Merlin Pptys Socimi Ord

Good afternoon, ladies and gentlemen. Welcome and thank you for joining Merlin's first half 2023 results presentation. Before we start, we ask you to please abide by the disclaimer containing the presentation available in our website. I will pass the floor to our CEO, Ismael Clemente, and COO, Miguel Ollero. We'll run you through the presentation, and thereafter, we will open the line for Q&A. For those of you who want to raise questions, please press star, followed by number five. With no further delay, I pass the floor to Ismael. Thank you.

Thank you, Ines. Good afternoon, everyone. Welcome to our first half 2022 results presentation. The company has enjoyed a solid semester in all business lines. Better than expected, I would say. The Spanish economy is not showing signs of abatement so far. I mean, it's performing relatively strongly on increased touristic revenues and public spending for the time being. But we remain prudent for the second half, a little less prudent than we were at the end of the first quarter. In terms of operating performance, as commented, very strong in all asset classes. The like-for-like rental growth for the portfolio came out at 7.7%, and the occupancy remained at close to historical highs at around 95%, 94.9%, slightly up versus the first quarter. In offices, clearly surprised us on the upside. Despite all the fears around work from home and San Francisco, we enjoyed a 7.5% like-for-like rent increase and a 3.2% release spread with a solid 92.3% occupancy. Logistics remains very strong with a 4.3% like-for-like, 9.3% release spread, and 96.4% occupancy, although there is here a little cutoff date effect because at present we are close to 99, 98.8, because there was just one contract that was signed following the cutoff date for the semester. And the darling of the semester has been retail. Believe it or not, after all the retail Armageddon and all the bullshit that we have, you know, withstood during the last seven years, now retail is performing admirably. I mean, with a 10.5% like-for-like growth, 10% really spread, which is really incredible, and record levels in terms of occupancy at 96.4%. Adding up the whole thing, financial performance of the cash flow of the company has also been very encouraging at 0.31 per share. which is a 16% increase pro forma excluding three as compared to last year. And, you know, leads us towards the belief that we are going to beat the original .58 percent, .58 cents estimate for year end. So, we are upping our guidance. to 0.60. Some of you may say 0.31 times 2 is 0.62, but we are expecting a little less income for the second half and also a little more financial expense. We have experienced an overall decline in valuation across the portfolio. We have onboarded 28 bps of yield expansion, which takes total to 72 to date since the change in interest rate environment started. You might remember we discussed at length during the first quarter call about what would be the extent of the correction. We have in many occasions mentioned to you that we expected in the region of 100 bps So we are getting there. I mean, we will no doubt have another additional valuation correction at year end. But little by little, we are going to be at or around the 100 bps correction we mentioned to you. Of course, whether this will continue or not will depend on the direction that interest rates will take. There are different schools of thought, people that say that they are now starting to level, and some people who say that there are still a lot of rises in the horizon. Frankly speaking, I am not a macroeconomist. I'm not an expert. I don't know. So the only thing we will do is try to have the company prepared for whatever scenario of interest rates and or cap rate expansion we need to face in the future. The financial situation of the company remains strong, with relatively low LTV, virtually all interest rates fixed, and noted until May 2025. Liquidity, which is made up of available credit lines and cash at banks, is in the region of $1 billion, which is you know, sufficient for what we need in terms of security cushion. I mean, we will continue doing liability management in anticipation of the May 2025 maturity. I mean, we will not go slip for the next two years, so expect some liability management exercises in the company in anticipation of the May 2025 maturity. Regarding minor or major value creation efforts, we have disposed of around $32 million in the semester, including two non-core shopping centers that you might remember and one very small industrial asset. This will be continued during the second half. Our budget for the year is between 80 and 100 million disposals, so we will continue making an effort in this regard. Although that effort is now especially focused on non-cash flowing assets. I mean, we have basically made a significant exercise over the past years of disposing business lines and assets that didn't fit our strategy. At present, what we are trying to do is make our balance sheet fitter. So in other words, have no assets in our balance sheet which are not producing cash flow or able to produce cash flow in the immediate future. So what we are doing basically is eliminating those assets that do not fit with those criteria. Regarding landmark. Nearing completion, Great Picasso