Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Inmobiliaria Colonial First Quarter 2023 Conference Call. The management will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions]

I am now pleased to introduce Mr. Pedro Vinolas, CEO of Inmobiliaria Colonial.

[Pere Serra, executive]

Thank you. Good afternoon, good morning, everyone. This is Pedro Vinolas speaking. Also with me Carmina Ganyet, Chief Corporate Officer; and Carlos Krohmer, Chief Corporate Development Officer.

I'm very pleased to share with you the results for the first quarter 2023. As you will see in a minute, I believe they are quite solid results and a strong cash flow, strong operations and a solid balance sheet.

Let me go now to Page #6, where you can see the summary of the results, and then I will go, as usual, more into details. We are -- have finished the first quarter of 2023 with a recurring net profit of EUR 38 million. It is 5% more. If we adjust for doing the right comparison in terms of continued operations, then the recurring net profit growth is 14%. The EPS, it's EUR 0.07 per share. It is 5% more, 14% more in terms of continued operations.

EBITDA, EUR 65 million, 13% more, 19% in terms of continued operations and revenues EUR 90 million, 11% more, 10% like-for-like. These are the main KPIs regarding the cash flow, which, as you can see, is quite strong.

In terms of operations, we have improved our occupancy, which was already quite high from 96% to 97%. That is 115 basis points more. So very close to the 100%. Our letting volume that is 13% more than the previous quarter, more than 45,000 square meters, a 6% indexation for our existing contracts. And in terms of rental growth, 6% release spread, 3% growth on the December '22 ERB, that is 3% in a single quarter.

Finally, on the balance sheet management side, we remained with S&P credit rating confirm at BBB+ stable outlook. As a coincidence, today, S&P has delivered in written their opinion about us. Liquidity remains above EUR 2.5 billion. All of our debt remains 100% at a fixed cost. And this cost, the cost of debt is just 1.67%. So a solid balance sheet, strong operations and cash flow.

Let me summarize what's going on at least this quarter and which is quite consistent with what we saw already last year. First of all, the obvious comment is that Colonial remains delivering very strong cash flow growth with full pricing power. In this sense, we achieved one of the highest gross rental income or net rental income like-for-like growth in the sector.

As we will see later, this double-digit growth rate, it's quite higher than the rate of growth that we used to have in recent months and years and clearly above our peers. So we show a leadership at this level coming from our very well-known leadership position in terms of polarization.

We continue to deliver a perfect inflation hedge. Colonial is capturing the cash flow growth coming from indexation in full. As you know, the game is now, now that interest rates are already up because inflation is already higher. The question is who's able of delivering an inflation hedge with cash flow that grows together with indexation, but this is our case for this quarter than it was for the last year.

All of these excellent performance in terms of operations have also, as a consequence, our performance in terms of occupancy. Colonial is improving its own occupancy, which was already very high. And not only this, but again, we are outperforming the market in terms of this ratio of occupancy or vacancy. And we have the highest occupancy among our peers as of today. So good operations, good data on occupancy.

Now going to the balance sheet issues. I just mentioned that today, S&P confirmed our BBB+ credit rating, which is very good news. Let's not forget that we are at the moment of the market where maybe 50% of the market is getting [ language ] of negative outlook. We remain same -- we'll remain strong in terms of our balance sheet. And this is because of a number of issues and let's just mention 2 of them.

First, strong hedging profile, which keeps us -- which keeps our financial costs under control. Not only under control, but in very, very good terms for the next few years. And also with this solid balance sheet position is because of the outcome of our disposal program that has already been completed in rough terms, as I will mention later, the Colonial 500 disposal program has been completed. And particularly, it has been completed again in line with the NTA valuation, in line with the appraisal results.

So all in all, a set of very good news, very good performance, better than the past, better than the rest. Now let's go into details. Let's go to the next section on financials.

[Carmina Cirera, executive]

Thank you, Pere. In this section, we are going to see in more detail the main financial indicators. The first is, as you see in Page 9, a strong profitable growth in all metrics. Gross rental income increasing 11%, 10% like-for-like, up to EUR 90 million as well as a net rental income [indiscernible] growth like-for-like 11% and EBITDA with EUR 65.4 million, increasing 13%. And considering the impact of the disposal, as mentioned in the continued operation, this growth would have been 19%.

Consequently, the recurring net profit increased 5%, 14% considering the continued operations. And the earnings per share as well shows a solid growth of 40% continued operation, 5% in actual terms.

What has been the main driving forces of this EPS growth? In next page, you can see the recurring EPS of continued operations increasing by 14%, EUR 11 million almost. On top, we have a negative impact due to the disposal achieved in this quarter of EUR 4 million. And financial cost negative impact of EUR 4.7 million due to the fact of the rates increasing, but as you can see later on, the impact of this financial cost has been only increasing 26 basis points when the market has been increasing more than 350 basis points in interest rates. You would see in more details in the following pages.

