Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Inmobiliaria Colonial's First Quarter 2018 Results Presentation. The management of Inmobiliaria Colonial will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions]I am now pleased to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please go ahead.

[Pedro Viñolas Serra, CEO & Executive Director]

Thank you. Good afternoon, and welcome to this first quarter results presentation. I have with me, as usual, Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Officer.The idea is to walk you through the presentation of the results. We have 6 sections for this presentation. An initial section on highlights, then a section on how do we see the market, then another one on operational performance, then financial performance and then growth drivers for the company, finish with a conclusion.I am now on Page #6 of the presentation, where I present the main highlights of these results. First of all, I would like to state that we are very pleased to share our results that we are sharing with you today. As you can see, they are very, very good. Starting with the financial results, they've been outstanding. The gross rental income shows a 19% growth. Behind it and even more important, the net rental income is growing on an 8% on a like-for-like basis. The recurring earnings grew at a 29% rate. And finally, there is a net profit of EUR 22 million, which is 40% more than the comparable period of the year before. These outstanding financial results are based on a strong operational performance. We have let 73,000 square meters in the -- in this first quarter. The vacancy levels remain healthy at a 5% percentage. And we feel that there is strong growth in rental prices, we keep a double-digit release spreads, we are capturing rental growth. Mainly, the gross rental increase, as you will see, is price driven, and it is a solid base for capital value growth.In term of profitable growth accelerating, what we see is that it's not only the current results which are healthy, but also the outlook for the future is a solid top line driving bottom line results, an outstanding GRI like-for-like increase in every market. The Axiare acquisition is enhancing growth, the loan-to-value remains below 40% and there's a confident outlook on real estate markets.If we go more in detail on Page 7, as I said, the group like-for-like is a 6% increase, and as you can see, all markets are showing equal strength. Madrid like-for-like is 8%, Barcelona like-for-like is 5%, Paris like-for-like is 6%. So the main takeaway is all markets contributing with very good performance to the growth. In this slide also, I would like to highlight the EPS performance. The new earnings per share is EUR 0.051, that is 15% more than a year ago, so also a very healthy growth. And talking about the balance sheet. Now that we are managing close to EUR 11 billion, just to say that all of this growth goes hand-in-hand with a healthy LTV below 40%, 39.6% to be specific. You know that the mix of the company makes always 90% offices, out of which 71% is CBD, 90% BREEAM/ LEED, an unparalleled mix of high-quality offices.On Page 8, what I would like to highlight is that the operational performance of the company has not only been significant, as I said, almost 74,000 square meters signed with a 5% EPRA vacancy, but as you can see, not only, in terms of like-for-like, but double-digit release spread is 28%; 16%, Barcelona; 30%, Madrid. So it's really an outstanding result compared to the history, let's put it this way. And also to highlight that the strong rental growth is in particular not only strong compared to a year ago, but referring to the first quarter. So this strong rental growth that you see at the bottom, is the rental price that we are signing compared to the ERV at the end of 2017. So that shows a 6% rental growth, 3% for Barcelona, 7% for Madrid, 5% in Paris. As you are probably very well aware, these results are not also -- not only outstanding in terms of absolute growth, but also compared to any peer in the Spanish or European market who are not showing this kind of solid growth rate.Now I will ask Carlos Krohmer to step in to comment on the situation of the market, Section 2.

[Carlos Krohmer, Chief Corporate Development Officer]

