Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to Inmobiliaria Colonial Third Quarter 2021 Conference Call. The management will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions]. I'm now pleased to introduce Mr. Pere Vinolas, CEO of Inmobiliaria Colonial.

[Pere Serra, executive]

Thank you. Good afternoon. This is Pere Vinolas speaking. I'm here attending the conference, as usual, together with Carmina Ganyet, Corporate Managing Director; and Carlos Krohmer, Chief Corporate Development Officer. We are happy to share with you the results for the third quarter of 2022. As you will see, there are -- these are an excellent set of results. They are better than expected. And as you will see, they are guiding us to a positive review of our results expected for this year. As an introduction, I would remind what already everybody is familiar with, which is a fact that Colonial has been insisting for a number of years in a strategy of flight to quality in our strategic approach to the market. We believe that this strategy is even more valuable in the context of current polarization of the market. It is also an answer to the new world that we live in, which is a world where pricing power remains one of the fundamental questions to the expected performance of any company. And we already see a little bit the outcome of this strategy as we approach the end of this first year of this new cycle. What you will see in these results is that, first of all, the pricing power challenge is having a very strong answer from Colonial. As you will see, indexation is fully passed through at this time of the year. That lead us to strong rental growth ongoing. And we will see this also translated in a very high number of top line like-for-like growth. In fact, very good numbers in absolute terms and very good numbers in relative terms to the sector. So the main first driver, which is strong pricing power is behaving very well at this time of the year. The second driver that is also a result of our strategy of flight to quality is the alpha factor. But the fact that the relative good positioning of our assets allow us to expect from them, particularly a strong outcome in terms of letting activity that apply both to our pipeline and both to our renovation program, you will see in this presentation that so far, we are already experiencing very good results at this time of the year. But more importantly, we are sourcing the drivers for additional cash flow in the near term in the future as a result of this presenting activity. These 2 strong value drivers, which is pricing power and alpha value coming from the client factory are already having an impact in 2022, which means that our recurring EPS, we expect that it will be beating the upper range of the guidance that we have been communicating to the market. To be more specific, on Page 7, already y, the data about these results. Gross rental income is EUR 2,062 million at the end of September. This is 12% more than equivalent period and 7 of last year and 7% like-for-like. This figure of 7%, I would like to insist that, of course, this is very good in upstream terms. But as you can see, it's at this moment, the highest in the office sector in Europe at this time of the year. The recurring EBITDA is EUR 207 million, 12% more than last year. And the bottom line, recurring net profit is EUR 119 million, which is 30% more than last year. And this is leading us to a recurring EPS number at this time of the year of $0.221 per share, 23% more than this time last year. Finally, we will be giving also some additional light on this. At this time of the year, we've been disposing of close to EUR 100 million, EUR 84 million to be specific. And we've been doing so far this at a 9% premium on the most recent appraisal -- these are the numbers. What is there behind those numbers, you can see it on the right side of this slide. First of all, letting volume that at this time of the year remains super strong, 136,000 square meters have been signed, which is 16% more year-on-year, which is a record volume also for Colonial. That's obviously driver #1 of cash flow that is being limited in 2022. And as we will see, future cash flow that we will see lending into in our P&L 2023 additional further future years. This letting volume which is strong is also hand-in-hand with a healthy performance in terms of rental growth. First of all, the average indexation of our contracts is 5%. We will be very specific about what does this figure mean. But just to highlight the main takeaways, you will see that, of course, we are passing through full indexation to our clients. Currently, but this means a very high expected rental growth rates by year-end as a result of indexation plus additional rental growth. We will see the details on this in the next few years. The ERV growth for the group is 5%. And by the way, the same applies to indexation, quite healthy across our markets, meaning same performance in -- or similar performance in Spain and France. And using other numbers, release spread is 7% for the group, 8% in Paris, 6% increase. Of course, as a result of this, the Average occupancy, as of today is 96%, 3% more than a year ago at this time of the year. So we are at the very high end of occupancy and just as very significant example. Paris it's fully provided it's 99.8%. We believe this is a number that speaks for itself. Well, now we will enter into the details of our financial performance and operational performance. We'll go back to, again, a discussion on what's going on in the end in Colonial and which are the drivers that are behind this excellent performance. And so what can we expect for the near future. After this introduction, I will ask Carmina to step in, talk about the financials of the company.

