Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2019-Q2

[Operator]

Welcome to the Inmobiliaria Colonial First Half 2019 Results Presentation. [Operator Instructions]I'm now pleased to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please, sir, go ahead.

[Pere Viñolas Serra, Vice]

Thank you very much. Good afternoon. I'm Pere Viñolas, CEO of Colonial. I have today with me Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Officer. It will be our pleasure to walk you through the results for June 30, '19, and I will be following our presentation on this end. And I'm now on Page #6 of this presentation. I'm very pleased to inform you that the results for the first half of the year have been very satisfactory. The outstanding financial results have meant that our new EPRA NAV is EUR 10.52 per share, which means a 16% year-on-year growth. If we take into consideration the dividend that we have already paid, that means a total shareholder return for the first half of 18%. This EPRA NAV growth is based on a gross asset value growth that is growing 9% like-for-like year-on-year to EUR 11.8 billion. This gross asset value growth is based on the growth of the gross rental income that is growing to EUR 174 million, which means a 4% like-for-like. And if you go down to the bottom line of our P&L income statement, that means recurring earnings of EUR 69 million. That is EUR 0.135 per share. That is 42% growth year-on-year. Therefore, very satisfactory results that we will now be explaining, as usual, in -- very much in detail.What's behind this very strong operational performance are the usual value drivers. First of all, a very intensive activity with our clients. We have been leasing more than 150,000 square meters with top-tier clients during this period. This is an extraordinary level of activity, which have led us to maintain and even improve a very healthy level of vacancy, which is around or remains around 4%, slightly below, in fact. At the same time that we have been quite successful in pre-letting the newer projects. Therefore, the main driver of this strong operational performance is the strong growth in rental prices. You will see this from the point of view of Colonial capturing market rental growth; also when you look at the double-digit release spreads that we are experiencing and therefore, as a conclusion, solid capital value growth.This is the present and the past. This is where we stand. But also, we'll try to explain in the second part of this presentation how confident we remain with the outlook for Colonial. We feel that we are delivering the business plan on track. We are confident that CBD is outperforming other markets, like secondary markets, and therefore, Colonial is profiting from this trend. And therefore, we believe that our portfolio is best positioned for capturing future growth.In Page 7 of this presentation, you have a little bit more of details of what I just said. So if you talk about annual returns, the EPRA NAV, as I said, is now EUR 10.52. That is 5% growth for the first half of the year, 16% year-on-year. And if I add the dividend, 18% year-on-year from -- as a total shareholder return metric. You can see that the gross asset value grows to EUR 11.8 billion, which is a 9% year-on-year growth. Here, a first important message. This growth in terms of GAV is equally spread among our markets. Maybe Barcelona, these aren't so common because it's substantially outstanding, but as you can see, both Madrid and Paris with 9% and 6%, respectively, remain also very strong markets.In terms of profit and loss, our gross rental income is EUR 174 million. Our recurring net profit rose much more to EUR 69 million because of a number of reasons that thereafter we will explain. And also, you can see the growth in terms of recurring EPS, which is 42% up to EUR 0.135 per share.In this page, you can also see that we remain with a solid capital structure with an LTV that is slightly below 38%, in fact, 37.9%. This will be explained in detail, but we remain with an overall liquidity, which is very important, more than EUR 2 billion and, of course, with the Standard & Poor's rating of BBB+.On Page 8, if we give a quick comment to vacancy, the vacancy remains very low, 4%, mainly because of the very high level of activity that we've had during the last 3 months. A number of contracts, very important, 60 transactions signed equal to 129,000 square meters.The GRI, in terms of like-for-like, we gave the big number, 4%, which, as usual, is very satisfactory in absolute terms but also in relative terms, so compared to other competitors on a European basis, remains in the high end. And interesting thing that you can see here is that remains equally strong for our markets: Madrid, Barcelona and Paris. You may see here Madrid is slightly above Barcelona. Remember that for Barcelona, it's difficult to have a higher number when your occupancy levels are almost at 100% occupancy. It is obvious that we give a high priority to the quality of our assets. Therefore, the level of CBD among our assets remains high. 76% of our properties are in the CBD zone, with a different metric, 91% of our properties, have an energy certification like the LEED and the BREEAM certificates, for example. You have seen this 4% like-for-like rental growth. Well, that's the number for the overall portfolio, but if we went into details, you would see a double-digit release spread as a number that would apply to all contracts that we are renewing or, in other metrics, also a very strong rental growth in terms of rental price that has been signing in the last 3 months or 6 months compared to the ERV that was existing at the end of 2018. This rental growth measured that way shows a 9% growth in 6 months, which is also very impressive and, again, equally strong in all markets. So these are the highlights. You will see in the details that this is a result of an evolution across the board, across all markets, our -- across all kind of assets. And that has allowed a number of other beneficial collateral effects, for example, the complete disappearance of our goodwill, as this will be disclosed later. Well, this is our highlights for our presentation. As usual, next section will cover an overview of our vision of the market. I ask Carlos Krohmer to step in.