Consequently, 5% recurring profit growth, 14% continued operation and the EPS guidance, thanks to the first quarter results, keeps on track as we released in the annual results when we release the EPS guidance.

If we go to the top line, the gross rental income, you can see here the main impacts of this growth of 11%. The core portfolio contributes with 9% growth in revenues, basically, back of the superior pricing power. Additionally, the project that has been delivered during the first quarter is adding 3% to the gross rental income. And additionally, on top the acquisition of Pasteur mainly contributes with 5% growth in the revenues.

If we go to the market and what has been basically the main impact and the main sources of this growth in different markets in the following page, you can see that Paris, Madrid remains very strong in terms of like-for-like growth, outstanding Madrid with 16%. Barcelona remaining flat in the first quarter.

And the main impact of this gross rental income basically is a combination of indexation. So this 8% price impact, half of this pricing power is coming from the indexation of the updated all the contracts at the rates of the indexation in France and in Spain. And on top, the occupancy has been contributed positively with 2.3% outstanding the occupancy in Madrid.

If we go to finally in the capital structure, as Pere mentioned, S&P has confirmed the BBB+ credit rating with a stable outlook recently. So as you can see, the interest cost of debt or financial cost is in the low levels of cost of funding among peers. We have a significant interest expenses protection, thanks to the hedge and the fixed cost of debt.

And as you can see here, since 2021 and 2022, the -- since last year, sorry, the financial cost has been increasing 26 basis points from 1.4% to 1.67% when the market has been increasing more than 350 basis point. This is thanks to the fixed hedge cost of debt strategy.

Thanks to also the disposal, the loan to value has been significantly improved, less than 37% loan to value in this first quarter. And as you can see here also, the profile of debt maturity shows a very strong stable debt maturity profile with 75% debt maturing after 2026 and with a significant liquidity covering -- liquidity position covering almost 2x the debt maturing in the 2023 until 2024.

So consequently, the limited debt maturities, the large pre-hedge position and significant also secure liquidity strength Colonial debt service and mitigate any financial risk for the following in almost 3 years.

Carlos?

[Carlos Krohmer, executive]

So thank you, Carmina. A quick look on operations. I'm on Page 15. As Pere already mentioned, this quarter has been extremely strong in letting activity, more than 45,000 square meters plus 13% versus the previous quarter. This is quite substantial, taking into account that we are already at high occupancy levels and have less and less space to be offered. Most of this has been vacant space. So we have improved a lot, 115 basis points the vacancy profile and we have locked in long-term contracts, 7 years until first exit and 10 years of this contract expiry.

When we go on to Page 16, go a little bit more into the detail. Here, you see that 27,000 square meters or 60% out of the letting activity in the first quarter has been new lettings, so new spaces. And this, at the end, as a consequence of a very significant occupancy profile, especially in Madrid, where we hit now 97%. In Barcelona, we have improved by 355 basis points. In Paris, we are remaining at a full occupancy close to 100%.

If we go into the next page on Page 17, where is the vacant space located in our portfolio out of the 3.3% availability? Half of it is scarce space of high-quality product in the CBD of our portfolio; in the CBD of Paris, 0.2%, 0.6% in Madrid. Part of this is Velazquez what we have already, as of today, let off a significant chunk and 0.6% in CBD Barcelona. The rest is entries into operation, especially in the 22.

If we go to Page 18 and look at performance, how we are signing, which trends we are signing? From the first indicator on the release spreads, we are remaining one of the highest release spreads in the sector, 6%, when you compare with other people that have reported. This is an extremely good result, especially driven by the very strong pricing power and release spread in Paris that is at double-digit levels of 10%.

On the ERVs, we are remaining and maintaining ERV growth. Just in a quarter, we have increased already 3% because you have to take into account that this 3% is rents that we have signed comparing with the very recent market rent references of the appraisal of December 2022. So just in 1 quarter, an increase of 3%. And in Madrid, really outstanding 8% increase. So really, we're really quite happy and confident with how it's going on in that portfolio.

[Pere Serra, executive]

Thank you, Carlos. Maybe I would like to come back to my initial comments and go more in deep with providing some visibility on the strategic angle of these results. I'm in Page 20.

As you know, Colonial is a company which, for a long time, has had a focus on Prime CBD, which means not only Prime assets, it's Prime clients, it's Prime contracts. It's about targeting the people, the companies that today have a behavior, a clear receiver, which is to secure the best assets more than ever. And in current market circumstances, what we are seeing is that on the back of this polarization trend, there's quite a very good tailwind for our business, the way we are approaching it.

We've seen in the presentation today that demand -- the take up this quarter has been double digit better than the previous quarter, which, as you may remember, was already a fantastic year, the year 2022. So demand has been in terms of square meters, much better. Occupancy has grown even more at the moment that we were already at 97%. Rents have improved. So everything put together, what means is that our productivity is performing very, very well.

