Merlin Pptys Socimi Ord

Good afternoon, ladies and gentlemen. Thank you for joining Merlin Properties' 2024 results presentation. You can find all the materials that will be covered in today's call available in our website. I will please ask you to abide by the disclaimer contained in it. Our CEO, Ismael Clemente, and our two directors, Ines Arellano and Francisco Rivas, will walk you through the main highlights of 2024. We'll thereafter open the line for Q&A, where you have to press star five. With no further delays, I pass the floor to Ismael.

Thank you, Teresa. Good afternoon and welcome to Merlin Financial Institute 2024 results presentation. As commented by Teresa, the call today will be joined by my colleagues Ines Arellano and Francisco Rivas in order to avoid monologal exposition from my side. Our CFO, Miguel Ollero, cannot join today. He recently underwent surgery. and is still at the hospital. So it will be Fran, Ines and myself taking the call today and the questions afterwards. Regarding the operating performance of the company, the operating momentum during 2024 was exceptionally strong with a very good rental growth combined with record occupancy, which for the overall portfolio now, which is 96.7%, is very, very successful. The offices continue to perform very, very well with a positive like-for-like of 3.9 and a release spread of 2.3, which is affected by some little weakness in particularly in Barcelona because otherwise it will be even stronger. The majority is performing very well. We have reached full occupancy in the real sense of the term in logistics with 99.4% historical record too with a positive organic growth of 2.8 like for like and a good performance in terms of pre-let of existing development pipeline. Shopping centers delivered an incredible year with a very good like-for-like of 2.7, but more importantly with strong sales and footfall reflected in a very affordable level of occupancy cost ratio of 11.2%, which again is our historical minimum. So our tenants are really doing very well and what we here from them regarding 25 is positive too. I mean, they have started the year with a very positive tone. The and sales campaign in January have gone very well and they are all operating under the assumption that the year is going to be very positive as compared to 2024. In terms of financial performance, the company generated a very solid FFO. Clearly, there was also some boost by the capital increase carried out in mid-year because that increased our financial balances at banks, and that interest income, of course, helped the performance of our FFO, but a very significant part of it is purely operational. The valuations remain broadly stable. I mean, we continue depreciating a little bit logistics, shopping centers, and offices in order to be as close as possible to what we believe are reasonable passing yields in order to stabilize the valuation of those assets. That devaluation has been offset by a solid gain in the appraisal of data centers. Our financial situation following the capital increase, of course, is super strong with 28% LTV, everything at fixed rate, and no additional maturities until November 26th. We are repaying with existing cash. The bonds mature in May, which is... is yielding 1.75, so of course, and this will become a recurrent, I guess, theme over the next years. We are facing a steady increase in our financing costs, and that will continue through 2025 and 26, and I guess we'll reach stabilization towards the end of 26, 27. Both Moody's and S&P have upgraded our company. Interesting thing about that upgrading the debt rating is not only financial standing, is also a testimony of our ability to continue generating or to grow our cash flow profile in the coming years through our data center activity. And well, as you all know, we carried out a successful capital increase mid-year in order to fund the phase two of our data center development program. Regarding value engineering, We sold 73 million of non-core and left some 53 signed for this year. So our objective of 100 for the year was missed just because of the year-end cutoff date. But in general terms, we exceeded that objective. In our landmark plan, we are basically finished. I mean, we have delivered with Picasso once with incredible tenants. And, you know, for those of you who are familiar with Madrid, if you have visited the asset, you will see that it has become a landmark of quality in the AFCA area. And not only in AFCA, I believe in all central Madrid is a building which now is praised by everybody. Regarding the plans, best two and best three for logistics, we have finished our capacity to develop in Portugal by leasing close to 135,000 square meters to a Portuguese end client. And those square meters will be delivered in several phases, mainly during 25 and 36, although there will be one shed that will be delivered end of 27, beginning of 28. But with that, we have basically finished with our land development capacity in the Lisbon Logistics Park, taking into account that we have reserved, we have booked one of the pieces of land there for expansion of our Lisbon VFX data center in the future. And regarding data centers, there will be a specific explanation by Fran during the presentation. The main highlights of the year is that we signed a block of 15 MW IT in Barcelona at the very end of the year that started cashing in in January 2025. And we are in very advanced negotiations for the lease of another 18 MW block in the Ilao Arasur data center with more than one and we are now at the point of exchanging drafts of contract and helping the clients with the prices of electricity and the construction of a physical PPA in order to ensure competitive cost of electricity over the coming years. Regarding the results on page six of the presentation, you will see that gross rent jumped by approximately 25 million. That 