Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2018-Q2

[Operator]

[Audio Gap]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.

[Pere Viñolas Serra, CEO & Executive Director]

Thank you. Good afternoon. It's Pere Viñolas speaking. I'm here, as usual, with Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development officer. Thank you for joining us. I'm going to go through the presentation of the results for the first half of the year. I will be following the document. As usual, I'm -- I will start on Page 6 of the presentation. We'll introduce you to the main highlights of this first half. First of all, let me share with you that we are quite satisfied with the excellent achievements of this first half 2018. There's a number of things happening here, which I'll highlight some of them. First of all, in terms of financial results, our total shareholder return showing a growth of 15% on a yearly basis, which is the NAV growth per share plus the dividend paid. We'll go in more details now. On, let's say, as a basis for that, there's a strong operational performance, almost 100,000 square meters let. And as you will see now, we keep on having -- experiencing a strong rental growth. On the acquisitions side, although this is already known, we are enjoying the acquisition of a number of assets. On the first quarter, we announced the vast majority of them through the Alpha III. Today, we are introducing a smaller, minor transaction of an asset that we just bought in Barcelona. Number four may be more important, we have finalized already, as we speak, the integration process of Axiare. Therefore, in the accounts from now on, you will find the impact of this acquisition. Based on a number of comments I've heard this morning, I will be a little insistent in clarifying how our results are constructed for the first half based on the accounting rules. What you see when you are looking at the first half results of Colonial is Colonial, as it was, plus what we owned during the first half of this year, which was 87% and not 100%. And bearing into account that we bought this company, the takeover was as of February and not as of January 1. And therefore, our numbers are, including 5 months and not 6, of 87% and not 100% of the numbers of Axiare. And let me clarify this just at the beginning because I think that's quite important and probably a clarification of this was worthwhile now. Beyond this clarification that has to do most of all with our funds from operations, let's say, that regarding the rest, the integration process of Axiare is gone very successfully. And as I will explain later on, we are now going through the strategic review of each asset and the portfolio management strategy that are far more oriented to pure real estate management. Number four, in terms of new equity, we've been following the expected path. We have merged Axiare, so we now have a total number of shares that includes 19 million of additional new shares. Again, when looking at the EPS number, the number of shares are the total number of shares for Colonial, including the 100% of Axiare. When we look at the earnings, the earnings do not include all of the earnings of Axiare but just a part of them following the accounting rules. The next topic is debt optimization. You know that we've been keeping on the strategy that we've gone through in the last 6 -- no, the last few years. And in the last few months, we, again, issued some bonds quite successfully, and we've been recently going through a liability management. We will go more in details into this because this all have some cut-off implications that is worthwhile sharing them with you. And then, let's say, to -- let's say, mentions 2 comments on things not so related to ordinary business of Colonial, we are working more and more in our flexible space strategy. So with the company we bought more than a year ago, Utopic [ arsenal ]. And we just saw first opening in Barcelona, which is quite successful, and we are [ envisioning ] additional openings for that company in the next few months. And also, we just appointed a new Chief Human Resources Officer in order to enhance talent management in Colonial. Going -- I'm on Page 7, going a little bit more in deep. The total shareholder return of the company, as I said, after the results we are presenting shows a 15% return year-on-year. This is based on an EPRA NAV that is now EURO 9.11/share. That is 13% year-on-year. As you know, more and more, this is based on a strong rental growth than anything else. In particular, than yield compression. That means that we are based in a very healthy value driver. In terms of growth -- gross asset value, we grow 10% like-for-like. But behind this number, there's a very interesting number, which is the net rental income is growing at 7% like-for-like, that, as you may well know, it's quite unparalleled in Europe, in Spain. We think that is an outstanding number in terms of net rental income. The recurring earnings grow at [ plus ] 12%, and the net profit that we are disclosing is EUR 254 million. This is based on a strong operational performance. As I said, a very strong rental activity, almost 100,000 square meters let, a very healthy vacancy at 5%. You will see that, in fact, it's less than that. But they have -- we are experiencing certain impacts on the acquisition of Axiare as we expected. And this rent, this contract, these vacancy levels supporting a strong growth in rental prices. You will see now the data, double-digit re-lease spreads, a good level of capture of market rental growth, which is the main support for the GRI growth and for capital value growth. Beyond these, let's say, ordinary course of business, the growth drivers of the company remain solid. The Axiare transaction is completed. The solid top line driving bottom line results. And as you will see, the assets of the portfolio are quite position -- are quite well positioned for future growth, no? We remain confident as we're looking now on the outlook on real estate market. On Page 8, we go more in detail in the numbers. First of all, regarding the main KPIs. As I said, the NAV is now EUR 9.11 per share, which is a 13% growth. The FFO adjusted per share would be EUR 0.11 per share and the EPS, recurring adjusted, will be EUR 0.11, no? Again, let me insist a little bit, the FFO and the EPS have to be carefully adjusted at the moment like the one we're going through right now because the shares are the total shares after including [ everything ], no, that has been delivered for Axiare, for the Axiare company, but the funds, the earnings, which I speak to the accounting rules, we are not including 100% but 87% for 5 months. So I think that is very important to present an adjusted number of FFO and EPS, no? In terms of profit and loss, our gross rental income shows a figure of EUR 170 million, 21% plus, the recurring net profit, EUR 41 million, 12% plus. If we look at the top line growth in terms of net rental income, the figure will be EUR 154 million, which is 7% year-on-year that I mentioned before. And you will see this later on, but this is coming from all markets we are exposed to from Madrid, from Barcelona and from Paris, no? And in terms of capital value growth in terms of GAV, our new number is now exceeding EUR 11 billion, EUR 11,190 million. This is showing a growth of 10% because of a coincidence. All Madrid, Barcelona and Paris are showing a 10% for the last 12 months. These KPIs, are they -- Page 9, on a very healthy operational performance to start with. We've been signing 55 transactions in the first half of this year. This accounts for almost 100,000 square meters. The EPRA vacancy being 5%. But if we look at 2 numbers, first of all, the [ re-lease ] spread shows a double-digit number: 26%, 14% for Barcelona, 28% for Madrid. That is quite healthy. And in terms of that, we look at the comparison between what we signed and the ERV that was available at December of '17, then we are talking about an 8%, which is 14% for Barcelona, 7% for Madrid, 6% for Paris. So very, very healthy, as you can see. Finally, if we look beyond -- I'm on Page 10. If I look beyond the ordinary numbers -- and I have to give a comment on Axiare. First of all, deal execution completed. So in a very efficient manner, since we started the takeover bid in November, and we finished it in February, no? We've gone through all the steps to finalize the merger and issued the new shares, and this is done. And starting the second half of the year, Colonial has already integrated Axiare, and Axiare does not exist itself in either as a company nor as a stock, no? And point number two, the synergies are confirmed. In fact, the synergies that we are working with right now are close to EUR 5 million per annum. And let's say [ that -- I'm talking a ] figure that is confirmed and secure. I'm not talking about estimates, about what we could improve in the future. We are now working on the optimization of the Axiare's debt, which is based on bilateral loans that we believe we can optimize. We will give some comment on this later on. And what we are now working on also is the implementation of our revenue synergies structure. More, let's say, looking at our internal process, the integration process is on track. We have now fully integrated results starting 1st January -- sorry, 1st July 2018, no? Again, no -- this is not -- could not apply for the first half of the year where we had 87% during 5 months. Looking at our organizational structure. Combined teams are now working together in one single headquarters in Madrid starting 16th of July, a few days ago. IT migration is improving without any major concern, will be finalized 6 months from now. And what we are working on right now is in the integration of Axiare's business process into Colonial's real estate value chain. Finally, as I mentioned in the previous presentation, no, what we are working on right now is on a portfolio optimization, which is confirming the underwriting of [ each unit's ] plan asset by asset. Looking at the strategic review of the whole portfolio and then reaching certain conclusions about any major or additional movement that we should be doing in the next few months, particularly regarding disposal. This is work with -- that is being done right now, and we expect consequences later on. This will be a sort of an introduction. As usual, now we'll go through different sections. We'll have now a section on market, on market performance that will be led by Carlos Krohmer.