will be delivered to the Anchor client at the end of the year, in November, December. No, it's important for us because that asset will contribute around close to 16 million euro rental income next year. So that is about, you know, 3 cents of euro per share, which is very much welcome in the times we are living. Super, super excited about the digital infrastructure plan. We are about to deliver the three assets we have been building for the past 14, 15 months. All of them will be delivered by the 30th of September. In two of them, the ANCOR client is already in, trying and testing their equipment. So, you know, what initially was a concept and then a work in progress is becoming more and more tangible and visible now. And, you know, we will be, you know, welcoming some of you for rounds of visits. I know that this is not an asset class. super transparent in the market. Very few people have had the pleasure of visiting one of these monsters. We will be happy to welcome the ones of you that so want in Spain for asset visits to our data centers. The, of course, the flip side of the coin is that this will mean a significant capex support as many of you are pointing to us in the latest meetings we are having with some of you. But so far we have incurred around 200 million. By year end we will be more in the 300 million mark. This is already budgeted for the year. And at this point, basically, our intention is to spend another $100 million next year in order to fit equipment amounting to 33 megawatts in the facilities so that we are not caught short of availability by the potential commercialization, because this is Of course, always a fine equilibrium between you need to have the availability of power if you want to commercialize, but if you want to have the availability of power, you need to fit it in advance because there is a significant delay between the commissioning of equipment and when you receive that equipment in your facilities. So this is what we plan to do. Without further delay, I pass the floor to Miguel Ollero, who will comment on the financial numbers. Miguel Ollero Hello, everybody. We should go now to page six of the presentation. I will be very brief on the financial performance of the company. As Ismael has been commenting, we have a very good operational performance. It has been already translated into the financial figures of the company. Consequently, on gross rents, we were increasing 6.9% with regards to the same period for the prior year, 2022, reaching the 237.8 million euros of gross rents within the company. Important to remember that on the data basis, we were close to 182 million euros, which implies a further increase of 9.6%. much higher than the growth trends increased during the first half of the year, and it was important to highlight that the winter margin was at the level of 76.4 percent, surpassing close to 100 basis points with regards to the prior year. On F4 basis, 147.4 million euros, which on a life-for-life basis taking into account that in this we have not been enjoying the BVB portfolio. We have increased the FFO on 16.7% basis. What also implies an increase in the margin from 56.7% to 62%. It's a great improvement in the margins for the company. So on the FFO basis, what we were commenting is 31 cents per share for the first semester. And as I was commenting, we're expecting 60 cents per share for the year end. With regard to the prime TA, it has moved from 15.67 per year end to 15.36. We were distributing 0.24 euros per share during the second quarter this year. And we have also been affected by the fact that we have a negative impact on valuation of the assets. But still, the NTE of the company continues to be robust on a very high level. We move to the next slide. It's just a brief reminder of how our range has been performing during the year. We are like for like improving by 7.7% all across the portfolio. Being shopping centers, the ones who have been growing the most on a double-digit basis, 10.5% on shopping centers, four open offices at 7.5%. Logistics is a little bit down, but it's more related to the fact that we are almost at full occupancy, so it's mostly driven by CPI indexation. But in the end, we already got 16.2 million of additional sales or revenues or rents during the first half of the year. If you move to the next page, page eight, in terms of occupancy, the company, as you might have pointed out before, is at the highest critical levels of occupancy, at around 95% occupancy. So you can see that offices at 92.3% is holding up with the occupancy we were reporting by the year end. Remember that in 2022 was a year in which we were improving largely our occupancy in the office portfolio. That was the best performance in the company in the prior year. In logistics, we are reporting 96.4. This is mainly driven by a cut of date. There is a logistics set that got but now it has been delayed. So considering that this is led in the month of July, occupancy will go up to around 98.8%, which means that we go back again to full occupancy in the portfolio. Shopping centers, 96.4, higher occupancy than we ever had in our portfolio. So as Ismael was commenting, shopping centers is not only a question of higher rents, it's also a question of very high occupancy. Finally, I should highlight that the company itself is transforming