In terms of like-for-like in this Page 20, you can see that this quarter, we had 10.3% like-for-like in our rents, which is a lot more than we saw in the previous 4 years. As you can see, for both gross rental income and net rental income on the left part of this chart and which is also more better than what we can see in our peers either if we look at the median or the average of our colleagues. So I think that this strategic difference is paying off.

In a very usual way, you can feel this on Page 21. When you look at these pictures, I don't know what else we could add in terms of how these buildings are performing. You can see where they are. You can see how much they are looked for by the market, how much people like them. And in the end, what kind of occupancy we do have.

Implicitly in these numbers, Page 22, what's happening to us is that there is no debate about us passing through inflation. There's no debate about pricing power because our performance is even better as has already been disclosed, discussed before by Carmina and Carlos.

But as you can see in this table on Page 22 on the left, we are capturing indexation at a level of 6%. We have already a cumulative impact year-to-date of 3% just in 1 quarter. So -- and we have another 3%, which is to crystallize follow-up in further during the rest of the year.

So in this context, we are France today, the last available number is 6.5% ILAT. In Spain, is a 4.1% just at least last week. We are securing that our cash flows reflect this accordingly, which, as I always say, is the other side of the coin of interest rates going higher.

Page 23 is just to say that all of this tailwind in terms of cash flow is coming not only at the level of our existing portfolio, which is already delivering its yield, its cash flow, it's already coming more and more from our project pipeline, where we have already 6 projects out of 8 delivered, and there are 2 more to come.

News -- recent news in the project pipeline, where that we finalized Plaza Europa 34. This building has been delivered as expected in terms of cost, has been delivered very well, fantastically well in terms of occupancy because it's fully pre-let by the group of [indiscernible] and it's already up and running. So now our efforts remain only concentrated in 2 projects, which is Louvre Saint Honore and then Mendez Alvaro Campus.

Louvre Saint Honore, as everybody knows, has been pre-let already, and we have just to deliver the project to our tenant. This is happening this year, is happening in the second half. It's happening earlier than we expected. So I think we'll have a positive variation on this, and is happening without any deviation in terms of cost.

And then the remaining issue for next year, which will be Mendez Alvaro, which where we are concentrating now our efforts in terms of leasing. All in all, that means that -- in our cash flows, there are EUR 34 million that is coming analyzed from this pipeline, but we have more than this to come. We have EUR 55 million, which is already secured. And on top of that, an additional yield that will come mainly from Mendez Alvaro that will yield up to a total global for all of the pipeline of EUR 82 million, which only a small part of this is in our current cash flow. By the way, this is 6%, 7% yield on cost, [ 16% ] yield on CapEx.

Page 24, just a reminder of where our efforts are, Louvre Saint Honore, as I just said, with a 4-year contract already signed. And here, the news is that we are delivering this project through SFL, which is doing a fantastic job earlier than expected. Mendez Alvaro Campus on track and represent new project in the horizon for a new office complex in Paris.

Maybe my final comment would be on asset management and the way we are approaching our balance sheet. As you know, we are quite consistent over time. And what we have been doing not only this year, but in the past has been to always work in a trend to secure the best rating for the company. We've done relevant number of disposals in recent years.

In this Page 25, by the way, you can see that always at a significant premium on gas. And in the last 12 months, basically in line where we see the expertise with our gross asset value. We've delivered this sales of approximately EUR 500 million. That's part of our strategy of being a net seller, 2 things in mind: first of all, with this, we are enhancing the capital structure of the company; and number two, we are providing repeatedly examples of arbitrage between what's the value of our transactions and what is the value that we see in the stock market.

So basically, this is another way of providing value to shareholders that so far this quarter has been very successful, and we probably will keep on growing in the same direction in the next few months.

Final remarks on Page 27, a little bit of a summary of what we've already seen. Things to be highlighted, main takeaways from this presentation. Our EPS going up 14% on continued operations. So comparing the same set of assets. That's the trend of EPS, which means that we have been able to deal with divestments without hurting our EPS. This is because the underlying strength of the market is quite high, and this can be summarized in a double-digit rental growth number 11% like-for-like for net rental income on the back of very strong demand, on the back of increasing occupation. An 11% like-for-like, which is at the high end of our history and at the high end of our peers.

As I just said, occupancy going even higher. It's difficult when you are at 96% to go higher. You cannot go very much higher than this, but we went a little bit, 97%. And all of this trend of strong demand, strong occupancy also in a framework of additional cash flow coming from indexation and coming from rental growth, which remains relevant.

