Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Analysis

Inmobiliaria Colonial Reports Robust Q3 Growth

Inmobiliaria Colonial experienced an outstanding third quarter, showing 11% like-for-like growth in net rental income and a 13% increase in recurring EBITDA, reaching 233 million euros. EPS also grew by 8%, hitting 0.238 euros per share. As a result, the company has raised its earnings guidance from the previous 0.28 to 0.30 euros to approximately 0.31 euros. The impressive results are attributed to a record-setting letting volume, with 113,000 square meters signed to date, totaling 49 million euros in annualized rents and a group occupancy rate of 97%, including a 100% occupancy in Paris. Furthermore, rental growth is strong, with 11% growth overall and 12% in Paris. The company maintains a strong liquidity position of 2.7 billion euros, with a hedging strategy keeping interest rates below 2.5% long-term.

A Strong Quarter Marked by Growth and Upward Guidance Revision

The third quarter reflected a robust performance across various financial metrics. Net rental income saw an 11% like-for-like growth, indicative of the company's strength in both absolute and relative market terms. The recurring EBITDA grew by 13%, hitting EUR 233 million from a previous EUR 207 million, and EPS experienced a healthy uptick of 8% to EUR 0.238 per share. These gains are credited to vigorous asset performance, with 113,000 square meters of spaces being let, generating EUR 49 million in annualized rent and pushing group occupancy to 97%. Subsequently, guidance for full-year EPS was revised upward from EUR 0.28 - EUR 0.30 to approximately EUR 0.31.

Solid Capital Structure and Disciplined Asset Management

The company continued to manage its capital structure judiciously, selectively disposing non-core assets totaling EUR 600 million year-to-date. These disposals were executed at valuation levels either at or 12% above the gross asset value, underscoring a strong market performance and liquidity. Furthermore, the firm maintained a robust liquidity position of EUR 2.7 billion and a long-term interest rate hedge below 2.5%, showcasing a healthy balance sheet.

Operational Efficiency and Resilient Financial Performance

The financial results were underpinned by a substantial cash flow, with a recurring net profit surging by 8% year-over-year—19% when adjusted for asset sales. The EBITDA's 13% increase—19% from continued operations—paralleled an 8% rise in revenues to EUR 279 million. The cash flow benefitted from superior occupancy rates and leasing conditions, with contracts indexed to inflation which afforded a 5% uptick. The stable and resilient financial capacity was reflected in an investment-grade rating and a fixed cost of debt at advantageous rates well below market averages.

Outlook and Guidance: Positive Trajectory with Revised EPS

Despite the financial cost increase due to rising market rates, the company's debt costs remain controlled, only increasing by 30 basis points compared to the market's 300. This financial prudence, combined with the strong cash flow derived from operational excellence, has led to the revision of the full-year EPS guidance to around EUR 0.31 per share, surpassing previous expectations.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Inmobiliaria Colonial Third Quarter 2023 Results Presentation. The management will run through the presentation, which will be followed by Q&A session. [Operator Instructions].

I am now pleased to introduce Mr. Pere Vinolas, CEO of Inmobiliaria Colonial. Please go ahead.

[Pere Serra, executive]

Thank you and good afternoon to everyone. This is Pere Vinolas speaking. I will run you through the presentation of the results, together with Carmina Ganyet, Chief Corporate Officer; and Carlos Krohmer, Chief Corporate Development Officer.

I would like to start with the highlights of our presentation on Page 4 of the presentation that we will be following. First of all, I'm pleased to say that the third quarter has been an outstanding quarter, again, for us in terms of our performance. First, we've seen a strong growth in net rental income. It's a strong growth, which means an 11% growth in terms of like-for-like, which means that is a good figure in absolute terms but also in relative terms to the peers.

Our EBITDA growth -- recurring EBITDA growth, its growth is 13%, reaching EUR 233 million compared to the EUR 207 million year-on-year. And finally, the EPS is, of course, showing also a healthy growth of 8%, reaching EUR 0.238 per share. So all in all, a strong growth in net rental income, EBITDA and EPS in this line. Let's say that accordingly, we are revising our guidance upwards from EUR 0.82 -- EUR 0.28 to EUR 0.30, that was the previous guidance, to approximately EUR 0.31 as we will discuss further in the presentation.

