Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Inmobiliaria Colonial First Quarter 2022 Conference Call. The management will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions]

I'm now pleased to introduce Mr. Pere Vinolas, CEO of Inmobiliaria Colonial.

[Pere Serra, executive]

Thank you. Good afternoon. Pleasure to be here again to present our results for the first quarter 2022. The team with me, we will have Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Officer. .

In order to introduce these results, I would like to say, first of all, that as you will see, they are quite satisfactory. The actual figures that we will share with you, we believe, are very, very good and very accretive comparative to the end of last year or to 12 months ago.

In these introductory remarks, maybe I would like to emphasize why we believe these results are strong, and it's not only this quarter, but in recent past and why we believe we are very well positioned for the next quarters or next years.

As you all know, because you've been following us for a certain time already, we are a company with a quite specific strategy. We've seen the office sector, we are betting on what we call the flight to quality. That is a focus on the ultra-high supply of the best quality offices. We believe that we do not sell the same product that other people sell and that means a different kind of assessment. And we believe that this strategy is benefiting from what's happening, let's say, in our sector in the outside world.

It's clear, as time goes by, that after COVID, that after all changes that happened in recent years, quality now is a must for a number of clients. Now the quality, the experience, the product that the companies have and offer to their employees for talent retention, for talent promotion, it's certainly at a different level. It's a priority today for any average, high-quality corporate, and this is having an impact in our sector of polarization.

So if you have the high-quality product, this product is even more required than in the past, and the scarcity attached to this product is even bigger. If you are not in this kind of segment, maybe the problems you may have could be bigger than in the past.

Page 6 of the presentation remarks maybe the obvious. We are a company with EUR 12 billion of gross asset value, 98% in City Center, more than 80% on CBD. There's nothing comparable to this in our sector. If instead of talking about location, we talk about sustainability, 95% of our portfolio is in a [ dream or league ]. So sustainability, it's again high above any comparable, and we are positioned, as you know, very strong European cities. And we believe that because of that, we have been able to secure maximum rental prices setting the benchmark for prime, getting very good numbers in terms of occupancy, getting a superior cash flow and capital value growth with very limited risk, in the end, benefiting from a strong profitable growth on the back of polarization. And that's the results that you will see for the first quarter, and the expectations for the next few years, you will see, are also quite positive.

Page 7 is only a reminder of the kind of product that we have. As I said, the product we sell, it's in a different league. It's in a different business. So based on that, on Page 8, basically, what you will see in the results for the first quarter is, number one, that our net profit and earnings per share of a high double-digit year-on-year growth, so that's important. And this profit growth is driven by solid execution on different key value drivers.

First of all, the successful project delivery. As you know, we are a company that we've been defining ourselves as a company that, without having to look for anything in particular outside our company, we can generate incremental cash flows just delivering what we are expected to deliver. In these recent months, we've been delivering important projects, and that's accelerating our profits and our cash flow.

We also are on a constant dynamic of renovating our assets, what we call the renovation program. This is also accelerating. And as you will see, this is producing incremental cash flows that enhance our profits.

We invested in SFL during last year. This is going to be also very accretive in terms of our results. That's another driver for our results. And basically, besides all of this news or, let's say, side-by-side with all of this news, our existing portfolio is being able, as expected, to capture indexation and rental growth. This, together with our active liability management on the capital structure side, is allowing us to deliver strong growth in our profits.

Behind this news, let's call it this way, in the end, what is happening is that we are going through a process of very good performance of our fundamentals. As you will see in a minute, our letting volume for the first quarter was 51,000 square meters, which is well above our pre-COVID levels, not only last year, but our 2019 levels. And that has allowed us to execute our operations in 2022 in a very successful way.

Based on that, Page 9 is devoted to the fundamental KPIs of our performance during this quarter. At the end of March, our good net profit is EUR 28 million, 32% year-on-year. Our recurring net profit is EUR 36 million, 26% year-on-year. Our EPS, it's growing at 19%, that would be EUR 0.067 per share at this moment, the first quarter. Gross rental income, EUR 82 million, 4% or, to be more specific, 4.6% of this like-for-like, our EBITDA, EUR 58 million, 4% more than default.