[Carlos Krohmer, Chief Corporate Development Officer]

Okay. Thank you very much, Pere. And let's start with the rental market on Page #10. Barcelona has had an extremely strong performance. The take-up of the first half has been 250,000 square meters. This is an absolutely historical record. This market never has had such a high take-up. Annualized, it would 500,000 square meters. This is really impressive. And on the other hand of the equation, CBD is -- CBD vacancy is below 2%, 1.9%, also a ratio never seen. Obviously, this combination of demand and supply is pushing pressure up on the rents.If we look at Madrid, take-up has also been quite strong. It's more than 330,000 square meters in 6 months. This is a 42% increase year-on-year of the demand. And CBD vacancy, it is at 6%, on a progressive decrease coming from previous years.On the Paris market, the take-up has also been quite strong, more than 1 million for the total market and CBD vacancy at historic low, 1.6%. If we would look at how much of this is Grade A, it's below 1%. And so extremely strong fundamentals. No supply at all, strong demands.Vis-à-vis previous quarters, I would say the biggest surprise is on the investment market side because investment markets have been picking up in activity. Barcelona, EUR 620 million of investment volume in the first half, and the experts expect a record investment volume for the full year, again, repeating same amount of the first half. And therefore, we are at prime yields of 3.75% and a very strong spread versus reference rate of 340 basis points. On Madrid, the same, EUR 1 billion of investment volume in the first half, 40% above previous year. Basically, interesting data point, international investors and prime yields at 3.5%, 300 -- or 311 basis points versus Spanish reference rate.Paris has seen absolute records, EUR 9.9 billion of volume in the first half. This is 5% higher than the last year that was already a record year. And just to give you an idea of how high this volume is, this is 88% above the 10-year average for this market. The investment activity is focused on big transactions and basically in the CBD. And due to this high liquidity and high demand, yields have compressed 25 basis points down to 2.75%. This would give us a spread of all -- close to 280 basis points versus reference rate for the investors that take exposure in Paris CBD.Let me now step into how this looks like in the Colonial performance of the first half. On Page 13, we see the set of figures for the total portfolio. As Pere mentioned, the Colonial Group has signed 62 contracts that equal more than 150,000 square meters in 6 months. This is an extremely high figure of activity. You can compare with whatever peer you might look at, it's extremely high volume of activity. This equals EUR 45 million of annual rents secured and puts the vacancy at the level of 4%.If we now step further into the details, what is the performance of the letting activity, I'm on Page 14. If we compare the prices signed with the market rent attached to every asset as of December 2018, we see an increase of 10% in the Barcelona portfolio, 4% in Madrid and 12% in Paris, a quite significant growth in just 6 months. On aggregate, 8% higher than the rent 6 months ago. Regarding the release spreads, also extremely healthy in the second quarter, on aggregate 10%. In Paris, there have been no renewals, so no data point for the second quarter. Barcelona, extremely strong, and Madrid is 4%, but this is basically due to one big contract of a senior tenant asset outside the CBD. If we look at the portfolio excluding this asset, it's at high double digit at 18%.On the next page, you see several examples of the market rental growth in our portfolio. This is on Page 15. And then on Page 16, several examples of release spreads. Again, what you see here, that it's really spread across the full portfolio. So this letting activity, at the end, how does this impact on the vacancy profile of the company? This is what we can see on Page 17. Paris and Barcelona have a vacancy ratio of below 2%, totally in line of what is a CBD market: 1.4% in Barcelona, 1.6% in Paris. In Madrid, if we look at the traditional Colonial portfolio, the vacancy is at 3%, also quite below the 6% of the CBD market vacancy. And what we have in terms of things that put the vacancy of Madrid at 9%, is recently delivered assets -- projects and assets from Axiare. Overall group vacancy is a very healthy 4%.On Page 18, we see the analysis of the Madrid market. Madrid as of June has a vacancy profile of 9.2%. As we flagged already on the first quarter, we signed 100% let of Avenida Bruselas. This asset will come -- this contract will come into effect during the month of July and therefore is not yet part of the occupancy of our portfolio in June, but it's not fully signed already. If we take into account the coming into effect of Avenida Bruselas, the Madrid portfolio will be at around 7%. And what is the GLA that is available that corresponds to this 7%? Here you see the main assets that correspond to this vacancy is Castellana 163, one of our projects coming into operation; assets in the north of Madrid and some other CBD areas.Page 19. Just to show that our commitment on ESG remains strong, we have EUR 9 billion of assets with BREEAM certificates, EUR 2 billion of assets with LEED certificate. And therefore, what you can see on Page 20, it's not -- it's clear that on the European comparison, we are rated as a large portfolio with the highest level of energy certificates.And now I will hand over to Carmina who will give you some updates on our flexible office activity.

