Merlin Pptys Socimi Ord

Good afternoon, ladies and gentlemen. Welcome, and thank you for joining Merlin's first quarter 2023 trading update. As we always do in Q1 and Q3, our CEO, Ismael Clemente, will briefly explain the main highlights of the quarter, and we'll thereafter open the line for Q&A. If you want to raise questions, please press star, followed by number five. With no further delay, I'll pass the floor to Ismael. Thank you.

Thank you, Ines. Good afternoon. Welcome to Merlin Properties' first quarter results. As commented by Ines, I will briefly comment on the performance metrics of the company, but I will also add a little summary on the performance of the Mega Plan to date, and then we'll immediately open the floor for Q&A so that you can make the questions that you want. The company is off to a... Very good start of the year, as commented on the 31st, when analyzing the 31st of December results in February. The growth rents have grown like for like 3.8%. Approximately two-thirds correspond to inflation and one-third to real rental growth. The FFO per share, however, is down 4.4%, owing basically to the drag created by the data center division, which is not yet performing at full steam in income. And, however, it is already adding cost to the cost base of the company. And a little higher financial results. I mean, a little higher financial expenses, mainly. The occupancy remains very stable, 95.8%. I mean, you might remember that first quarter in Spain is the quarter in which most renewals take place. So we normally have a lower first quarter and then recover during the year, but this year has been pretty mild, the effect of the renewals. The activity of the company remains solid in divestments. In the quarter, we only did 3 million that we have accepted deposits of more than 10 million for close to 80 million of disposals that will happen during the rest of the year. We are talking mainly about miscellaneous assets with no cash flow generation capacity. So this is very important because what we are trying to do is basically get rid of anything which is not adding to our cash flow, given the effort we are making in data centers. The highlight of the quarter probably has been the upgrade by S&P to BBB+. After a long time knocking on the door, we finally got it. It is remarkable because it's been probably the only company that has been upgraded in the last year. We haven't conducted any revaluation of the portfolio, so the MTA per share has gone up slightly. I mean, we will only perform appraisal of the portfolio in June, at the end of June. And we have, well, we proposed to the board and the board to the general shareholders meeting the distribution of another 24 cents to shareholders, of which one is pure dividend and the other 23 is premium. So no fiscal impact for those of you who are receiving that money in Spain. Regarding business performance, the rents like for like grew by 2.8% in offices. And the risk spread was surprisingly positive at 3.4, increasing compared to the end of the year results. you have to take into account that the CPI impact was completely dissimilar compared to 2023. So in 2023, at the end of first quarter, we have renewed 38% of our portfolio of rents with a 7.3% average inflation. And this year, we have renewed 44% of our portfolio with only a 3.4% effect of inflation. So I think it's quite remarkable achievement, the like for like that we are showing to you today. In logistics, 4.9% increase with 5.2 logistics, pretty much in line with latest available results. And in shopping centers, 4.8 and 7.8, slightly down from last year figures, but 12% was yearly unsustainable. I mean, you cannot continue growing at 12% for a long period. In terms of data centers, by the end of the second quarter, we will have 14 megawatts ready for supply up from the current nine. We are receiving equipment as we speak, and we are equipping or we are fitting it out in our existing facilities. So by the end of the second quarter, we should be at 14 megawatts capacity. By the end of the third quarter, that figure should grow to 26 megawatts. And in the first quarter of 25, so a delay of one quarter compared to our initial estimate, we will reach 44 megawatts of installed capacity with Arasur and Barcelona having reached maximum critical power, the power for which the two facilities were originally designed. This is due to the fact that we are diverting some of the equipment that we are receiving in Getafe, given the slower ramp-up of electricity. We are diverting part of the equipment to Alaba and Barcelona. As of end of 2025, we will reach 16 hours of installed capacity and will also reach total maximum design in Getafe, where a crucial approval for the additional power has recently been obtained. So we expect to be able to provide additional color on the utility supply in the second quarter results. Regarding the construction sites for the second phase, in Arasur, Well, as you know, the Arazur 03, the third building, is already in operation. And we have obtained license for Arazur 02, for the second building. We are making it, we are building them upside down, three to one. Thirty megawatts utility were already obtained and are already in place for the existing Arazur 03 building. And we have obtained another 70 megawatts corresponding to 44 megawatts more or less of critical power for the Arazu-03 building. Plus, we have obtained as well another 100 megawatts supply in reserve for the Arazu-01 building at the time it is built, which will be good for something between 50 and 60 megawatts. That is a little, I mean, that will be a little over the 100 megawatts that we initially conceived for this data campus. But we continue sourcing additional electricity because it is highly efficient from a financial perspective to continue building in the same construction yard. So we are working on another two feet of electricity. and have reserved extra land onsite for further buildings. More clarity will be provided during the year. In Lisbon, we are already urbanizing the plot. We obtained the license for the construction of the data campus. We will start a compaction of land in Q3 with the hope that we are finished with compaction and micropiloting by end of second quarter 2025, moment at which we will start erecting the buildings. In this case, we will start, the initial idea is to start with the generator building, administrative building, and two technical buildings, two data centers, out of the five that we have on the site. Those two buildings, depending on a number of changes in the design that we are currently negotiating with the authorities, can host between 18 and 36 megawatts each. So the power might range between two times 18, 36, and two times 36, 72. So between 36 and 72 megawatts for those two initial buildings in Lisbon, of which 30 megawatts have been pre-booked regarding the power feed we have obtained two feeds one from edp 110 megawatts and another one from red electrica nacional of portugal of 140 megawatts so we have we are at present uh enjoying an electricity supply of 260 megawatts which is good for around 180 megawatts of IT power in case of need. We have, in preparation for that, we have also reserved some extra land in that location in Lisbon. What else? I think that is basically all. Regarding the disposals, we have disposed of 79.3 million We're valued in our books at 68.3%. So we have made a 16.1% markup to our existing book value. And what is more important, we have received 10 million in deposits. So the idea is to continue making lighter the balance sheet of the company by disposing of everything which is non-cash flowing. and trying to concentrate all of our efforts, cash flow, and resources into the development of the data center business. Without further delay, I think I will pass the floor to all of you for Q&A. The whole team is here for your benefit, so we will be happy to entertain whichever questions you might have. Thank you. Thanks a lot.