As I said, behind this, there is a strong letting volume 74% higher than a year ago, already above pre-COVID levels, I mean that is first quarter of 2019. More specifically, if you talk about the renovation program, we've done almost 10,000 square meters only on this specific part of our portfolio that is going through renovation. And not only have we leased almost 10,000 square meters during the first quarter, we have already done additional pre-lets of almost 5,000 square meters post the first quarter of 2022. If, instead of talking about our renovation program, we talk about our pipeline, we will be talking about agreements equivalent to 17,000 square meters. So therefore, our letting volume is not only applying to our existing buildings, which are already in operation.

But as you can see, 2 buildings that are being renovated or to future buildings that are currently part of our project pipeline. But anyway, everything together, that means that we finished our first quarter with a group occupancy of 95%, which in place would be 99%. And all of this happening in parallel to rent behavior that as you can see at the bottom of this Page 9, remains very satisfactory returns.

The group ERB growth, it's 4% compared to December last year. And this across markets is the general behavior. So in summary, very important double-digit numbers in terms of growth of our profits, very good letting activity for existing buildings or for new projects.

Now we will enter in more detail on section 2, we'll be devoted to go through the financials more in detail. Carmina, all yours.

[Carmina Cirera, executive]

Thank you, Pere. On this section, I am in Page 11, we are covering the main financial KPIs and especially the key drivers of this strong growth. The first just to remind, the net group profit increased 32% year-on-year. Instead of looking at the group profit, if we look at the recurring net profit it's increasing 26% year-on-year. And in terms of earnings per share, as Pere mentioned before, we are showing a first result -- first quarter result of a growth of 19% year-on-year.

If we look at the top line -- sorry, if you look at the main drivers of this income or recurring growth of 26%, the first important impact is revenues, with a profit impact of 11%. The second layer of a positive impact is the financial results, thanks to the work done last year on the liability management. And the third layer is due to the fact that we increased our exposure in SFL and also some acquisitions that we have done, adding 7% of this recurring profit year-on-year growth of 26%.

If we look at the top line, I am in Page 13, so basically, the gross rental income increased 4.1%, but especially highlighting that excluding the disposals, as you know that we have disposed last year a nonstrategic asset, the growth of the rental income would be 6% without considering the disposals. Especially when you look at the main impact, the main key impact of this gross rental income growth, we are having a positive impact coming from the project pipeline, which is 3.2%.

Additionally, renovation program, the acceleration of the renovation program and the rent achieved after being renewed with additional 1% of the rental income. The renewal of the contract of our core portfolio is adding also slightly 1% of this rental growth. And on top, the acquisition program also has a positive impact of probably 1%. So these are the main key drivers. All of them positive, with this 6% gross rental income growth results we told you including the disposal program.

In the next page, you can see that this growth is across all the markets. So I would like to highlight the like-for-like growth in offices, 4.6% total portfolio. And when you look at the different markets, all of them are very positive, smooth with Paris, 4.3%, Madrid 4.2% and Barcelona, more than 6%. I mean if we look at the main sources of this rental growth, basically it's driven by prices. So more than 50% is driven by prices 2.5% and 45%, broadly speaking, is driven by occupancy, increasing the volume of occupancy with the impact with this 2.1%. And you can see in all the markets in Paris especially driven by volume, as we mentioned with fully occupancy in the Paris market. And in Madrid, Barcelona may be driven by price, as you can see here with Madrid, 3.5% price impact in the office and Barcelona outstanding with 5.2% in also in office actually.

As you know, another layer of this positive impact in the profit in the first quarter has been the financial impact. This quarter, in February, we have finished the conversion of our bonds -- 100% bond conversion into green. So it's the first company in the highly certified also in the real estate sector, which have all the bonds being converted to green. So it means that we have a very, I would say, outstanding leadership position in decarbonization of our portfolio that it's going -- or it's being very, I would say, positive impact is also in our debt market being in a very well position or tapping all the world markets in this liquid sector of the green bond.

So as a reminder, we touch and then Carlos will cover all the efforts and all the decarbonization part to the carbon footprint, which today we are at the lowest level in the sector with 9 kilograms CO2 per square meter and, as you know very well, 95% of our portfolio has already agreed or lead on a very, I would say, outstanding levels of the green bond. So as a consequence of this conversion, as a consequence also of this very active liability management done in 2021 and also the disposals of nonstrategic assets, we have a very solid capital structure, I am in Slide 16, with also a very significant liquidity position with more than EUR 2.5 million -- EUR 2.6 million specifically of liquidity between cash and undrawn balance.