Okay. On page 10, just 2 comments on the macro framework. The Eurozone has grown above 2% and Spain, as always in previous quarters clearly above the European average with positive momentum. And then I would say, specifically to highlight France is accelerating in a relevant way. It will, according to analyst forecasts, be about 2% GDP growth at the end of 2018, basically underpinned by the reform agenda and several catalysts for growth that are happening after the Macron election.If we go a little bit more specific, on Page #11, a quick snapshot around office markets starting with Barcelona. CBD vacancy is 4.4%, below 5%, it's clearly an historical low. The take-up is accelerating vis-à-vis the last quarter, 21% quarter-on-quarter. And we are seeing something that we have foreseen in the past, an increased number of pre-let transactions.On Madrid, the take-up has increased in the first quarter, 24% year-on-year, hitting the highest take-up figure in the last 10 years, and this is comprised of an almost inexistent stock of available high-quality assets in the city.On Paris, vacancy below 3%, in the CBD, 2.5%, really an all-time historical low with a very strong take-up increase, 13% for the total Paris market. This is the highest take-up seen in the last 12 years.If we take a quick look on what is happening in the rental market and we compare this with what Pere mentioned already regarding our first 3 months of signed rental effort, what we can see here is that on the left-hand side of the chart, in gray, we are reporting and achieving growth rates in signed rents similar to the prime market or even above, 3% in 3 months in Barcelona, 7% in Madrid that compares with the 2% on the CBD market, and plus 5% in Paris. And also in absolute terms, you see here in the blue bars on the right-hand side, the absolute market rental prices that we have signed.Regarding the investment market on Page 13, first of all, the kinds of product that we have discussed, people are looking for this and there was not really that much product of this type on the investment market. And now one of the main drivers is rental growth. If we go a little bit market by market, in Barcelona, we have seen, in a quarter, a 3% increase of capital values, of prime capital values that now stand at 7,200 €/sqm. You can see here that this is basically rental price-driven and we remain a healthy spread of 284 basis points of prime yield versus reference rate.In Madrid, the prime yield is at 3.75% and rental growth is driving capital values. And Paris remains at one of the -- if not to say, the most liquid market in Europe. We had an investment of volume of EUR 3 billion in the first 3 months, 10% increase year-on-year, 36% above long-term average and with 10 transactions above volume of EUR 100 million.

[Pedro Viñolas Serra, CEO & Executive Director]

Thank you. And now we step into Part 3 of the presentation, which is about operational performance. On Page 15, you can see that we've had strong letting performance in this third quarter -- in this first quarter. We have signed 33 contracts for a total amount of 73,000 square meters. That means EUR 12 million of gross rental income secured. And basically, I would like to draw the attention to the incentives which are at the, let's say, low end of what would be common standards in the market, 4% in Barcelona, 2% in Madrid, 14% in Paris, which is also an extremely good number, according to history.On Page 16, you can see a little bit of more insight on what has been signed. For example, in Barcelona, we signed 10 contracts. The maximum rent signed has been 24 €/sqm/month, 13 contracts in Madrid with a maximum rent of 30 €/sqm/month. And you can see on the right-hand side, a number of examples of kind of top-tier clients that we have.These contracts mean a very good growth rate either if we compare this to ERV or we compare this to signed rent. For example, in this page, 17, you can see the growth on the left-hand side. In the first quarter compared to December ERV, and you can see that just in the quarter, Barcelona has shown 3% growth; Madrid, 7%; Paris, 5%, that means a total of 6%. Or you can look at it in a different way, which is the re-lease spread, that is the percentage that means the signed rents compared to the previous contracts, therefore, the renewals. This, for the first quarter, the re-lease spread is 16%; for Madrid it's 30%. There's nothing there to be disclosed about Paris, so an outstanding 28%. So very, very strong rental growth in our numbers.In Page 18, we show a little bit of examples about Barcelona. You can see that the growth is not concentrated in one particular case, but there are several examples of double-digit re-lease spreads, that's Page 18. On page 19, you can see the same for Madrid. You can see an impressive, for example, 40% re-lease spread on Sagasta 31, where McKinsey has its headquarters in Madrid, but also 25%, for example, re-lease spread for Alstom in Martinez Villergas, and so forth, or in Castellana 52, a 49% re-lease spread. So a number of good examples. Last but not least, we always highlight that our performance in Paris is better than many people could think of. And we are also signing very close to a double-digit of re-lease spread. So you can see here some recent signatures, 11% in Louvre Saint-Honoré, 9% Cézanne Saint Honoré, 9% in Washington Plaza. Another example in Louvre Saint-Honoré, that explains this ERV growth that we can see of 5% for the Paris market. If we now go from rental growth to occupancies, we also provide you with a healthy number. Colonial vacancy is, today, at 5%. But particularly, if you dig in the details, you will see that this is quite satisfactory. In Barcelona, the like-for-like Colonial portfolio shows just a 1% vacancy rate. Now that we have included Axiare which, as we know, means a little bit more of vacancies because there's more presence of news projects, it's 2.7% for Barcelona.In Madrid, the like-for-like vacancy rate is also 1%. But there, we see the effect of Discovery, which is just a building that we are putting in the market right now, that adds another 3%. And then the vacancy that you will see now that comes from the buildings that we have just been finalized at the actuarial level as expected. Last, but not least, again, Paris, 2.9%. So everything combined, 5% of vacancy rate, but out of which, the like-for-like of existing buildings is only 2%, which is very, very healthy. In Page 22, some examples to illustrate what I just said. You can see here that the main driver of a little bit of higher vacancy is those projects that are coming mostly from Axiare world but also from Colonial, projects such as Luca de Tena 14, Ribera del Loira, Francisca Delgado, Luca de Tena 6, Estebanez Calderon, that is Discovery, and Castellana 163, that are examples of why the vacancy is showing the number that it's showing. But at the same time, we are quite pleased with where we are. Moreover, in Page 23, just to share how this vacancy compares to the wider market, either if we compare it to the total market or only to prime CBD. In Barcelona, the prime CBD vacancy is 4%, the total market is 7%. We are at 2.7%. In Madrid, the prime CBD market is 8%, the total market is 11%. We are at 12%, but if we deduct these new products, we'll be at 1%. And in Paris, our Colonial portfolio, it's a solid portfolio which is at 3%, compares very well with the prime CBD market and is well below the total market.Page 24 is just to remind us that the corporate social responsibility standards remain a key priority for us. And Colonial, as of today, remains EPRA BPR Gold Standard. In also EPRA sustainability, BPR Gold Standard. Green Star rating by GRESB. And also, SFL obtained a BREEAM Award in 2017. As you know, 90%, 9-0, of our buildings have energy efficiency standards. So very good operational performance. As you can see, basically, on rental growth. Now we skip to the section on financial performance. Please, Carmina, begin.