The other takeaway that we just saw pipeline delivery almost completed, which is about to deliver significant future cash flow to come. And finally, good strength at the level of the balance sheet, disposals plus outstanding financial hedging and pre-hedging, securing a low interest rate. All in all, providing a strong balance sheet outlook, which has allowed us to have confirmation from S&P about our rating level just today.

Based on all of this, as of today, it's just the first quarter. So the first quarter usually means that we should be more prudent than usual and more when we go in the second half of the year. But as of today, we can only do a confirmation of our guidance for the EPS of this year '23, which means EUR 0.28, EUR 0.30 per share. And as is already well known, in the short term, we are going to submit to our General Shareholders Meeting, the payment of a dividend fully in cash of EUR 0.25 per share, which means a 4% growth year-on-year.

This quarter, you know that it's not the quarter where we go through the revaluation of the assets, which in our sector happens in June and December. We can only provide strong evidence on operations, also a little bit on balance sheet management. But I would say that the summary of what we are doing today is that is quite satisfactory for us.

This has been the presentation. Thank you. And now, as usual, we are open to the questions you may have. Thank you.

[Operator]

[Operator Instructions] We have a question from Jonathan Kownator from Goldman Sachs.

[Jonathan Kownator, analyst]

Three questions, if I may. First of all, could you help us understand what's happening on the transaction market. I understand there's processes happening in Paris, in particular, what is the feel in terms of asset valuations, yield increases, the number of investors obviously concerned that prime assets could be priced the most because they have very low yield in tariffs. So a bit more color on that would be helpful. And then we'll go through the other questions maybe after first one.

[Pere Serra, executive]

Thank you, Jonathan. No, on our side, just to confirm maybe that the current outlook, first of all, has been, for us, quite different in France and in Spain. Maybe in Spain, there's been a much more visibility for an investment market where our assets are very appealing for family offices. And basically, in that segment, we have been able to deliver the most part of our divestment program and explains most of the EUR 500 million that we have already done.

On the other hand, Paris remains quite in a transition mode where no activity is happening. I think that basically, my view is that investors are trying to assess how to underwrite an asset, and they still probably are in the process of having more visibility on what cost of capital, inflation, rental growth you can expect from the assets.

Of course, they come maybe with some much more strict numbers, or let's say, much more demanding on the pricing that they have. But then what happens is that on the other side of the table, there are no willing sellers at that price for those assets that are so unique and replicable.

So as a summary, I think that this first quarter, and I would say until today, investment markets in France remain quite in a transition mood trying to find a repricing maybe at a higher level of yields, but still with very low visibility.

[Jonathan Kownator, analyst]

Okay. That's clear. Second question, maybe, obviously, your operating performance appears to be strong. Your interest cost hasn't moved too much and you obviously are seeing good level of hedging. The question is to what extent your guidance would be conservative and obviously, it's only first quarter. But you're saying that there's more positives. The question is, are you -- is your guidance has to be conservative given the strength of the market? Or are you expecting deterioration from here and your metrics maybe to not be as strong from COVID impacts perspective that would have run them until now?

[Pere Serra, executive]

Yes, Jonathan, it's very difficult because, as you know, at this time of the year, we usually have to be more prudent than usual. So we maybe are more conservative than anything in whatever we may say. As you see, the current generation of cash flow is very good. But I am not in a position to say that the guidance should be revisited.

I think I have to stay where I am as of today because at this time of the year, there's still too many uncertainties on the cost. There's nothing happening to our assets in terms of more weakness, recession, nothing as of today, but because of everything that's going on, I think that we have to remain with this outlook in terms of guidance for the rest of the year.

[Jonathan Kownator, analyst]

And perhaps if I can expand on this, obviously, your like-for-like rental growth is quite elevated, obviously. I appreciate there is inflation coming through, but those levels are substantially above inflation. Can you help us understand whether that comes from additional rental from services that were previously in sort of soft refresh? Is that just because of the reversion? Or why is the incremental like-for-like rent growth versus new inflation, where does that come from? And ultimately, should we expect that like-for-like trend back to inflation quite quickly, given your [indiscernible]?

[Pere Serra, executive]

Maybe Carlos is taking this one.

[Carlos Krohmer, executive]

Yes. Look, obviously, it's a combination of several things, but we have been on a recurrent basis, always repositioning and putting the assets in the best shape. So this we are doing as a continuous policy. And this allows us to really capture then that extra rent. And when you look into the ERV growth, into the like-for-like growth, into the [indiscernible] spread wherever you look at, you will see that basically the assets that are leading the trend are especially the Paris assets. There, we are having the strongest growth. And then as we put the brand-new additional product for the market, and this highlights also explains the figure in Madrid, we are there also capturing significant market rental growth.

So it's a combination of reshaping the things of capturing really the maximum rent in the market by putting the supply of the best product. But as you can see, it's well in excess of CPI. So we are generating in excess of CPI on the like-for-like, a 5% extra like-for-like cash flow growth.