[Carmina Cirera, executive]

Thank you, Pedro. So in Page 9, well, just a reminder that what Pedro has already mentioned, with the relevant metrics of these third quarter results. The gross rental income increase is12% year-on-year up to EUR 262 million. And consequently, the group EBITDA also increases 12%. If we look at the recurring net profit, also a very outstanding results with a growth of 30% up to 10- close to EUR 119 million. And secondly, the recurring EPS increases 23% up to EUR 0.221 per share. If we look at more details what are behind this growth, I am in Page 10. The main message is, well, the revenue, the rental growth increases 12% but moreover, the operational portfolio without considering the disposals that we did last year and also at the beginning of this year, the rental growth or the revenues increased 16%. Without considering the renovation program and the project pipeline coming into the operation. The revenue increase is 10%. If we look at it in more details, what does it mean this 12% rental growth, I am in Page 11. You can see here that this level of growth of 12% is a consistently positive in all the markets with outstanding level of in values of 17%. And when we look at the like-for-like growth in comparable terms, the same portfolio from the previous year, the like-for-like growth is 7%, 8% in Paris, 5% in Madrid and 10% of Barcelona. What are the main driving forces behind this like-for-like 7% growth. And you can see here in the right-hand side of the slide, the main impact of this like-for-like growth, 1/3 its occupancy of 2.8% is occupancy and 2/3 is pricing power. Inside the pricing power, probably let's explain a little bit more in detail, what does it mean indexation. You can see here that the price impact is 4.4%. Out of this impact, 2.1% less than 50% is due to the indexation impact. More details about this indexation impact. The first comment I would like to share is that all the contracts the majority of the contract, except the government bodies, which is by law, not linked to the indexation. All the contracts in Spain and in France are linked to inflation. In Spain is CPI, which the average for these 22 years has been as of today, 5%. We started the year of 5%, and we finished 10%, the average is 7% in Spain, the CPI. And in France, all the contracts are linked to the LAT, which during the year, the LAT has performed from 3% to 5%. The fact that in France, LAT is disclosed in a delay of 3.6 -- sorry, between 3 and 6 months, the average LAT of the 22 years has been 3%. So the average of inflation of all our portfolio between France and Spain is 5%, 7% in Spain and 3% in France. So we have been passed 100% of the indexation in all our contracts in the moment, in the month that is due the indexation. So it's not all the contracts due in the beginning of the year. It's in a secondary basis, in a monthly basis that the contracts are due to the new indexation as a consequence of the updated levels. So one message one important message is that we have been updated all the contracts to the inflation, CPI in Spain and LAT France, in average terms, 7% in Spain, 3% in France. And the fact that the contracts are not signed at the beginning of the year are not due to indexation index at the beginning of the year. The effect of the passing indexation, like-for-like in the last quarter or during -- until September 2022 has been 2.1%. If we could imagine that all the contracts, the indexation data would be -- would have been at the beginning of this year at January 1. The impact of the indexation of all the contracts would have been 5%. What does it mean in reality is that if all the contracts has been impacted since January 1, the like-for-like growth instead of being 7% would have been 10%. The fact that we have this indexation delay during all the months. This is the reason why you could see the impact of 2.1%. What does it mean in reality that in 2023, the annual impact of the indexation that has been updated on all the contracts during 2022 would be or will be 5% in annual basis that would have been -- will be a full impact in 2023. I hope it has been explained, I would say, clearly, but the fact that this is a time effect because all the contracts, the indexation is in a monthly basis. The impact of these 3 quarters is 2.1%0. This year, in an annual basis, 5%. Very important message about this like-for-like, very strong, 7%. And again, if we would have been indexed since beginning of January, this like-for-like would be 10%. If we go into the next page, you can see the level of this like-for-like also considering this time effect of the indexation, it's outstanding. It's the highest level in our company from during the last 5 years. And moreover, if we compare this like-for-like growth with our peers. As you can see here, it's well above the average like-for-like that our peers have already been disclosed during these days. So consequently, as a result of these important rental growth, you can see in Page 13, an EPS growing of 30%, impacting positively the revenues, I already