[Carlos Krohmer, Director of Corporate Development]

Thank you, Pere. On Page #12, we put the macro context. Just to remind, Spain is the economy in the European area that is growing the fastest. Specific thing to highlight, there were on a -- 70,000 new jobs created in the second quarter. This is a historical record. France is also growing quite robust at 2% GDP growth annually. And the activity index for business, the PMI index is clear above 50 basis points. This is a very strong indicator about the confidence in the French economy. If we go to Page 13, most specific to the cities. Barcelona has had a relevant push in the last 2 quarters, especially attracting digital companies, establishing itself as a digital hub, the second European hub after Paris. And it's named the 4th best city to work according to a BCG study. Madrid is attracting international firms and is quoted as the city with the highest growth profile in Europe. And Paris is clearly consolidating the positive Macron effect business activity indicators [ at high level. ]On Page #14, we have given some detail on what has happened since the beginning of the year. As you can see here, there has been many companies establishing digital hubs in the city of Barcelona. Tech companies, multinational companies are putting together hubs and startups. According to a recent study, this would put Barcelona at #4 globally, just behind Berlin in Europe. If we go a little bit more into real estate, office market details on Page 15, how are the different markets performing? On Barcelona, we had a 20 -- 42% quarter-on-quarter take-up increase, maximum take-up since 2014, and this is basically concentrated in the City Center and the 22@market. CBD vacancy is below 4%. This is a historic low. And if we go to the traditional CBD area, Diagonal, there we have a vacancy that is 2.4%. In Madrid, the vacancy decrease is -- performing -- is ongoing. We have a 10% year-on-year increase in prime rent. And as stated, this is the city that is flagged with the best growth profile in Europe. Paris had a plus 15% year-on-year take-up increase. This is above the 10-year average, especially to highlight the 28% take-up year-on-year increase in big transactions. So the kind of assets that we own, big assets. The CBD vacancy is at 2.1%, and it will go more granular to the Opera CBD area where [indiscernible] the CBD vacancy is 1.4% and future supply is almost inexistent with 160,000 square meters of projects identified as of today. On Page 16, we put as every quarter just a comparison of the Colonial performance always [ improved ] with the market performance. We are quite there, in many cases, outperforming. So we are setting, again, the reference for the prime rents. If we go to the investment market on Page 17. On Barcelona, there are many investors that are willing to increase exposure, but there is not really that much core product available. This leads at the end that we see transactions at very high levels. We just recently saw a transactions above EUR 7,500 per square meter, with prime yields staying at 4%, 270 basis points on the reference rate. The Madrid market will gain momentum during the second half, with a lot of things that seem to be happening will crystallize in the market [ as ] general and prime yields there at 3.75%, in some cases, even below. And Paris again confirms its huge liquidity as investment market, EUR 9.1 billion in offices in the first half. This is 70% year-on-year increase. It's 2x above the long-term average and I think interesting to highlight, 28 transactions above EUR 100 million.If we go a little bit more granular on Page 18, you see transactions that have been happening in the last quarters. You see them as green dots in comparison to where the Colonial assets are. What you can see here is, on the one hand, the valuation of the Colonial assets is extremely solid, and the market is pricing a core product [ at this cost ], [ it ] quite interesting.