[Carmina Ganyet I. Cirera, Corporate Managing Director]

Okay. Thank you, Carlos. In these next pages, we'll show you some color about our earlier-stage business of coworking, which call it -- it's called Utopicus. Utopicus is being consolidated as a leadership in Spain with 14, today, centers. It means close to 38,000 square meters, 9 centers in Madrid, 5 centers in Barcelona. And we are receiving a very special and high recognition about this brand. And in the new openings that we have been able to start or to open in the first half of the -- 2019, you see here some examples of some names about our tenants, about our users, for example, in Gran Via, McKinsey. So we still -- we see -- we start to see some traditional names combining traditional spaces and coworking areas like in Gran Via, McKinsey; Parc Glories, Philips, for example; Clementina, a unit from Unilever; and Gala Placidia, Nokia. So it's true that it's a very early-stage business, but we feel very positive to have the combination of traditional and coworking product, it's a match in our portfolio. In the next page, in Page 22, it has been 2019, and it's been a year of optimization in occupancy. You see here the months in operation and the rate of occupancy that we are achieving in each month. Plaza Cataluña, after 12 months, the occupancy, it's 100%. Principe de Vergara and Orense, after 8 months in operation, we reached occupancy at 80%. And the rest of the centers that have been inaugurated recently, Clementina, Ciutat de Granada, Gala Placidia and Gran Via, after 3 months, we are achieving the breakeven which we target at 60%. So positive performing, very good combination. As you see, in one of the -- one example is in Page 23, combining the traditional business and the flex or coworking business in Principe de Vergara, it's a window building in Madrid. We believe that combining traditional clients, they gain flexibility through having in this specific case, this business basically, it's 11,000 square meters; 30% of the total square meters we allocate on Utopicus, so 1/3, 2/3. And with this combination, we have benefits from traditional and benefits for the flexible offices. As you'll see, for the flexible users, we can increase occupancy. We have less volatility, we create hubs, and we reduce the high or the -- we reduce the churn rate, so we increase the client loyalty from our flat. And in exchange for that, for the traditional clients in the traditional areas, they gain flexibility. We can provide additional services. They gain -- and they start to collaborate with a start-up through a dynamic environment and through this creation of these hubs and digital areas. So again, it's a very early stage but with a very interesting, I would say, performance that we are achieving in this aggressive month that we have been able to start this business.Let me go to the next section, next section #4, about the financial performance. I'm giving some additional details on the different lines in the P&L. The first line is the gross rental income. Again, outstanding this semester, about 4% like-for-like. Madrid, with highest like-for-like of 5%, and Madrid -- and Paris, sorry, and Barcelona remained very strong with 4% in each market.If we see what are the sources of this 4% strong like-for-like, basically, this like-for-like is driven by rental prices increases in the -- all the 3 markets, Paris -- especially Paris, Barcelona, as we mentioned before, with only 1% vacancies. The like-for-like growth comes from price impact. And in Madrid, with this 5% like for like, it's a combination. It's growth of important rental price in combination with solid letting up vacancy spaces. Another important impact in the P&L in this first semester is the valuation. Our valuation of our portfolio today after the appraisal updated valuation is EUR 11.8 billion, EUR 12.4 billion including transfer tax, with a 4% like-for-like year-on-year growth, 4% -- 4.2% particularly for this semester. And solid growth rate in every segment: Barcelona, the last 6 months, the gross asset value growth, 8%, 19% year-on-year; Madrid, 4%, 9% year-on-year; Paris, 4%, 6% year-on-year. And we analyze what are the sources of this value growth -- this capital value growth, in Page 28. Basically, the strong Alpha, with 3.3% growth out of this 4% capital value growth, is the main driver of this gross asset value growth through this project delivery and rental price increases. So 80% of the -- of this capital value growth comes from Alpha projects, prices and project deliveries. And the fact of having scarcity in the market and Colonial having