25 difference remained true after incentives. Regarding EBITDA, we lost a little bit of margin as compared to last year. But in FFO, you can see that we recovered through the exceptional performance of EBITDA. the cash remuneration at banks following the capital increase. So it's been a lucky coincidence that we struck a period of high interest rates for the second part of the year. In terms of magnitudes per share, our 0.61 of last year converted in 0.55 this year as a consequence mainly of the capital increase. But you might remember that the capital increase implied the issuance of 20% new shares. So post-money, the dilution was 16.7. So that means we have recovered approximately half of the dilution caused by the capital increase by organic growth during the year. And also importantly, because I know some of you asked us to specifically stress the idea, we count the number of shares as number of shares at present. If we were to count the number of shares as weighted number of shares during the year, then the cash flow will be 0.61, so absolutely flat compared to the year before. In terms of MTA, the 1508 moved to 1432, again, as a consequence of the evolution caused by the capital increase, corrected partially by the increase in value created by the data centers during the year. For 2025, you will immediately notice, I mean, as it will be mentioned, I guess, during the Q&A session, that we are dealing a relatively flattish number. There are two reasons why we're doing that. One is because we still do not know which months of the year will be impacted by the new lease in the Basque Country. And second, because we continue to onboard more financial expenses. So, particularly after repaying the May maturity of the bond, we will continue increasing our cost of finance. hit a minimum of 198 in 2022 that has now moved to 246. We believe we are going to finish the year at around 2.6 and that number will move to around 2.9 by 2026. So as you can imagine, I mean, we are onboarding one full point of extra interest cost, which is around €50 million of cash flow that we need to generate in order to simply kill the increase in interest expenses. There is another reason why our guidance for 2025 cash flow may look like weak for many of you, which is that we don't capitalize interest. We have had some internal discussion regarding that. I know there are different schools of thought. We know that some of our peers do it. At some point, if we are obliged by either the regulator or the auditor, as it happened with the linearization of the FITL contributions, At that point, we will, of course, abide by whatever rule is imposed on us. But for the moment, we believe it doesn't reflect a good practice to perform your cash flow by kind of capitalizing your indirect expenses because in reality, you are showing a stronger image of yourself today that at the cost of you know, prejudicing your future cash flow machine. So, we prefer not to do it. I mean, we told you in the last call that we will do an exercise in order to give you the pro forma. The pro forma is basically five cents more. So, instead of 0.54, we will be at 0.59, 0.60 for the year. We prefer to do it that way because this is the cash that we actually have at banks as of end of the year. The rest is simply a linearization or a pro forma, which, you know, is good, but it's not a true image of your accounting. So we prefer to stay that way and continue giving you the actual information. FFO including the interest expense incurred during the year in the development of our CAPEX in data centers. And what data centers and some other business lines, but mainly data centers. On page seven, you will see the GRI bridge with the performance of offices, logistics, and shopping centers. On page 8, you will see the evolution of occupancy, including also different asset classes, reflecting what I commented, which is that we have reached a new maximum of 96.7, increasing close to 60 bps during the year. As you all will immediately notice, I mean, this figure will be very difficult. to exceed in the coming years. I mean, we can add a little bit of occupancy in offices. We believe the growth in offices will come more in rents, but we can add a little bit of occupancy in offices, but there is very little that we can do now in shopping centers or logistics, because in shopping centers, as you know, those of you who are familiar with business, there is a significant rotational vacancy, which always strikes you, you know, at every month end and December is not, is not an exception. Regarding offices, as commented, a little weakness in Barcelona reflected in the loss of more than one percentage point in occupancy, but a very reasonable risk spread of 2.7%, which is remarkable taking into account that in the past year we have been eating significantly in our reversionary potential by applying inflation. that the market seems to be digesting that and the market brands are growing and we are growing together with the markets. In Madrid, we have a very, very active year with more than 130,000 square meters contracted. We have a release spread of 1.9%. It's a market which is much more stable because it's significantly bigger than Barcelona or Lisbon. Regarding loom on page 12, loom is now reaching maturity with 35,000 square meters now in operation and an 82% occupancy in 14 spaces. The ADR that we are charging at present is allowing us for the first time this year to obtain positive EBITDA at all levels, including the overhead of the, let's say, management of the division. So, Loom has been a clear contributor to Merlin since its initial creation by providing the company with a service that our clients demand. Then it moved also into a good contributor in terms of rents, although the Loom rents represent only around 2% of the total rents of Merlin in the office division. But recently, we are now making