all of our business lines as is best. Now we are moving on to the specifics of each asset class, and Ismael will introduce you to them. Thank you, Miguel. Well, in offices, you have here the breach of the income. We are running now at rate for a year of around $250 million of billing in offices, which will be our historical record. I mean, inflation is clearly helping us because we have disposed of a number of buildings in the past years, but little by little, offices is holding up as a very important contributor of the income of the company. Like for like growth, has been surprisingly high in Madrid, because this is, of course, the biggest sample, and normally it is lower. But it's been surprisingly high, very good also in Barcelona, and a little less impressive in Lisbon. But I believe it's simply a blip. I mean, Lisbon continues performing very, very well, and you will see it shining in the second quarter. Semester occupancy, as you can see on the bottom right of the page, is 100% at present in Lisbon. Regarding leasing activity, a lot of leasing activity, 160, in excess of 160,000 square meters contracted. very good tenants, and very good release spread, although clearly the CPI and release spread in offices are countering forces. I mean, they are opposite forces, because if you want to really update to market any given contract when it comes to experience, the tenant will request a cap on inflation. And if you want to apply full inflation, it will not accept bringing the contract up to date. So this is something that we have commented already in past conference calls, and now it is more visible in the portfolio. In the second half, we expect the performance to worsen a little bit. I mean, so for those of you, when I say worsen, go from 90 to 80%, no, it's gonna be less than one point. So we are expecting something really meaningless, but we expect a little, decrease in performance. And I believe also that the indexation will not be that positive in the second half because, as you know, there is a big disparity in Spain between core inflation and nominal inflation. We index on the basis of nominal inflation. However, as you know, interest rates normally trend towards core inflation. They try to tackle core inflation. So there will be one or two quarters or maybe one or two more in which you know, we are not going to be as You know able as in the past of increasing rent via inflation because inflation nominal inflation is already Going going down in Spain is the July print was like 2.3 percent. I came out today In room we have opened two spaces, Castellana 85 and Plaza Cataluña in Barcelona. We are now at close to 27,000 square meters and 2,700 desks with an 85% occupancy and an ADR of 380. So space by space, we have reached now positive EBITDA in all of them. At the top goal, we are still a bit negative because the business is not able to absorb all the overheads. We believe the break-even will be reached between 36,000 and 40,000 square meters open. So, in the coming years, we will be in that kind of situation. But we are reporting occupancy and ADR for your convenience. very strong quarter and semester. The like for like has been 4.3%. The growth has been higher in Barcelona and in other locations within Spain than in Madrid because it's much deeper. I mean, market and more contracts. But occupancy remains super strong. as commented is now close to 99 and the rest of the portfolio is also virtually fully occupied. So we are going to go to market with a significant amount of new offer for the coming year so that we can, you know, cope with the demand that we are perceiving at present in which also we have, we are relative winners because the touristification in the logistic market is coming to an end and most tourist investors can no longer find financing or capital. So many of the tenants that were really speculative in the past and were in doubt of whether going to your facility or any other facility that was to be built by somebody now come to you and, you know, it's clearly making our relative negotiating position a little better, as you can see, for example, in the yield of the upcoming projects, which has increased a little bit versus the one we had anticipated in prior versions of what we considered best two and best three yields. The consequence, to a lesser extent, Prices of construction are coming back a little bit, coming down. But it's more that rents continue to grow in our, at least in the important markets in which we operate. In Southport, very good period of activity. The occupancy remains, I mean, point up, point down, remains very close to full occupancy. Generation of FFO is solid, a little lower than last year, but it's not really meaningful. Shopping centers, as commented, super strong semester. And the visibility for year end remains also super positive. an incredible footfall. The footfall is now steadily above what it was in 2019. As you know, it's been so far our black spot because we were obtaining better sales per square meter over the past months, but we never managed to exceed the 2019 footfall figures. Now we are also above the football figures of 2019. And with the recent cinema blockbusters, we believe that those will increase farther towards year end. So very, very interesting behavior of shopping centers. Recovery of tourism