Residential real estate

In the first half of 2017, the French retail market for new homes appeared to stabilise at a high level thanks to the range of support measures currently in force and continuing very low interest rates. The market was also helped by strong growth in the consumer confidence index.

Revised statistics from France's Commissariat Général au Développement Durable (General Commission on Sustainable Development) indicate that new home reservations reached a record high in 2016, at 126,300, in a French market where the medium-term trend for housing needs remains positive, particularly due to expected future growth in the French population and continuing urbanisation.

After hitting a low point in November 2016 (1.31% on average), mortgage rates started to rise again, reaching 1.57% on average in June 2017^[4], thus returning to their level at the start of the summer in 2016, with financing terms for clients (for both new-build and existing properties) remaining very attractive throughout the period.

New homes

In the first half of 2017, net new home reservations in France totalled 7,794 units, up 10% compared to the first half of 2016. Expected revenue from reservations came to €1,513 million including VAT, 16% higher than in the first half of 2016. Growth in expected revenue from reservations outpaced growth in the volume of reservations over the period as a result of mix effects, in particular a higher proportion of non-social housing bulk sales (19% in H1 2017 versus 5% in H1 2016) and a slight increase in the sale price to individuals, especially outside the Paris region.

After adjusting to exclude external growth transactions, a total of 6,982 units were reserved in the first half of 2017, slightly lower than in the first half of 2016 (down 1%), mainly due to a high base effect. The corresponding expected revenue from reservations was €1,356 million including VAT, an increase of 4% compared to the first half of 2016. On a like-for-like basis over the two-year period since H1 2015, this increase was 36% in volume and 34% in value.

Steady progress continued to be made on integrating the businesses acquired through external growth transactions in 2016. Edouard Denis is expected to book at least 2,000 reservations in 2017. The Group has confirmed its target of growing its market share by 1 percentage point relative to 2016.

Due to a particularly high base effect in the first half of 2016, reservations by first-time buyers and individual investors declined by 6% and 5%, respectively, in the first half of 2017. Individual investors accounted for 47% of Nexity's new home reservations in France during H1 2017. Investors benefiting from the Pinel scheme represented around 25% of new home reservations over the last couple of years.

Reservations made by professional landlords were up 11% from the first half of 2016, accounting for 26% of all new business (compared with 23% in H1 2016).

In terms of geographic breakdown, reservations in the first half of 2017 were buoyant in the Paris region (up 9%), buoyed by a sharp increase in bulk sales (2.2 times higher than in H1 2016), while reservations by individuals slowed over the same period (down 13%).

The average price including VAT of new homes reserved by Nexity's individual clients in the first half of 2017 was 4% higher than in the first half of 2016, with an increase in the average price per square metre and the average floor area per unit.

Nexity launched a total of 9,431 units in the first half of 2017 (25% more than in H1 2016^[5]). Unsold completed stock (118 units) as a proportion of the total supply for sale (6,673 units) remained very low. The average level of pre-selling booked at the start of construction work came to 79% in the first half of 2017 (compared with 72% in H1 2016), an exceptionally high level.

At end-June 2017, the business potential^[6] for new homes was up 22% from end-June 2016 and came to 43,616 units, the equivalent of 2.6 years of development operations.

Subdivisions

Subdivision reservations totalled 1,159 units, 8% higher than in the first half of 2016, reflecting the vitality of the single-family home market. The average price of reservations by individuals grew by 4% to €77k.
                          
International

Nexity recorded 143 international new home reservations in the first half of 2017, mainly in Poland. The decline relative to the first half of 2016 was linked to the sell-off of stock in Italy.

Commercial real estate^[7]

Commitments in the French investment market totalled €6.8 billion in the first half of 2017, 27% lower than in the first half of 2016. Office assets accounted for almost 76% of such investments, with prime premium rates remaining stable after having steadily declined since 2008.

The market for office space in the Paris region reached almost 1.2 million sq.m marketed in the first half of 2017, up 4% year-on-year. Prime headline rents were up slightly relative to the previous quarter.

Nexity booked orders totalling €77 million at end-June 2017.

During the first half of 2017, Nexity acquired the property assets of the French headquarters of US company 3M, located in Cergy-Pontoise (Val-d'Oise). Plans are in place to build a new five-storey, 11,000-square-metre building for 3M, which has been sold off-plan to a private real estate company and is scheduled for delivery in the first quarter of 2019. At the same time, plans to build over 1,000 residential units - including a Domitys senior independent-living residence - will also be developed in place of the former office tower. This mixed-use, multi-product project illustrates the synergies between the Group's various business lines (Residential real estate, Commercial real estate and Nexity Conseil et Transaction).