Basically, the driver behind this strong growth in our net rental income, EBITDA and EPS is a very good performance of our assets, both in volume and rental growth. The letting volume has shown an outstanding performance. We have signed 113,000 square meters year-to-date, that is equivalent to EUR 49 million of annualized rents. This is much higher than our long-term average. So it's almost a record year, what we are -- the path that we are showing right now.

As a consequence of this, the group occupancy is at the end of September at 97%, with Paris still fully let at 100%. And this outstanding performance, and it's not only in quantitative terms, but also in qualitative terms, meaning that the nature of the contracts and the clients that are signing with us remains very high with strong tenant demand coming from professional services, luxury brand companies and similar kind of high-level clients.

I said that the performance has been outstanding in terms of letting volume. Also, it's been very good in terms of rental growth. The ERV growth that has been signed up to the third quarter, of September of this year is showing an 11% growth, 12% in the case of Paris. That means that the rental growth is showing acceleration. And behind that growth, it's rental growth itself, but also, of course, a solid capture of indexation, that is full pass-through of inflation at this time of the year.

And of course, this healthy rental growth and letting volume is done also in a framework of low-carbon assets, which are attracting these high-quality tenants at maximum rents. That's the main point regarding the, let's say, the P&L.

In the meantime, concerning the balance sheet. We've been following our policy of disciplined capital structure. We've been keeping on disposing selectively of the assets. The third quarter of this year, we have sold EUR 100 million of additional disposals. That put us very close to EUR 600 million of disposals year-to-date. And a very interesting valuation levels. On year-to-date, we are basically selling at appraisal value. The particular disposals that we have done during the third quarter have taken place at a 12% premium to gross asset value. That, I think, proves that we've been quite successful compared to market performance, and particularly showing the high degree of liquidity, and not only liquidity, of valuation attached -- the market valuation, attached to our assets.

On the other side, the liquidity remains very healthy, EUR 2.7 billion, almost EUR 600 million more than a year ago, and with a healthy hedging strategy that is ensuring that interest rates remain below 2.5% in the long term.

These are the highlights. And now we'll go into the details behind this data. But just to give flavor of the rationale of the drivers of what has happened during this third quarter, we are -- firmly believe that the main driver of this is the flight to quality trend that we can see in the market, the polarization, which is increasing as a fact. The fact that many companies have already decided that they want to increase their presence in the locations where the experience that is being provided to the employees is outstanding, that happens to be in places where the vacancy is extremely low, where scarcity is a major issue and where the vacancy is close to 0 in Paris and below 2% in Madrid and Barcelona.

And therefore, this is the main driver and happening, the market is starting to differentiate between different submarkets. That probably deserves a different view from anyone's point of view.

The letting performance, as I said, as a consequence, it's been outstanding. I gave the main numbers, in terms of square meters signed, annualized rent and rental growth. But just a few examples. Velazquez 86 in Madrid has been signed above EUR 40 per square meter per month, EUR 41.

Washington Plaza, to do an example about France, we see current tenant taking up additional space at EUR 1,000 per square meter. In #Cloud, again, in Paris, we've seen during this quarter a 12-year lease signed with a luxury good company from more than 9,000 square meters at this top rents. And finally, in Galerie des Champs-Elysées, a 7-year noncancelable turnkey lease signed with Adidas for more than 3,400.

Page 5 -- 6, sorry, it's just an illustration of what our equity story is. You can see our current situation in Paris and in Madrid. And here, you can see what is happening in our submarket of aspirational office and what is the kind of occupancies that we see.

And in Page 7, not only their occupancy, but just to share that this performance is happening with very good KPIs in terms of rental growth on rental level. You can see the 12% rental growth in Paris as a very, let's say, outstanding number. EUR 1,000 as a maximum rent signed year-to-date in Paris. You can also see Madrid performing quite well, 8% rental growth. And as I said, EUR 41 per square meter per month already signed in certain assets.