money with the business. I mean, besides paying market rents for the properties we use, the company or the division is making money on its own. And attracting very interesting clients. I mean, this year, Microsoft, Sanofi, OneTrust, I mean, those are incredible brands that have entered the Merlin universe. through Loom. So it's very interesting because in many cases, those companies then end up expanding into other assets of the portfolio in regular lease contracts during their business lives in Spain and Portugal. On page 13, we simply wanted to bring your attention to the fact that that little trend which is just emerging of transforming office into residential it's clearly making us hopeful that some tension will be created in the rental market in the coming years because that destruction of supply that is happening particularly happened in 2024 in a very clear way i mean depending on the source you follow, I mean, whether it's JLL, CBRE or Colliers, between 200 and 300,000 square meters have been distracted of offices in 2024 and moved into residential. And for those of us who have been working in Portugal for many years, this is a very similar wave to the one we saw in Portugal following the impatriation law. when the Portuguese government enacted the high value added professional impatriation law, the residential prices in Lisbon went to the roof. And as a consequence, the highest and best use of many buildings was residential. And many buildings in the Daisha and in the Shadow and in Rocio were moved into residential. And as a consequence of that, in only three years, the little stock because this one is relatively small market of less than 5 million square meters counted by CDRA because probably the residential use as offices can take that number to grow to 10 million that the offices looking as offices, which is 5 million all of a sudden went down by 600,000. I remember that perfectly. And the immediate consequence of that is that today We are trading in Portugal at rents of 28 and above. And we believe that in our Liberdade building we can reach a higher rent than that. We are probably going to hit the mark of 30. And in the peak before the great financial depression in 2007, the maximum rents in Lisbon were in the region of 22 euros. I mean, that was what McKinsey paid for Marqués de Pombal III, which currently is a building of ours. If you compare that to Madrid, you will see that the rents that we attained in the 2007 maximum were 46 to 48 in Castellana 64, Japan Imperial Tobacco and Goldman Sachs and UBS. and uh you know those ranks uh have evolved 17 17 or 18 years later to only 40 to 41 uh at present in two terms i mean a very different thing is the facial rent that some people is bragging about but you know then you need to do the fit of contributions the the free rent periods etc but when you calculate the real rent, we are present at something between 40 and 41 in true terms in Madrid. And, you know, we believe that given the effort rate of our clients, which is very low in offices, there is some room for future growth in the rent of city center in Madrid, particularly if the current, let's say, hyper-development of the city continues. I mean, Madrid is now a 7 million people city, including metropolitan area, and it's set to continue growing and reach very close to 8 million people by 2030. Madrid is, at present, economically, is clearly a rocket. It's an island in Spain. So, simply wanted to bring your attention to this, because I know there has been a lot of bad-mouthing about offices, and many of you are influenced by the problems in San Francisco and the U.S., et cetera, but, you know, for the moment, I think the office market in Madrid has coped very, very well with work from home, which has been negligible in terms of real effects in occupancy. And also with the densification wave, which by the way, now is returning, is coming the other way around. I mean, the pendulum has clearly shifted and many companies now that they are a little less concerned about ESG and a little bit more concerned about the quality of life of their own employees. So we are seeing some of our clients now re-densifying for lower density rather than for higher density. density within our portfolio. Logistics, page 15, a very good year. I mean, with a good like for like. A little drop in Barcelona, which is not a trend. It's simply a consequence of two modules in the Pago Logistics Fonafranca that couldn't be relayed on time for the year-end cut of date. But, you know, very interesting year in logistics, resulting in that 99.4% occupancy of the portfolio, which is absolutely remarkable. On page 17, you will see that our investment in Zalport continues to perform very satisfactorily, although it is clear that it has become now a completely mature and stable business following the development of more than 370,000 square meters since we joined. that were vacant. I mean, were in land status. So we developed a lot in that area. And now we have reached full occupancy and full development. And there is very little we can do in order to continue growing ZAL in its current framework. Shopping centers, page 19, again, Super strong year, which is continuing through 2025. Good evolution of footfall, despite, of course, the drag that we have had since 2019, which is the cinema industry, which by the way now seems to be resuscitating a little bit. But despite the drag of cinemas, very good food for evolution and very remarkable take and sales evolution. It's incredible how strong product consumption is. Those of you who know me, you know my opinion. We are a little bit doped by a lot of public spending. But one way or another, this is going into consumption and at the end is reflecting in performance of our shopping center portfolio. And then I will pass the floor to Ines, who will talk to you about valuation and depositions of the company.