Nexity has also agreed the off-plan sale of a building at the Euratechnologie business park in Lille (Nord). The project, developed by Térénéo, consists of a five-storey wood-frame office building with a total floor area of around 8,500 sq.m, rented by Capgemini.

Furthermore, during the first half of the year, Nexity took over the property portfolio of developer Thalium Promotion, enabling the Group to expand its geographic footprint in the Nouvelle-Aquitaine and Occitanie regions.

Deals in the set-up phase are progressing satisfactorily, and should be marketed starting in the second half of 2017.

Services

In Real estate services to companies, the floor area under management at end-June 2017 totalled 11.7 million sq.m, down 5% from end-December 2016, mainly as a result of the expiry of a management contract for more than 530,000 sq.m.

In Real estate services to individuals, the portfolio under management totalled 887,000 units at 30 June 2017, eroding slightly over the period (down 1.2%) but lower than in the first half of 2016 (down 2.6%). The brokerage business was buoyant, with the number of provisional sale agreements signed up 4% relative to end-June 2016.

In Franchise operations, Century 21 and Guy Hoquet l'Immobilier signed 8% more provisional sale agreements in the first half of 2017 than during the same period the previous year, in a French market for existing properties having reached an all-time high at end-June 2017^[8]. The number of franchisees grew in the first half of 2017, totalling 1,257 agencies at end-June 2017 versus 1,217 at end-December 2016.

Urban regeneration (Villes & Projets)

At end-June 2017, Nexity's urban regeneration business (Villes & Projets) had land development potential of 508,000 sq.m^[9], with the notable addition to the portfolio of a residential development located in Villenave-d'Ornon (near Bordeaux), with a floor area of nearly 9,000 sq.m.

Digital and Innovation

Nexity continues to invest around €20 million a year in digital technology and innovation, split between in-house digitisation projects and investment in new services through direct investments (Blue Office, Bien'ici, E-gérance, etc.), partnerships with start-ups and investments with venture capital funds.

In the first half of 2017, Nexity:

• opened Le Lab, an in-house demonstrator dedicated to enterprise clients, at the Group's Paris headquarters, together with a new Blue Office shared office space (third-party office and co-working space for companies, freelancers and start-ups);
• signed a contract with Atos to deliver a Blue Office at its Bezons campus (Val-d'Oise);
• launched in Lyon (Rhône), for the first time in France, an entirely online sales campaign for a large-scale new home development (Vill'Arboréa: 425 units); and
• launched Connect', Nexity Conseil et Transaction's interactive and immersive new space in Paris (on Avenue de la Grande Armée), in partnership with an ecosystem of French start-ups and established businesses, providing investors and end-users with optimal conditions to develop their real estate strategy.

In addition, Bien'ici - a next-generation property listings website in which Nexity has a 48% stake alongside a consortium of real estate professionals (Consortium des Professionnels de l'Immobilier) - continued to receive a growing number of membership requests from professionals wishing to place paid listings (with 6,800 member agencies at 30 June 2017).

National advertising campaign

After having brought all of its business lines under a single brand in 2012, and following its two previous national advertising campaigns in 2013 and 2014, on 4 June 2017, Nexity launched a moving new television and digital media campaign with the aim of firmly establishing the Group's brand image as a comprehensive real estate services provider.

Governance

As from 9 June 2017^[10], the members of the Executive Committee, led by Alain Dinin, Chairman and CEO, are as follows:

• Véronique Bédague-Hamilius, Company Secretary, in charge of Commercial and Local Authority Clients;
• Julien Carmona, Deputy CEO in charge of Internal Clients;
• Jean-Philippe Ruggieri, Deputy CEO in charge of Individual Clients, and President of Nexity's Residential and Commercial real estate development business; and
• Frédéric Verdavaine, Deputy Managing Director in charge of Individual Clients, and President of Nexity's Real estate services to individuals business.

This new organisation is part of Nexity's transition to its role as a comprehensive real estate services provider, focused on each of its client categories and structured by business line.

CONSOLIDATED RESULTS

Revenue

In the first half of 2017, Nexity recorded revenue of €1,464 million, increasing across all the Group's business lines and globally up 8% relative to the first half of 2016. On a like-for-like basis, excluding Edouard Denis and Primosud, Group's revenue for the first half 2017 came to €1,445 million, up 6% compared to H1 2016.

* Revenue generated by the Residential and Commercial divisions from VEFA off-plan sales and CPI development contracts is recognised using the percentage-of-completion method, i.e. on the basis of notarised sales and pro-rated to reflect the progress of incurred construction costs.