the best portfolio in the market, so this scarcity factor provides additional yield compression in this first semester of 2019.We have a very solid asset base. We also have a very strong credit profile. I am in Page 29. We have been able to continue to be very active in the liability management. We shared with you in the first quarter that we refinanced all the bilaterals, all the debt, and we take this from Axiare. We also have been able to sign the first sustainable loan granted on a real estate company in Spain linked to the ESG ratings. We also have been able to take advantage of the low rates through issuing a very tactical ECP program of EUR 500 million in Spain and EUR 500 million in France and reducing our spot cost of debt. And as a consequence of this very active liability management, our financial costs have been reduced 12% year-on-year from EUR 51 million to EUR 45 million. So as a consequence, our credit profile has been enhanced through our low loan-to-value of 37.9% in comparison to the previous year of 39% with a very low spot cost of debt from close to 2% to 1.58%. We have been reducing our loan-to-value with the financial policy of being in the range of 36%, 40% with an ICR of 2 -- more than 2.5 and, again, with a very strong liquidity position between cash and undrawn facility of more than EUR 2 billion and with a very solid rating by Standard & Poor's with BBB+.As a consequence of a very strong performance and a very solid credit profile, our recurring earnings has been grown 66% in actual terms from EUR 41 million first half 2018 to EUR 61 million (sic) [ EUR 69 million ] first half 2019, thanks to additional EBITDA like-for-like, EUR 13 million; improving and saving financial costs, EUR 6 million; and additional minorities coming from additional interest and exposure in our subsidiary of SFL from 54% last year to 82% in this year, our stake in SFL, so additional EUR 14 million of minorities coming from SFL of -- from the French activity. And after the impact of disposing the noncore assets, our recurring earnings have been growing EUR 27 million, 66% in absolute terms. But in relative terms, we see this earnings per share, again, high double digit, 42% increase in terms of earnings per share from EUR 0.095 per share to EUR 0.135 per share. So it's a very impressive growth in absolute and in relative terms. After the impact of our price evaluation after these strong recurring earnings, the group net results, we delivered this semester EUR 338 million with an increase of 33% of increase. To summarize, we provide to our -- or we delivered to our shareholders, as Pere mentioned before, a year-on-year total annual shareholder return of 18%, 7% this semester from EUR 10.03 per share to EUR 10.72 per share. Our net asset value before the dividend per share is EUR 10.52 per share. And very interesting that after 1 year after the merger, we have been able to fully absorb the goodwill impact that we raised at the moment that we merged with Axiare. So it means that the beauty of our investment in Axiare after 1 year, any impact of the goodwill in our net asset value.In the next page, we show you what are the sources of this total shareholder return, basically highlighting that, again, at the strategy of -- the Alpha strategy, we've been able, thanks to this Alpha strategy, to provide and to deliver this successful outperforming total shareholder return. More than 50% of this total shareholder return is thanks to the successfully project deliveries and rental growth. And you see in the next pages some examples about this project delivery and renovation program that has been impacted to our net asset value -- or our shareholder return of EUR 0.25 per share through pre-letting activity, through providing to delivering the pipeline into operation like Window, like Discovery buildings, like Glories. The Alpha rotation, so the fact that we bought Torre Marenostrum at a discount and the beauty of this investment provides also additional returns to our shareholders included in this EUR 0.25 per share. And again and on top and additional, we have been able, as you see in the strong performance for this semester, to sign rents above the ERV from our appraisal, 13% in Barcelona, 4% in Madrid and 11% in Paris. That provides additional returns through net asset value of EUR 0.32 per share to our shareholders. So we understand or we feel comfortable that provide -- we will continue to provide interesting returns, thanks to the Alpha strategy and thanks to playing the scarcity of product that we will continue, of course, to be leader in this sector.