So thanks to that, Colonial is maintaining the high end of investment grade with a BBB+ stable by S&P. And today, Colonial has the benefit of a very, I would say, interesting cost of debt of 135% and average maturity debt for the following 5 years is a very, I would say, interesting cost of that for the following year.

But we are not -- we have not only done this conversion into green. We also did in 2021 a very interesting movement of protecting of the debt, which means that lowering the interest rate risk is what we did last year, and we had a very, I would say, benefit or taking advantage of the market conditions last year. And today, Colonial has 40% of the total group already pre-hedged at an average swap of less than 0.6%, so 60 basis points for the 40% of our debt. And this hedge is starting, it's a hedge forward swap, starting in each bond maturity date for the following 7, 10 years. So it means that at the moment that we are going to renew our bond which, as you know, more than 80% of our debt will mature after 2025.

So at the moment that we are going to renew this bond, we have already 40% of the total amount of the debt maturing in the future already pre-hedged at a very interesting levels of rate, which is less than 60 basis points today. So 92% today is fully hedged. And in the future, we'll have what was close to 50% already pre-hedged at a very, I would say, interesting levels of cost of debt.

What does it means today that the hedge today already closed has a mark-to-market value of EUR 175 million. You know that certain days it's EUR 200 million. The last number was EUR 175 million. If you consider this EUR 175 million positive mark-to-market for the following 7, 10 years after maturity bond, you can see the savings on the interesting rates that Colonial will have the benefit in the future.

So as a summary, I am in Page 17, we have experienced a very, I would say, strong profit growth of this 26%. And basically, you can see here the different key drivers of this positive feedback. The first one is successfully of our project delivery. As you know, we have delivered [indiscernible] quarter in Barcelona. We have delivered also [indiscernible] success quarter in Paris. So it will -- it has been impacted in this first quarter of 8% additional profit growth in comparison to the previous year. Additionally, the second layer of this positive growth has come from the acceleration of the renovation program with 2.6%.

The third key driver also has been the increase of our exposure in SFL today with 98.3% participation in SFL plus the acquisition of [indiscernible] quarter has been impacted positively of 10%. Also, [indiscernible] Carlos will cover the performance of our letting activity. We have delivered rental growth in comparison to the year December 2021. Also with a very positive release spread of 9%. All in all, the impact on the profit is 2.1% -- 2.8 % sorry, coming from the core portfolio and the renewal of our contracts. And on top, as I mentioned, all the liability management done in 2021 has had another positive layer of 9%. So as a consequence, our EPS of this first quarter is increasing 19% year-on-year.

[Pere Serra, executive]

Thank you, Carmina. Now to have more deep focus on what's going on in the company, Carlos Krohmer will step in to cover the delivery and operations section.

[Carlos Krohmer, executive]

Thank you very much, Pere. First on Page #19, a quick view on the market where we are. As you can see, our fundamental markets where we are that is basically in the city center of the 3 cities are performing very well. You see here the CBD vacancy ratios and what is more important than that, the Grade A availability.

As you can see in Paris, it's non -- there's only 0.4%. And in Madrid and Barcelona is around 2% what is available in terms of Grade A. On the other hand, take-up is increasing. Take-up has increased quite a lot in the Paris CBD. It has increased 70%. This is much higher than in the total market, but the total Paris market has increased 40%. But in the CBD even more. And in the Madrid and Barcelona markets, also the take-up has been quite high. In Madrid, it has increased 99% versus the quarter of the previous year. And in Barcelona, it has increased around 40% compared to the previous year first quarter. And this leads that we are at rental price levels of EUR 930 for prime rent, EUR 36.8 for prime rent in Madrid and EUR 27.5 for prime rent in Barcelona. I will come later on back on this.

The investment market also remains very, very strong in Paris [indiscernible]. So CBD plus city center, there has been a 64% increase and 34% increase of year-on-year total investment volume only in the CBD. So quite a lot. What is the assets that are being transacted, the high-quality Grade A assets. In Madrid, we have had a significant pickup. We have had a volume that is doubling the previous year first quarter figure. And in Barcelona, we had EUR 150 million and basically concentrated on the 22@ and looking basically at great assets. There, the main highlight would be that we see moreover international investments in Barcelona.