[Pere Viñolas Serra, CEO & Executive Director]

Okay. So let's now go into next section. I think that the main conclusion from this section on market is that the market remains quite healthy in Paris, Madrid and Barcelona. Now let's go back to Colonial performance on our sections about operational performance. Let's start on Page 20 with a comment on a strong letting performance. We already went to the main number. We've done almost 100,000 square meters during these 6 months. Obviously speaking, here, logistics play a certain role. So if you want to talk about square meter signed in offices, we'll be talking about 50,000 and more than 50 transaction for Barcelona, Madrid and Paris, no? We have secure EUR 19 million. The incentives remain at the level of 8%, quite healthy for the markets we are in. And the vacancy is 5%, as you will see now, with certain impact of an outlier for Madrid that you will see in a minute, no? Page 21, it's just to remind you about the top-tier clients that Colonial is able to enjoy that are able to pay maximum rents. In Barcelona, we've been signing 18 contracts, and the maximum rents signed have been EUR 24/sqm/month. In Madrid, we signed 23 contracts, and the maximum rent is EUR 30/sqm/month. And in the case of Paris, we have signed 11 contracts, and the maximum rent signed is almost EUR 800 per square meter per year in this particular case. In Page 22, we go a little bit more in-depth, and we go on a comment about rental growth, no? Here, you can see 2 kind of numbers. On the left-hand side, you can see the kind of growth that we are experiencing is that we compare, [ is ] what we've signed, with the existing ERV for December '17. And basically, here, you can see is that in the second quarter of this year, we have -- we are experiencing a 24% growth in Barcelona, a 5% growth in Madrid and an 8% growth for Paris, no? And this would give us 12% growth. In the case of release spread, we are talking about a 9% growth in Barcelona, 19% in Madrid. That's -- there's no available evidence for Paris. The total would be 17%. Page 23 is just to remind you of quality of our portfolio, looking at 2 things. One is diversification. You can see the first pie chart. To what extent our portfolio is diversified and relying on things such as law firms, consultancy, finance, insurance, digital and IT, information technology, no, and the rest of the groups. The second pie chart is about client loyalty. As you can see here, that the vast majority of our clients are really, really long term. And the next pages, we provide a little bit more of color in this. You can see, first, some examples on Page 24 for Barcelona, with an important presence of new lettings in -- out of 12,000 square meters let, you see new -- 9,000 square meters of new lettings. And you can see here some examples of comparison between what is signed and preexisting ERV, no? As usual, in the previous presentations, I always want to highlight that we are showing a number of examples and not the concentration of improvements based on a 1 or 2 particularly extraordinary cases. On Page 25, you can see the numbers for Madrid. Also, a relevant presence of a double-digit release spread or of healthy numbers also in terms of comparison to ERV. And on Page 26, some examples for Paris. Again, healthy numbers in terms of comparison to the ERV, showing a 6% signed rents compared to December '17. So healthy operational performance, strong lettings, strong activity, strong rental growth. As a consequence, on the Page 27, you can see our situation in terms of occupancy. Here, we have to go into details. Barcelona remains at a 1% vacancy, which is, let's say, almost full capacity, no? At Paris, remains at 3% vacancy, is also almost full capacity. In the case of Madrid, the number would be 1%, if it wasn't for 2 things. One is we just finalized Discovery building, and we are now on the process of leasing this business, this building. Discovery is adding now at 2%. We are pretty comfortable about the speed of negotiations in order to lease this building so we have no particular concern about this number 2% vacancy due to Discovery disappearing quite soon or coming to a marginal number quite soon. And then we have another important percentage, which is because of the inclusion in our numbers of the Axiare portfolio where we know that we have, and that was one of the reasons for the acquisition, a number of buildings that were just at the end of their, let's say, development process and are just now joining the portfolio but still at the beginning of the leasing process. I'm talking about buildings like Ribera del Loira or Luca de Tena. That explains a little bit this higher number vacancy, and we don't have a particular concern on that -- on this. On Page 28, what we do is, again, comparing these both with the market and with the -- in particular, the prime CBD market. No matter which market you compare, the comparison is very healthy for our portfolio in all our markets, geographical market. And on Page 29, the message is not only to remind us of, let's say, to what extent our occupancy is showing a good number compared to the market, but here is to emphasize the fact that our Madrid portfolio comes with additional availability of Grade A space in the solid market, and that is an upside for us. Finally, on Page 30, just as usual, to share with you that we remain with a corporate social responsibility at the core of our strategy. So our, let's say, ratings, our numbers are -- remain healthy as usual. If anything else, I should ask that in this first half of the year, we had an improved sustainability rating from MSCI. The rating went from BBB to A, which is, I think, an outstanding achievement. I think it's one of the highest, no, MSCI sustainability ratings in European real estate. So it's an additional milestone, additional achievement in this respect. So at the conclusion of this section, and in line with our view of the market, operational performance, quite strong. Healthy rental growth at the heart of our numbers. I will now skip to Section #4 that is focused on financial performance. Carmina Ganyet is stepping in.

[Carmina Ganyet I. Cirera, Corporate General Director]