Thank you, Ismael. I remind you that for those who want to raise questions, please press star. followed by number five. We have a first question coming from the line of Ignacio Dominguez from . Ignacio, the line is yours.

Ignacio Dominguez Good afternoon. Thank you for the presentation and taking our questions. I have three, if I may. Firstly, could you provide us on the updates on how the data center's expansion plan is going? At what point are you writing in terms of potential capital increase?

Ignacio.

Yes. Can you hear me? We can hear you very well. You said that you wanted an update on how data centers are going?

Yes. There have been different rumors in press, and I think it would be helpful if you could kindly give us a better idea of the process.

Ah, not on data centers. You want an update on the press bullshit. Okay.

Yes.

Okay. All right. What else?

And the second one is regarding the rental income in data centers for year 24. Will most of this come in the second half, or should we expect some quarter-on-quarter growth in the second quarter? Thank you.

Okay. Okay. So, well, first, probably you are referring to the El Economista press article on whether the preferred route for our main shareholder was to do a capital increase downstairs at the data center subsidiary versus upstairs, et cetera. I would simply say that at present, this is press speculation. I think nothing has been decided. We are at present analyzing, or the board is at present analyzing the management plans with the help of a couple of investment banks. Those investment banks will momentarily present conclusions or initial conclusions to the board of directors. The board will then enter into some Q&A and information feed with them and with us. And the idea will be to take a decision by summer. That is basically all, so there is no decision-taking at the moment. I mean, of course, if you want my opinion, doing a capital increase at the subsidiary level and losing control of that subsidiary, of all the options we have on the table is probably the one that I would recommend the least, but that is something that will be decided between the board of directors and the management team. um then regarding uh the rental income from data centers that will come really back ended uh during the year and in fact uh you know it will be highly volatile because you know uh one month uh delay in obtaining the cash flows may move the cash flows to the to the following year so i mean be prepared for whatever happens i mean we are doing our best uh we we are helping our clients to do the fit-outs. But it's not only fit-outs. It's not only doing the blind-door bars and the deployment of the racks. It's, in some cases, for the client to obtain their own machines, which particularly when we are talking about NVIDIA machines, they might be subject to some delays. So we will inform the market as we progress, but rest assured we are doing our best in order to improve our figures as much as we can.

Okay, thank you very much. It's a pleasure.

So the next question comes from the line of Stephanie Dozman from Zephyrs. Stephanie, the line is yours.

Hi, hello everyone. I would have three questions as well. The first one regarding the really spread across the board. It looks to me that in offices it's almost three times the level of the full year 23. So I was wondering about the I would say the cannibalization between indexation and rental uplift. How does it work and how is it sustainable over time. The second question would be regarding the disposals you achieved or at least you signed and will be completed in the coming quarters. What kind of assets did you sell at a double-digit premium and maybe how much was the valuation decline on those assets in 2023? And maybe a follow-up on that. How do you see valuation decline or stabilization maybe going forward since revaluation was moderate in full year 23?

Okay, Stephanie. Regarding the release spread, release spread is a little bit like an accordion. So sometimes it goes up, sometimes it goes down, and it depends very much on the inflation that you are onboarding on the rents. And it also depends on your delta between passing rents and total reversionary potential, which is also a moving target. So, I mean, we have been very, very close with our passing rents very close to market rent, to total reversionary potential. However, at present, we believe that the market has run slightly faster than we have. So we believe we have gained a little bit of extra room for this year, for 2024. So, I mean, during the year, you will see what is the evolution of that release spread. I mean, don't expect anything... major because of course we have been onboarding a lot of inflation in the past three years and so don't don't expect that the release spread is going to be uh monstrous but uh that probably we have a little extra room as compared to where we were at the end of uh 2023 as appraised by our uh three appraisers regarding the disposal uh basically i mean if you want to to have like one headline of what we have been doing. What we have disposed is office, land, and or buildings for residential uses. So what we have been doing is we disposed of a plot of land in Valdebebas, north of Madrid, which was originally earmarked for offices. Total buildability was like 26,000 square meters. And this one has been bought for residential use by a residential operator. We also have sold or have received a deposit on Africa 19, which again is offices. It's an office plot of land with office buildability that has been also will be converted into RECI. Total buildability is less than 10,000 square meters. And, you know, on that one, we have made a very significant premium. And then the rest is basically the same. Little plots of land and non-core buildings which are going to be reconverted into RECI. This is a major thing happening in the market at present. and it will probably be fostered by a new legislation that should be enacted by the Comunidad de Madrid, the Madrid Regional Government, which is seeking to increase the offer of new dwellings by converting, let's say, subpar or sub-quality office buildings into residential across all the region. So their political aim is to obtain around 2 million square meters of residential buildability from the office segment, which is pretty interesting because it is erasing a lot of low-quality offer that existed in very highly peripheral areas of the city. You know, this is always going to be good in terms of, you know, helping, although it supply and demand in Madrid are already in a clear equilibrium. It will help that equilibrium by erasing part of the potential supply of low quality things that could try to compete via price with higher quality office buildings. And then regarding valuations for the first half, what can I say? If you want my honest opinion, I believe offices will continue to fall because the market wants that. And I believe our passing yield will continue little by little drifting towards 5%, 5% plus. And then in shopping centers, probably we should have already seen the worst behind us. So I don't know whether they will start being reappraised up as it is happening in some other countries or even in Spain with our colleagues of Grupo A, but at least the falling values, I believe, should now recede significantly. So this is what I can say regarding valuations. We will do whatever our appraisers tell us to do. I mean, yes, it is, of course, Not nice to post a negative number on the net results, but for those of you who are familiar with the way rates work, what is important for you as investors is basically the recurring profit, the FFO. Yes, it affects negatively the LTV, et cetera, but we are not in a bad position regarding LTV.