is clearly helping us. And for us, what is really, really important is that the occupancy cost ratio has set a new record low at 11.7, so the tenants are clearly comfortable in our facility. They are not struggling to pay the rent. They have quite a lot of room for maneuver. And on page 19, we have the different clients. Let me pass the word to Miguel for valuation and debt position. Thank you, Ismael. Now we are coming into valuation and debt position of the company, page 21. As you know, we conduct valuation twice per year. So for the first half of the year, June 30, we conducted valuation. The outcome of the valuation maybe is the negative point of our financial set of results. because we were getting a 1.4% dipole-like reduction in valuation in our portfolio. We are pointing out here that gross yield stands between 4.6% in offices to 5.9% in shop incentives, where on average it goes to 4.9% all across the portfolio. We should highlight that in terms of valuation, what we had was 2.5 percent life-or-life negative evolution in offices, which implies 24 basis points of yield expansion in the office portfolio. Logistics, despite 20 basis points expansion in yields, was getting a 4.1 percent up in valuation. This is mainly driven by the fact that our, as you know, we have a land bank on logistics, which now is advancing. Ismael will be commenting later on how advanced we are of around 180,000 square meters, which are coming into development and operation on active land basis, which is driving up our valuation with regards to this land bank. Finally, on shopping centers, we had a 2.9% platform-like reduction in value and 32 basis points of GIL expansion. We take a view of the last 18 months of our portfolio. In offices, we have had a GIL expansion of 63 basis points. On logistics, 47. and shopping centers, 97 basis points of TID expansion, which on a portfolio basis means 72 basis points of TID expansion in the last 18 months in the portfolio. Moving to the financial infrastructure of the company, we should say that the company continues to be very solid from the financial standpoint. We should be highlighting that in the first half of the year we have been first refinancing the bond that was in the mark of record. For such purposes we were entering into bond financing, bond financing with a very attractive cost, well below what you can get on the bond market. We were ending up with a net debt of below four billion euros, with a gross debt of 4.16 billion euros, which is 80 million below on gross debt basis with regard to the situation we had on the other end. So the company, as of today, has a loan-to-value of 33.9%. The vast majority of our debt is fixed rate. We have 98% of our debt on a fixed rate basis. We have an average maturity of 5.3%. having the first maturity only in May 2025, so close to two years beyond, and with a liquidity of about $1 billion. We have been reducing our liquidity with regards to the one we had by the end of 2022, but this is mainly because we were advancing on the refinancing of the bond maturity in April. and we have been using part of this liquidity, drawing down the bank financing that we put in place for this replacement during this first semester, but as a consequence of it, it has been reduced. However, I should be highlighting that in terms of A revolving facility, we have been expanding it. We used to have 700 million. We have been expanding it into 740 million. I'm also enlarging the maturity of it. Now it's maturing in 2028 with the capacity to enlarge additional two years. Finally, from the financial standpoint, we should be highlighting that the two rating agencies, Moody's and S&P, they have been conducting their annual review. And both of them have maintained our current rating stance also keeping our positive outlook that was set . And I think this is it from the financial standpoint. To remark again that we are very well set with debt on a long-term basis, normalities ahead of May and fixed rates all across the financial portfolio. Well, in terms of sustainability, the semester has been quite active. In terms of the pathway to net zero program, we have now reduced the scope one and two footprint from, you know, the target is 85% and we have achieved 71% already. So, we are clearly progressing towards achieving our 85% mark, then the rest will need to be compensated. And in terms of implementation of the green clause that will take a long time before we can really change that clause in all the contracts that exist in the company, that at least in the semester, the progress has been good with 100% of the new leases signed in the logistics department incorporating already the green clause, and 37% of the leases signed in offices mainly the ones with the bigger tenants, incorporating the green clause. In shopping centers, we have not yet started incorporating the green clause. a little bit of time to design or to implement it in the different contracts, because the contracts have different shapes in some cases, depending on where they were coming from, , the ones in Portugal, and shopping centers we bought. But we will continue doing it and report in progress. Value creation, we invested a little bit of money in the purchase of a vacated department store in Marinera. Our intention basically is to expand the mall of Marinera to adapt