explained and also impacting positively the financial results, thanks to the liability management we did during 2021 and also the impact -- additional impact thanks to the additional stake that we have during this quarter -- sorry, during this year in SFL. You know that the increase in SFL stake was done in August 2021. So we have a positive impact of this additional minorities that today are at home are at Colonial. So this is the reason why you can see this welding box positively increasing the EPS 20%. As Pedro mentioned before, we have been also continuing disposing some selective and nonstrategic assets. During the year, we have been selling EUR 84 million in secondary assets. The last one has been Sagasta, a small asset of less than 5,000 square meters, which is not consistent with the strategy we have in our portfolio. But very important, all these assets have been selling at 9% premium to the last reported gross asset value. And more important, all these disposals will be and has been EPS accretive basically because all of them are an where they can at the moment that has been disposed. If we go to the capital structure in the following pictures, why we kind of say that we believe that we have a solid capital structure. The first comment on the first reason is because of the profile of maturities of our debt, as you can see here in the right-hand side of the page, more than 80% of our debt matures after 2025. So the first message is we don't have huge maturities coming in the following 2 years because 80% matures expires after 2025. Second comment, what we believe that we have a solid capital structure is we have a very healthy liquidity position with more than EUR 2 billion in terms of undrawn facilities and cash available, which means 2x the coverage ratio of the debt maturity in the following 48 months. So we believe that also it provides a lot of comfort in our company. And the third comment would be that we have today a very competitive cost of debt with 1.4% cost of debt spot. And this holistic approach of this capital structure at the end is providing us the rating by S&P with a BBB stable and modest with outlook with a positive outlook. So this is holiday approach, it's not a specific metric or a specific KPI that they -- as you know, they analyze. It's moreover what are the different, I would say, quality of the cash flow, the predictable cash flow, the quality of the clients, the liquidity position and also the maturities and the profile debt maturities for our company. This is why they confirm the rating as of today. And why we believe that also we have a competitive cost structure. I am in Page 16. Basically, we confirm and we can affirm that we have a good level of fixed cost because today, we have almost close to 90% of the current net debt at fixed costs, so at no fixed cost. Because today at 1.4. So we know what is the level of the cost of debt that Colonial has because basically close to 90%, it's already fixed and closed. But moreover, we -- I think we released in the previous webcast, we have a pre-hedge position, a very interesting pre-hedge position, which today, the mark-to-market of this hedge is close to EUR 300 million. And what does it mean this pre-hedge levels of interest rates that it will recover. It's covering 50% of the bonds that will mature in the future. So EUR 2.4 billion are already pre-hedged at the level of 0.6% strength, 0% interest rate for the following 5.4 years. What does it mean in reality that at any maturity of bonds in the future, 50% of these maturities are already pre-hedged at 0.6% for the following 5 years. This is very important because today, we have 90% -- close to 90% cost of debt fixed, but we have a very secure level of interest rates and, consequently, a very secure and healthy level of interest cost of debt for the following years. What does it mean in practical terms? And you can see here in the right-hand side, what the impact of this hedge policy of the cost of debt to Colonial and the increasing market rate that has been happening presently. So in June, we expect the durable 3 months from the remaining part of the year at 37%. It has been increasing 188 basis points up to 2.25. This is the average live 3 months for the remaining part of the year. And with this huge impact of close to 190 basis points, our cost of debt only would have been increased 12 bps. So we have very, I would say, healthy hedge, spot and in the future, which means that we can confirm that if the forward rates continue at the level as of today, the average cost of debt for Colonia for the following years would be in the range of 2%, which we believe that we are very healthy protected. We have a very predictable cost of debt in the future. not only a spot or also in the future. What does it mean also in practical terms, that this level of fixed cost of debt, it's also above our peers, not only today, also looking forward in the following year, thanks to this pre-hedge policy or this pre-hedge position that we closed last year and a very interesting levels of interest rates.