Okay. Thank you, Pere. In this section, we are going to analyze in more details the main lines in our P&L. Thanks to this healthy operational performance. The first comment I would like to share with you is that these numbers should be read considering that Axiare impact since 1st of January, and only 87% of the total impact of Axiare are included in the [indiscernible] results.So the first topic we would like to cover is the gross rental income. The gross rental income, growth 21% enhanced, partially thanks to Axiare acquisitions with EUR 26 million. And the EPRA like-for-like shows a very strong performance in other segments, in other markets where we are, 5% in total but 3% in Madrid (sic) [ Barcelona ] -- a 3% total in Barcelona; 8% in Madrid; and 5% in Paris. We remind that Axiare impact is more in the Madrid market because of the majority of the assets are placed in Madrid, in the Madrid market. So the total rental income increases 21%, up EUR 170 million, considering, again, 5 months and only 87% impact from Axiare acquisition. If we analyze drivers from this for like-for-like rental growth in Page 33, basically the goodness of this like-for-like growth is driven by [ France ], 2% by price, 3% by volume. Barcelona and Madrid with a strong price effect, as you can see here in the bubble. And Paris with 5% like-for-like increase, well above our peers in the same market in the Paris sector. In Page 34, again, as you know, our commitment is to maintain and to improve the efficiency in our buildings. We are increasing the efficiencies. And you can see the net rental income like-for-like increase at 7%, more than [ net ] rental income, meaning that the efficiency levels we are improving and enhancing asset by asset. Madrid with outstanding 10% like-for-like in net rental income and also accelerating since last year with 238 basis points, [ meaning ] the 7% total net rental income growth. The other important line and impact in our P&L is the gross asset value. As you know, we have been updated the gross asset value [ with -- after the ] valuation. Today, first semester, the gross asset value increased 21%, EUR 11.1 billion, EUR 11.7 billion including transfer costs. It means that 10% like-for-like year-on-year growth in every market: Barcelona, Madrid and Paris. In terms of like-for-like, and the growth of this gross asset value is 4%, positive in all the markets with an additional 17%, EUR 1.5 billion, with the major impact is the Axiare acquisition. So the capital value growth basically is driven by prices, as you can see in the next page, Page 36. Basically, this 4% like-for-like gross asset value growth is driven by pricing effect, but very important, real estate transformation. It's what we call creation yield. So we have been creating yields and impacting this 4%, the [ 50% ] of this increasing [ gross asset value, surely ]. Thanks to these asset transformation, [ these ] yield transformations through [ repositioning ] of the [ assets ]. So if we compare the valuation and the main output of our valuation in comparison to the market, Colonial appraisal valuation continually shows already solid levels. So we continue the -- we continue [indiscernible] of the valuation. The capital values are below recent transactions evidence. As you can see in the right-hand side, for Colonial, valuation shows in every segment already prudent capital value in comparison to the recent market transactions. So we are confident that the combination of rental growth and the scarcity factor, or the scarcity of products is an important [ part of ] continued commitment or continued showing an important growth in the future [ from our gross profit. ]For the conclusion, in Page 38, you can see the gross rental income growing 21% and will be 5 months of 87% of Axiare impact. The recurring earnings that we have been accounting in the first semester is EUR 41 million, 12% more. But if we analyze the recurring earnings adjusted, it's what you see in the left-hand side, is EUR 0.11 per share. If you consider, or you assume 87% of total Axiare results in January, not in February, but in January and also assuming as the cutoff transaction basically the liability management that we have been implementing in July post-closing, the EPS recurring adjusted grows 7%. If -- Another way to look at this impact. We consider 100% of Axiare's results in January. And also the cutoff transactions considering the liability management close, post-closing of June, so in July. And also considering the new shares in play after the merger also being executed in July, beginning of July, the EPS recurring adjustment considering 100% Axiare impact, considering the cutoff transaction as a consequence of the liability management. And considering the merger, the EPS would be also EUR 0.11 per share. So because of the accounting rules and considering that the control we have in Axiare in February, and the merger took place in July, having taken place in the beginning of July, we can show a healthy FFO recurring and a healthy EPS recurring considering or bearing in mind all the cutoff transactions and also considering the -- all the impact of Axiare since January 1. So as a summary, the EPS and FFO increased 7% and 13%, mentioning all the impacts post-closing and all the impacts we thought considering this accounting rules because of the Axiare cutoff. If I jump to the financial and the liability management and also the active management and the liabilities [ there ], we highlight that we have been issuing [ to ] -- issuance of bonds, one at Colonial level, at holding level. Another one at SFL. EUR 650 million at Colonial level. EUR 500 million SFL, increasing and smoothing the maturity [ to debt ] and very, I would say, very interesting [ position], 2% in Colonial for 8 years maturity and 1.5% at the SFL level for 7-year maturity. Highlighting that both books at Colonial and also in SFL have been to strike with -- by very high-quality investors at Colonial level also strike at more than 3x. And you can seek here the distribution of very first thing on high-quality investment around the Eurozone. So very active again in the bond market. And thanks to these active activities in the market, we have executed in July, not in June. This is why you see in the first semester the impact of additional interest costs that has been or will be faced in the second semester of 2018. We have been instituted a liability management of EUR 375 million, bond maturing in 2019 being repurchased beginning of July. That means that we have increased, thanks to these liability management, the debt maturity from 5.7 up to 6.2 years. Also, we have been improving the ICR approaching 3x and consolidating the cost debt at a level below 2%. On top of that also, we have been canceled more than [ EUR 100 million ] of debt of more [ matures ] from [ Axiare ] and our plan also is to repay additional EUR 200 million to improve the ICR, to improve the maturity of -- our debt maturity profile and also to improve the EPS and FFO from our [ competitors. ] In the -- in Page 41, well, you can see that [ both ] liability management, again, we maintained a very healthy position of liquidity, EUR 2 billion between [indiscernible] facilities. 6 years maturity after the [ liability ] development, which will be also with the improved after [indiscernible] partially part of the mortgages in Axiare probably in September. We maintain a solid capital structure, 31% (sic) [ 39% ] loan-to-value growth, less than 2% of cost of debt. And of course, being in the range of BBB and BBB+ [indiscernible] that we would like to be. So thanks to these healthy and very solid operational performance and very active asset liability management in the liability side. In Page 42, you see the strong and the solid total shareholder return that will be hit, 15% year-on-year total shareholders return, 8% in 6 months.We have been added share -- [ 3% ] NAV growth from Spain. EUR 2 per share from France, additional recovery, so the total net asset value at closing is 6%, included goodwill from Axiare, paid EUR 0.79 of goodwill. The goodwill, as you can see in the business evolution we talked about is only 145, and we have been recovered this in the 6 months, more than EUR 25 million from the goodwill. So we are very confident that this goodwill is very solid and healthy, meaning that the total result per share is 6 months remains in the 8%, and [ doubling the last quarter ] . So as in Page 43, you can see the total shareholders return, mainly driven that from our alpha strategy. Very important alpha strategy coming from [indiscernible] thanks to repositioning assets and also market yield compression, thanks to buying assets with a [indiscernible] period adjusted on after repositioning after managing all the portfolio would have been great in this with an impact in [ total shareholder return ] of 0.6% and results 2% dividend per share. So very important delivery in our total shareholder return, the majority of them thanks to our Alpha transition. And the market has been recognizing this execution of the business plan and this transformation of the asset management, thanks to this Alpha strategy. For new analysts are covering Colonial with 19 analysts [ since ] 2005, 7 analysts have raised recommendations to buy. And here, we'd show you the latest update recommendations from the analyst community, which, of course, we are very proud. We continue to work to improve the target and the recommendations from the analyst community. And in Page 45, well, we would like to continue to work that the share price recognized our efforts to deliver this strong performance. Since yesterday, the share price recognized in Spain and in Eurozone, [ or the Europe ] in cooperation with our peers, the outperformance from our peers in Spain and in Europe. Hopefully, we have -- we'll continue and after this [indiscernible]. We hopefully [ they should try to ] recognize the efforts that we are delivering in this semester.