[Jonathan Kownator, analyst]

Okay. And maybe last question regarding LTV and disposals again. I mean do you have a sort of target where you want to get to, obviously, you've done this. You're doing this EUR 500 million program. Where should we expect -- where should we investors expect your LTV to be positioned as a sort of target at this stage?

[Pere Serra, executive]

I think that to have a view on the LTV, that is difficult because that depends a little bit on [indiscernible] that we have to see how further develops during the year. In terms of divestments, I think that we will be monitoring the market, and we may do more in terms of divestments because it has this double logic, first of all, to enhance a little bit the LTV, it's good, it's well received by the market, both from the debt market and from the equity market.

But then on top of that, today, if you sell the equivalent of 12 what the market is pricing at 5.6, I think it was today, it's a no-brainer. So if we can do more of this, we'll be -- we have a few transactions that we are working on as we speak, although, let's say, a smaller volume. But just to answer your question, we will be still doing a little bit more if market conditions allow us to do so in terms of divestments.

[Carmina Cirera, executive]

Sorry, sorry, this is Carmina. Jonathan, and also, I think it's not only a matter of loan-to-value because the fact that we have this I would say, hedge and [indiscernible] position in interest cost, even with 37% or 39% or whatever loan to value, we don't have any deterioration of the debt services. And this is why the rating agencies approaches this criteria.

So of course, decent loan-to-value but it's not only loan-to-value because you can have a very low level of loan-to-value and a high risk of derivation of the debt service because of the floating rates.

[Jonathan Kownator, analyst]

Sure, of course. Maybe one final conceptual value on your disposal program. Would you rather sell assets, maybe at the lower quality end of your portfolio, slightly high yielding, then would you consider the topping of your portfolio low yielding or would you even have the ability to sell assets within the cash flow at this stage, may be development or land lord?

[Pere Serra, executive]

Yes. Look, that, of course, it's [indiscernible]. But in theory, the packing order is, first of all, it will have a land lord, which is secondary than we sell. It has to be a good asset because you would not sell this at appraisal value if it was not good, but -- number one, we've already done a little bit of that, but empty assets or land, and we may do more of this.

Next, it's maybe secondary, Spain, which is in the list. It's not only that we are not so fond of this for the long term. But usually, in many occasions in Spain, you have a short-term world that we don't like but this impacts negatively in, let's say, in our pricing power that we always are paying attention to. That will be second and would apply more to Spain than to France.

And finally, we do know that these days to do smaller than bigger works better. So I think basically, this is the case, then it comes one by one, and depending on the analysis we may choose one asset or the other.

[Operator]

We have a question from Veronique Meertens from Kempen Investment Management.

[Veronique Meertens, analyst]

Congrats on the solid results. And just one question for me. I believe on the 6th of June, in Paris, they are voting on a new urban planning. I think it could make it mandatory for specific assets to transform 10% into social housing upon disposal refurbishing. And I was wondering how this -- if it actually applies to one of your assets? And what's your view is towards this and how this would also impact [indiscernible] the 30% same project that you just announced in the presentation?

[Pere Serra, executive]

Sorry, Veronique, we could not understand very well. You are referring to the change of administration that happened in Spain regarding residential. Is that -- that was your question because we could not hear you very well.

[Veronique Meertens, analyst]

No, it's about Paris. So they are voting on a new urban planning. About 10% of social housing on specific assets?

[Pere Serra, executive]

Yes, the Paris one, okay. Yes, the French word is Pasteur. That's a word that's using these days just for sort of clarity so for everybody is on the same page. What Veronique is referring to is its recent changes in the urban planning in Paris, which means for a significant number of assets in Paris that the future may be more linked to residential than to office which, in many cases, maybe detrimental in terms of valuation. And that is -- may apply to several hundreds of buildings in Paris.

What I can say today is that according to our information sources, there are -- there's no single impact of this new urban planning framework for our assets in SFL. So let's say that these -- the assets we owned, the city believes that they better remain the way they are. Let's put it this way. So as of today, what I can tell you is that we don't have any visibility or I could confirm that there's no relevant impact in our assets.

[Veronique Meertens, analyst]

Okay. That's very clear. And for instance, for that new project 30%, if that's now announced in the pipeline or that you're looking into? Would that apply to that one?

[Pere Serra, executive]

Yes, it does -- [indiscernible] the planning is not affecting the 30% either. So we don't have, let's say, news from this [indiscernible] the impact we design or the rest of the assets of SFL as of today.

[Veronique Meertens, analyst]

Okay. That's very clear. And maybe one other question. Yes. So operationally, Paris definitely stands out again. You see at also the recent spread in more so in Madrid are lagging a little bit. Could you maybe highlight are you clearly seeing in the market from an occupational perspective?