[Carlos Krohmer, executive]

So I will step into Chapter 3 operations that will show our strong outperformance through our polarization and prime positioning strategy. Let me start with Page 18, looking at the moment that the market where it stands as of September 2022. And what you can see is in the markets where we are present, that the availability of high-quality product, like our Colonial portfolio in the 3 markets is very, very case. The availability of grade Air product in the CBD of Paris is 0.4%, so nonexistent any Madrid in Barcelona, it's around 2%. And this, we have to put it in contrast with -- or compared with what is happening on the demand side. And what you can see here, the gross take up in the 3 markets has been increasing in the first 9 months of the year. We are the versus the previous year that already had a comeback from the pre-COVID situation. So we are really positioned in a slice of the market where the availability is cause. And this explains our operational performance. When we look at Page #19, we have signed 136,000 square meters, plus 16% versus the previous year. I would like to remind that the previous year was the second highest letting activity year in our history was already a record year. And compared with this record year as of September, we are 16% above the levels of the previous year. Also important to highlight that close to 90,000 of these 136,000 square meters is letting up of new spaces. So either vacant spaces or pre-let of projects. The quality of what we are signing in terms of risk profile is very good. The average maturity of the contract is 8 years until contract expiry and 6 years until the first drug option that typically our clients do not exercise -- and this sustains the profile that we have, that we have clients with a high loyalty they want to be in the best assets. Here, you have some examples of the contract names that have been signed during the year. If we go to the next page, you see the 3 maps of the city, and you see basically with the blue signs where the contracts have been signed. Basically, everything published into move all, so CBD and RBM and greener assets and in Madrid and Barcelona, all around the Basel Castellana and the [ Avnera ] or not. So really being at the prime and phase off, and we are reaching -- we have reached maximum rents of EUR 940 40 per square meter month and 28, really setting the benchmark in the market. And this is an effect of the polarization trend that we see in the market and that is clearly benefiting our strategy. And we can see it here on this Page 21. What we show you here is the Colonial share on the total stock in Paris and on the total stock in Madrid, it's 7%. So Colonial's assets are 7% of the total stock in Paris and Madrid. However, we have captured out of the gross take-up of the first 9 months of the year, 10% of the take-up in the Paris market and 11% of the take-up in the Madrid market. What does it mean that we are capturing more than our market share. Why? Because the clients want to be in the best assets and there's clearly proof of the polarization track. If we go then to the occupancy profile, thanks to the strong letting activity. And as I said, 63% is letting of new services, we have improved our occupancy profile year-on-year. September last year, it was 93 million. Now it's close to 300 basis points higher, 96%. And as part as Peter mentioned, Paris almost fully let. So what is still to be let on Page 23, it's just 4.2%. And you see here the breakdown or roughly half of it, 1.7% is asset of our renovation program. At this moment, while as we speak in Ortega asset and the and Diagonal 530, we are having ongoing conversations to have them soon fully let, Diagonal 530 is one of the best assets in the Barcelona market. The rest is 0.6%, very good space in the CBD of Madrid, where we have already some pre-lets on regulators and 0.9% of CBD space in Barcelona. And then a residual secondary asset in Barcelona the Suncorp that explains 4.9% of the current vacancy. So just 4% vacancy and as all of these services will go costs. What is the price performance behind this? I'm on Page 24. We are maintaining high rental growth. If we look at the first 2 columns, this is the performance -- price performance of the full letting activity, so renewals and new lettings. And when we compare the prices that we have signed vis-a-vis the market rental price of our assets at the beginning of the year, we are signing 5% ahead of the market rent attached to our assets. So clearly, we are capturing rental growth. We look just at the renewal side and make another type of comparison so that we compare how much are we capturing the reversion potential of the current contracts, we can see that we are signing 7% above the previous rent pre-negotiation, so we are maintaining the quite strong growth levels that we had already last year in 2021. So in 2022, we are having ongoing strong rental cost.

[Pere Serra, executive]