[Pere Viñolas Serra, CEO & Executive Director]

So thank you. You've seen in the section on financial performance that, number one, our NAV is growing healthy, 6%, that this is based on a GAV that is growing healthy, 4%, I'm talking about only 6 months, that behind this growth mainly, what you see as the driving force is a net rental income like-for-like 7%. And then very important impact of, let's say, Alpha strategy. So let's say the half of what Colonial is being recently remains the same and the value drivers being this, no and not others like we saw in the past, like yield compression, no, for example. So this is a little bit comment on the numbers. Section 5, which is the final section. It's section looking ahead, no? So what is available for Colonial in the future. At Page 47 again is more or less a broad vision of what we expect in terms of activity. Colonial is a company that is now or was now showing a figure of, broadly speaking, EUR 300 million in terms of rents. With Axiare, this jumps to EUR 867 million, but this is the layer number one, no? Layer number two is that we believe that with the profile of assets and contracts we have, there is an additional EUR 54 million that we would expect in terms of reversion, which would lead us to, roughly speaking, a little bit more than EUR 400 million. And on top of that, we believe, and this is very important, with the GLA of more than 340,000 square meters, with more than a dozen, 13 projects in Spain, 3 flagship projects in France, we could add more than 100. So we keep on working on a vision of reaching EUR 500 million of rents in the future. So it's come [ to the ] results of adding the strong footprint that we have today, plus the adjective reversion, plus the impact on the project pipeline. Comments on these, and going a bit more into detail regarding the strong footprint. You already saw that with the inclusion of Axiare and with the updated results for the existing Colonial, the GAV is now exceeding 11. The GRI is now 367, so both figures 21% up and the potential GRI now is reaching 522. Always, always bear in mind that 73% of our portfolio is CBD, real CBD because CBD is an elastic concept these days, as you know, no? So we keep on being basing our growth in high quality and low risk. This idea of a strong footprint has many, many examples as the one you can see on Page 49, where you can see more than 1.3 billion of value in 15 Spanish assets, no, which is very easy visibility on what we do, no?On top of that, we have the capacity of unlocking value in the synergies, on adding a similar compilation of letting up with good terms and accelerating project schedules, as you can see on Page 50. So that's today, no? And on top of today's strong footprint, Page 51, a vision on how much this can improve through the capture of reversion. And you can see here when our role is maturing in our core markets and what kind of additional rent roll we would foresee for the -- for this year's in terms of either static upside or release spread capture as of today, no? This gives you a figure of layer #2 of our strategy. And layer #3 is about value creation potential through our pipeline. Here, [ like is white, no, for an ] example. But here you can see all the different projects we are working in, which explain the final EUR 100 million of rents that we are working in, with several examples for both Barcelona and Madrid and also Paris. If I had to say something on those who are more around the corner, in the case of Discovery, this is the one that is already been delivered that is having a certain impact, no, in our vacancy rate as you saw. As we speak, meaning today, today, we have already 66% lets, no, and this I'm talking about today and not a month ago because that is improving every day, no? And you can see here what kind of rent are we signing. What is the ERV that we are signing compared to the ERV that was expected at the moment of acquisition, which was this, in the case of Discovery, is 24% plus and therefore, what the yield on cost and the total product cost, no, that we had in this business that can be compared with the market value that this business, this building may have today, no? So Discovery done and quite comfortable with a progress in terms of letting. Príncipe de Vergara, honestly even better because going a little bit later on than Discovery in our agendas, it's already 80% pre-let. And this one as opposed to Discovery has not been delivered yet. So this one will improve the numbers for our second half of the year because we expect this building to be delivered by second half of the year, maybe September, October, no and this will be an actual improvement of our rents around the corner. And the same applies to Parc Glories. Parc Glories, as we speak, it's 88% pre-let. Also, at the 2 examples before, are the very substantial premium to the ERV acquisition date, no? We are signing around 20. And let's not forget that we bought at slightly more than EUR 3,000 per square meter so very, very healthy yield on cost. So the 3 layers of our strategy: strong footprint, capturing reversion, strong pipeline. Finally, on top of that, a couple of things. Quietly, no, but consistently, we are working on the area of flexible office space through our company because it's not a brand, it's a company itself, which is called Utopic_US. We are working on 10 centers to be opened soon, on top of those who are already open right now, which are [ 4 ] . We have like 3 different strategies. These are leasing someone else premise and opening Utopic_US. For example, the one we just opened in -- close to Plaza Catalunya downtown Barcelona, which is already close to 70% occupied, and it has only 1 month of existence. Another thing we can do is when we release that the location ensures whatever kind of office activity, then Colonial buys that, and both leases it to Utopic_US. It will be the example of Gala Placidia in Barcelona again, where we are working in, and we expect to deliver this premise next year. And finally, a third example is when we place a Utopic (sic)[ Utopic_US ] center in an existing Colonial building with a sort of mixed use that is being very much appreciated by the market. We will see Principe de Vergara in Madrid quite soon, and I think that the initial impacts we are having are very rewarding. People like very much this kind of combination. Also in Parc Glories in Barcelona, we are going to include 2,000 square meters of a Utopic (sic) [ Utopic_US ] center. So as of today, Utopic (sic) [ Utopic_US ] is already one of incredible realities that you can see in the world of flexible office space. The next page is a picture of [ Rhonda ] from [indiscernible], in Barcelona downtown that I just mentioned. Finally, of course, our long-term acquisition -- strategy is based on acquisitions we've done on the smart capital recycling. This is already known. We've gone through a number of Alpha, a number of acquisitions. Maybe on Page 57, although it's not really relevant in terms of size, we mentioned that we just bought what we believe is a unique premise in Barcelona, almost 6,000 square meters of office in Diagonal prime CBD. Really, really, really prime in the area of Barcelona, where it's simple, nothing is available for a tenant. This is now leased to the regional administration -- regional government in Catalunya. They are expected to be [ leading ] in a year or so. There, then, we will be doing our typical strategy of capturing value through certain level of refurbishing of the building. And then we will able to lease it to the market, as I say, in an area of Barcelona where nothing is available. You can see in the map where it is. Just to give you a couple of numbers, we cannot disclose the acquisition price, but we can disclose the total cost of these on Page 58. And the total cost after refurbishing will be EUR 37 million. I'm on Page 58. That allows us for a total cost of EUR 6,400 per square meter, an IRR of 7% to 8%. We've seen the scope of this picture that you have in this page. They want a very relevant transaction, I think a couple of weeks ago. Let's say, less than 400 meters away from our building. And according to press, the average capital value paid for that building was in excess of 8,000, no? So we believe we've done a very, very interesting deal, no? So that's part of our capital recycling establish investing wisely and on top of what I've been saying in recent presentations, together with divestments that we may be doing at the right time and any of our assets at Colonial SSL or Axiare, that we may find interesting if the opportunity is there. Page 59, finish with this presentation. Again, this vision of the route we try to take towards a company with more than EUR 500 million of rents, no? So in conclusion, on Page 61, but I won't go through that through this slide. I think that the comments that I would make, looking at everything we said, you've seen that the market remains quite strong in where we work and particularly in CBD, particularly in Spain, therefore, our activities remains quite strong. The result, it's not only strong letting activity but rental growth. We are showing a 7% like-for-like rental growth that honestly is difficult to find around, across Europe, so 7% like-for-like rental growth. This, plus our typical value-added industrial-oriented activities, is leading to also healthy growth on [ JV ], which is sending us to a healthy growth on NAV, no? Besides this, what we introduced today is that we're working on the Axiare transaction successfully. We have already integrated this, and we keep on working on the pipeline with the same kind of expectations that we've seen until now, no?Regarding the numbers you saw, the presentation on the numbers, in which maybe we [ insisted too much, but we wanted to clarify today that as of today, we are going through the technicality of the numbers of -- that we are providing for the first half, not being really 100% because of Axiare not being owned by us 100% in the first half of the year, [ not letting in ] for the first half, only 5 months. Although, as of today, the shares allow us to own 100% of the company already. This needs careful adjustment regarding our FFO numbers, no and also some cost-cutting issues to be shared with you that are very important. So -- but regardless of this topic, as you can see, basically, we remain confident with this -- with a strategy of [indiscernible]. So this was the presentation. Sorry, a little bit more for 1 hour that we try to accomplish. Now we will open to your questions. Thank you.