[Carmina Ganyet I. Cirera, Corporate Managing Director]

Thank you, Pere. In this section, we are going to analyze briefly the main metrics of our profit and loss accounts. The first one is the gross rental income. As Pere explained, the gross rental income growth of 19% from EUR 70 million last quarter 2017 up to EUR 82 million this quarter, thanks to the strong EPRA like-for-like growth, 6%, in general. And then thanks, also, with a strong growth from Axiare contribution of EUR 11 million. If we analyze in the right-hand side, in the main impact in the market, with what you see is Barcelona increasing 5% like-for-like. Axiare contributed in the Barcelona market with an additional 9% in gross rental income. In the Madrid market, the EPRA like-for-like growth, 8%. And on top of that, the acquisitions and projects contributed an addition of 14% and Axiare with an additional 53%. So in total, Madrid market rental income is growing 76% vis-à-vis the last quarter 2017. And in Paris, the like-for-like growth, 6%. The disposal of In/Out projects has a negative impact of minus 7%. So in total terms, our like-for-like growth shows a very strong growth of 6% with a total growth in rental income of 19% up to EUR 82 million. In the next page, what we analyze is the contribution of this like-for-like growth, mainly 50% of this like-for-like growth is driven by rental prices increases, and the other 50% is driven by occupancy. If you see the main contribution in the Barcelona and in Madrid, is driven by prices, so this shows the very strong momentum of our market and the very strong capacity of capturing the rental growth from our quality portfolio.In the next page, 28, what we would like to highlight is the improvement in the efficiencies. We saw the like-for-like growth, 6%, but when we analyze the net rental income growth shows an improvement of efficiency with an additional 8%. Highlighting, especially Barcelona and Madrid with 11% of net rental income accelerating by 200 basis points vis-a-vis the last quarter 2017. It means that, again, we are managing this portfolio every day in the direction of improving and enhancing the efficiency of our institutional operations.In Page 29, as a result of this strong performance in the rental income, the result is the profit and loss increasing 29% from EUR 16 million, the recurring earnings this quarter 2017, up to EUR 20 million, the recurring earnings in the first quarter 2018, mainly with solid 8% like-for-like net rental income growth and also the result of enhancing the impact to the Axiare acquisition. It is important to highlight that this profit and loss account contemplates the integration of Axiare since February -- 1st of February so that we have an impact from Axiare division of only 2 months. You know that we ended the takeover of Axiare at the end of February, beginning in January, with an assigned stake of 87%, so these first quarter results include the consolidation of 100% of Axiare from 1st of February of 2018.So as a conclusion, in Page 30, the results of this first quarter shows an increase in net profit of 40%. Very important in terms of EPS per share, 50% more in terms of EPS growing from last quarter 2017. And as I mentioned, the gross rental income, which is the main impact of this impressive increase in the net profit, showing a 19% growth from EUR 70 million to EUR 82 million.If we jump to what has been our liquidity management, you know that we did a model issuance of bonds of EUR 650 million for a tranche of 8-year senior unsecured bond with a total all-in cost coupon of 2% with a very well acceptance from the capital market. The book has been oversubscribed of more than 3 times, so we took advantage of investing with the opportunity to contribute again additional liquidity of the company and to improve the maturity profile of our debt. As you can see, in the next page, in Page 32, thanks to this active liability management, today, the cost of debt is 1.82%, with debt maturity for Colonial holding of more than 6 years. For the Colonial total group close to 6 years, we maintained the credit rating from Standard & Poor's and Moody's in the same direction that we had before the takeover of Axiare. So they have maintained the solid capital structure to BBB stable outlook from Standard & Poor's, and the same for Moody's in the rank of investment grade. And thanks to this issuance of bonds and this active liquidity management, today, Colonial has between cash and undrawn facilities of more than EUR 2 billion. Of course, this liquidity will be ready to optimize the debt structure from Axiare when we would end the process of the merger that is needing to be approved in the next shareholders meeting. And also we have the liquidity ready to repay the maturity of debt for next year.So this has been the result of this active liability management for this first quarter 2018.And the last part of this section is page 33. We would like to share with you and of course to thank to the community, investors and to the capital market, the recognitions of the share price and the recognition of the management and the strategy of Colonial. Since December 2017, the share price has been recognizing all the milestones on all the strong performance that we have seen delivered in the first quarter for Axiare takeover bid, and for the performance of our business and also for the included SFL first quarter results. As you can see, in this page, the share price has been performing -- or has increased more than 20%. Year-to-date, 19%, but we need to thank all the community for this recognition. And if we compare this performance from our share price, from our peers in Spain and Europe, of course, and also, if we would compare the performance of the share price with the main index, EPRA and IBEX 35, we are beating the performance of our peers. So we are proud to continue on and of course, we are very committed to continue for this performance of the share price and for this recognition from the capital markets.