[Pere Viñolas Serra, Vice]

So thank you, Carmina. Now let's skip to Section 5, which is about the future, about some thoughts on the growth drivers of the company. On Page 35 is a summary of what we believe are our value drivers for the future. We will go indeed now what -- we believe that they are, number one, our leadership in prized offices -- in prime offices. In other words, our strategic choice for CBD as the main characteristics of our assets. Number two, it's our project pipeline, that is our choice to complement the quality of our portfolio with a number of projects that are able to provide additional relevant value in the future, in intangible turned into NAV. The third driver has to do with our rent potential in terms of how much can we capture reversion in our rents. Number four would be a comment on the investment market, a comment on not only rental growth, which we've been discussing recently, but also yields and the yield compression that may be another characteristic of current market. And finally, the way we try to manage our capital, our assets with a certain discipline.So Page 36 is for illustration of the first point, which does not deserve a lot of time because it's very well-known. Colonial is the largest property owner in terms of real CBD in Madrid, Barcelona and Paris. And this is just a quick reminder through a view of the map of where our properties are, of the extent of our prime positioning, our strategy in focusing our assets in the prime CBD areas that has proven to be a very remarkable strategy in the last few years. That's the first value driver, and we are happy to stand where we are. Beyond that, there are other sources of value that can come with additional return in the next few months and years. In Page 37, you can have the typical look at our project pipeline. You can see here that we remain committed in 12 different projects for more than 200,000 square meters of GLA. In other words, more than EUR 1.3 billion of total costs that will hopefully generate a yield on cost above 6%, 6.3% to be specific. The news on these are in next page, in the Page 38. In fact, some -- most of this is already well known. As of today, 4 out of these 12 projects have been already pre-let. So in other words, if we expect from these 12 projects EUR 83 million of stabilized GRIs in due course in the long term, as of today, we have already secured, in the first half of this year, EUR 20 million, that is 24% of this EUR 83 million. So this plus another 3% that is on the negotiation currently means that 1/4 of our pipeline is pre-let or almost pre-let. On the right side of this slide or in Page 38, we want to give a little bit of hint on the value that is hidden in this portfolio. Basically, the message is we have EUR 1.3 billion of total cost embedded into these 12 projects. The yield that we expect to is 6.3%, which is EUR 83 million. And we leave for you, we leave for the audience the thought on how much value this can generate if we keep in mind that this EUR 83 million of potential GRI, out of which we have already 1/4 pre-let, is being valued at yields of 3.75% in Barcelona, 3.5% in Madrid or 2.75% in Paris, according to market references. If you have this level of rents potentially expected for the future and you have this level of yields that the market can give you, you can easily find out the number on how much value this can generate into the future. So this is a source of future value, which is value that will come from the pipeline. Coming back to our portfolio of existing assets, I will have also a couple of comments. On Page 39, just to mention that the current breakdown of expiry dates, the rent roll that we have offers attractive potential opportunities in terms of yield -- rent reversion, in terms of strong delivery of this reversion. Basically here, what I'm reminding you is that the release spread captured as of June 19 has been 52% in Barcelona, 6% in Madrid, 7% in Paris. And basically, what we are saying is that these rents which are expiring, 18% in the second half of the year, 29% next year if we talk about Spain; 9% this year, 18% next year if we talk about France. So in other words, we see this breakdown of expiry dates as another interesting source of rental revenues.Maybe something new that just we would like to highlight on Page 40 is that usually, we talk either about Alpha, let's say, the pipeline, the value that we can generate through our projects; or Beta, which is rental growth that is happening into our assets just because of the fact that the market is performing well. On Page 40, we just would like to highlight something else that we work on a current basis and on a permanent basis. I don't know if we should call it the light Alpha or basically the fact that we always expend some of our investment capacity in renovation programs that also behave as another interesting rental growth accelerator. Here, you have an example of 5 assets that, with, let's say, light CapEx attached to them, will allow for significant reversion, going from EUR 16 million in June '19 to EUR 25 million once the work that we are doing in these buildings is stabilized. So just to mention that through all of our portfolio, not only through the pipeline, we present to add value through our investments. So this is the value drivers that have to do with rental growth. On Page 41, we would like to mention the value that may come from the fact that our yields compared to interest rates are delivering very attractive spreads. In other words, we all know that in recent years, we were talking a few years ago about yield compression, and we were not talking about rental growth and remember in 2015, 2016. Later, we talk about rental growth. Assuming the yield compression was over, what we are highlighting is that, well, recently because of interest rates going down in a very significant way, again, maybe yield compression is another source of value driver. And what I'm highlighting here in Page 41 is that if you look at the yields that are embedded in our valuations, in our appraisals, you compare this with a bond in Spain or in France, the spread remains quite significant, that is around 300 basis points or more, which is at the high end of our history, I would say, for the last decade. So I'm saying that this will have some consequences in our valuations not in the past but in the future.This is also the message for the slide in Page 42. Talking about the investment market, what we try to show in this slide is that when you look at the recent transactions that have happened in Madrid, Barcelona and Paris and you compare this with the Colonial average, capital value per square meter in our appraisal, we are in very prudent zones. Another way of looking at this is when we have done any disposal, the kind of premiums that we have obtained has always been double digits. So that's another source of value that we believe that may happen to our portfolio. And finally last but not least, you know that we try to bring that confidence in value creation through our discipline in capital allocation. And in Page 43, where we have been buying and selling in the recent years successfully to the point that recently, we've been awarded again by the third consecutive year by MSCI as the winner in terms of best investor in terms of allocation discipline in Europe. And we have been awarded with European Property Investment Awards basically that show that we've been consistently investing wisely the money of our investors.Page 44 is just a reminder that if we believe in all of these value drivers, our forecast of our GRI should go from EUR 360 million to almost EUR 500 million.So this is a little bit our usual comment on our growth drivers and looking ahead. And therefore, there's only remain -- there are only remaining a few words from myself in terms of conclusion from -- for this presentation of results. As I said at the beginning, the numbers for this first half are quite satisfactory, either in terms of gross asset value growth, gross rental income, EPS or shareholder return, that is NAV growth. Year-on-year, with any metric, the numbers are quite substantial. We have been trying to explain that behind these numbers, what we see is very healthy vacancy levels together with very strong rental markets, together with stronger investment markets. And the whole consequence of these are the numbers that we've been sharing with you. Well, that's basically the presentation. We think that they are quite satisfactory. But now I think it's time for Q&A if you have any question for us. Thank you.

[Operator]

[Operator Instructions] The first question comes from Jaap Kuin from ING.

[Jaap Kuin, Research Analyst]

I've got a couple of questions. The first one is on the logistics. Could you maybe give some color on the potential disposal of this portfolio? Then the second question will be on -- I think Carlos stated that one of the biggest surprises with the first half was the strength of the investment market, especially in Paris. Does this trigger any additional appetite for you to rotate assets, especially given the very large spread between your development pipeline and potential disposal yields? And then thirdly, you were highlighting, probably rightly so, at the end of the year presentation, the investment discipline. So does it also rule out you are looking at new geographic markets?