[Operator]

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

[Maxwell Wilson Nimmo, Analyst]

Just on the goodwill. You said you've got EUR 145 million of goodwill in there. You've already reduced that by EUR 25 million. Was that the number you said there? And do you expect to kind of grow into this going forward? And second question is around -- on the earnings side. Your adjustment, the tax credit of EUR 7 million, I assume that is relating to tax credits on Axiare as well? So if you give a bit of information on that one there. And then, finally, just on some synergies. Obviously, your EUR 5 million is what you expect, but now that you've kind of got your hands on the business a bit more, do you think -- or what kind of magnitude do you think the kind of revenue synergies can be? Or is it too early to say?

[Carmina Ganyet I. Cirera, Corporate General Director]

Yes, on goodwill, well, yes, in the first semester, we have reduced the goodwill 70%, more or less. So we expect that potentially in 2 years, we come up short the goodwill, subject, of course, the potential and the future of value creation, no, of the portfolio that we have on the project that [ are ] in the pipeline in Axiare. But we are very confident, very, very small goodwill as a result of the acquisition. And only in 6 months, it has been absorbed 17%, 18% the total goodwill. About the taxes and the [indiscernible] tax, I'm not sure if I follow the question, but Axiare just finished. So we will -- the Axiare will be and all the Colonial group is [ subsidiary ] , and there is some tax savings of converting part of the subsidiaries of Axiare not being converted in a subsidiary, although it could be done. And we identified this potential upside and of course, we did it properly, the conversion, the subsidiary, 100% rental activity into subsidiary status. So we have some benefits of that not [ considering ] the past from the Axiare administration.

[Maxwell Wilson Nimmo, Analyst]

Sorry, can I -- is that the -- so the EUR 7 million of tax credit, so I'm just looking at basically the EPRA earnings as reported and then the company adjusted EPRA earnings, I can see that's where -- that's what you're referring to there, correct?

[Pere Viñolas Serra, CEO & Executive Director]

Yes, this is the main impact of this, yes.

[Carmina Ganyet I. Cirera, Corporate General Director]

The main impact, yes.