[Pedro Viñolas Serra, CEO & Executive Director]

Thank you. We will enter into the next section, or the final one, which is about growth drivers. Mainly, here, what we want to highlight is the fact that we while we're very pleased with the results that we've shared with you, looking backward, looking at the rents and the results and everything else, that does not mean that this is over, and we have nothing else to deliver for the future. But it's basically the opposite. Basically, we feel that we have a number of growth drivers that allow us to expect a substantial additional increase in the cash flows we produce for investors. Broadly speaking, today, Colonial, after the Axiare acquisition, is a company that is in the range of around EUR 300 million in terms of rents. And what we are showing on Page 36 is that, in due course, we can send this to the level of almost or around EUR 500 million, so that's the spare capacity that we have. This basically comes from 2 different sources. One is from Axiare, which is contributing EUR 100 million of potential rents. And then another EUR 100 million that comes, let's say, from the existing or previous Colonial world. And in this Colonial world, we could say EUR 70 million comes from 11 different projects which constitute the project pipeline of Colonial, that allow for GLA of more than 240,000 square meters. That would generate EUR 71 million in terms of rents. And the other driver is reversion of our contracts. This allow us to capture around EUR 33 million in terms of additional rents from both Spain and France. So from Axiare, from this project pipeline and from this capturing reversion driver, we see additional upside of around EUR 200 million to be added on the existing EUR 300 million of rents. Let's talk about each one of these 3 value drivers, growth drivers, sorry, a little bit more in detail. The number one that we mentioned is the reversion, the capturing of the reversion. Here, you can see a little bit more flavor on this. What you can see is that this is already happening. If you look, for example, at the steady upside that we have at December of 2017, and if we compare this with the re-lease spread captured in the first quarter of 2018, you can see that this driver is clearly accelerating and showing its potential. In Barcelona, the re-lease spread has accelerated towards 16%, and in Madrid, to 30%. In the middle of this slide, you can see our expiry dates, the breakdown of the expiry dates. For Spain and France, you can see that there is a different share of expiries in the next 2, 3 years, that would allow us to capture this reversion. On the right-hand side of this slide, you have some examples of where this could happen. So this is driver #1, capturing reversion, EUR 33 million. The second driver of what we can do for the growth of our rent in the future is the value creation potential through the project pipeline. We have a substantial capital gain potential in this pipeline, and you can see here a little bit of a breakdown of agenda of the future projects that will come in due course. This year, for example, we have 3, Discovery, Principe de Vergara and Parc Glories in Barcelona. But then, in the next 4 years, you can see a different number of them. Maybe I would like to highlight, in Madrid, the Méndez Álvaro campus that was bought under the Alpha III umbrella. And then to highlight also the hidden 3 that I could mention for Paris; Iena, Emile Zola and Louvre St. Honoré that will provide substantial growth in our lets. Some of them are close to crystallized. On Page 39, you can see here the 3 projects that I just mentioned. Discovery building, which is already finished and is now going through the period of commercialization. And this, as of today, we have already strong interest for 50% of the GLA. I think that as of today, we can confirm that the yield on cost will be higher than 7%, so the return on this investment will be quite satisfactory. A little bit later, will come both Parc Glories and Principe de Vergara. Parc Glories is an almost 25,000 square meter project in Barcelona. There, we can also confirm the initial yield on cost that we expected, higher than 7%. Here, moreover, we can say that more than 80% of this building has been already pre-let. So it's going to be a success by the time of its opening. And on the right-hand side, Principe de Vergara is going to be also delivered soon to the market in the next few months. Again, as of today, we confirm an expected yield on cost above 7% based on the kind of negotiations that we are having that will lead us, if possible -- or as we initially expect, to pre-let 50% of this building before its opening. These are the 3 examples. I mentioned that the third driver after the pipeline and the capture of reversion is Axiare. Axiare doesn't show big news as of today. We are mainly going through the execution of the final steps of this transaction. In