Moving then step to Colonial performance, if you see first overview all of the figures I'm on Page 20, quite healthy, quite strong and basically, this is on the back of our high-quality product portfolio. When we go more into detail on Page 21, the first thing that you can see is a very, very high letting activity in Q1, 74% above the first quarter of the last year. If we put it in economic terms. So combine this with the rental price that we have signed, it's even doubling the volume of the previous year's first quarter and all of it are really high-quality tenants. Also interesting to highlight, half of this letting volume is letting up available space or letting up vacancy.

Why is this so? Because of the product that we offer. On Page 22, you can see it quite clearly, out of the CBD, out of the Paris letting activity, almost all of it has been CBD and 7ieme. In Madrid and Barcelona also, the major part of the activity have been assets located in the CBD or in the 22@. And more interesting than that, here you see the maximum rent that we have signed, EUR 940. In Paris, this is higher than the prime rent consumptions are flagging for the first quarter, EUR 39 per square meter in Madrid. This is a post Q1, but has to do with some pre-let on our project and EUR 28, the highest rent signed in our portfolio in Barcelona, also EUR 0.5 above the prime rent reference. So really, our portfolio is setting the reference on rental prices.

On Page 23, you can see the occupancy profile, 95%. This is a healthy level. With this level, you have sufficient available space for future activity, very outstanding, Paris. Paris is full, 99%. So it's totally full. And here, you see another interesting part on Page 23, when we look at the take-up volume, it's not only much higher than the EUR previous year, it's the highest in the last 4 years regarding the first quarter and it's 60% above the first quarter letting activity of the pre-COVID world, which is a quite important element also.

So out of the vacancies that we have today in our portfolio, what is this attached to? We have 4.7%. 1.8% is renovation program in Spain. Part of this is already pre-let post Q1, and I will make some comments on this. The second part is renovation program in Paris. As you can see, it's almost fully let. Grenelle, that is just the remaining part to be let in March as of the date of this results release, is also fully let. And then the other vacant or available space is basically the CBD of Madrid with also some pre-lets post Q1 and the CBD in 22@ Barcelona and 0.6% in [indiscernible].

So last page on this section, I'm on Page 25, rental growth remains very strong, 4%, as Pere has mentioned, release spread at 9%, outstanding 21%. And I think the most interesting element on this page is where is our maximum rent and how does this compare with the Prime market rent of the consultants. So you can really see we offer here the product that sets the reference, and it is absolutely at the highest end of the market.

And with this, I pass to Pere regarding ESG.

[Pere Serra, executive]

Thank you. As Carlos mentioning, our next section is devoted to ESG, which, as you know, is a high priority for us, is where we've been working a lot for a long time and where we are also delivering. So we have a decarbonization business plan that is being executed. And of course, always a question is we say that we do this, everybody says so, how can we prove that we are being excellent at this level? And in this Page 27, where we are providing just 4 milestone 4 remarks in order to prove the degree of excellence of our ESG policies.

First of all, on the left-hand side of this page, we have this business plan of our strategies for decarbonization. While we have been working in order to get the size-based targets approval on this business plan with an objective, with a goal, with an ambition within the framework of 1.5 degree increase. Well, this is done. This is delivered. We are, as of now, the first and only real estate company in Spain to deliver that. We are 8 out of 35 IBEX35 with this ambition, where we have this business plan, which has been statistically validated.

As mentioned before, we have already been working not only on the asset side of our balance sheet, but also on the capital structure side. We already delivered regarding the bonds. All of our bonds are green now. Again, not many people can say so. We are the first and only IBEX35 company with 100% of our bonds, which have gone green. We are the first and only Spanish listed company with all of our bonds gone green and very well positioned within Continental Europe on this. We keep a lot of importance to this. It's not only a delivery. It's how we are positioned, how the company remains positioned for the immediate future, where we think that this is going to be extremely important.

Which other ways can we share with you that more or less approve the degree of excellence of our ESG strategies. While GRESB is also a widely well-known standard, we scored at a 5-star level. Our last qualification was 94 points out of 100, according to GRESB leader in the listed offices segment of Western Europe. For the investment portfolio -- for a development portfolio, we got 97 out of 100. That's the end or just the final stage of a very long strategy with strong momentum that allowed us to increase to 54% in 3 years our level of excellence according to GRESB.