[Pere Viñolas Serra, Vice]

Thank you, Jaap. Concerning question number one on logistics, let me start with an obvious statement. No, it -- that we have not ended yet with divestment in this logistic portfolio. In other words, these results do not include anything related to the disposal of the logistic portfolio. In other words, they do not include any profit that would arise from the disposal of this logistic portfolio. In terms of what -- which are our expectations regarding this disposal, I think that we remain quite confident that this disposal should take place in the short term and in very satisfactory levels. So not yet, we are not yet there, but we are confident that this may happen in the short term and in satisfactory levels. And again, this is not included -- therefore, nothing of this is included in our current results and remains as a value driver for the future. Regarding your second question regarding the strength in the investment market, I think that -- well, we've been trying to show that yes, in all our markets, Spain and France, the market is proving to be more strong both in terms of rental growth that we knew but also in terms of additional strength in terms of yields, in terms of yields going down. As a consequence, it may happen that we invest more in France you were mentioning or in France and Spain. We've always said that, first of all, we remain disciplined in terms of capital structure, so always committed to a risk profile in terms of debt that leaves you at the level of LTD where we want to be. Second, within that scope, happy to be investing if there are investment opportunities in Spain or in France that could appear. And we are not, let's say, biased toward any particularly newer geography. If we see any interesting investment opportunity both in France or in Spain, we will be there. Although as you also mentioned on your third question, our investment discipline is something that we are very proud of. And therefore, always, we've seen the investment criteria that we want to have. You mentioned if we may be considering revisiting our view in terms of geographical scope. We have always been transparent that we are not in principle against this view from, let's say, a theoretical long-term approach, but we are also been -- have been, let's say, quite clear that in the short term, our priorities are based in the -- our domestic markets mainly because of the performance that they are offering. So we do not see anything changing in the short term concerning this.

[Jaap Kuin, Research Analyst]

Okay. Maybe just one follow-up on, let's say, my middle question on the asset rotation and investment market strength. I guess I was trying to -- looking for some color on whether these lower yields actually would tempt you to sell a bit more especially in Paris, potentially even bringing down LTV a bit more because of this kind of maybe unique window of opportunity to sell assets?

[Pere Viñolas Serra, Vice]

Could happen. We don't have any specific plan for rotation of the assets in Paris. But as you can see, we have done it in recent years. I remember the In and Out project. So it could happen in the future, that you could see more rotation of French assets. That means buying and selling. But we don't have any specific plans in the short term, meaning specific names for that strategy.

[Operator]

The next question comes from Peter Papadakos from Green Street Advisors.

[Peter Papadakos, Managing Director & Lead Research Analyst]

Just one question on Slide 39. Can you give a sense -- you talked about the releasing spreads. But for the expiries for the next few years, the visibility you have on existing leases, what should we be modeling for releasing spreads for the city? Should we still be thinking about double digits in terms of the types of rents you have? And a related question to that is, do you need to spend material amounts of CapEx to get that growth? Or is it truly organic?

[Carlos Krohmer, Chief Corporate Development Officer]

Yes. Thank you for the question. First, let's start with the end of your question. You see at the start of our presentation the incentives that are basically not applied in leasing up things. These are basically hold periods, so it's not a CapEx in hands that we have, thanks to our CBD exposure, a very, very limited, narrow level of incentives. To give you an idea of what could be release spreads going forward is obviously quite difficult because nobody knows the future. But the way to get there is the first column on Page 39, the first gray bubbles. What you see there is if you compare the current passing rent of all our contract portfolio with what is the ERV, the market rent that [ then touches ] the appraiser, as of June, so now, just at this moment, to our contract portfolio, you see the adjusted current studied rents. If this applies and the appraiser has done a good job in -- we would have 24% higher rents in Barcelona, putting them on market levels, plus 10% in Madrid and then plus 6% in Paris. Moreover, what you then have to factor in, in your own best guess is how much additional rental growth we can see in the next 24 months. And I think the main element to judge this is to look at the fundamentals of the market. And as you have seen, there's no supply, strong demand. This argues that rental growth could be there. How much, I leave it to everybody to do his own guess. But I think this is a way to approach this.

[Operator]

The next question comes from Jonathan Kownator from Goldman Sachs.

[Jonathan Sacha Kownator, Financial Analyst]

A couple of questions if I may. Just on that strong demand, can you perhaps comment on the evolution of pre-letting on your Paris projects and perhaps actually on other projects as well? I mean how are you progressing in terms of pre-letting demand given the strength of the CBD market? And next question is around like-for-like rent growth. Obviously, part of the question is already answered with Pete's, but the other part of the question is, you talked about renovation program. And I'd just like to understand, when you do on a floor-by-floor basis, is that included in like-for-like rent growth? And how much are you expecting to invest for these renovations as well?

[Pere Viñolas Serra, Vice]

Okay. Let's start with the renovation program. The renovation program, the growth that we will capture there would not be part of like-for-like calculation because we would then compare periods where the asset is not available for the market. We are doing this light CapEx work to a period where it's available for the market. This is number one. Number two, the CapEx, as we said, it's light CapEx. This means for the French part, we are factoring in -- but we are still finalizing numbers, between EUR 10 million and EUR 15 million and, on the Spanish side, around EUR 15 million to EUR 20 million. Yes, this would be...