Thank you, Carlos. I think that we've gone through the financial performance of the company. We have gone through the operational performance of the company. And maybe now I would like to add some comments about the visibility of our future rental growth, which was -- that we believe that it's key. It's one of our fundamental questions to the answer. First of all, how we see this current situation of the market. I think that current situation is lift in 2022. It's a situation where interest rates have obviously gone up because inflation has gone up. And the market has already taken the heat that comes from incremental interest rates. -- but has remained in a wait and see more mood regarding the visibility of cash flow. And the answer to the question of if these cash flows can offset or even beat the heat that it can happen because of interest rates remains with low visibility. And I think that our goal as a company is to deliver incremental cash flows and to show as much visibility as we can on those increments cash flows. So the final view on valuation can be more accurate regarding our assets. This is a gain that has started this year in 2022, and this result of September, we already have some provisional answers. The provisional answers can be seen in this Page 26, which is, as of today, our cash flows in terms of recurring profit are growing by 30%. And they are growing because of 2 reasons. First of all, because the incremental cash flow that's coming from indexation and rental growth and then what's coming because of the outcome of our investments in Prima factory in our Alpha strategy, both in our project pipeline and our regulation program. What is more in detail our positioning in terms of cash flow profile, Page 27. So far, at the end of third quarter, we have already gone through the indexation of 73% of our cash flow. As we've seen before, everything has gone through indexation. And we capture a 5% annual equivalent indexation. But what's happening is that in the P&L, we only see 2% because of the breakdown of the different contracts and in which moment of the year, are we capturing this indexation. As Carmina explained, if we have started all of our contracts going to indexation in 1 September, as of now, 1 January, sorry. As of now, our expected cash flow will be increasing by 10%. That's what will happen. That's the result of the part of indexation that still we have not been able to capture because we're still not there at this time of the year. On top of the like-for-like that we have already been experiencing. So from the point of view of rental growth coming from pricing power coming from just the real rental growth beyond inflation. At this time of the year, we can say that in this new [ game ], we are delivering substantial additional cash flow that should provide visibility on to how extent can we offset any negative impact of higher interest rates with higher cash flow coming from our rents. In this Page 28, you can see more specific message. In 2022, we have already experienced sustained rental growth of 5%. In terms of contract reduction, we are at 7% [ relisted ]. But this is only the first, let's say, layer of visibility that we can provide on future cash flows. As you can see, if we were to forecast inflation for a number of years already in year 1, the performance is quite impressive. But we have a second source of value in our future -- for our future cash flow to grow, which is what's coming from our Alpha strategy, which, as you know, both of you we are familiar with, has 2 levels, our pipeline and our renovation program. Our pipeline is what you can see on Page 29. And Page 29, we can just confirm that in this healthy environment, for our assets. We keep on providing additional good news on the performance of this pipeline. The pipeline of Colonial consists of 9 different projects where we have been disclosing progress in the last few months and years. And what we can share with you today is that we have already pre-let the vast majority to say all of it, of 8 out of 9 projects, 8 out of 9. The remaining one that we just started marketing just a couple of weeks ago is main problem. Looking at these 8 projects, many of them had previous visibility in previous communications with you. Maybe today, the additional news that we can confirm is that for #7, which is Plaza Europa 34.We are in quite advanced conversations, let's call it high interest for 100% of this building. So that's why we are putting [indiscernible] also on this building, but we will be also producing cash flows starting 2023. In other awards on the chart, on the right hand of this page, if you look at the cash flow that is coming from all of these pipelines, we have secured gross rental income to come either secured or with high visibility for a total amount of EUR 54 million, which compared to the EUR 10 million that can only be seen in the P&L at the end of the third [indiscernible]. And if we would be successful with the remaining one and the remaining things to be done, that will lead up to EUR 81 million of future cash flow to be added to our P&L. Page 30, some examples. Maybe what we'd like to highlight of these examples is that you know that for us, quality means the best assets, but also means the best clients, which you can see here and also means the best contracts. By the way, when we say that we are delivering indexation, a big part of this, if you may allow me, the expression is easy. It's just because we have a substantial number of long-term contracts with super high-quality assets. There's nothing particular that you have to do just to capture this rental growth. It's just to collect the harvest of what we did a few years ago when we started with all of these clients and all of these assets. The second level of alpha value is what we call the renovation program, which mainly has to do with existing assets where we are going through investments that are related to the renovation of the assets. And here, we also have 9 different initiatives that amount for more than 100,000 square meters. And basically, again, here, the message is a high level of progress, 8 out of 9 projects are being delivered. 6 out of 8 assets are almost fully let. There's only one project which is left to start in 2023. And if everything goes well, this should provide EUR 36 million of [indiscernible], which are already secured plus an additional 11 if everything was well with the remaining project to a total amount of 47%. These figures compared to EUR 17 million. million only included in the P&L. Again, you can see a little bit of color of what's behind these renovation programs in terms of assets, in terms of clients, in terms of what kind of contract levels are we signing what kind of rents are we selling compared to ERV. And this is the second source of income. So basically, if we say the game now is for deliver incremental cash flows at the end -- not the end, the end of the third quarter of this year, I think that we are providing high visibility on this, which is the part of the equation where we can deliver -- this is basically what we wanted to share with you today. On Page 34, basically, the conclusions. We are delivering incremental rental income, 12% more than a year ago. We highlight as a particularly interesting figure, a 7% like-for-like, which is #1 in the European sector, plus 23% regarding EPS year-on-year. And all of this based in strong operations as we have seen strong letting volume a strong market, strong rents.We basically rely on our strategy of prime positioning that for us means good assets, good clients, good contracts that can help us to deliver incremental rents and incremental cash flow. Basically, with this incremental cash flow coming, number one, from indexation plus rental growth that is pricing power; number two, from additional value coming from our pipeline and coming from our renovation programs. So far, this has been translated at this time of the year, is very positive numbers. And maybe as a conclusion, we were the guidance of $0.28 to $0.29 for the EPS for the end of the year 2022. As of now, we believe that we will be beating the upper range of this guidance in the same way that we believe that this pan-European private City asset positioning of the company is outperforming the market as we can see with the results, and this will help us going forward in the near future. These are the results for the third quarter of 2022. Now we will be very happy to go to any questions you may have.

[Operator]

Thank you. [Operator Instructions] The first question comes from Veronique Meertens from Kempen.