And last but not least, if we talk about CDP, the Carbon Disclosure Project, there, we score with an A. That means the only office real estate company in Europe, only 5 or 6 companies in Europe rank this way. Only 12 listed companies worldwide rank this way. And all of this is because of this decarbonization plan that you can see on Page 28, we try to simplify our achievements in 1 specific KPI that we could share with you, which is the intensity carbon emissions per square meter, how many kilos of CO2 per square meter is Colonial generating. The last -- the most recent number is 9 kilos of CO2 per square meter, which again if we should compare -- if we could compare this with and the benchmark would be in the very high end.

Finally, the section 5, I think we've seen, let's call it, the past or the immediate path, you can see that the delivery is great, looking at the occupancy, looking at the letting activity, looking at the EPS, looking at any KPI. But it's very important to talk about the past, but it's even more important to talk about the future, and we would like to devote this next section to the future.

Basically, you will see that today Colonial has a number of elements which allow them to have strong visibility on a strong EPS growth for the next 3 years. With everything that we are working on as of today, with everything that is being agreed as of today, that would lead us to an expectation of EPS growth of more than 60% in the next 3 years. But let's be specific about this to see where the numbers come from.

Basically maybe this is one of the most important slides of this -- of our presentation. It's our Colonial particular stairway. And you can see here basically what is our outlook for the next few years. Our number for the end of 2021 in terms of passing gross rental income is around EUR 350 million. Our outlook, I was going to say our ambition. But, as you can see, it's more an outlook or more or less where do we probably see the outlook for Colonial in the next 4 years than anything else, it's above EUR 500 million.

And how do we go from EUR 350 million more or less EUR 334 to more than EUR 500 million, we are relying on 4 value drivers. First of all, you will see the status of our pre-letting regarding our project pipeline, which we expect them to contribute is close to EUR 70 million to a future rent EUR 68 million to be specific. And we are already delivering EUR 44 million. Our second level -- sorry if you hear a little bit of noise, but it looks like there's an alarm going on in our building. So we will work with it as we can.

Our second level in this particular stairway is what we call the renovation program. That is what we are expected to do in our existing buildings, not in our future buildings, but in our existing buildings that should contribute with around EUR 40 million, and we are delivering already EUR 23 million. Third level is our acquisition program. We've been delivering the acquisitions that we expected, that's contributing another EUR 20 million. And finally, the indexation and rental growth that should contribute in the future with EUR 35 million. Well, this is a particular outlook for growth that Colonial is going through.

I'm going to go very quick through this. First, value driver, delivery of project pipeline. This is beating our expectations. Some example, on Page 32, regarding Velasquez basically, you can see here that this is almost fully delivered, the pre-letting of this building well ahead our expectations. That is almost 16,000 square meters. On Page 33, you can see at Miguel Angel, which have been also fully pre-let to a global advisory firm, also ahead of schedule.

Putting all these in perspective in Page 34, you can see that out of a pipeline of EUR 1.2 billion, there's almost a vast majority of this, which is already being delivered. And as a result, out of EUR 80 million that we are expecting from this pipeline, EUR 37 million is already pre-let. In fact, EUR 13 million is already passing in July, EUR 16 million are under negotiation, only EUR 27 million are for the immediate future to deliver.

The second value driver is our renovation program, which is almost completed. On Page 35, there are a number of examples. Let's go to Page 36. The outlook is, again, quite positive. Our passing GRI has already gone from EUR 17 million to EUR 24 million, but we have already pre-let an additional EUR 11 million that is we are expecting EUR 47 million from this value driver first, EUR 35 million has already been secured.

Our third value driver in Page 37 is the 2 more recent acquisitions that have been delivered that are helping our future cash flow with an additional EUR 20 million. And finally, the indexation component, you know that our rents are fully indexed to CPI with a few exceptions but the vast majority, like 99%. This component is going to be also very important, being CPI, 8% in Spain and [indiscernible] 4% in France. I think that this is also going to be an important contributor of growth.

And so basically, that's what we wanted to share with you today. In Page 40, in the end, the summary is -- looking at the past -- recent past, important delivery of earnings growth, 26% in recurring profit, 19% on recurring EPS. This on the back of very important letting activity. And if we instead of looking at the past, we look at the future, based on these 4 levels, some of our particular staircase, very good progress to deliver something that will be equivalent to 50% EPS in the next few years.