Thank you. So the next question comes from the line of Bencilia from Kempten. Bencilia, the line is yours.

Hi, good afternoon. Thank you for the presentation. Take my questions. I have three questions, if I may. First one, could you follow up on the preferred alternatives? So I understand that you don't want to lose control, but if, let's say, we take that out, so you retain control, So wouldn't you say that if you raise equity at the subsidiary level, you can raise enough, and then if you raise it at the group level, then you always kind of have to raise below NAV? So in essence, I'm trying to say that raising at the subsidiary level should be more accretive.

He's asking, if we do not lose control on joint venture level, isn't it more accurate to do joint venture level instead of doing the whole cost? Sorry.

If we do not lose control, even if we do not lose control, it is not more accurate. Exactly. But anyway, I mean, Bensi, when you do a model downstairs at the subsidiary level, you are on your own regarding that cost, for example. So you will be raising debt at prices, which are the prices that you can have at the subsidiary level. So it's going to be six and a half, seven and a half. If you raise debt at the top call, you are going to be raising debt at triple B plus cost. So just by that, the difference in WAC is very significant. On top of that, you have the cost of capital of the breed of investor you are going to get downstairs versus the breed of investors you are going to get upstairs. So there's going to be a significant difference in cost of capital, plus complexity. I mean, the best day for JVs is the day in which you celebrate the marriage. Since then, most JVs only go down. So it is not easy to manage JVs, and if you start creating JVs, for offices, for shopping centers, for logistics, like many of you in some cases are suggesting, at the end, the company will end up being a holding, a conglomerate of JVs, and will be impossible to manage. You will lose, for example, a very important thing for us, which is cash pooling and debt pooling. So you lose completely the control of the generation of cash downstairs. any new capital increase you need to do at the subsidiary level, you still need to inject money from the top call. You need to raise capital at the top call to inject money in the daughter call. I don't see many advantages of doing it, but anyway, of course, there is a lot of science out there and maybe somebody can show to me empirically that it makes sense. I mean, from the initial analysis we have done, it is clearly a less preferred alternative. I mean, financially speaking, just talking about BPA accretion versus total ownership dilution, it is a much better alternative than doing it at the top code and doing it at the subsidiary code.

Okay, I appreciate your comments. Then second, on the 2025 guidance, I really couldn't find the comment in the press release. Of course, you earlier mentioned the small delay in the data center rollout. So could you add more color on the guidance in general?

For the guidance for 24, you mean, no? For 25. No, but 25, we don't provide guidance two years out. The guidance for this year was 0.59. We are clearly on track to comply with that number, probably with a little bit of lack exceeded. And then regarding what you call the guidance of 25, that was simply an indication of what we think we can achieve. Of course, we are on track to get there, but only God knows. I mean, there are many things that can happen between now and the end of 2025. So, I mean, it is a highly volatile number, but yes, I mean, we are doing our best to be there or exceed it if we can.

Okay, thank you. And then the last question. Of course, we saw the RIMO proposed takeover yesterday. If you look at the implied numbers, then for Arima's portfolio, that would imply a net yield of 5.5. If I'm not mistaken, your portfolio is currently valued at 4.7% growth and maybe close to 7% net yield. So do you believe there's a risk growth and why shouldn't appraisers take this into account?

Well, the Arima portfolio is, I would say, quite dissimilar from ours. The 5.5, by the way, is implied yield. When you look at our portfolio, our passing yield is 5.1, but this is with our current occupancy and with rent not updated to market. We are probably already above the 5.5 mark. How can you compare? Arima was one little logistic shed and some of its buildings. Our portfolio is a blend of shopping centers, logistics offices, and recently data centers. So very, very difficult to compare. I think we are, I mean, if you look at the number and if you consider that the appraisers know what they do, which I guess this is your initial hypothesis, ARIMA has received or has obtained a premium of 38% to trading price and around 24% discount to NTA, which is more or less where we are trading today. So we don't feel we are in a bad position or have a negative read across from the ARIMA transaction. Probably much to the contrary. I mean, we see that there is clear appetite Now returning to market, we are seeing it also on the underlying transaction market for small tickets. I mean, we have now much more leads for the sale of non-core. We see the market reopening in terms of lease activity as well. So maybe the read-across in many cases is positive because at some point somebody is going to turn their eyes into a company which is valued at present as a real estate, let's say plain vanilla real estate company, but will at some point in the future become a data center company.

Okay, thank you. That's it from my side.

Okay. Thank you. Next question comes from the line of Floor on La Roche from Odo. Floor, the line is yours.

Hi, good afternoon. So thank you for this presentation. So I would have two questions. My first question would be on the offices, and more specifically on the occupancy rate in Barcelona and Madrid. In Barcelona, I think it has decreased by 300 basis points and increased in Madrid by 100 basis points. Is it possible maybe to have more color on that? And maybe my second question would be on the mega planner. So we understand that you are looking for, that the board is looking maybe to find, to decide or not to find a new partner to enter into the capital. But could you maybe tell us, give us maybe more color on the willingness today, how do you assess the willingness of the board to have a new partner to enter in the capital? So what are they ready to accept? And if at the end the board decides to have no new partner at Merlin, so what could be the alternative solutions so that you can start or continue developing the second phase? Thank you.