[Veronique Meertens, analyst]

A few questions from my side. Perhaps first on valuations. Just curious what kind of discussions are you currently having with appraisers? How are they looking at potential yield expansion versus the revenue growth? Is there a key difference between [Technical Difficulty] I noticed in your presentation, you mentioned yields for France stands at 3%, but stood at 3.25% for Spain. So therefore, I was wondering if there was a difference.

[Pere Serra, executive]

Thank you. Look, as you may understand, we cannot disclose, not too many things about the discussions with appraisers and basically, to be honest, because we don't have either a lot of visibility yet. Maybe what I could say is that we don't have any evidence of distinctive performance of different performance of Spain versus French assets. If I had to say something, it's more about individual characteristics of each asset. So prime versus secondary plays a bigger role than any geographical, let's say, angle of the discussion. And of course, I think that current situation that may happen, we can all agree that appraisers are based on evidence, spot evidence of what we see in the market. And what we see in the market is not a lot yet. And the other thing they do is that they look at the discounted cash flows that we have for any asset or the discounted cash flow that themselves may have. And maybe related to what I was saying before. And number one, they may come with a different vision on discount rate or cost of capital or whatever they mean, they may do. We don't have be on this. But number two, of course, they have to, let's say, acknowledge what's going on with the cash flows. And the joint effect of both things as of these days is unclear. And you know what this is, the more strong you are, the more you offset or can even beat any let's say thing that may happen from yields being revisited. And last but not least, I didn't say anything maybe because we are to focus on cash flows. Recently about other nonfinancial angle of our positioning, which is the ESG positioning our strong portion in rebuilding. The other thing that starts to have a little bit of visibility, the difference between green and brown buildings. This is something that is now remains a qualitative talk, but at some point, certain tradition into numbers. Having said that, just to give a view on this, well, we don't have still any visibility on where the appraisals can go by the end of the year.

[Veronique Meertens, analyst]

[Technical Difficulty] perhaps one more question from my side. You still have relatively high net debt EBITDA, I would say, due to completions and with letting results, we can expect some increase in EBITDA. Are you also planning on more disposals in the future? Is that one of the key targets for the coming years?

[Pere Serra, executive]

Well, regarding this, we all like to be very prudent, and we are not very specific in terms of targets of disposals. What we obviously can say is that our investment mood is negative or, let's say, is the one an investment strategy based on net disposals. So far, you can see what is done through at the end of the year, so close to EUR 100 million. This trend will remain, even I cannot be specific at this moment. Again, what we would like to highlight is that we want to be, let's say, more specific about individual assets than to be, let's say, brutal and generic about the analysis of our portfolio. And we have to remind the specific characteristics of our debt as Carmina has been showing what exactly the current debt that we are facing to what extent we are protected or not protected, what is the maturity, what is -- how many years will remain in this position and then compare this with a leveraged return of each asset -- of course, the yield will be whatever it has to be. But then on top of that, what is the effect of incremental cash flows that lead you with to an unlevered return, what's the comparison between these and debt and the cost of debt. These are an analysis that maybe forced us to be more, let's say, sophisticated in the individual carats of each asset. But maybe coming back to the beginning, without being specific or without providing a specific target, we will remain in this mood of, let's say, net divestment mood.

[Carmina Cirera, executive]

I'm sorry, Pere, I may add something on this ratio. You need to look at the net EBITDA considering also the future income or future rents that are already secured. And as of today, the impact on the EBITDA as of today is very insignificant. As Pere, was mentioning, the project pipeline, we have already high visibility on EUR 54 million on the P&L on the EBITDA only 10%. The same happens in the renovation program. So this ratio needs to be analyzed in a dynamic basis, first, considering the secure rents already locked and also the potential rent in the future because the CapEx is very immaterial. So the ratio today, it's -- I think it's not the level that the company would be in 1, 2 years after completion of the secure -- of all these projects already secured today. And this is the approach by the rating agencies, how is the level of this company about the EBITDA, considering the future cash flow that we have today already secured and considering also the quality of this cash flows.

[Veronique Meertens, analyst]

Yes. Okay. So -- but for instance, in my estimates, net EBITDA will go to roughly 13x and that is a level that you are comfortable with?

[Carmina Cirera, executive]

Well, if you consider all these secured already, yes, I mean, the debt to EBITDA top up improving the rent in the range of 13x, yes, between 13x and 12x and 14x for a company with the risk, which is low, we have in our cash flow.

[Operator]

The next question comes from Fernando Abril from Alantra.

