUR 18.2 million for the company's entire land bank portfolio.  For Polygon, this calls into question both the accuracy of the inputs provided by Realia to Tinsa for the purposes of its valuation and Tinsa's correct application of the RICS valuation standard.

In light of the above, and the underlying strength of the Spanish housing market, Polygon continues to be of the view that Realia's published NAV should be in excess of EUR 1.8 per share.

Contact: Polygon Global Partners LLP ([email protected])

¹ The ECO Order is governed by various principles, which are detailed in Article 3 of the order. One of these principles is the so-called principle of prudence, according to which, "when faced with several equally probable scenarios or choices, one should select what results in the lowest appraisal value" (ECO Order art. 3.1(f)). This principle of prudence is an inherent feature of the ECO valuation standard.

SOURCE Polygon Global Partners LLP