Okay. Look, regarding the first question, yes, Barcelona has decreased a little bit. Madrid has increased. As a general tone of both markets, I can tell you that in Barcelona, as commented on many occasions, there is a slight oversupply situation on the 22 at area. So, you know, that we are, of course, suffering like the rest of the market players that oversupply in the 22 ad area. In our case, the effect is pretty, you know, modest because in the 22 ad area, we have one building which is iconic, Torre Glorias, in which we have now the headquarters, the original headquarters of Meta, Oracle, and Microsoft. And as such, we are not only well-occupied, but also have a building which is clearly highly attractive. Then we have another building in which we have the headquarters of Capgemini, which is under a very long-term lease. So we have, again, no problem with that building, which is mixed-use, half hotel, half offices. And the only building in which we are potentially rent takers and not rent makers is the new 22 ad building in which we have, say, half of the building occupied by the headquarters of Schneider Electric. So we are in good shape with that. And then for the rest of the building, we are multi-tenant and subject to market oscillations. So, you know, very little preoccupation on the situation in Barcelona. If you look at our numbers compared to the three months of 2023, we have gone down. But if you compare to the end of the year, we are one decimal point up. So we are from 92.7 to 92.8. Our forward occupancy report is not giving us any signs of alarm for the rest of the year in Barcelona, so I wouldn't be that worried about Barcelona. Yes, it's a more complicated city. Yes, there is a lot of political noise, but we are not worried at present about the situation in Barcelona. Then, well, regarding Madrid, Madrid is Clearly performing. Yes, it's a much bigger market, so you cannot expect big oscillations in terms of rent or release spread. But it's a very solid market. Activity during the first quarter has been very intense. There are a number of big, big, big tenancies out there looking for space. So we believe the year is going to be interesting and very active in terms of offices in Madrid. And the city is absolutely booming. One important aspect to mention is, for example, the performance of the A1 corridor, which has been subject to significant debate on many result calls because, as you know, we were suffering from a relatively endemic lack of occupancy in that area. At some point in the past, following the absorption of Metro Bafesa, we reached a maximum vacancy in the area of close to 100,000 square meters. And that has now been reduced to around 40,000 and going down. I mean, we are at present discussing a number of new deals in the area. So probably by year end, we will continue reducing the um the vacancy in the in in that particular part of the city uh owing to many things first renewed activity uh renewed lease up activity in the madrid market second quality of the buildings we have there i mean yes it's a new business area so it is not cbd is not what you normally like to visit. I mean, it's not a building located in Castellana, but it's a highly sought after area. And at present, with the proximity of Operación Chamartín, many heads of real estate in companies are starting to look at this area with different eyes because they see that it will become first line to Operación Chamartín, which is going to be a major revamping of the north part of the city. On top of that, the quality of services in the area has significantly improved. We have implemented a number of measures to help our clients transport people to the area. We have even built our building at present, as we speak, We have even built a dedicated lane for buses that will move people in and out that particular area of the city with the cooperation with the PPP signed with the Municipality of Madrid. And these together with the redefinition of the north highway hub by the municipality of Madrid, according to our traffic engineers, has reduced the average transport times from Moraleja to Plaza de Castilla by around 36% compared to pre-road improvement. Pretty interesting area. I believe it's an area that will little by little find its way in the city. Probably it will be slightly detrimental to the A2 corridor because at the end those are communicating pools, but we are much more exposed to the A1 than we are to the A2, so no big problem. I'm happy to witness or to see what we are finally seeing because it was always our bet that that area of Madrid, given its proximity to the CBD, would be the next frontier for office, let's say, implantation in Madrid. Okay, regarding the mega plan and the willingness of the BOV to proceed, well, look, the BOV of Merlin and, generally speaking, the BOVs in Spain are subject to the same rules that they are subject in the rest of the world. So the board members need to take decisions based on the interest of the company. So what really is important is the corporate interest rather than any possible self-interest that could eventually arise in some cases. So we believe that out of common sense, we will continue seeing that the board of Merlin will take decisions which are in the best interest of the company. The different alternatives that we have presented show very, very compelling EPS accretion scenarios which significantly or largely offset or more than offset potential ownership dilutions. I mean, we, the people here in this room, as we are speaking with you, we own a lot of shares of this company and we have bought those shares with our money. So most of our worth is invested in this company. We are the first which are not super happy with an ownership dilution. However, we can easily take that decision if we see that the PPA accretion is going to be very, very significant and will more than offset the ownership dilution. So at the end, if you are working just for the benefit of the company and for the good of the minority shareholders, of course, I believe a judicious decision will be taken. So we are, at present, we are not worried about the outcome of those conversations. We will continue providing information. We will continue helping on the Q&A, but we are, at present, not worried with the outcome of those conversations.

Okay, thank you very much. The next question comes from the line of Ben Richford from Bernstein. Ben, the line is yours.

Good afternoon. Thanks for the questions. Just firstly, on the EPS, now I think previously you'd indicated 59 for the year coming and 68 plus for the year after. I appreciate you saying maybe that wasn't formal guidance, but is there something changed certainly that year after that's maybe making you less comfortable or confident in that growth trajectory? That's the first question. And then second question, just on the offices and shopping centers, just the capex side of things that you see coming due in your commitments to maintain the quality of the assets for the next couple of years. And then third question, I think you talk in terms of becoming a data center company. I know we've spoken to the IR team about this, and there seems to be Um, you know, within the company, a much greater ambition than you're setting out in a way that it becomes, you know, I don't know, making them a 50%, uh, 75% data centers at some point. Could you set out more clearly how that's going to come about? Um, is it just the sites you've got, is it acquiring more and will it mean a sell down of, um, of some of those other sectors? Okay.