[Fernando Abril-Martorell, analyst]

I have 2 questions, please. First is on margins. I would like to whether understand your year-to-date EBITDA margin evolution, particularly in Barcelona. Then second question is with regards to your hedging strategy. I don't know if you would be considering selling down part of your hedges to crystallize that value that you've mentioned, Carmina and also probably to increase cash and lower the amount of variable debt of your capital structure? And then third question is on the long-term guidance. So a couple of quarters, you pointed to a plus 60% EPS growth until 2024. A lot of things have changed since then, higher inflation, also higher interest rates, the small changes in your perimeter. So I don't know if this is still in place? Or would you be pointing to the upper end or to the lower end?

[Pere Serra, executive]

If you want to -- I'll start with the last one, just to say that I think that at this time of the year, we are still not in a position of providing an update on the guidance. Probably next quarter we can come with additional visibility and but we can see more or less now which are the evolutions of fundamentals, nothing out that can be added at this moment at this point. On the first question, maybe Carlos and second Carmina.

[Carlos Krohmer, executive]

On the efficiency and the NRI efficiency, it's a temporary time lag. As you have seen, we have just released renovation programs in the Barcelona market. So these assets are already in operation, but not yet at the full occupancy pre-debt level. So what does this mean that the OpEx of these assets that are in operation that typically it's almost 100% fully passed through to the tenants at the moment, fully accounting as a cost in the P&L of Colonial. As I have said, and we have highlighted, we have very advanced conversations to let this space is up. As soon as we have the letting up of the space, we have a double effect. We have an increase in rents and a much higher increase even in profit because we just not only get the additional rents, we also fully or almost fully reinvoice the OpEx that we have today in the P&L. So as soon as this -- we succeed and we closed the conversations, and this is what we will have a very significant impact, a positive impact on this.

[Carmina Cirera, executive]

Yes. On the hedging, Fernando, yes, it could be liquidated. So it's acquisition that we [indiscernible] but this kind of hedging is to cover and through what to protect and to manage the risk of the rate of the company. It's not a speculative position. It's to protect the company to perform or to provide high visibility on the future customer and the future EPS. We saw any volatility in the interest rate. This is the reason why we did this hedge, and this is the reason why were we have the benefit now type of any volatility on the rate that Colonial would be in the red for the following years 2%. And this is to protect our shareholders, our investors, our peer expectation and to provide this growth not affecting any volatility on the rates. So it's not a speculative position. It's to manage the risk the balance sheet.

[Carlos Krohmer, executive]

If I may add something. If you allow me sometimes it's a temptation because it would help on the short-term window dressing. So you suddenly one of the KPIs that is most sensitive to. And suddenly, you change the number easily. But the way we see our business is look, we are working on a long-term business plan. What we are saying is, if you look in the details in our debt and how our cost of debt will evolve in the next 5, 6, 7 years as a result of all of these hedging policies, what is the actual not market actual interest rate that we will pay, how this compared to what everybody else will pay I think we are better off and we can then rely on managing our portfolio without too much, let's say, risk coming from interest rates and manage our portfolio in order to generate, let's say, the right level of returns on the asset. I think that we prefer this second approach. We know that for the next 5, 6, 7 years, what the actual interest rate will be -- it's under our control. And we prefer this to what you're absolutely right now. If we dispose of this from a speculation point of view, we have, let's say, a window dressing effect, but this is not what we like to do at this point.

[Operator]

The next question comes from Celine Huynh from Barclays.

[Celine Huynh, analyst]

I have 2 questions, please. The first one is about indexation. Why is that indexation roughly the same in Madrid and Barcelona. It looks like it was a lot stronger in Barcelona. And I was wondering if you could provide any explanation? And the second question is about number of [indiscernible]. Your LTV has gone up slightly quarter-on-quarter. Why would you not care for numbers of rounds to preserve the balance sheet and under what conditions will you help it? How much CapEx would you say would you want to cancel it? And also what kind of total costs are you seeing for this Q.

[Carmina Cirera, executive]

Well, about the indexation. Well, you cannot compare the index between my [indiscernible] because it's at the contract that has been updated into CPI. So if one contract in Barcelona, the data that should be the decision to be done its 1st January and the contracts in Madrid are in March or in June, the impact on the P&L of this level of indexation will be much higher from the Barcelona contract rather than Madrid contract.

[Celine Huynh, analyst]

Okay. So it's about planning.

[Carmina Cirera, executive]

It’s not the level of execution. It's how the impact on the P&L.