[Pere Viñolas Serra, CEO & Executive Director]

Finally, regarding your third question was synergies. Well, honestly, here are like 2 different sets of data. First of all, the EUR 5 million is a number that we are confirming today because it's already there, no? This includes what we have already identified, managed and executed. And that starting from, let's say, today, we know that it will be there and has to do a vast majority of them with payroll expenses and organizational matters. So we are, let's say, sitting already on the synergies. On the other hand, if we talk about synergies because of a different level of efficiency in managing the assets, we have a vision that this could be there, but we prefer not to flag any number on this by now because we still don't have, it's too early, as you suggested, for us to come and say that we foresee a number attached to this. So let's say that the number that we've been able to disclose more related to overheads or this kind of matters that are easily to identify and confirm. The second kind of numbers, which is more related to real estate management is we are working on this right now but not able to deliver a number yet.

[Operator]

The next question comes from Jaap Kuin, ING.

[Jaap Kuin, Research Analyst]

Maybe just to follow-up on the last one. Obviously because of Axiare and you having different EBITDA margins going in, I think you've -- and then adding on top this EUR 85 million that you're already sitting on, so could you maybe -- I think previously, you've guided for kind of a flattish EBITDA margin for 2018, but could you maybe reconfirm this number? Or if you have any new insights into a potential EBITDA margin number for 2018, that would be my first question.

[Pere Viñolas Serra, CEO & Executive Director]

Well, it's difficult at this point to give a specific guidance. What we clearly can tell you is on the EBITDA margin, the very, very relevant impact here are at the end, letting of empty space. As soon as you let empty space, you have a double effect on top of the rents that you get. Obviously, you can then re-invoice a huge part of the cost that you'd normally -- you cannot re-invoice. So as soon as we are progressing on leasing up empty space as this seems to be because we have several positive examples of pre-let in this quarterly results, we should further improve our efficiency, but it would not be prudent to now give a specific guidance on this. But it's at the end, very linked to the letting performance and result.

[Jaap Kuin, Research Analyst]

And then another question on like-for-like rental growth. Where you give out the splits between volume and price from your like-for-like rental growth [indiscernible] 3 basically for Paris, you quote 1% price and 4% volume. How should I interpret that? Because at the end, the vacancy in Paris over the past 12 months had decreased by 2%. So how should I read that -- or 2 percentage points. So how should I read that 4%?

[Pere Viñolas Serra, CEO & Executive Director]

Yes. What you cannot see in the -- which page did you mention, sorry?

[Carmina Ganyet I. Cirera, Corporate General Director]

73.

[Pere Viñolas Serra, CEO & Executive Director]

73.

[Carlos Krohmer, Director of Corporate Development]

Basically, you say I see an impact from volume, but I see the vacancy profile steady. While this is basically [ just because there's ] something that -- in the vacancy figure, you cannot see when the project portfolio and the refurbishment portfolio is rotating. So when things are coming into operation, then this creates new vacant space. But if you are able to pre-let and to let this at the same moment, then it disappears. So it seems that the vacancy is flat, and nothing has occurred by volume. But as you may remember, we always mention that on our assets that are very big in Paris, we have several areas on the refurb, [indiscernible], in Washington and it was [ set ]. So we finish the refurbs, it comes into operation, we let it, and this is the case, and therefore, we have no renewals. We have new pre-lettings or new let of empty space. And so this is basically volume agreement. And then we obviously spread, make that point, where do we have increase of project vessels ERV or release spreads on [indiscernible]. Project [indiscernible] is pure price, and then volume is new space that is there to be let.

[Jaap Kuin, Research Analyst]

Great, that's very clear. Then another question on the reversion. You mentioned for France, 43% of contracts are expiring or you use the word expiry. Are these like end of contracts? Or is it -- are these break options for tenants usually 43%?

[Pere Viñolas Serra, CEO & Executive Director]

Basically, it's most of them are end of contracts. Some of them are also great options. But typically, we concentrate on the ones that are really what we can do a renewal. But when we look at the chart, this is the first risk according to our standard so this is either end of contract or break option. Please keep in mind that in the vast majority of the break option, we normally have also the possibility to revise the rent. So -- but we put here [indiscernible] so the first [indiscernible] .

[Jaap Kuin, Research Analyst]

Okay. Then my final question will be on your flex office space offer. Could you maybe just comment on [ there ] because I think, honestly, your portfolio probably best suited for flex office and in competing with likes of wework. So how would you see the market in terms of the rent multiple you can achieve, let's say, current prime rents in your flex office offering? And what would you say is the breakeven points in terms of occupancy for your flex office space?

[Pere Viñolas Serra, CEO & Executive Director]

Yes. Well, first of all, it's just -- we are just at the beginning. So we are -- don't have still a lot of visibility. As I mentioned before, we have now 4, 5 almost existing premises for us plus a pipeline of 10 to be open quite soon. And these are in the range of 3 different concepts. One is that we rent to a third party, and then we start our operations. A second example is when we buy [ one asset ] Colonial is buying, and Colonial rents, at arm's length, this to Utopic_US. The third one is where Utopic_US is a part of Colonial building itself, no? As of now, it's too early to know what kind of, let's say, EBITDA we are having, but we have some, let's say, assumptions that we can share with you.

[Carmina Ganyet I. Cirera, Corporate General Director]

Yes. Well, the business case that we are facing is basically the subject, of course, the phase or the location, no, for these Utopic_US space, we can improve the market ERVs about 20%, between 20% and 40% after the initial market ERV and subject the additional services that we are including in the different spaces. So between additional margins is [ 20 40 ]. And the breakeven, more or less, is when we reach basically 60% occupancy, okay? So this more or less are the key metrics we are facing in the business case when we decide to go ahead with one Utopic_US space.

[Pere Viñolas Serra, CEO & Executive Director]

And please bear in mind that there is some areas that synergies are at stake that are very difficult to evaluate. If you have seen that in the both Glories and Principe Vergara, the current rental situation, the current situation of the buildings shows a very high level of pre-let. In these 2 particular places, we are pretty aware that, let's say, what we would call traditional clients like very much the fact that there would be a Utopic_US center because it is providing them with some flexibility and with the tools that these kind of centers have, no? And therefore, this may reinforce a decision to come to their building. It's very difficult to evaluate if that means higher rent that they are willing to pay in this building. At the very least, we can see that the building is pre-let faster than other where there's no Utopic_US. So there are certain numbers that remain in a gray zone where we are quite [indiscernible] of being in this flexible space direction but very difficult to give a number on top of what Carmina just mentioned.