Look, regarding the EPS, nothing has changed. I mean, we believe the 59 cents guidance for this year will be achieved. So we are comfortable with that guidance. And regarding the one for next year, we continue working on achieving it, or if we can, exceeding it. So we will continue doing our best to reach that number. And we will provide you immediate color if we see that there are going to be significant deviations regarding that objective. But please do not call the 67 for next year guidance because it is not a formal guidance. It was simply an indication of where we think we should be next year just to provide you with color of how we are losing a little bit of income as a consequence of the extra drag of expenses we are experiencing from data center, but what happens when the income from data centers comes into fruition. So that was the whole purpose of that analysis. Regarding offices and shopping centers in terms of CAPEX and maintenance CAPEX, maintenance CAPEX is the same. So we are not applying significant differences to the maintenance CAPEX of those two traditional asset classes for two very reasons, because all the greenization, all the green CAPEX has already been incurred. So now we have the vast majority of our portfolio both in offices and shopping centers certified lead silver or better and bring good or better. Of course, we continue refining those certifications. We are trying to upgrade, if possible, one notch or multiple notches the certifications, but I mean, we are not, now at present, we don't need to incur very significant capex in order to make greener our office or shopping center portfolio. Regarding WIPP, The truth is that once we have finished the WIP Picasso building, the WIP this year is going to be focusing mainly on the reforgement of the Liberdade office building in Lisbon and the Torre A, former GALP headquarters. in Lisbon, and then Josefabalcarcel18 and Cerro de los Gamos in Madrid, which are a little bit more like bread-and-butter types of CAPEX, so no significant CAPEX in offices. And by the way, the numbers are good. We are obtaining very good results of our reconversion programs. We are beating our underwriting assumptions in the buildings that we have recently refurbished. Regarding how the company will reconvert, look, talking at the beginning of 2024 of what will happen in the future is risky, but I am sure that we will get there simply by converting the 200 megawatts that we have on the belly in operating assets. you will see a very, very significant addition of income and cash flow to the company. So that in itself will already put the company at around 50% income from VCs. But then if you have made the maps of what I was just commenting to you regarding the utility supply that we have secured in the Basque Country and in Lisbon, you will immediately see that the utility power that we are sourcing probably exceeds the one needed for the original IT power that we have reported to market. And we are reserving extra land. This means basically that our intention is to continue growing in those two big sites because we see that the demand is there. So if that happens, of course, we will little by little grow our CAPEX step by step. We cannot, of course, we cannot run before we walk. I mean, the first thing we have done is we have developed 60 megawatts with our own money. Then we are seeking some help from the market to fund the 200 megawatt program. And then once we are there, we will see what comes next. But of course, data centers are a highly capex-intensive animal. But once you have built it is a very profitable animal. So we, of course, it's a relatively simple math to perform the effect that this is going to have on the company. Immediate question that everybody has is, then will you sell down the offices and the shopping centers? Well, first, this comes normally from a misconception of both offices and shopping centers. I mean, three years ago, everybody wanted us to sell all the shopping centers. At zero in some cases. I mean, I remember some conversations with some members of the analyst community that wanted us to sell the shopping centers at zero because they were a negative. They were a drag to the value of our company. Thanks God we didn't sell because, you know, they continue giving us 125 million euros, which is good money. And, you know, performing stellarly for the moment. Will they go down? Of course. As soon as the consumption, private consumption in Spain goes down, they will go down. And so be it. It's part of real estate, part of cycles. I mean, there is nothing we can complain about that. And now it's offices. Now everybody wants us to sell offices because, you know, offices in the U.S., they are suffering a lot, like shopping centers were suffering. I remember the people showing to me the deadmalls.com webpage and all that. And now, you know, people are talking to me about offices in San Francisco and et cetera. Look, we will do what we can. I mean, of course, we are not alien to the financial world. We know we are a listed company. So sometimes we know we have to please the crowd. So, you know, in order to please the crowd, we are selling some non-core office buildings. We are trying to reconvert whatever we can into RECI. But as a real estate professional, I wouldn't feel comfortable selling are, let's say, jewels of the crown in both Madrid, Barcelona, or Lisbon at present, particularly in a market which is now at present a buyer's market. It's not a seller's market. So if you sell those buildings, you are not going to be maximizing their value. I mean, the time for maximizing values is already past, and we have sold a lot. I mean, we have sold 6.5 billion of assets in the past, obtaining very interesting prices always. and have created a lot of value for our shareholders. So bear with us a little bit and respect the fact that at present, we don't believe it's a good moment to put assets up for sale on a five sale basis. So this is the way I see the future of the company.

Great. Can I just ask one follow-up? Just the returns on data center, just so that we're all clear. on them, you're sort of indicating a doubling of your investment, which sounds fantastic, right? So why is it that that will remain the case and not get competed down? Do you think that's a realistic scenario? And if it's not a doubling, maybe you could just clarify exactly the returns on the full pipeline of data centers that you see.