Page 40, you can see the very disciplined approach in terms of calendar that we have in the previous month. This very disciplined approach will allow us to finish this process in the next 2 weeks, with both the AGM of Colonial and Axiare meetings, which will be held on May 24 and May 25, and that AGM will, in due course, approve the merger of both companies. So all of the process is going as expected. As I said at the beginning, since we already own 87% of Axiare as of today, we are including full consolidation figures in these numbers. As Carmina was saying, being a little more specific, with Axiare starting February 1 we entered into the company. And just to share with you that the integration process of both companies is expected to start immediately after the merger. But with the, let's say, visibility and information that we have today, that is enhancing and being more and more important. We can say, as of today that we -- our synergies estimate is confirmed and we will do an asset allocation decision that, as of now, is underway.If you look at this Axiare portfolio, what we expect from its contribution. Well, first of all, on the left-hand side of Page 41, a contribution of core assets with more than 95% occupancy, Sagasta 33, Manuel De Falla and so on. We will be talking about 13 assets fully occupied allowing for price reversion. Together, we would expect from Axiare additional space in grade A product that would allow us to capture additional price and volume reversion. For example, those that you can see in the middle of this page, 41, and on top of that, an attractive project pipeline of things that are going under refurbishment and have, let's say, more delayed plans which is a third source of growth.Page 42, last, but not least. The other things besides offices, that will contribute to enhance the cash flow of Colonial. For example, the logistic portfolio that as of today has 0 vacancy, that is among the 5 more important portfolios in Spain and that as of now is contributing with healthy cash flow to our company.In Page 43, also, to mention that on top of whatever I said, the growth will come through our acquisition plan. We have always highlighted to the market that we expected to acquire around or a minimum of EUR 300 million per year. You can see how this has been delivered consistently since 2015 through the Alpha I, Alpha II and Alpha III projects. You can see that a vast majority of the transactions have been off market and value added. And these both things allow us to enhance our portfolio with a very industrial kind of approach. So a little bit as a summary. If you put everything together in Page 44, as I said, as it looks today, Colonial is a EUR 300 million rent company. That's the kind of rent that we are showing at the end of 2017. And we say we would like to add through our effort, an additional EUR 200 million. EUR 100 million of this would come from Axiare. Another EUR 100 million would come from the existing Colonial. In the case of existing Colonial, EUR 71 million from the delivery of our pipeline, EUR 33 million from capturing reversion. That would lead us to EUR 500 million. On top of that, of course, we will work to have additional growth from the market -- the market rental growth, from additional acquisitions that we may do and, by the way, devoting time and effort to the flexible office space as a potential additional source of growth for the future.That's the end of this Section 5. With this, I only would devote some words for the conclusion which is page 46.Well, basically, to summarize, we've seen that these first quarter results have been strong. One could say, well, they are strong because you are including Axiare. Of course, Axiare is helping in many different ways. But I would like to emphasize, number one, that the accretiveness of the Axiare allows for a double-digit growth in the EPS, for example, which is a more, let's say, a more disciplined way of looking at our growth. And then the other thing that we want to highlight is, yes, Axiare is important. But what we would like to really highlight and emphasize is, look, our GRI growth like-for-like, 8% for the net rental income, is outstanding. As I said, in historical terms that compared to any peer in Spain or in Europe, and these, in the context of very solid occupancy, only 5% of vacancy. As Carmina explained in the context of very solid capital structure, LTV remaining just below 40%. And everything of this does not mean that, well, we do not have anything else to offer for the future, but as I just explained, we remain confident about the outlook for the future because we, let's say, have a different visibility, a very substantial number of additional rents that will enhance our portfolio in the future in due course.That's basically the presentation for this first quarter. Now as usual, we will be open to any questions you would like to share with us.