So a very good set of numbers with a rationale that is based on the polarization as the main driver of this outperformance.

With these introductory remarks, and now I will ask Carmina to step in and to comment on the financial performance of the company.

[Carmina Cirera, executive]

Thank you, Pere. As usual, in these sections, we are going to detail the main indicators and drivers that underline the strong evolution of the results.

The result of this 3 quarter are described in the first place by a strong growth of the cash flow. Recurring net profit increasing 8% year-over-year, 19% without considering the asset sales, and the same growth year-on-year is shown on the EPS, up to EUR 0.238 per share. The main driver of this growth is mainly the EBITDA increasing 13% and 19% continued operation, in line with revenues with a growth of 8% like-for-like, up to EUR 279 million.

Secondly, the strong cash flow. The strong cash flow is supported by an extraordinary operational activity with the letting activity of more than 113,000 square meters, meaning an outstanding occupancy of 97.4%. These letting activities have been closed at exceptional conditions, as you can see, which represents a rental growth of 11% above inflation, demonstrating, again, the pricing power of our portfolio, benefiting off the polarization trend, as Pere was mentioning.

Additionally, all the contracts have been updated. As you know, this year, to an average indexing between CPI and ILAT in France of 5%.

And finally, a solid balance sheet. Due to an active management of the balance sheet carried out, as you know very well, in a permanent basis, we maintain the rating -- the investment rating of BBB+ by S&P. We continue to keep as well a very strong position of liquidity, eliminating any refinancing risk.

And as well, we maintain a fixed cost of debt of 100%, in levels below market of 1.72% spot. And for the following years, as you know, we're well below market levels, thanks to the prehedge structure, which ensures a debt coverage ratio according to the rating agency.

In the following page, you can see the most relevant indicators more visually that shows the growth of Colonial cash flow and the resilient profile of our portfolio that I was mentioning before. If we analyze the recurring results, we see that it increases by 8%, 19% without taking into account the sales program. The building block shows the positive contribution of the continued operation of the portfolio, EUR 34 million.

On the other hand, the negative impact of the disposal of nonstrategic assets, EUR 13 million, and as well the negative impact of the financial cost of only EUR 12 million. Basically, this impact of the financial is due to the rate effect. Remember that in September 2022, the financial cost was 1.4% compared to the existing cost of debt of 1.72%. The market, as you know, has been increased more than 300 basis points, while the cost of Colonial -- the cost of the debt of Colonial has only increased 30 basis points.

Consequently, due to the strong cash flow and also due to the strong operational performance, the full year EPS is being revisited up to circa EUR 0.31 per share, beating the upper end initially released in the previous communications.

This strong EPS is mainly based on the strong growth on gross rental income. First, back on the strong like-for-like growth of 7% of the operational portfolio, EUR 18 million. Secondly, the entry into operation of the projects contributing with EUR 28 million, 11% growth.

And on the opposite direction, as you know, the sale of nonstrategic assets have had an impact of EUR 29 million. As a result of the portfolio of a higher quality has showed year-on-year an increase of gross rental income of 7%.

And what has been this growth and why. I am in Page 13. It should be noted that the 7% rental growth has been positively impacted by a great performance in Paris market with a 13% rental growth. In comparable terms of the portfolio, the 3 markets have performed very positively with an extraordinary evolution in Paris and in Madrid.

This extraordinary like-for-like growth of 8% is basically due to a combination of rental growth, thanks to the scarcity of grade-A assets in the markets where we are operating. The price impact also includes the indexation effect, thanks to the quality of the contracts and clients. And finally, the improvement in occupancy, especially in the Madrid portfolio, as you see in this chart in details in Page 6.

If we look in perspective, the rental growth is being accelerated. As you see here in details in this page. You can see the extraordinary year of the rental growth and net and gross compared to the last 3 years. And moreover, you can see the growth capacity of rentals beyond indexation effect. So very healthy levels of growth in the last quarter as we are -- as you can see in this page.

As you well know Colonial is characterized by an active portfolio management in order to recycle capital and the strength of capital structure. In a very market as narrow as current -- as the current one, we have been able to sell almost EUR 600 million, EUR 574 million, confirming valuation. The operational growth in the last quarter adds additional EUR 100 million to the disposal program, with an average premium of 12% to the last supported [ produced ] value.