Well, on the current pipeline, which is phase one of the construction, the one which is already done, the returns are already the ones that we explained to all of you, of course, on a stabilized basis. So at present, if you look at the real production of money of our data centers, we are running on a negative yield because we have more cost than income. But once they are stabilized, the yields are the ones that you saw. For the second phase of construction, you will see basically the same yields because the cost of land, which is what really moves the needle in terms of obtaining 14% yield on cost, the cost of land is the same because that land was transferred to the data center division as part of the initial agreement with our U.S. technology provider. So, you know, the yield cost will be the same or very similar. Of course, it will be subject to market oscillations. Cost of equipment may eventually harden a little bit. but we also see a very positive trend in grants. So let's see what happens because the market is still a little bit spoiled from the years in which the only possibility of listing up a big data center was cloud. And of course, cloud players were an oligopoly of five names. So the market is clearly affected by that. And there are a number of market rules which have been clearly imposed by a cartel of players that eventually in the future might significantly vary when you see the diversity of the players which are now crowding the space of artificial intelligence. So we see clearly, we see tension in the top line trends. Plus I anticipate that at some point we will see also gross-to-net conversions because the rule of I pay you a net rent and I forget about the cost of engineers, it's very nice when you are happy with the usual number of engineers that the owner of the facilities are ready to deploy on site. But if you have special petitions and you want more engineers per block, you want more mechanical engineers, you want more electrical engineers at some point, I am sure that new discussions will be open in terms of recovery of common expenses. Likewise, with the usual fixed step-up process for CPI indexation, many of those things will be completely reshaping in the future. But I like what I see in terms of demand tension. Then, when you do further developments, of course, the cost of land might be differential. It could be different. However, we still have a lot to do in our own portfolio, and we still have the capacity to find adequate land in many places without going to the mainstream market of just simply calling the agents and accepting whatever price they have with electricity supply. I mean, we can obtain electricity supply by ourselves, so we can buy land and then attach electricity supply. I mean, there are, of course, advantages of being a local player for many of those things. So, you know, I'm not sure that we can guarantee you that the return will continue to be 14%. but I'm sure they will continue being in the region of double-digit for quite a while. At some point, the market will float. You know, the market will be, I would say, commoditized, and, you know, anybody will be able to do a data center, as it happened, for example, with logistics. I mean, remember the first logistics shares we bought in 2015, we bought them at double-digit. I mean, 10%, 11%. Then we went down with the market to nine, eight, seven. At some point, we stopped buying existing products and started developing ourselves. The initial developments, we did nine, eight and a half, eight, seven, seven and a half. we go with market but at some point we normally at least always in the past we have always had the discipline to start to stop so we stopped buying assets office and shopping centers in spain in 2017 we continued buying something in lisbon till 2019 then we stopped we we stopped buying new land for logistics uh about three years ago uh so you know we we normally have enough of financial discipline to know when to stop. So at some point, of course, we will stop buying land for data centers. If we feel that we are no longer earning our cost of capital, you can rest assured.

Great.

Thanks so much. I know it's taking a little bit of time. And finally, the investment yields on a completed scheme, just to sort of square it away, what would you anticipate? And what's the depth of understanding of that estimate?

Well, of course, I don't have a crystal ball, but I believe, of course, for London it's different. But for Spain, I would believe something between 5% and 6.5% should be the investment yield once the scheme is completed and fully let. And I believe with a downward trend. Because, as you know, there is clearly a lot of capital out there who is happy to buy things. that are led on a long-term basis and have, let's say, a high certainty of cash flow. So let's see.

All right. Thanks so much. Thank you.

You're welcome, Ben.

The next question comes from the line of Thomas Roethlisler from Deutsche Bank. The line is yours.

Hi. Good afternoon. I've got, I think, three questions, one on data centers. Can you hear me? Yes. Perfect. Yes, one on data centers. Just wondering if you could provide any rough idea about your occupiers there and maybe a rough split of what is hyperscalers and what co-location. And the second is on the master plan funding. One of your peers just announced a major capital increase underwritten by a new key shareholder. and the contribution of assets in kind. Just wondering if this could be a role model also for you guys. And then the third point is on the change of your chairman of the board. Maybe any comments from your side. Would you regard it as a favorable change for your data center expansion plans?

Okay. Look, regarding occupiers of data centers, this is a world in which, disgracefully, there is not much information you can provide to market. What I can tell you is that, as commented on other occasions, we initially thought that our data centers, particularly the one in Barcelona and the one in Madrid, would be mainly employed for co-location and a little bit of cloud. That was our original intention. And then the one in Lisbon and the one in the Basque Country will be more artificial intelligence data campuses. The truth of it is that in Barcelona, we were lucky enough to link to the first ring of the Barcelona cable landing station. So we became a landing station for a couple of very interesting cables. And as a consequence, the demand we have for that data center is mainly coming from artificial intelligence. So Barcelona, which was initially earmarked for colo and cloud, at the end will end up being 85% artificial intelligence and 15% is going to be mainly cloud. I mean, what we have there is mainly cloud. In Madrid, well, we are at least now, we have a much higher visibility on electricity In Madrid, we don't have the benefit of the sea. Maybe with climate change, one day the situation changes, but we don't have sea in Madrid, and as a consequence, the data center will be mainly occupied by collocation and cloud in a proportion which is going to be highly favorable to cloud. because Colo in Spain is still, you know, mainly residing or living in basements and relatively obsolete data centers from first generation, if you are lucky, second generation data centers, and it's not easy to move those clients out of those. And then Lisbon and the Basque Country, you know, at present, yes, we have... some cloud we have some connectivity stations of some hyperscalers but those are peanuts compared to the ai uh utilization so i believe they are going to be more than 90 percent uh ai uh when uh if and when uh completed so ai is clearly weighing a lot on uh on our portfolio um at present uh And that AI, at least in our experience in the Basque Country and in Barcelona, is mainly American AI. I mean, it's American players. As you know, there is a significant shortage of IT capacity in the U.S., so they are seeking new computing capacity, and clearly Spain is well-positioned because of It's linking to a number of submarine cables, which reduce very significantly the latency vis-a-vis the US. More importantly, at some point, with the coming into force of the 2026 European Union Data Sovereignty Act, about three gigawatts of data of European origin will need to be repatriated into Europe. So that is a very, very interesting prospect for demand, hence why we are trying to line up capacity and be ready for when that happens in the future. And regarding the capital increase vis-a-vis Colonial, well, very similar transaction. Well, they conducted a capital increase with a slight premium to trading price. although it is true that it was a capital increase with a partial contribution of real assets. In our case, of course, we do not want assets. We want cash because we need the cash for the construction of our data centers. So the idea will be similar. In our case, it is more an offensive capital increase than a defensive one because Clearly, we don't have an impending need of restoration of our balance sheet. So what we want to do is get money to continue building data centers. But yes, very similar. They were lucky to pinch a Catalan investor, which is super high quality, entering their capital. Let's see if we can do the same in our company. And regarding the chairman, well, our chairman has been now promoted to the helm of one of the five global businesses of Santander, so his responsibilities at the bank have been significantly boosted. That means basically that he's going to be overseeing business with very, very big number of employees and a very significant balance sheet. His role will be global, so it will entail a lot of traveling. And as a consequence, the bank thought that it was now a good time to replace him by another very traditional and very well-known name within Santander that, you know, also very interestingly, has been playing the role of Chief of Corporate Development and Chief of Strategy at Santander, which is also very interesting for us because it means that if that is to be read as a message, clearly they are understanding now that we are a company, we have a strategy, and as such, they are sending us a person with the capacity to understand our strategy and support it for the future. Of course, it is something that depends on our shareholders. It's nothing that depends on us or nothing in which we have any influence. So we have to welcome the new chairman and continue working on a loyal basis to Santander as we have done in the past following these racial events in 2021.