to a number of requirements we have from existing tenants that want to enlarge their space. and we will be making use of around 18,000 square meters of the new buildability acquired. The rest will remain untouched for future use in case we need it. We dispose of two non-core shopping centers, one in Villa de Canes and the other in Aldaya, Valencia, near the Bonaire Shopping Center, operated by Univail Rodanco and one industrial warehouse in Zaragoza, a small one. Pasarriz-Picasso we already commented. Near incompletion by the end of 2023 it should be opened. The most important thing here is they can tell it's fantastic. And then we have signed with IDN for the National Headquarters in Spain. which is a technology company also for the headquarters in Spain. We list our work zone, same thing. SAP, same thing. And then we are also putting in a loom that we will use to cushion the flex space needs of all the, you know, neighborhood in which we have one, two, three, four buildings. So we will be using this loom as a way of providing services to the immediate neighborhood. On a more bread and butter kind of thing, we finished the facelifting of Cerro de los Gamos, a small building, so nothing really important. But as you can see, the change of aspect was very significant. I mean, somebody should have shot the architect that designed the building you have on the bottom left of your page. But, you know, the new design is clearly has been welcomed by the market and both buildings are now the ones that we have refurbished are now full. We will continue working on this business park because it is It's a business park that is a top performer, always in high demand because of its close, you know, distance to super affluent residential areas. So we will continue refurbishing the rest of the buildings of the, or facelifting the different buildings of the business park. Regarding logistics, on page 31, we will start in the semester 180,000 square meters, 160 of which are already under agreed terms. And the other 20 will be speculative just because they are, you know, side by side, one of the prelets that we are going to build. So once we precharge the land for one of the development It is very easy for us to pre-charge the land which is closely adjacent. It makes sense for us to do both at the same time. And we are sure that it will be let before it is finished because it is in an area of high demand. We will be progressively starting construction during the second half. for delivery at the end of 2024. In one case, we believe it might slip into 2025 first quarter. But remaining investment is €109 million with a yield cost of 7.4. And we were projecting with the rise in construction costs that we experienced over the past 18 months. We were now projecting between 6.8 and 7, 6.9, around that, but clearly rents are helping us in this regard, and construction costs are also coming down a little bit. The latest construction quotes we are getting are much more moderate than they were in the past. On the digital infrastructure plan, where there is being a lot of construction, of course. Bilbao Arasur nearing completion. In this data center, we asked for the license in February last year. The vast government was clearly the one that reacted quicker and faster to the need for data storage. So they were very quick in giving us the license. We started development in April 2022. The client will be granted early access on the 15th of September and the final delivery date and opening date to follow immediately will be 29th of September 2023. The facade is already completed. General construction around 90% completed. Interior of the office is 85%. And the equipment has been now delivered. So three megawatts are already live in the interior of the building. The fiber connections are now being present as we speak, are now being connected to the data center. In Madrid Getafe, We obtained licensing in July 2022. This license costed us almost one year, but we finally started development on the same date, and we are now finishing patches. The client is already in. It's already been granted early access and has started paying, let's say, half rent. The final delivery date will be 29th of September 2023. And in terms of key milestones, the facade, 95% completed. We are now, you know, clubbing it with photovoltaic panels that will be capable of delivering up to 0.5 MW peak. And the building construction is 85%. Interior of the office is 80% and the equipment is already in the premises with fiber being connected as we speak. Barcelona Parc Logistique, the licensing also happened in July 2022 and we started construction immediately thereafter in August. The tenant is already in. The final delivery date is on 29th of September 2023. The facade is almost completed, and this one is also being cladded with photovoltaic panels. Building construction, 85%. And in two of the offices, it's a little bit delayed because the priority here was to grant the early access to the client. So what really was the priority for us was the technical room. So we left the offices a little bit on the side. Equipment delivery already in, completed, and connecting to fiber. On page 36, you will see a number of images of the interior of our data centers. One of the data holes, which is already receiving final touches. The air blocks, the