[Pere Serra, executive]

I think that what we see today is, as you just said, Paris is performing super strong because simply there's no available supply for Prime CBD. So leasing team meetings are quite boring in SFL because they are -- we are preparing very much for our future, but today there's nothing to happen. There's only 0.4% vacancy in Grade A buildings. Madrid slightly higher, 2.2% Grade A vacancy and the dynamics are very good.

Barcelona, I think that we have to be maybe more specific Grade A availability. It's also scarce. So it's only 1.4%. Maybe what's happening in Barcelona is that particularly in 22@, the balance between the supply and demand is less strong than you can see in other cities, in Paris and in Madrid, and that explaining that why the occupancy rates are a little bit lower than that, but that also is in a framework where our occupancy in Barcelona has improved from 82% or 83%.

And I think that still CBD is attracting very much the demand in Barcelona so our occupancy is growing. But the dynamics of demand and supply in Barcelona I think that are not as strong as in Paris or Madrid.

[Operator]

And we have a question from Markus Kulessa from Bank of America.

[Markus Kulessa, analyst]

Yes. I hope you can hear me. I wanted to follow up with Barcelona and the not so tight supply demand. Is it why the like-for-like is flattish in Barcelona? Maybe you can just explain the Slide 12 between -- because I understand the minus 10 is due to assets going into developments, but the flat like-for-like, I struggle to see where that comes from?

[Pere Serra, executive]

Okay. Carlos is taking this one.

[Carlos Krohmer, executive]

Yes. We have it. Basically, you can see it on Page 12. We are having a solid price. The increases of our gross rental income like-for-like in Barcelona is increasing by 4% in terms of pricing, but we have, on the other hand, on a year-on-year comparison, first quarter of 2023 with first quarter 2022, a little bit weaker occupancy profile. So this is not one is offsetting the other. So we are flat. So we are having basically at the moment, a little bit weaker occupancy profile than previous year -- the first quarter of previous year in Barcelona.

[Pere Serra, executive]

If I may add something, you know that our share in Barcelona is quite small. So we own a very small part of our [indiscernible] management, which are based in Barcelona. And as a consequence, a small change in 1 asset or 2 assets, that has an immediate impact in the numbers of a specific quarter. So probably this has more to do with the asset A or the asset B than the general trend in the market probably because it's been so small, it's different that it would be if we talk about a much bigger market like Paris. It's more, I think, individually originated than a very, let's say, a wide market trend, in my opinion.

[Markus Kulessa, analyst]

Yes. Okay, clear. On staying in Spain, the releasing spread seems to flatten or to be flattish in Spain. Does that mean that at the year-end, post indexation, we might have a negative leasing spread in Spain?

[Carlos Krohmer, executive]

Look, we -- as we always have said previously in previous webcast, we do not really guide on future release spread. Obviously, what we can see is as Spain started much earlier, no indexation because it was CPI driven, not ILAT driven with higher upwards revisions that we are catching up quicker. We're catching up much quicker the release spread that we could have between passing rents and ERV.

But I think we should also look at another interesting data point that this year the growth that we are experiencing in our office portfolio. And we have experienced just in a quarter plus 3% and in particular, in Madrid, plus 8%. What's going to wait more at the end, we would see because we are continuing also not in high indexation levels. But so far, we are sustaining a good positive release spread. And if you compare with other people that have released first quarter, much better than many others. So this is what we can say about this today.

[Markus Kulessa, analyst]

Okay. You said I didn't saw the split on ERV. So you have positive 4% to 8% year-over-year in Spain in Madrid and Barcelona?

[Carlos Krohmer, executive]

In Madrid, it was 8% especially highlighting Madrid, the yearly growth in 1 quarter of April.

[Markus Kulessa, analyst]

Okay. Do you have an update? Maybe I missed it earlier on Mendez Alvaro? You say it's on track, but do you have anything you can share?

[Pere Serra, executive]

No, Markus, I just said that this is going through its regular normal ordinary process, but no relevant news at this point. So the typical flow of visits and conversations but nothing relevant at this point.

[Markus Kulessa, analyst]

Okay. And just my last one, sorry. On the Paris change in regulation, which was addressed before. So you're just saying you don't have -- you cannot say that it won't have any impact. It's -- you just don't know yet how the law will look like and if there will be an impact?

[Pere Serra, executive]

I wouldn't like to be too specific because I'm not involved directly. But as far as I know, there's been no disclosure yet of the specific list of assets that could be affected by this, but our information and expectations is that none of the assets of SFL is going to be impacted. It's still something that is not confirmed but that's our best guess of where we might be in the short term.

[Operator]

We have a question from Fernando Abril from Alantra Equities.

[Fernando Abril-Martorell, analyst]

I have 3, please. A follow-up on like-for-like rental growth. So you posted in Madrid 8% positive impact from volumes but there has been 4 percentage points improvement year-on-year. So I would like to better understand this 8% impact, which looks high for me?