[Operator]

[Operator Instructions] The first question comes from Max Nimmo from Kempen.

[Maxwell Wilson Nimmo, Analyst]

Just on the gross rents and when we get to that EUR 500 million, is that around kind of 18 to 24 months? And just for the full year, looking at Axiare, you said you'd actually get the 2/3 of this quarter. So that EUR 11 million that was added is roughly around EUR 16 million if it were for the full quarter -- if you had had that in the full quarter? And on the logistics, I was just wondering, have -- did you -- I see you have done quite a bit of leasing on it this quarter. Did you outline a plan for divesting that? Or at this moment, is that not in the plan? And are there generally any problem assets that you've come across in the Axiare portfolio that you perhaps didn't envisage or anything that's going to take a little bit longer or -- a bit more color on that, please.

[Pedro Viñolas Serra, CEO & Executive Director]

Thank you. I will start with the final question, I will ask Carlos to go to the first question. First of all, on the logistics portfolio, as of today, we are on the, let's say, a phase of analysis. We do not have a decision of selling or not selling this division. We, of course, see the merit and how easy this could be divested because of the high interest of the market. But we'd like to take our time to go through the analysis of this portfolio not only at the individual level but at a more strategic level. So as of today, no decision has been made regarding a potential divestment. So we are not working on selling them as of today. Regarding the rest of assets, there are some assets where we see -- more clearly see an exit strategy, like for example, those who have to do with retail or hotels. But here, I would like to be, let's say, very clear about the fact that we do not plan an immediate sell -- an immediate sale. We have to go through 2 kinds of analysis. One is from the fiscal and financial point of view when the sale would be optimal. And also, from a real estate point of view, we see some assets that even if they are not strategic, maybe maximum value could be obtained after a period of additional work on them. So retail and hotels, we more clearly see these as assets where we could be divesting, but I would say that probably not immediate because as everyone knows, we want to maximize the value. The remaining office portfolio both of Axiare and Colonial, once we are in the integration process of both companies, we'll have a look to see what kind of rotation strategy could make sense. But as of today, we do not have individual assets identified that we would like to sell in the office segment. So yes, we could be divesting but without specific names and quantities as of today. Regarding the other question, Carlos.

[Carlos Krohmer, Chief Corporate Development Officer]

Regarding the potential inflow, the future potential rents, it's important to remind, number one, on the Colonial, on page 38, you have some sort of a calendar when the projects are phasing in. So this is some of them short term, some of them more midterm, some of them a little bit later, so it's in the coming years, not everything absolutely short term. Then regarding Axiare, as you can see, from our figures, what has been incorporated in terms of 2 months of the first quarter is EUR 11 million. So you can easily calculate what is -- what would be the quarterly contribution, that is roughly around EUR 16 million of gross rental income. To have the really short-term phasing in of the rest of the Axiare portfolio, we will see after the merger with a detailed analysis how the different schedule, the phasing calendar of the projects. But we are quite optimistic, obviously, but now it's early to be too specific.

[Operator]

The next question comes from Alvaro Soriano from Société Générale.

[Alvaro Soriano-De-Miguel]

Just 4, if I may. The first one, can we have an EPRA NAV pro forma as of first quarter 2018? Taking into account that you still need 13% -- I mean, you need to merge both entities just to know where we are compared versus December 2017, that would be the first question. And the second question is, excluding Axiare, I'd like to know if the 3 markets, Madrid, Barcelona and Paris, they have some positive net take-up in those 3 regions in the office portfolio. The third question would be just a quick follow-up on Max. If you could give us some color on how much cost saving you can obtain from moving mortgage debt in Axiare to unsecured debt. And also if we can expect any one-off costs through the year arising from Axiare, I'm thinking on compensation to Axiare management or something like that. And the last one, is on the new trend of coworking, I would like to know how much of the GLA of Colonial is let to coworking companies? And if we can have any vacancy view on that specific space?