cooling system, which is made in the U.S. by Thermoworks. The generator sets, big ones, made in Germany by MTU Rolls-Royce. The hot aisle, although this one is still with the cables, you know, it's a little bit under construction. The cooling system and the mid-meet rooms of which we have two in every data center, you know, which are also now with the cable trays and everything almost in final status. Regarding CAPEX, we have incurred already around 200 million. And we expect to incur another $90 million before the end. So expect around $300 million to be spent in data centers for the three fully built shells, plus the initial nine megawatts of equipment. We will continue procuring equipment. It is important to do so, because you cannot offer to hyperscalers what you don't have. And there is a significant delay between commissioning and receiving the equipment. So we have already launched procurement for another six megawatts. In the second half of the year, we will probably procuring another six megawatts of equipment up to 21. And, you know, the whole thing will continue in 2024 with the idea finishing 24 with around 33 megawatts of installed capacity. That, of course, is important in terms of commercialization. Commercialization, in our demonstration phase, we are now topped up as compared to the power that we have installed in our data center. We have currently nine megawatts and have launched the commissioning for another six. And we have pre-commercialized 4.2, 6.8, between 8.8 and 11.8. So we are already topped up with the current nine, hence why we have gone for another six. And we, with the intention also to accommodate the options of the existing clients. Two of them are hyperscalers and the other one is an industrial client with a technology integrator. So it's a different type of breed as compared to the others. What we feel is that the phases that we initially designed, 2027 and 2035 and beyond, should probably be shortened a little bit. So we are seeing significant demand. Generative artificial intelligence is clearly the driver in the market now for demand of data center storage. So very, very interesting. although from a cash generation standpoint, we are slightly delayed, owing to the delay in obtaining the construction licenses. So for 2023, we will only be invoicing a meaningless figure, $1 million, and for 2024, where we are going to be invoicing in the region of our, let's say our scenario is that we are going to be invoicing in the region of 11 million. So, but that deal will very quickly ramp up immediately thereafter. Outlook for 2023, beyond the fact that we up our guidance from 58 to 60, the idea continues to be to propose an ordinary dividend of 44 cents to the board, which corresponds to around 80% of the adjusted FFO. Before today, we were a little bit more in doubt of being able to reach that point of cash flow, so we will be using a little bit of cash advance in order to distribute the dividend. Now we believe we are going to be comfortable generating the cash flow in order to pay the dividend so that the company doesn't incur any usage of cash or in order to pay the dividend. So dividend will be comfortably covered by the cash flow generation of the company. And that is basically it. Strong performance in all key operating matrix. We are very happy with the way the first half ended up evolving. We had a little greener picture at the beginning of the year, but clearly it's been a very good semester. Occupancy remains strong in all asset classes, and offices in particular is probably more resilient than, of course, many people think. But even ourselves, we had We have a lower projection for occupancy of offices in this quarter, so we are happy with the way it has resisted. Logistics continues to rock, so we are going to play the wave by putting in the market 160,000 square meters fully pre-lit, plus another 20 spec. Current occupancy is close to 99%, and the demand remains very, very strong. Shopping centers, as commented, super impressive performance, and what is more important, with relatively modest effort ratios. We are happy with what we see and we believe the second half will be also very strong because the tourist season in Spain is expected to be very strong this year and also the household spending remains high for reasons probably difficult to understand from an economist mentality but remains very, very strong at present. In terms of value creation, as commented, we have been doing some little adjustments in our asset inventory. And the idea is to recommend a dividend of 0.44 to the board for the fiscal year 2023. So as you know, we normally distribute part of it in the fall, around October. The idea will be around $0.20, and then the rest of the dividend is paid after the general shareholders' meeting approves the dividend in the following year, normally in the month of April or May. So immediately thereafter, we distribute the remainder of the full year dividend. So that's it for now. We are at your disposal for Q&A. So please start making your questions, and we will do our best to respond to your questions.

So we remind you that for those of you who want to raise questions, please press start, followed by number five. We have a first question coming from Ignacio Dominguez from JD Capital. Ignacio, hello. The floor is yours.