[Operator]

The next question comes from Alvaro Soriano with Societe Generale.

[Alvaro Soriano-De-Miguel]

A couple of question there. The first one on CapEx. I would like to know why there, what you call like-for-like CapEx that, I guess, is maintenance CapEx in the portfolio, has increased from roughly EUR 12 million, EUR 10 million to roughly EUR 35 million during this first half of 2018? And what would be the long term -- or what is your long-term view on your maintenance CapEx for the portfolio? That will be my first question.

[Pere Viñolas Serra, CEO & Executive Director]

Well, I think maybe we can go through the details in a separate call, but there might be a misunderstanding that the maintenance CapEx is on track. It was typically for the traditional portfolio for Colonial at EUR 2 million to EUR 3 million per annum so at a low level in Spain and around EUR 45 million in France, but we can go through this in a separate call with more detail. But there is no change in the ratios of our maintenance CapEx [indiscernible] .

[Alvaro Soriano-De-Miguel]

Okay. And the second and last question would be on your EPRA calculations on Page 45 of your management report. Basically, I would like to know if your annualized cash rent includes 100% of Axiare. And also if the property in operations includes Discovery building. That would be the last question, yes.

[Pere Viñolas Serra, CEO & Executive Director]

Which page you said of our [ results ]?

[Carmina Ganyet I. Cirera, Corporate General Director]

45.

[Alvaro Soriano-De-Miguel]

Sorry, Page 49 of your management report.

[Pere Viñolas Serra, CEO & Executive Director]

Yes. This is full portfolio, yes. It includes Axiare.

[Alvaro Soriano-De-Miguel]

It includes full Axiare and Discovery building on the property portfolio completed?

[Pere Viñolas Serra, CEO & Executive Director]

Yes, correct. This is effective [indiscernible] exactly.

[Operator]

The next question comes from [indiscernible] from Barclays.

[Unknown Analyst]

A follow-up question on the like-for-like rental growth in Paris. You reported a 5% like-for-like rental growth in Paris, which is naturally higher than your peers. Can you please comment on this? How do you achieve such a high number? And I think you mentioned refurbishment, but that's not part of the like-for-like, if I'm correct. The second question is about the vacancy rate in Madrid, which has been relatively flat quarter-on-quarter. Is the reduction of the vacancy inherited from Axiare, especially ex CBD, taking longer than you expected?

[Pere Viñolas Serra, CEO & Executive Director]

Okay. First, starting with Paris. Basically, if you look at our portfolio and look what could be potential competitors, you clearly see that our portfolio in terms of asset type and location is absolutely [ uncomparable ], so it's -- and then it will go to the market. There's no available space, and there have been very good traction on peak transactions. What offers FFL are big, sizable square meters, big transactions in really prime buildings of high quality, and this is a strong competitive advantage, at the end, leads to higher growth. It's as simple as that. But if you compare other competitors or other portfolios with ours, you can do it very easily with the map, you will see it's quite, quite, quite easy. And again, as I said, the Paris market favors big transactions in good buildings, and there's not really that much of this there. And on the Madrid portfolio, again, what you do not see here is the combination of things that are entries into operation that we had some recently in Axiare projects and things being letting up. This leads to a temporary flat evolution. But as Pere mentioned already in the presentation, we remain very confident, first of all, because a lot of the assets had a very good micro-location and then, please do not forget, this is high-quality Grade A product. So as soon as the market gets stronger traction also beyond CBD, and this should be the product that benefits the earliest.

[Operator]

The next question comes from [ Erica Ive ] from Zürich.

[Unknown Analyst]

I would like to know the time frame on achieving or any way what you reckon could be a time frame on achieving a potential passing GRI of EUR 522 million?

[Pere Viñolas Serra, CEO & Executive Director]

Yes, very good question. Maybe Carlos will now go into detail, but there are, of course, certain relevant parts of this rent that are more for the long term. For example, I would put the example of the French assets. A big part of what is expected on the pipeline side is a 3 projects that we are having in France, that work on France, which is [indiscernible], which is [ lena ], and which is Emile Zola. These are expected. I'm looking for the page...

[Carlos Krohmer, Director of Corporate Development]

52.

[Pere Viñolas Serra, CEO & Executive Director]

Page 52, maybe we can use as -- for reference, yes? These are not expected before 2021, 2022. Just look at this page on Page 52. And these are a good part of EUR 100 million, no, that are affecting the pipeline, no? And the rest, you can mainly see they're -- on the very short term, you can see Discovery, Principe de Vergara and Parc Gloria joining [indiscernible before the end of the year and some in between. Did you have addition comment, Carlos?

[Carlos Krohmer, Director of Corporate Development]

Just maybe 2 additional comments. Number one, it's true that part of the pipeline is a little bit more in the midterm. However, just keep in mind that as soon as we are able to get the pre-lets of things done, even though the cash flow will come more later, we reduce -- we improve the risk profile of the asset, so we will see earlier some of the impact and valuation and also a little bit earlier, some of the impact in the P&L as soon as we have signed and get progress on letting -- on pre-letting projects. And for the other elements as Pere mentioned, we have quite some decent projects coming into the operations but not in the incoming 2 quarters.

[Operator]

Ladies and gentlemen, there are no further questions. I now give back over to the company. Thank you.

[Pere Viñolas Serra, CEO & Executive Director]

So thank you again for your kind attention. Hopefully, we'll come back with more good news, no, after August and in the last quarter of this year. So what a pleasure to be with you today again. Thank you. Good afternoon.