[Jonathan Sacha Kownator, Financial Analyst]

And help me understand, I mean are we talking about the renovation of the entire assets? So we're not talking about floor-by-floor renovation, are we?

[Pere Viñolas Serra, Vice]

We are talking of light things, so making the lobby new, making a little bit maybe the -- just the floor to update a little bit and the ceiling. But nothing relevant in structure, nothing comparable to a typical refurbishment project that we have.

[Jonathan Sacha Kownator, Financial Analyst]

Are we -- just to clarify, are we talking about the building being fully empty for a short period of while? So -- you foresee for that renovation as opposed to doing things for one single tenant on a floor-by-floor basis?

[Pere Viñolas Serra, Vice]

Depends on the case. Typically, it's progressive. So it's not everything is out and then everything is again in.

[Jonathan Sacha Kownator, Financial Analyst]

Okay. All right. And just can you remind me, on the like-for-like rent growth, so when you renovate one thing on the floor and you put extremely minimal CapEx, like, whatever, new painting or new carpet, whatever, is that included in your like-for-like rent growth typically or not?

[Pere Viñolas Serra, Vice]

The very light things, yes, this renovation program would be, I think, [ solve ].

[Jonathan Sacha Kownator, Financial Analyst]

Okay. Pre-letting?

[Pere Viñolas Serra, Vice]

On the pre-letting, we are starting the commercialization periods on some of the assets. Louvre is, as you know, fully pre-let. And this is dependent on the best market momentum. Not necessary today pre-let is the best option. It depends on the commercialization progress in every asset. In terms of -- yes, go ahead, Jonathan.

[Jonathan Sacha Kownator, Financial Analyst]

No. Sorry, go ahead.

[Pere Viñolas Serra, Vice]

No. No. I was saying that if we go through the 12 projects, just to come back to what is already known, Pedralbes Centre, Gala Placidia, Diagonal 525 and Louvre Saint-Honoré are fully pre-let. Then on the case of Castellana 163 and Miguel Àngel 23, I think that [ Joe ] is starting right now the process. In terms of Biome and Marceau, I think too soon for leasing strategies because the project is at the very beginning. The same would apply to Velázquez/Padilla and Plaza Europa and Méndez Álvaro, Méndez Álvaro, which is a rather big one. So in order to provide a little color on these, we expect licenses for the beginning of next year. And therefore, I think that there, when we -- must be much closer to real pre-letting activities. Before that, I think that would be not a good use of our firepower. And coming back to our projects, if we talk about the Naturgy assets, I think that this is starting with very good feelings on the market. I think that we have a number of negotiations already advanced for a very small part of the building. So that's progressing quite well. So it depends one by one. The main message that we want to give is 4 out of these 12 are fully pre-let, some of them advancing, some other still not -- it's not yet the moment for leasing strategies.

[Jonathan Sacha Kownator, Financial Analyst]

Perhaps one final other question. I mean obviously, you -- coming back to the investment market in Paris, you've highlighted the strength and highlighted a prime yield at 2.75%, which is not necessarily what some brokers have shown at least to date. So should we assume that, that movement in yield, that 25 bps yield compression, is already factored in your appraisals? Or is that something more recent that in effect has not been taken into account as of Page 1?

[Pere Viñolas Serra, Vice]

That's a very good question because it is very important to clarify the answer. Absolutely, this is not included in our June valuations. The -- what we like -- what we wanted to share is a little bit the opposite, which is our numbers in June do not include anything similar to what we are watching in the outside world. So when we see the outside world, we see many investors reacting to the spread widening between yield and interest rate. And basically, what we wanted to flag is that nothing of this is included. I think we see this more as a potential value driver for the future. That's something that has already been factored in our current valuations.

[Operator]

The next question comes from Max Nimmo from Kempen.

[Maxwell Wilson Nimmo, Analyst]

Kind of just following on from that last question a little bit, just on the fact that you have derisked the Louvre project already. But how much of that value is being recognized by the valuers already? So in that kind of EUR 0.25 of value you have on Slide 33 there, how much of that is coming from that project? Are they fully recognizing this now already for 2023 given that it's derisked?

[Carlos Krohmer, Chief Corporate Development Officer]

Okay. As of today, roughly EUR 110 million of value has been recognized on this project.

[Pere Viñolas Serra, Vice]

On new projects. Yes. I -- just to clarify, I don't know you were talking about new projects, but our -- on the, let's say, ordinary portfolio, what I wanted to highlight is that in the ordinary portfolio, we have not seen any significant yield compression being included in our June valuations. Therefore, as I was saying in the previous question, we see this more as a source of future value. If we are talking about the pipeline, here, we may have seen an accumulated EUR 100 million, as Carlos was saying, but this has to do nothing -- not with yield compression but just with the achievement of significant milestones in these projects. The most relevant example could be Louvre, where, a few months ago, was not pre-let and now it is pre-let. But again, just to clarify, we see the yield compression as something that could have an impact in our numbers in the future, not in June valuation.