Thank you.

So the next question comes from the line of Fernando Alvarez de Malandra. Fernando, the line is yours.

Hi. Thank you for taking my questions. I have three, please. First, in a follow-up on disposals, I don't know if... Have you identified more office buildings with the potential to, you know, transform into residential units and whether this could be a material amount of assets or not. Then second question is with regards to the data centers again. You've mentioned about the different alternatives again. I was wondering if you could remind us the schedule that you are right now targeting. I think you've mentioned in the last AGM that decisions should be taken before summer. and proceeds after summer. So you should be ready to invest before the end of the year. But just wanted to confirm this. And then last, again, follow up on data centers. You've mentioned that Yilton cost for the phase two could be similar to phase one, which is surprising, I think. I don't know if this is based on on the mood you are seeing in the market, whether you are already having some very preliminary conversations with potential clients on, I don't know, Bilbao or your Lisbon asset. Thank you.

You're welcome, Fernando. Look, regarding disposals, of course, we have done an analysis of our existing office portfolio, and we have identified the buildings which are either automatically or let's say easily convertible into offices, which is a minority of them, and the buildings which can be converted into offices without, let's say, not minor, but at least, you know, I would say moderate degree of negotiation with the municipalities because they either allow the conversion in residential because of the general zoning or because they have the technical specifications that allow them to be converted into RECI, which is another very important aspect because many people ask us why in the U.S. many people is not converting the big tower into RECI. I don't know what is the zoning or what is the municipal rules in the U.S., but when you have a 4,000 square meter floor plan type of building in Spain, if you want to reconvert into RECI because of the distance to light, you will need to punch the structure and create light holes and that makes virtually impossible to do anything with those type of buildings. But in Spain, the average type of office building can be relatively easily reconverted into RECI. into office because it was already conceived in a block, in a type of block with distances to light, et cetera, which originally were conceived for residential. So we have an idea of what can be achieved. It is not material. I mean, at present, clearly, it is not material. It is a good help. We will continue, of course, right in that way because it's an interesting way to dispose of some well not not not necessarily non-core i mean some of those buildings are good quality buildings and in some cases you need to dispose of them even when they are full uh that the the new um buyer you know will wait they are empty and in the meantime while they are preparing all the plans technical plans etc they enjoy a rent and then they reconvert into offices for us what is really important is whether they beat or do not beat our gross asset value so if it is a credit for us and those are you know and they take different Requisites that we have internally established, like, for example, is it a building that was on the queue to be converted in green. So if it was on the capex queue and we can eliminate it from the capex queue. That is a double whammy because you not only beat your JV, but you also eliminate a building that was in the queue and ready to suck. from the, let's say, finite CAPEX effort that the company can make. So, of course, this is important. Then a second idea that you might be pointing out is the possibility that the Comunidad de Madrid enacts a new legislation allowing for a relatively higher liberty of use and enabling for the change of use of office buildings into residences. we will cross that bridge when we get there. At present, there is clearly not enough information. There is an anteproyecto, which is a draft law, which is highly incomplete and is not technically still in final format. It's even technically incorrect in some cases. So let's see how that draft bill of law evolves in the coming months and what is finally the legislation which is passed by the Comunidad de Madrid. It could be very interesting. I mean, directionally, it is very, very good. Even if it doesn't allow us to convert many buildings, directionally, it is very good because it will wipe out a lot of trash out of the market. And this is going to be good for the rest of the office market. I mean, we have seen in Lisbon what happened when the impatriation law resulted in the residential prices going to the roof. And as a consequence, a lot of bad buildings were reconverted into recce in Lisbon. As a consequence, the stock, the total office stock of the city went down by around 600,000 square meters. and that immediately pushed up the office prices, which remain very high because it is a city in which supply and demand are pretty much in equilibrium, and the elimination of the lowest quality office supply clearly resulted in better prices for the rest of the office players. Then, regarding disease, The schedule will look at present. The board will meet with the investment banks with the objective to be as much up-to-date, as much abreast as possible of the business plan or the ideas that we have presented to the company by the board of June. And then we will try to obtain a decision in the board of June or maybe the board of July. But this is initially our idea to obtain some form of decision by the board of the company by summer. We are on track to get there, so it's simply a question of we need to continue working. Then regarding going to market, well, if we go to market seeking for just one potential shareholder taking up the full capital increase, that should be a relatively speedy process. And if the evolution of the share price ends up making more advisable to simply launch something, an ADV at market or something similar, it is even speedier. I mean, that is relatively easy to execute. And clearly, the directional movement of the share price is helping us very much in that respect because it is evident that that the market is now buying into the capital increase. The people who is buying the share at the current prices is people who does it even knowing that they are going to be slightly diluted as a consequence of an eventual capital increase, but they don't care because they believe it is going significantly in terms of BPA and future company performance. Let's see what happens, but we remain perfectly on track. And then regarding the phase two of data centers, the phase two construction, the 200 megawatts, well, the reason why we are reliant on the fact that we are going to get a very similar cost is, first, that we are already registered for the supply of the main equipment, so we have confirmed prices for most of the equipment, so it's just a question of making the down payment, but we have closed prices for the most critical equipment. Second, the cost of land remains the same at which we contributed for phase one, so that was a contribution that was drawn a long time ago. So having the land and having a relatively cheap land as a consequence of our initial contribution. Plus, then in terms of cost efficiencies, we have learned a lot. I mean, the learning curve has been intense, but we are little by little refining our construction techniques. And in some cases, we are able to beat eventual hikes that we see in the cost of some materials that even at present we are not seeing big hikes in commodities. I mean, steel is now more or less under control. Prefab concrete is more or less under control. So we are seeing a very, very good dynamics in the market. So we remain relatively confident. And regarding rental prices, well, only God knows what will happen in the future. But we have some hints. I mean, in Lisbon, as commented, we have signed now a 30 megawatt pre-book. which is interesting, and we know at which price this can be achieved. So little by little, of course, we will continue signing other pre-bookings, and the trend, as commented before, that we see in rents and the dynamics of the market are tremendously positive.