And also linked to occupancy in Q1, which has been strong, I would like to better also understand the impact from asset disposals on your occupancy, especially Madrid?

And then third question is on your reversionary potential. I don't know how much reversionary potential is left based on prices after the strong indexation you have carried out over the past few quarters?

[Carlos Krohmer, executive]

Look, I will do a quick answer to this. And I think when it comes to more specific number crunching, happy to do a call with the IR. So on the like-for-like, I think it's very clear on Page 16. What you can see here is a like-for-like gross rental income in the P&L of the Madrid portfolio is plus 16%, and the split is plus 8% comes from pricing. Pricing, part of this -- significant part of this 4.5% is passing through indexation during the last 12 months. You have to take into account that this conversion is first quarter this year with the first quarter previous year. But on top of this, we have also not captured in addition to the indexation, rental growth that increases the gross rental income of our assets in Madrid.

And then as you can see also on the vacancy figure, we have improved quite a lot the occupancy of the Madrid portfolio. When you look at the map, you're not going to find any single asset that is significantly below 90%. Mostly they are 100%. We have also a page of this in our webcast. So we have also a quite important improvement in occupancy. And these 2 elements together give the 16%.

On top of this, but this will feed further rental growth, we are continuing to sign good brands that will crystallize in future. So this is what we can say about it. Regarding the more detailed P&L impact on the disposals, we have showed here already the figures, how they are grouped in the different blocks and a little bit more of color on this, I would then suggest that you do a specific call the IR team not to take too much time.

[Fernando Abril-Martorell, analyst]

And the rest of questions, the impact from asset disposals and occupancy and also the [indiscernible] potential left coming from prices?

[Carlos Krohmer, executive]

I think this is also a very detailed question at the end. So the assets that we sold, a part of them were fully occupied, others were not fully occupied. The consequence of all of this is that we are today at a good rate, but we are basically at a good occupancy rate because we have let a lot of vacant space, not because we are factoring out [indiscernible]. But if you can further clarify any detail, if you want, you can go to the IR.

[Pere Serra, executive]

Go to the next one, maybe?

[Operator]

Our next question comes from Florent Laroche from ODDO BHF.

[Florent Laroche-Joubert, analyst]

Yes. This is Florent from ODDO BHF. Yes, I would have a follow-up question on what you overall all said. So as a consequence of your disposal plan and the increase of interest rates, could you remind us what could be the expected growth offshore cost of debt? And maybe also how you are looking at the trajectory of recurring EPS due to the disposal plan? So are you looking for a positive growth of your recurring EPS? Or are you looking more today at preserving your LTV ratio?

[Pere Serra, executive]

Yes. Look, you mentioned something that -- look, it's a good opportunity to refresh and that is that when we divest and we go through a number of disposals, I think this is very accretive for the company. It's very good news. And of course, it has some -- they have some impact on EPS, and this cannot be perceived if the company was performing more poorly. So that's the logic.

But let me be more specific. We have been disposing of, as you have seen, EUR 500 million. After that, we are giving -- providing for a guidance of EPS for this year, which is not going down compared to the year before. So in other words, I think that the detrimental effect of the disposals of EPS is compensated by the higher strength of the market. And we don't see, as a consequence, any downside in the EPS. We remain close to EUR 0.30 per share.

Another way of looking at this is that if you instead of EPS, you would look at the dividend per share, I think that we have a consistent policy of growing our EPS. Traditionally, it has been always double digit. We made 2 exceptions, what was in the year of COVID, the other has been now which we are only doing 4% growth. But I think that anything we may do on the disposal side is consistent with DPS, dividend per share growing. And as I said, EPS in the short term, which is the maximum we can say today, the guidance is a good one at the level that we've mentioned.

Going forward, I think that what will happen to our P&L is, as you mentioned, very much driven by the management we have done of our debt profile, which mainly means that today, we have a cost of debt of 1.6%, 1.7%. And then we have all of our debt fixed and hedged for a number of years. And then we have a pre-hedge for the year after, which means that what do we know today is that the cost of debt that is 1.6% and Carmina may step in and correct me if I'm not too precise, but will go up in the next 3, 4, 5 years, but to a maximum of 2.2%, 2.3%.

So if anyone would do a projection of our cash flows should do so with the assumption that our cost of debt for this period will remain at this very low level. And let's -- and this will be for the next 5 years.

After that, let's not forget that we have pre-hedged after that initial period, a very relevant part of our debt, which means that our cost of debt later on will also, let's say, much more competitive than the rest of the market. And we will have the consequences that we may imagine for EPS, but we cannot be so specific for the EPS so much in the long term.

[Operator]

We have a question from Beltran Palazuelo from LTV Europe.