Residential real estate revenue totalled €1,074 million, up 9% compared to H1 2016. This growth reflects the increase in the division's backlog observed over the previous quarters.
On a like-for-like basis, division's revenue for the first half of 2017 came to €1,054 million. Revenue generated in the first half of 2017 by Edouard Denis and Primosud (€84 million) is only recognised in the amount of €19 million as part of consolidated revenue due to the adjustment for the effects of PPA (purchase price allocation), which involves the elimination of the portion of revenue relating to business activity prior to the acquisitions.

Revenue for the Commercial real estate division was substantially higher than in the first half of 2016 (up 11%), at €142 million, reflecting the ramp-up of projects signed in 2015 and 2016, particularly those outside the Paris region.
  
The Services division recognised revenue of €246 million, up 1% from H1 2016. Higher revenue from property management for individuals and franchise networks offset lower revenue from real estate services to companies and Nexity Studéa (due to the voluntary non-renewal of less-profitable operating contracts).

As in the first half of 2016, revenue from Other activities was not significant.

In IFRS terms, revenue for the first half of 2017 was €1,402 million, up 7% relative to consolidated revenue of €1,316 million in the first half of 2016. This figure excludes revenue from joint ventures, in accordance with IFRS 11, which requires joint ventures to be accounted for via the equity method instead of proportionately consolidated as they were previously.

Current operating profit

Nexity's current operating profit was €124 million in the first half of 2017 (compared with €107 million in H1 2016), up 16%.

The current operating margin increased by 0.6 percentage points to 8.5%.

In Residential real estate, current operating profit grew 9% (up €7.0 million compared to H1 2016), reflecting good progress on housing and subdivision development projects. The division's current operating margin was nearly stable (down 0.1 percentage points). Nexity expects an improvement in this operating margin during the second half of 2017.

In Commercial real estate, current operating profit totalled €30 million in the first half of 2017, compared with €22 million in the first half of 2016 (up 39%). The division's current operating margin saw exceptional growth, rising to 21.4%, which was significantly higher than usual, reflecting excellent financial and technical management of ongoing projects as well as reversals of provisions on delivered projects.

The Services division generated current operating profit of €19 million, compared with €15 million in the first half of 2016, resulting in a sharp rise in its current operating margin to 7.6% (compared with 6.3% in H1 2016).

Current operating profit from property management for individuals rose by 27% to €15 million, resulting in a 2.0 percentage points increase in the current operating margin to 9.9%, helped by good control of overhead costs and strong growth in the brokerage business. Nexity Studéa's profitability continued to rise, due in particular to improvements in occupancy rates. The franchise networks had an earnings-enhancing impact on the operating margin for the Services division. The profitability of real estate services to companies continued to be affected by the ongoing reorganisation of Nexity Conseil et Transaction.

The operating loss from Other activities (€12 million in H1 2017, compared with €10 million in H1 2016) includes loss from the holding company, research and overhead costs incurred by Villes & Projets, the development of incubated start-ups and digital projects^[11], and a portion of the IFRS expenses on share-based payments.

EBITDA^[12]

In the first half of 2017, Nexity generated total EBITDA of €139 million, compared with €119 million in the first half of 2016 (up 16%), giving an EBITDA margin of 9.5%, compared with 8.8% in H1 2016. The EBITDA margin rose in all business lines, notably in Commercial real estate (up from 17.8% to 21.6%) and Services (up from 7.7% to 9.7%). In Property management for individuals, it rose from 9.3% to 11.8%.

Net profit

Net financial expense was stable in the first half of 2017 at €14.9 million (€14.8 million in H1 2016). In 2017, it included the impact of expenses related to the early redemption of €65 million in bonds issued in 2013 and originally due to mature in 2018, for €3.1 million, whereas the net financial expense in H1 2016 had included a €4.8 million expense related to the redemption of 2014 OCEANE bonds. After restating for these items, the increase in net financial expense reflects the controlled increase in the Group's debt.

The tax expense (€39.7 million) increased by €4.8 million as a result of the higher taxable profit figure. The effective tax rate fell to 36.3% (38.0% in H1 2016), which was still higher than the usual rate of 34.4%.

Equity-accounted investments made a €5.1 million negative contribution (compared with a €3.4 million loss in H1 2016) and mainly reflected the contributions of Bien'ici and Ægide-Domitys.

Net profit attributable to equity holders of the parent company grew by 18% to €62.0 million for the period, compared with €52.5 million in H1 2016.