Sorry, Ismael, the last thing you've mentioned, 30 megawatts, 3-0, pre-book is like a pre-let, signed pre-let?

No, pre-book and pre-let is different, particularly in Spain, Fernando, because pre-booking is when normally an American counterparty books from you a certain amount of power, okay? That is not yet binding. And then before moving into pre-let, you need to convince the counterparty to sign a Spanish pre-let. urban lease law contract, which is 180 pages. So it takes you a year and a half working with illustrious New York lawyers to convince them that it is the same, but just painted in a different color. It takes a lot of time to really convert the average American megawatt contract into a shitty Spanish square meter contract.

Okay, thank you very much.

All right, so the last question comes from the line of Ignacio Romero from Sabadell. Ignacio, the line is yours.

Yes, hello. Madrid, RoboNorte. I know this is not top on your priority list with good reason because you are obviously focused on the data centers, but could you please give us an update on this development and what is the capex expected in the next few years, which I know is not Not a big figure, but if you could please give us an update on this.

Okay. Well, in principle, the transmission of the land is expected for the next month of November. And we know that the counterparty is now clearly advancing towards doing it on time. I mean, they have been clearing most of the hurdles they used to have from a land registry standpoint because some of the pieces of land come from very, very old deeds of ownership, and they need to be updated to the latest seller. let's say, in Spain, the tracto needs to be rebuilt in order to make sure that what reads on the deed is the last corporate name of the actual seller which is going to transmit the land at present. So very interesting effort from the seller side, from the Adif, and we expect the transmission to take place around the month of November. If the month of November, for some reason, is not achieved, it will be because of some technical adjustments, but I believe it will be more or less around the date. Then regarding what continues to happen in the area, well, as you know, the Municipality of Madrid did all the revamping of the northern highway hub, so that is finished. ADIF is now refurbishing the station, and they are well advanced into the refurbishment of the train station. Of course, they are just at the present, they are just only doing the ground floor, so they have not started with the upper floor, so it will take time to finish all that refurbishment because they are doing it while they maintain the operation of the train station. It is visible already if you come to our offices that they have started building on the floor the steel structures that will support the covering of the railways. They are building the structures on the floor and then they will lift those structures and then they will cover that with concrete. It is already visible. They are working on the piloting. of the covering of the railways. They are working on a number of things. As you might know, the impulse or the original impulse in the initial years of the development is mainly public. I mean, we as privates, the only thing we have to do is contribute our pro rata share of the capex expenses, which are capped by the contract. that the leadership of the construction of the infrastructure is going to be on public hands. So all that is also happening. Let's see how the thing will evolve. And as you commented, as you correctly pointed out, our current stake is only 14.56%. It barely represents the total cost barely represents 1.5% of our balance sheet. When we are fully deployed in terms of capital, the model is giving us less than 4.5% commitment from our total balance sheet at the time when we didn't count on data centers, by the way. So 1.5% of our total balance sheet to be committed into the development. So it's not going to be very, very relevant for us, but it's highly transformational for Madrid, as we are already experiencing, as we are already witnessing in the neighboring areas, you know, including the A1 corridor where, you know, the activity has picked up as people are starting to see the proximity of the start of the Chamatín operation.

Okay, thank you very much.

There's another question coming from the line of Mark Mossi from Bank of America. Mark, the line is yours.

Yes, very good afternoon. Sorry, to be the last one. Ismail, just a very brief question from my side around this new chairman of your board. Do you know him? Have you already met him? And when is he supposed to start his mandate?

Well, it started, Mark, it started yesterday. It was appointed yesterday following the resignation of the current chairman. And while I knew him from before, I have the best of opinions about him. Very technical personality, very financial mind. And he's always been doing strategy and corporate development for Santander. He's been responsible for most of the brilliant transactions that Mr. Emilio Botin did in the early 2000s, including Anton Benita and some others. He was the mastermind behind those transactions. So clearly he's a high caliber type of person and very efficient and I'm very hopeful that our cooperation with him will be fruitful for the benefit of all the remaining shareholders of the company. Okay.

Have you talked to him already or not yet?

Regarding Merlin, not yet. Only yesterday, but on a video conference at the board, but I haven't yet sat down with him.

Okay. Thank you very much.

Have a lovely day. You're welcome, Mark. Take care. Thank you. You too.

So there are no more questions. Thank you for staying with us for almost an hour and a half. We thank you all, and we wish you a very good weekend. If you have questions, as always, do not hesitate to contact us. Bye-bye. Thank you.