[Beltran Palazuelo, analyst]

I have one question. Pere, you were mentioning that if you -- if the company was able, maybe there will be more divestments. My question, my philosophical question is, at some point, in the near future. If the company is able, let's say, to divest a good magnitude of assets with that apart from, let's say, reducing debt, is there a possibility that the -- let's say, the investment opportunities are not as attractive as buying back shares that the company at some point, if it's able to divest a certain amount of assets, does a big buyback because it seems that let's say, the values of where it's trading against your current NAV or, let's say, or even if you put the assets minus 20%, it's still, let's say, very depressed.

So is the company going that way or it refers to, let's say, to reinvest the possible proceeds of divestments to keep growing the FFO long term?

[Pere Serra, executive]

Yes. Look, very good question and also very difficult to answer. First of all, let's say -- let's do the following statement, no? We are very much comfortable with our assets for the longer term. We don't see that we own any stranded assets, assets that are going to suffer, assets that are not going to generate a good unleveraged IRR. Most of them, they are. And so we -- in the long term, we are comfortable with what we own.

What happens is more tactical. Today, if we sell 2 things happen. First, we reduced our debt. At the moment, that there's a lot of sensitivity about this. Maybe at the moment with less sensitivity, there is not so much appreciated. But at this moment, we know that this has an impact of enhancing the perception of our shares.

And number two, it's also a function of the market. If the markets are pricing us where they are today and we are selling at NAV. I think that, as I said before, it's a little bit a no-brainer. So there are 2 reasons for selling today if the market is there.

Now as you are suggesting, it's true that it may come a moment where you can say, I am already in a situation where deleveraging is not accretive for shareholders. I could think about different users for the proceeds. And this could be investing in on assets or buying back the shares.

I think that what would be our answer if we came to that moment, it's still unclear, but I would say that today, the gap between the stock price and the selling price of the assets, being what it is, that it's quite an incentive to go into direction of buying back shares. But I think that it's a discussion that's still too early for us.

I think as of today, we are not in that -- we are in a mode of slightly enhancing the capital structure. So protecting the company more than anything else. And so therefore, this discussion will come at a later stage. As of now, we see ourselves mainly being simple net sellers in order to produce some upside in NAV and additional protection on our capital structure.

[Beltran Palazuelo, analyst]

Maybe if I may follow up, my question is, is a company, let's say, prepared if there was an opportunity to divest EUR 1 billion in assets at, let's say, close to NAV, is the company prepared, let's say, intellectually to, let's say, to reduce EUR 400 million in debt and to buy back EUR 600 million in sales. So is a company prepared to be, let's say, smaller, let's say, with an enhanced NAV or -- not there, yes?

[Pere Serra, executive]

Yes. Intellectually, as you say, what you say makes sense because in the end, it's about creating value for shareholders. So we don't have any problem in going in this direction if market circumstances are there. But as you say, it's a more, let's say, intellectual level, at a more strategic high-level view that regarding short term. But I agree with you.

[Operator]

And lastly, we have a question from Marie Dormeuil from Green Street.

[Marie Amelie Dormeuil, analyst]

I just had 1 question with regards to Rives De Seine project. Just want to understand a little bit better. So I assume the tenant is vacating the asset. So do you need a catalyst, [ EDF ], for example, a pre-let to launch the redevelopment? Or will you go speculative? The reason is because potentially this asset is a little bit outer of the very prime areas of the Paris market. So I just want to understand here.

[Pere Serra, executive]

Yes. First of all, we -- our outlook, our agenda is that we will probably come with a more precise agenda [indiscernible] in the presentation in the first -- for the first half of the year in July because at this moment, we are going still through the process of evaluating the details of this project in the future. And we know that many years, we knew that the tenant was leaving. So we know that there is a potential of doing a beautiful project there with good returns. But I think that we will be more specific in the month of July.

Having said that, as of today, to answer your question, the current situation of this project is that it is speculative as we speak, which is something that we believe that we can live with. So at a very high level with a lot of distance, the way we see our balance sheet is that we are managing around EUR 12 billion. Our, let's say, strategy for the long term was that 10% of this could be, let's say, the more risky environment of value-add projects.

What's happening now is that because we were managing the current environment, we've been delivering this pipeline and this percentage of value added and the total of the balance sheet is almost nothing. So in this context, to have a little bit of a [indiscernible] risk for this project in the framework of the global of the balance sheet, I think that it's something that we can have. But yes, I confirm that as of today, we will be speculative. And I think that we can give more detail about this project probably in July.

[Operator]

And that was our last question. I would like to hand the call back to our speakers for any final remarks.

[Pere Serra, executive]

So thank you for your attention today, particularly for those in Madrid today that we understand that today is not the best day. So thank you twice for our attention. We'll not repeat it. And I think that we've been very happy to share with you this set of results and to have your attention here today with us again. Thank you very much, and have a good day.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference. You may now disconnect.