This is basically what we wanted to share today. I would, again, maybe apologize because of the noise. But to be more specific, it looks like it's a fire alarm and maybe we cannot cope with too many questions today because of this, I don't know, call it, inconvenience or just recent news that we did not expect.

Maybe we have time to go through a couple of questions, and sorry about this unexpected event. Maybe let's start now with the final questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from Celine Huynh from Barclays.

[Celine Huynh, analyst]

I have 2 questions, please. The first one is on your like-for-like rent, your growth number. Can you help me reconcile your numbers because I'm a bit confused? First of all, you're introducing 1.8% like-for-like rental growth, Page 4 of the statement. According to the chart, it looks like you've included acquisitions, which should not be part of the like-for-like rental growth calculation.

Secondly, why is your 1.8% different from the 3% like-for-like? And then if I purely isolate the contribution from your core portfolio, your like-for-like rental growth was 0.9%. Can you tell us what was the contribution of indexation in this number? And then your like-for-like in offices -- it looks like your like-for-like in offices was stronger than the overall like-for-like. So can you give us more color about what's happening in retail, especially in Paris?

And then the second question, sorry about the questions. And second question is on your decarbonization strategy. Can you clarify whether your carbon neutrality targets include Scope 3 and if so, whether you Scope 3 includes carbon from construction and tenants' emissions.

[Pere Serra, executive]

No, I will answer very quick, and we can with you specifically do a call specifically technically that you get the figures down. First of all, the like-for-like is correctly calculated regarding EPRA recommendation. So it does not include neither projects, nor renovation, nor acquisitions. When you look at 1% growth, it's on the profit base. It's not on a revenue base. So it's there we are looking how much is the portfolio contributing on the profit base. So the like-for-like is correct. It's 3% and it's basically concentrated in our office portfolio that is 4.6% like-for-like. What we have in terms of temporary out layer is the hotel activity basically in France that is still driven by volatility and it's operationally driven on hotel occupancy, and this is basically the impact that is reducing the overall like-for-like. But all of the like-for-like is correctly and the office portfolio like-for-like is 4.6% of the price, of the volume, and we're happy to organize a specific core to walk you through the numbers that you get everything right. And any other questions?

[Celine Huynh, analyst]

Sorry. Can I go back again because I really don't understand why you're pointing out 1.8% in your chart, and it comes up as a 3% like-for-like. What is the 1.8% here?

[Pere Serra, executive]

I think maybe let's do tomorrow a specific format. That's correct. And you will understand very easily.

[Carlos Krohmer, executive]

I'm sorry about that. We have this specific problem of our fire alarm going on. I mean it looks not relevant, but it's actual fire. And so I've got a number of presentations in my life, but that's a new kind of presentation with a fire going on. So maybe you have time just for a final question and the rest we can then take place later. Maybe 1 final question, please.

[Operator]

The next question comes from Alvaro Soriano from BNP Exane Paribas.

[Alvaro Soriano-De-Miguel, analyst]

If it is the final question, it will be simple. What do you think of -- what sort of LTV leverage it is the right one for the current cycle in offices, Paris, Madrid and Barcelona? And should we expect more acquisitions to come in the coming quarters? How do you feel about the current interest rate environment linked with your balance sheet with your leverage.

[Pere Serra, executive]

You've been the right one because now we have the fire alarm stopped. But I start maybe answering the last part of your question. I think that we are going through a current environment which is quite particular because there are 2 driving forces. One is interest rates going up. The other is inflation even going higher than interest rates.

The first question for a company like Colonial is, is Colonial able to pass through this inflation to our clients? And our question is, yes, it is, not only because from a legal point of view, all of the indexation is automatic in our clients. But also because I think that real life, it has to do basically about to what extent your product and your client is strong enough or not so strong enough being in the high end, I think that allows us to do the pass through. And then based on that, if -- from an investment point of view, if inflation is at the higher end, that interest rate itself, that means entering into even more negative zone of interest rates, I think that it's something that deserves quite a deep analysis to see the impact on a company like ours.