Working Capital Requirement (WCR)

Operating WCR at 30 June 2017 was €722 million, up €27 million from its level in December 2016. This change was mainly due to the rise in WCR for Commercial real estate (up €71 million), resulting in particular from unfavourable client payment schedules in the period, which are expected to remain a factor in the coming quarters. Conversely, WCR for Residential real estate improved (down €59 million in H1 2017), reflecting the successful sale of projects.
           
Cash flows

Cash flow from operating activities before financial and tax expenses totalled €132 million, up €18 million relative to H1 2016, mainly as a result of the higher profit figure for the period.

Cash flows from operations decreased to €57 million (compared with €78 million in H1 2016) due to an increase in operating WCR and in corporate income tax.

Operating investments, particularly in IT and digital, increased to €15 million, compared with €10 million in the first half of 2016.

Nexity's free cash flow for the first six months of 2017 was €42 million, compared with €68 million for the first half of 2016.

Net cash used in financial investments was much lower than in the first half of 2016, when this item included the acquisition of a 55% stake in Edouard Denis for €55 million.

Net cash from financing activities (€59 million) primarily involved the proceeds from the bond issue carried out in June 2017 for €151 million (see below), net of loan repayments and bond partial redemption during the period.

Financial structure

Nexity's consolidated equity (attributable to equity holders of the parent company) was €1,525 million at end-June 2017, compared to €1,589 million at end-December 2016, mainly after €133 million in dividends paid and the inclusion of net profit for the half-year period (€62 million attributable to parent company shareholders).

Net financial debt amounted to €416 million at 30 June 2017, compared to €317 million at 31 December 2016 (up €99 million). This increase in net debt over the first half of the year was mainly due to the increase in operating working capital (up €20 million), the dividend payment (€133 million) and investments (€15 million), partially offset by the cash flow generated by operations in the first half of the year (€81 million).

At 30 June 2017, net debt equated to 27% of equity and 1.3x EBITDA over the previous 12 months.

On 22 June 2017, Nexity successfully issued €151 million in bonds into the private placement market, comprising one tranche of €30 million in bonds, redeemable at maturity in November 2023 (6.5 years) and paying an annual coupon rate of 2.05%, and a second tranche of €121 million in bonds, redeemable at maturity in June 2025 (8 years) and paying an annual coupon rate of 2.60%. At the same time, Nexity redeemed €65 million in bonds originally due to mature in December 2018, issued in January 2013 and carrying an annual coupon rate of 3.75%. This new borrowing extends the maturity of the debt (4 years as against 3.2 years prior to the new issue) while also taking advantage of current favourable interest rates.

At 30 June 2017, Nexity had authorisations from banks to borrow up to €1,013 million, including available facilities of €300 million on its corporate credit lines (undrawn). The Group had drawn down €359 million of its authorised credit at 30 June 2017. Nexity was in compliance with all of the financial covenants attached to its borrowings and lines of credit as of 30 June 2017.

Backlog at 30 June 2017

The Group's backlog at end-June 2017 stood at €4,226 million, up 5% relative to year-end 2016 and equivalent to 19 months' revenue from Nexity's development activities (revenue on a rolling 12-month basis).

Order book in the Residential division totalled €3,744 million, up 8% compared to 31 December 2016. This backlog amounts to 19 months of revenue (Residential division revenue on a rolling 12-month basis).

The Commercial division's backlog dropped to €482 million at 30 June 2017 (compared with €544 million at year-end 2016), as the new orders received during the half-year period did not offset the extent of completion of projects under construction. This backlog amounts to 18 months of revenue (Commercial division revenue on a rolling 12-month basis).

Implementation of IFRS 15 and IFRS 16

Detailed information regarding IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases is provided in Note 2.1 to the consolidated interim financial statements in Section 2 of the 2017 Interim Financial Report.

***

Financial calendar and practical information

9M 2017 business activity and revenue                          Wednesday, 25 October 2017 (after market close)

2017 annual results                                                       Tuesday, 20 February 2018 (after market close)

Q1 2018 business activity and revenue                          Wednesday, 25 April 2018 (after market close)

Shareholders' Meeting                                                  Thursday, 31 May 2018

A conference call on H1 2017 revenue and business activity will be held in English at 6:30 p.m. CET on 25 July 2017, accessible using code 8040410 by dialling the following numbers:

The presentation accompanying this conference will be available on the Group's website from 6:15 p.m. CET and may be viewed at the following address: http://edge.media-server.com/m/p/dn9hd8wv

The conference call will be available on replay at http://www.nexity.fr/real-estate from the following day.

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