[Pere Serra, executive]

And the second question, sorry, we could not hear very well. If you don't mind repeating it again, it was about [Technical Difficulty]

[Celine Huynh, analyst]

It's about [indiscernible] and your LTV is going up slightly quarter-on-quarter, you're at 38%. So why would you not cancel [indiscernible] to preserve your balance sheet? And under what conditions would you cancel it? And how much CapEx would you save if you were to cancel it? And what kind of yield on cost are you seeing for [indiscernible]?

[Pere Serra, executive]

Yes. Okay. Now I think I understood. I think that we basically are quite advanced in Louvre. So regarding the residential part, -- this is to be finished during 2023. And the office part is we finished first half of 2024. Now we will go through the details of the remaining CapEx on both. But I think that if we were to stop it, it would be quite detrimental in terms of value. So if now we have a specific valuation and we have to take new decisions, I think that any, let's say, marginal benefit on LTV would be much less than the value destruction that you would provoke in project that is being canceled when it's almost finished. So I take your point, if it was -- if we were at the very beginning, that would make sense. But we are, we believe, quite close to the end. As you saw, market performance in terms of letting activity is quite good. So yes, we have to cross the river for this year, 1.5 years, but we believe that at the end, so 2 years from now, a maximum, let's say, we are much better off in terms of valuation and even LTV that canceling this today. By the way, if you would like to provide some numbers about Carlos about the remaining CapEx on both residential and the office project.

[Carlos Krohmer, executive]

Yes. The remaining CapEx is altogether for [ Menear ], roughly EUR 120 million, EUR 90 million for the office part and around EUR 28 million for the residential part. And I would also like to remind that the cash flow capacity of this project once delivered is around about EUR 25 million of rent per annum of a very significant yield on cost. And also, it will be during 2023. It will be almost everything delivered. So we will see the first cash flows during 2024.

[Operator]

The next question comes from Florent Laroche-Joubert from ODDO BHF.

[Florent Laroche-Joubert, analyst]

Yes. So I would have 2 questions, if I may. So the first one is on the EPS that we can expect from Q4. So can we say that Q4 can be viewed as a repetition of at least Q3? So that would be my first question. And then my second question would be on the investment market. So would you be able to give us your view on the investment market in the different CBD offshore cities. So do you -- what appetite do you see from investors today for prime facility in CBD, for example, in Paris, Madrid and Barcelona and at which kind of prices?

[Pere Serra, executive]

Okay. Look, on the first question, I think that what I say now is that we are at November 16, so exactly just half of the last quarter. And what I can confirm is that our daily operations have not changed also when we have our management committee so the kind of dynamics, kind of individual situations have really go through that do not change substantially with what we have seen so far during the year. So that's all I can say, but I say what I can confirm is that we have not seen any change in the dynamics so far. Regarding the second question on investment markets. I think my view is that the institutional market now remains particularly cautious, no matter what kind of the assets we are talking about. I think that people need a little bit more of visibility on the underwriting assumptions that they have to do to invest. So on discount rates, interest rates, yields, inflation, incremental cash flows. So people is not ready to underwrite a discounted cash flow for any asset, I would say. So I would say that institutional investment now remains quite passive for any kind of asset -- maybe my view would be that, as of now, that the market that is remaining more positive, it's a market for a smaller kind of assets, mainly because there the players are different. We see a substantial presence of institutions like family offices or similar that are not, let's say, dependent so much on this underwriting assumptions don't have too many constraints regarding capital structure. And these kind of people, I think that they are -- if you look at the profile, you probably will agree easily, these kind of people, they do make a difference between a higher quality in the asset and, let's say, a secondary kind of assets. It's not a coincidence that if you look on the transactions we've done so far this year, all of them are regarding this average size. And number one, number two, the buyer is mainly family offices in our arcade. Number three, and this may be surprising, but so far, they are paying appraisal values or in our case, a premium, a 9% blended. So this sweet spot is the one that is working well right now and where you can be active and perform in very excellent terms -- while, let's say, a bigger picture, I think requires today more patients for the market to become, let's say, more active again as of now remains very passive. That's my view. And finally, no particular difference between geographical markets. Again, the big difference is about high-quality assets versus secondary assets, looking at the profile of investors that is quite obvious. But that would be my view of where investment markets are today.

[Operator]

There are no further questions. The speakers, back to you.

[Pere Serra, executive]

Okay. Just to thank you for your patience and attention in this presentation of Q3. It's been a pleasure to share these results that we believe are very good. We are quite pleased at this time of the year. Hopefully, we will be able to meet again in the future coming with the same kind of performance. Thank you very much, and have a good day. Thank you.