Having said that, from the point of view of your question, which is actual, let's say, safety or strength of our capital structure. As you know, our question -- our way of approaching this is, first of all, all of this, it's more or less in our rating. Our rating is very strong. This takes into consideration everything that has to do with the specifics of our balance sheet. So not only our LTV, but the nature of our assets, the strength of our cash flow. I think that this gives you a first measure about this.

But the second point to stress about this is maybe what Carmina mentioned in the presentation. We've been working for a number of years to have an even stronger balance sheet. As you know, doing liability management to have longer and longer maturities with lower and lower interest rates. So as of now, it doesn't matter. It matters but besides what happens to the market in terms of interest rates that go higher. Our interest rate will not go higher for a number of years, and there will be no maturities for this. This means a value that it's -- would be easily calculated. This net present value of the interest rates that we are not paying.

On top of that, and this may be a more technical, as Carmina was mentioning, we have pre-hedged some -- a part of our interest risk that goes beyond the maturity of our bonds. That has also a significant mark-to-market value that as of today, I don't know, but will be in the range of EUR 200 million of something like this. So of course, generally speaking, higher interest rates may be deserve more prudent capital structures. But in a way, we've done the work before, and that means that we can live with, let's say, this safer environment in our balance sheet for the next few years because of this strategy that has been put in place before.

[Alvaro Soriano-De-Miguel, analyst]

If I can quick follow up. I'd like to know your view on the cycle, more specifically your personal view on how to read offices for the next 3, 4 years and try to link it with Colonial if it's going to be a net buyer or a net seller or neutral on the investment market for the next 3 years? Maybe too much philosophical question. And if I may also on indexation, out of the 3% like-for-like, how much is indexation in this Q1?

[Pere Serra, executive]

Look, indexation for us in our, let's say, past numbers, let me start by the end of your question. It just has a residual impact because indexation or CPI has shown very high numbers just very recently. A very rough estimate would be that if indexation should remain -- CPI would remain at the same level as it is today, by the end of the year, this should be adding an additional EUR 50 million or so to our profits and to our gross rental income that, let's say, on top of what we expected before. But this would be if inflation was to remain at the same level, and we revisited the contracts that are due during the rest of the year.

Then going to the first part of your question, our outlook for the future, I would differentiate, let's say, on the leasing side and on the investment side. On the leasing side, I would like to differentiate. I know that we are, let's say, maybe too boring coming also with the same kind of emphasis, but the kind of product that we are in sits in a particular world where the balance of supply and demand is very particular. The kind of clients, the kind of long-term approach of those clients with the pass of the growth of the economies, we feel, let's say, quite, let's say, comfortable with what we could expect on the leasing side and on rents.

On the financial side of the equation, I think that here that the situation is more complex because it's just what I mentioned before. It's a balance between what happens to interest rates and to inflation and, therefore, to real interest rates, which today it's still difficult to see. If we had to contemplate the -- just the spot numbers that we have today, that would mean negative interest rates, much more negative than they were a few months ago. And that would mean that real estate will remain even more as a safe haven because fixed income would be even more, as we know, no fixed, no income and that would be positive.

If real estate interest rates went to -- should go much higher while inflation becomes much lower, that would mean a normalization of the spread between yields and interest rates. You know that it's been very high for several years, that would mean coming back to normalization. In our view, this should mean neutral, let's say, consequences for yields if you look at average history.

So in a way, I wouldn't say that today the numbers mean fundamental negative KPIs for our business. Having said that, I mean the macro scenario is uncertain enough not to be able to forecast what may happen to those key drivers, to interest rates and inflation, which means that, on average, let's say, this manager should be more prudent than on average regarding their investments.

In this framework, we don't have a specific goals of investing significantly in the short term. I think we will be more concentrated in what presentation was about, which is in the delivery of what we have already in, which only with this, just based on that, we are able to deliver a very significant earnings per share growth in the next few years. I don't know if I answer with this because it's a very sophisticated question, a very complex scenario that would allow for a long, long discussion. But that's what I can say right now.

Okay. My final remarks, first of all, to inform you that we are safe so far, but we have to leave. Just save the date. Our Capital Markets Day will take place on July 11. So that will be the next milestone in our communication with you. So thank you very much for your attention. Sorry again for the incidents, and let's keep in touch. And we are available if not today at any other moment to go through your questions more in-depth, let's say, directly. Thank you, and have a good day. Bye-bye.