As you see in this map, the 3 disposals are non-strategic. A land plot in Periphery in Madrid, a secondary asset with 17% vacancy, and a small asset also in the secondary area. With these new disposals, we have been expanding the divestment plan that we shared with you in the last presentation of results. According to market conditions, the results -- we believe that this result that has been achieved with this disposal program. It's very outstanding according to market conditions. We have confirmed valuations. We have reinforced the liquidity and the debt position, and we reinforce as well the quality of our portfolio.

As we have been sharing in a quarterly -- in each quarterly presentation, Colonial has been very actively managing the capital structure and therefore, the debt, and as well successfully covering the interest rate and any refinancing risk that we may face. In this sense, there has been a decrease in net debt of EUR 240 million in the last 12 months, with a loan-to-value of 39% according to [indiscernible].

We have also a fixed interest, cost of debt at the current levels of 1.7%. And additionally, and as you know, we have explained in the last presentations, as a consequence of pre-hedged closed in 2021, 50% of the debt at rates of 0.67%, which represents a mark-to-market position today of the derivatives of more than EUR 300 million. We can guarantee the financial costs in the coming years below 2.5%. Finally, as you see here, the liquidity position remained strong and healthy, following any refinancing risk of the future debt maturities.

And in the financial management, another important milestone that demonstrates the ability of Colonial to have access to the financial market has been the signature of the new revolving facility of more than EUR 800 million, EUR 835 million, under very favorable conditions and providing additional liquidity as well to the group. This revolving credit line is qualified as a green loan, reference to a very ambitious green KPIs that allows us to maintain the strong position from one hand and confirms as well our strong commitment on the ESG strategy of the group.

[Pere Serra, executive]

Thank you. So now we get into the next section. And Carlos Krohmer, we will walk through -- of the outperformance in the operational side.

[Carlos Krohmer, executive]

Thank you very much, Pere. I'm on Page 19. As Pere mentioned at the beginning, we have signed 130,000 square meters year [Technical Difficulty]. This is extremely large because if we take into account that we are already several quarters at very high occupancy levels, we have really not that much space available. And even though we have signed a lot, and almost on previous year levels because previous year, we signed 24,000 square meters in the Biome project. If we take this out, we are at the same levels than previous year that was a record year.

When we look at the breakdown of this, more -- close to 50% is luxury industry, tech and media, professional services, and we've signed with an average maturity of 9 years, so extremely strong.

Mainly on the Paris portfolio, an example that it's nice to be highlighted, we have recently signed with a cosmetics company that was already in the building, extra space and at a record rent at the levels of EUR 1,000. So people are taking more space in our buildings at record rents.

And this leads me directly to Page 20, that is our rental growth profile, which are the levels of rents that we are signing in our contracts. And as you can see here, the market rental growth is accelerated -- accelerating.

In first quarter, we signed rents 2% above the market rent level of December '22, in Q2, 6% and now at 11%. So really extremely outstanding. We think it's one of the highest levels in the market. And it's driven mainly by Paris, but we're also seeing a very strong acceleration in the Madrid market. So very, very strong rental growth and across the board.

When we go to the next page, on Page 21, we see how the occupancy profile is evolving. And again, we have improved our occupancy that was already at very high levels, at 97.2% to 97.4%. We have improvements on all the levels year-to-date and especially a very relevant acceleration in Barcelona. In terms of absolute levels, Paris at 100% and Madrid at 97%, but at the beginning of the year, it was at 96%.

So really, I would say, structurally, we are talking about a full occupancy situation and just a little bit of structural available space, which is the space that is available. We can see a zoom of this space in Page 22. So today, on the office part of our portfolio, that is almost now the full portfolio, we have 2.8% of availability.

Basically, this is in parity of nothing available as of today. So this is basically then concentrated in 0.7% availability in the CBD of Madrid. As of today, this ratio is already lower because we have fully let 2 weeks ago the Velazquez building. The CBD of Barcelona, the availability is just 0.3%. And then we have 3 assets that 1 of them is entering into [indiscernible] of a renovation program, that are concentrating 1.7% vacancy in the Barcelona market. So a very healthy situation with quite interesting available product.