[Pedro Viñolas Serra, CEO & Executive Director]

Okay, just to allow my colleagues to prepare the other questions, I will start with the last one with coworking. As of today, we only have 1 relevant office building which is let to WeWork which is Castellana 43. And then we have also the same in Paris which is also the Ozone building which is also let to WeWork, at very, I would say, satisfactory terms in both places. In Barcelona, in -- sorry, Madrid, WeWork was a winner of a process with different bidders. In the case of Paris, I have to say that is almost a record. The one we signed with WeWork they closed with EUR 900 per square meter. We have a plan. You know that we bought a company focusing in coworking which is Utopic. We have a number of plans of openings but we don't have anything relevant, I would say, at this date. Probably we'll see something before the end of the year in some of the openings that we have, like for example, Principe Vergara, but nothing substantial at this level. Carmina, the first question he said was about the EPRA NAV pro forma.

[Carmina Ganyet I. Cirera, Corporate Managing Director]

Yes, well, at this moment, we are doing the visibility so we don't have the monthly -- the January close. So we are not able to deliver an EPRA NAV, but we want is to deliver to the market the EPRA in June when we would update all the valuations from all of our portfolio and at that moment, we would have all the impacts as a consequence of the merger of Axiare. But as of today, we cannot deliver any figures for EPRA NAV.

[Pedro Viñolas Serra, CEO & Executive Director]

I didn't clearly understand your second question about Axiare because you mentioned...

[Carmina Ganyet I. Cirera, Corporate Managing Director]

Synergies, yes...

[Alvaro Soriano-De-Miguel]

The second question was just on, just to make sure there has been net take-up in the 3 markets without the Axiare impact, I mean, the 3 markets, Colonial standalone, has experienced a net take-up in those 3 markets.

[Pedro Viñolas Serra, CEO & Executive Director]

Yes. It's been this way, that is confirmed. The third question, if I understood correctly, about the synergies and savings. Just to confirm that, at this moment, and let's not forget that we are still outsiders to the company until the merger happens in the next few weeks. But of course, as you can imagine, we've become more and more familiar with the outlook of Axiare within this -- the world of Colonial. We can confirm that the estimate that we gave to the market of EUR 3 million, that will be easily met. And we expect higher levels of savings than the one that we just flagged at the beginning. This related to overhead. We will also estimate some savings in other areas such as taxes but I think there was a be final comment related to that, Carmina?

[Carmina Ganyet I. Cirera, Corporate Managing Director]

The Axiare debt profile are mortgages. Mortgages with pledge of rent, and of course, with a higher interest cost vis-à-vis the Axiare and Colonial conditions. The overall would be 2% that we have -- well it is probably minimal, which is around between 2.1 or 2 point something. So the integration of Axiare in Colonial Group would have the benefit to have an investment-grade credit profile without any securities, without any guaranties, any pledge on rent, and longer maturity with more or less maintaining this 2% cost of debt that we have today.

[Alvaro Soriano-De-Miguel]

Okay. Just one quick follow-up on the first one. Can we expect in 1st -- in June, 2018, a pro forma NAV 100% consolidated, Axiare, as of December 2017 just to see how the needle has moved from December 2017 fully integrated Axiare including the merge and then first half of 2018?

[Carmina Ganyet I. Cirera, Corporate Managing Director]

Yes, what we would have in June is the EPRA NAV considering all the measures and all the integration of Axiare, our pro forma NAV in December, it's something that we need to check with information that we would have after the merger closes.

[Operator]

The next question comes from Pedro [ Galvez ] from [indiscernible].

[Unknown Analyst]

The first one on the potential gross rental income coming from Axiare, you mentioned over EUR 100 million of potential rental income which is, obviously, significantly higher than the current passing rent from Axiare. I was wondering if it's possible to split this EUR 100 million between what is the reversionary potential of the current portfolio in operation and what is project delivery? And if you could share the pending CapEx for those projects of Axiare, it would be helpful as well. And the second question, on the re-lease spreads, you reported strong numbers for Madrid and Barcelona. Looking at the rental and specific contracts to be renewed in the coming quarters, what kind of re-lease spread should we expect for the full year both in Spain and in Paris?