[Maxwell Wilson Nimmo, Analyst]

Okay. And just so that EUR 110 million, sorry, is across all projects? Or was that, sorry, across just the Louvre? That's what they've recognized there?

[Pere Viñolas Serra, Vice]

I think that the main part is in Louvre because it's a very important project. They may be small quantities in other projects. And therefore, the number applies to overall projects, but the most significant part was in Louvre -- or is in Louvre des Antiquaires.

[Operator]

The next question comes from José Cravo from Banco Santander.

[José Francisco Cravo, Equity Analyst]

Can you hear me?

[Pere Viñolas Serra, Vice]

Yes, very well. Thank you.

[José Francisco Cravo, Equity Analyst]

Okay. So just 3 questions if I may on -- again, on yield compression. The first one is on Paris. I mean you've mentioned this 25 basis points compression. Could we expect that Madrid and Barcelona, so the Spanish market, to follow this through assuming that usually, these markets are sort of synchronized? That would be my first question. Then my second question is on the 1.3 percentage points of yield compression that you have on your total shareholder return here. Where does this come from? It's actually from the logistics? Or where does it come from?

[Pere Viñolas Serra, Vice]

Okay. Coming into -- I will answer the first question talking about potential elements of value coming from yield compression in Barcelona and Madrid. Yes, our general comment has been that until now, in the last 18 months, we've been basically driven by rental growth, as we all know. And nobody was factoring in our numbers, let's say, nothing related to yields or to interest rates going down. And it's obvious that in recent months that the spread between yields and interest rates has widened a lot. We do believe that this can have an impact in the Spanish market. And just I would like to put just one example for the case of Barcelona. In the case of Barcelona, if you take the Diagonal Avenue that is very well-known, you know that with -- in recent months, we've highlighted the fact that there was a transaction at the high end of Diagonal a few months ago, an acquisition done by Blackstone on a building that's just in front of one of our main buildings, on Dow building. According to press, the capital value per square meter was almost 20% above, if I recall correctly, our current valuation of Dow. In this same direction, just a few months ago, at the very other end of Diagonal, there was a transaction that took place in Diagonal 0, Diagonal #1, that, again, according to press, the capital value per square meter could be roughly, again, 20% or between 10% and 20% above the valuation of the assets that we may own in the 22@. And finally, just a few weeks ago, El Corte Inglés, which is a big retailer in Spain, announced the disposal of an asset which is half a mile away from our headquarters where we are based right now as we speak. A lot of uncertainty about the real price in this transaction. But again, it looks like -- clearly, we are talking about double-digit difference between the valuation in the media and the appraisal value that we have in our books. So this is just to give you a flavor about the fact that transactions that we've seen recently are factoring other kind of valuations than the one that we include in our own appraisals. So answer number one -- or answer to your question number one is that yes, we do believe that this can be something that comes in the second half of this year in Madrid and Barcelona. The second question, Carlos, do you want to step in?

[Carlos Krohmer, Chief Corporate Development Officer]

Regarding the impact of yield compression on our portfolio, you can -- we have a page about this on our presentation. But basically, to go directly into the summary, it's basically concentrated in Barcelona. There has been very high value growth, 8% in 6 months, that comes from 3 drivers: price, projects and yields. And there are quite relevant yield compression. But this is basically, there, the portfolio was lagging recent market evidence of the last 9 months. So it has been catching up with the market. And if we look at the data as of today, and we have several information about this in our presentation, you can see that Barcelona still has quite relevant room in capital value. But it has been concentrated, the yield effect, on the Barcelona portfolio.

[José Francisco Cravo, Equity Analyst]

So on logistics, there was none?

[Carlos Krohmer, Chief Corporate Development Officer]

No.

[José Francisco Cravo, Equity Analyst]

Or it's too small?

[Carlos Krohmer, Chief Corporate Development Officer]

No. Logistic, there was not really very relevant impact.

[Operator]

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

[Pere Viñolas Serra, Vice]

Yes. There is one question we have received and written from [ Pear Tree Asset Management ]. Basically, the question about is what is the supply risk pressure across the 3 geographic regions. What we -- the information that we have as of today, especially in Barcelona and Paris where there is some visibility on future pipeline that -- in the market, the pipeline is, to a big extent, already pre-let, and the current demand levels really fully absorb the future pipeline in Barcelona and Paris market. In Madrid, in the market where we are, inside M-30, there's not really a relevant future project supply inside the M-30. So we do not see in -- regarding the positioning of our portfolio, any relevant risk in the short term.Okay. So this was the last answer to the last question. My final words are in order to thank you for your attention. I think that we have seen another set of good results for the first half of this year. Just to wish you happy holidays for those of you who haven't enjoyed them yet and just to remind you that on October 15, we'll have our Capital Markets Day expected to take place this time in Madrid. Thank you very much, and good afternoon.