Le Lézard
Classified in: Business
Subject: ECO

Polygon Remains Concerned by the Significant Inconsistencies in the Realia Business, S.A. Financial Results for FY 2019 and Other Actions of Management


LONDON, March 27, 2020 /PRNewswire/ -- Polygon Global Partners LLP notes the release of Realia's 2019 financial results on 26 February 2020.

Polygon remains concerned to find that Realia's presentation of its net asset value (NAV) in its 2019 financial results materially underestimates the true value of the assets held by the company and therefore depresses the true value of Realia's shares.  Polygon considers this to be the case for several key reasons:

Realia fails to consider tax losses in calculating its post-tax NAV
Realia has published its NAV net of 25% tax on capital gains.  In doing so, the company has failed to make reference to the fact that it has EUR 430 million of tax losses carry-forwards that could be used to shield 70% of such capital gains. On this basis, even without considering the significant understatement of the company's land bank value as detailed below, Polygon believes that Realia's NAV post-tax (NNAV) should be EUR 1.42 per share?and not EUR 1.30 per share as published by Realia.

Realia contradicts its own sensitivity analysis
In its 2018 consolidated annual accounts (Note 13), Realia published a sensitivity analysis for the value of its inventories (mostly comprised of its land bank) that showed a 5% increase in the prices of new homes in Spain would imply an increase of EUR 87.3 million in the value of inventories.

Data from the Instituto Nacional de Estadística (INE) shows that the prices of new homes in Spain rose 7.3% in 2019.  Applying Realia's 2018 sensitivity analysis, all else being equal, the land bank should have increased in value in the range of at least EUR 127 million.  Instead, Realia's results show an increase of only EUR 16.4 million.  Realia has failed to explain the reason for this obvious and significant discrepancy.

Realia also published a similar sensitivity analysis in its 2019 consolidated annual accounts.  By contrast with its 2018 sensitivity analysis, the 2019 sensitivity analysis showed that a 5% increase in the prices of new homes in Spain would only increase the value of inventories by EUR 48.8 million?a figure 45% lower than the prior year.  Considering that Realia's residential land portfolio is materially unchanged from last year, Realia fails to explain how such a material reduction in the potential revaluation of inventories can be justified.

Realia continues to significantly understate the value of its land bank
Realia's 2019 results state that the value of the company's land bank was EUR 313.6 million as of December 2019, using the RICS Valuation ? Global Standards 2017 (the RICS Red Book) (RICS). 

Realia's residential land bank portfolio was valued by CBRE using the RICS valuation standard at EUR 734 million in 2011.  In 2012, the same portfolio was valued by Tinsa?the external valuer still used by Realia, who inappropriately applied Order ECO 805/2003 of 27 March (ECO) standard?at EUR 412 million, i.e. EUR 322 million lower than had the appropriate RICS valuation standard been properly applied. 

Polygon notes that: (1) Realia purportedly readopted the RICS valuation standard from June 2019, (2) Realia's land bank has remained materially unchanged since 2011, and (3) the prices of new homes in Spain are now higher than in 2011, as can be seen in the official statistics published by INE.  Given this set of facts, Polygon believes it is unjustifiable that Realia's financial results do not reflect at least a mechanical reversal of the EUR 322 million impairment incurred by the company in 2012.  Realia has still not provided any justification to the market as to why the re-adoption of RICS has not produced this expected valuation uplift.  

Realia's auditors, EY, have also failed to provide any explanation.  They have limited their work to checking the "plausibility" of Tinsa's valuation models, and in doing so, raise unanswered questions as to the extent to which Realia's financial statements present a true and fair view of the company's assets.

Realia materially undervalues two of its properties 
Realia continues to undervalue the company's land plots in Retamar de la Huerta and Guadalquitón.  In 2019, Polygon commissioned Sociedad de Tasación to produce independent valuation reports, which showed a RICS valuation of EUR 78.7 million for the two plots?a figure materially more than Realia's own appraisal of EUR 8.4 million.   

In the 2019 results, Realia has not changed the valuation of its land bank in the categories of "Ordenación" and "Planeamiento" (where the Retamar de la Huerta and Guadalquitón plots are included).   It is therefore unclear to Polygon why Realia continues to publish financial information that materially understates the value of these two properties.

In light of all 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 1.80 per share.

Polygon notes its serious concerns regarding certain other actions of management
In December 2018, Realia carried out a capital increase to raise EUR 149 million at a very steep discount to its NAV, with heavily dilutive consequences for shareholders.  The expressed rationale for this capital increase was the company's urgent need for money to restart its housebuilding arm.  It is notable then that during 2019, Realia acquired two pieces of land in Tres Cantos for over EUR 25 million for its rental activity (which were not named in the capital increase prospectus), it repurchased over 2 million of its own shares, it increased the number of units being built by 126 and yet it reduced its net debt by EUR 8 million.  Polygon thus questions the necessity for the capital increase and its benefit to the company when its effect has been to depress Realia's stock price and to dilute the minority shareholders.

Polygon is also troubled by the lack of information provided by Realia to minority investors and the market-at-large.  In particular, Polygon notes management's failure to publish any medium-term strategic targets or to hold conference calls to present the company's financial results, as well as its refusal to interact with the company's minority shareholders and other market participants?as management expressly promised Polygon it would do following the annual general meeting in June 2018.  As a result, there is little coverage of Realia by equity research analysts. 

In light of these circumstances, and the company's publication of financial results with the significant inconsistencies described above, minority shareholders and investors are being deprived of the ability to properly assess the value of Realia?a fact which Polygon is concerned may be exploited by Realia's majority shareholders in transactions that do not reflect true and fair value for the company.

Contact: Polygon Global Partners LLP (ir@polygoninv.com)

SOURCE Polygon Global Partners LLP


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