[Carlos Krohmer, Chief Corporate Development Officer]

Okay. Starting with the first question, we have, as of today, not really the exact breakdown but what you can use as of now as a proxy is the breakdown that was disclosed by the company. The last breakdown is what was disclosed in June 2017. As soon as we have then full access, we will give guidance on this but it should not change dramatically. So this is a good proxy for seeing what comes from where. As we highlighted here, we have the 3 drivers, rent reversion, letting up vacant space and the project portfolio. Regarding the second point, obviously, it's difficult to give guidance about any future events. But let me say, in a way, what we have used here to give the guidance and as of today has been a good proxy is, let's look at our portfolio, you can see it on Page 37, as Carlos highlighted, what is the level of under-rented that we have, 12% Barcelona, 8% Madrid, add a little bit of rental growth. So this should be something that if the market continues with the current positive momentum in the coming quarters, that's something that could be expected. But anyway, it's about the future, so we have to be cautious. But we have delivered, as of today, a strong first quarter, and we remain, as we've said in the presentation, very positive on the real estate market in general, and with good product in particular.

[Operator]

The next question comes from Jaap Kuin from ING.

[Jaap Kuin, Research Analyst]

My first question is a bit on rental levels in Madrid. I can see you've quoted the Sagasta property, and if I recall correctly, the passing rents were about EUR 80 per square meter last year. And so if you increase about 40%, that implies roughly a level of around EUR 25 per square meter. And then also, on the Discovery yield indication, you give, I think the 7% implies like EUR 27 per square number, and you said you ended up a little bit higher. Could you maybe talk us through those numbers a little bit? And then whether the market is still moving up and at what kind of pace would that be? And then I would say, on the -- the second question, is on the run rate of your EBITDA margin, let's say maybe -- this year is maybe not the best year to look at the kind of end of year for the EBITDA margin, what would it be?

[Carlos Krohmer, Chief Corporate Development Officer]

Okay, starting with the first point, I'm not sure what reference you are quoting, but in any case, the asset of the McKinsey rent was at low 20s. Now we are at a rent close to 30s, is basically what explains the re-lease there. And regarding the margin, we should converge at what we are now, also at Colonial levels, at the end it's maybe correlated to occupancy. And so we could take as a proxy where the stabilized Colonial portfolio is at the midterm run rate.

[Jaap Kuin, Research Analyst]

Could you maybe talk about the movement of those rental levels for kind of the -- because Sagasta is almost prime, almost Castellana type of rents, I mean, are those moving up faster than Castellana and how does that compare maybe the more peripheral markets? So could you maybe talk us through the current direction of the market which areas are moving up the fastest?

[Pedro Viñolas Serra, CEO & Executive Director]

Well, I think that, as a general rule of what's happening in Madrid so far is that CBD has been the stronger player by far. So if you look at the details of where the rental growth is concentrated, it's basically in our more central buildings in Madrid. Sagasta, I can say, I think that this is a very, let's say, good news, good surprise because I think you're clearly pointing at the fact that the kind of renting signed is a rent that not so long ago, we were expecting as a new rent for Castellana. So yes, let's say, Sagasta compares a little bit in an outstanding manner with what which -- what has been the rule for Castellana. In other words, today, the more central locations such as Castellana, we are always awarded with expectations in the 30s, even close to the mid-30s. That's, for example, where Castellana 43 was or Serrano 73 that we signed in the EUR 35, that would be more or less what it is. While this kind of, let's say good locations like Sagasta, but not really downtown, are EUR 25 to EUR 30 in a very satisfactory mood. We believe that while it's not there yet in such an evident growth rate, it's in secondary locations where still some buildings have to fight with a more higher level of vacancy. The way we see this within the cycle, as you know, is that if we are talking about this EUR 28, EUR 29 for Sagasta, this is something that in the trough of the market, it could be below EUR 20, in the peak of the market, it could be close to EUR 40. That's why -- because Madrid is such a volatile market, if the economy is showing such a good trend as it is showing me right now, we are confident about additional rental growth because something that is in final 27, 28, 29, in some places in Madrid, you could easily expect EUR 33, EUR 34, 2 years from now.I've been told that we don't have more questions on my side, so I would like to thank everyone for their attention. We're very pleased to show again very good results with you. I do hope that we will be able to show similar results in the future. Thank you very much and good afternoon.