Thank you, Ismael. Good afternoon, everyone. So, as commented with Ismael, we go to slide 22. Valuations are pretty much in line with 2023, which stands at $11.5 billion. reaching a 5.3% passing yield for the entire portfolio, coming from a 5.1, which it derives or it implies a 4.5% net initial yield. In terms of how it comes to these flat valuations, you see that in the existing portfolio, we've had a 21 basis points expanding yield, That's on a gross basis, but on a net basis it's been absolutely negligible for office and for shopping centers, slightly more impact for logistics. But they said about 60 million of impairments has been netted off by the 17% uplift in data centers. As you know, data centers, we carry phase two and everything that we have in land bank at cost. Part of the valuation that will be created, and valuers are taking a conservative approach in this new asset class for us. Moving to page 24, well, as you know, we have a very sound financial structure. Thanks again for the capital increase that we saw in July. That was a great achievement, and obviously that was very well supported by you, by our own shareholders. But as well, this position has been strengthened, or there's been a big achievement, as Ismael has mentioned before, having an upgrade from S&P and Moody's on the basis of sustainable lower leverage and expanding cash flow generation. We stand at a $4.9 billion gross debt coming from 4.5%. As you know, and we've committed this many times in the year because this happened throughout the first half of the year, we raised almost $284 million of mortgage debt, and we also did a 100-tack on the September 29th bond. Those are the main actions that have taken place in the debt side. And the implied LTV is at 28.3%. It's about less than 10 times net debt to EBITDA. We are at 8.8 times net debt to EBITDA, which is a ratio that more and more credit person shareholders care about. We've also commented about the average cost and that we are, this average cost is going to increase definitely because we are refinancing our cheapest bonds. 14% of our debt, and we are in page 25, as you can see, is mortgage-based, but we remain with more than 85% being corporate. And again, our maturity for on the 26th of May, the bond, the $600 million bond maturity, that's done. We did the homework back in 2023, and the next maturity only comes in November 26th, so we still have a lot of time ahead of us. We'll probably start to tackle it at the end of this year, and then I'll put you in a quick basis. Moving to investments and divestments, so I'm going on slide 27. Well, again, you see there's been a modest activity both on investment and non-core divestment in the traditional asset classes, a little bit more active in data centers, but Sam will comment on that in a minute. And in terms of... what we've done is basically consolidated the ownership of the adjacent building of our landmark building in the primate area of Madrid. So that's only 4,700 square meters building. And regarding divestments, Again, 73 million disposals are double-digit premium, 10.8% to GAV. That's below 100 million targets just because some of those infections have moved to 25. We've been very focused on reconversion. opportunities to the residential, either selling land, office land, or non-core office buildings to be reconverted by next fire. And we're talking about 33,000 square meters in 24, and we have identified another 50,000 square meters in our own portfolio that could be reconverted in the future. In terms of value creation for logistics, as you all know, our pillars of growth come from data centers, mainly, and from logistics as well. Data centers, again, will be explained by Sam, but I'm going to walk you through very, very briefly through the logistics. So our total land bank amounts to 511,000 square meters, plus we have a refurbishment in the Victoria warehouse, which is 73 square meters. for which we already in negotiations, advanced negotiations for pre-legs. So overall, we have 40% of our portfolio with either pre-legs or head of terms. We ran out of land in Lisbon, as Ismael commented before, and out of the committed pipeline. We are expecting to deliver all these warehouses except for 68,000 communal warehouses in Lisbon. We're expecting to deliver this on the first half of 26, and the rent that will be generated, they're around $20 million, $19.6 million. which entail a 7.5% yield on cost and obviously a double-digit yield on carpet by investing $171 million. For the future, we have another 244,000 square meters of land that could generate around $13.8 million, also implying a 7%. yield on cost or an 11% yield on topics. And with no further delay, I'll pass the floor to the most interesting part of the presentation that will be carried out by Sam. Thank you.