If we then go to the next page to the -- from the operating portfolio to the project pipeline. As of today, out of the 8 projects that we have, 7 are fully let, 100% let. The main highlight of this quarterly results is a fully -- completion of the full letting of the Velazquez. We have let the last floor at a record rent of EUR 41, and I think we can say today that Velazquez is one or maybe the building with the highest average passing rent in the Madrid market. So it's one of the best buildings in the market.

What is now will come progressively into operation in the coming quarters in 2024 is the Mendez Alvaro Campus. Just to remind, we have a part of this that is office and then a part of this that is residential. On the office part, we have today already very advanced conversations for more than 10%. And we have, in addition to this, a number of large clients that are really visiting several times the building with many interest. So we are really in good mood on the commercialization of this project.

Last point on Page 24. As Pere mentioned at the beginning, the GRESB results have come out just recently. We have again increased our standing portfolio rating. We are now at 94 on 100 points. This is extremely high and puts us at the top 3 level in listed Europe. And we confirmed the 5-star rating for the fourth year in a row.

And on the development benchmark, you know that we also do projects, we are even higher. We are at 98 out of 100, with a very relevant increase since we started to participate in GRESB and also a very relevant increase year-on-year.

In addition, you know that we are really in the business of creating low-carbon destinations. This has been also officially by third-party awarded with the BBCA. This is a label of low carbon buildings in France. We are -- we have obtained 100% of low low-carbon building certification for the projects in our French portfolio. And Colonial has been included in the newly created ESG -- IBEX ESG Index that we are also quite proud of.

[Pere Serra, executive]

Thank you. So some final remarks on my side. First of all, on Page 26, just to state the fact that the machine Colonial is working and delivering very well in terms of cash flow and EPS delivery.

In the end, what we see is a multilayer cash flow growth. First of all, with the pass-through of inflation showing maximum power, maximum pass-through, a real inflation hedge, as we've seen before in the figures that have been shared by Carlos. Second, moreover, rental growth in terms of like-for-like that it's very high in absolute and relative terms. And moreover, additional cash flow coming from projects and the acquisitions that we've done in previous years.

All of this is transformed into a recurring EBITDA that is growing 13%. And as it has been stated before, it's remarkable that we -- this EBITDA is growing 15%. If we consider that we've been in a divestment mode in recent months and years. And therefore, this could be revisited. And to say that if we look at this from a continued-operations point of view, that cash flow would be increasing 19%, which would even be much more.

The earnings per share, of course, as a consequence, also showing a remarkable performance, EUR 0.238 per share at the end of September, 8% year-on-year, 19% if we were to adjust by the impact of asset disposals, a very strong performance. And therefore, as I said at the beginning of the presentation, we revisit our guidance for the full year EPS from the previous EUR 0.28 to EUR 0.30 per share to circa EUR 0.31 per share.

As I said at the beginning in my introductory remarks, I think that what's going on is a clarification of the performance of the market that more and more is clearly showing the different profile of the different markets.

Simplifying, what you can see on Page 27 at left, is that the different occupancy in the grade A CBD kind of places, 0.3% in Paris, 1.7% in Madrid, compared to a less attractive performance of the rest of the market, 8% vacancy total market in Paris, 12%, vacancy in total market in Madrid is driving the prime brands in a different way, while rents remain not so much performing in the outer M30 or in the outskirts of Paris.

If we look at prime CBD market, we already can see and accumulated rental growth, which is relevant, both in Madrid or in Paris, as you can see in this chart. And Colonial happens to be mainly in the prime CBD, and therefore, we enjoy the results of this strategy, and we are showing an occupancy of 100% in Paris and 97% in Madrid, and a rental growth of 12% in Paris or 8% in Madrid.

And this, let's say, different performance and polarization of the market, of course, means that our GRI like-for-like growth is showing an absolute number, 8.2%, which is remarkable, but also that is different to the peer group average or the peer group mean.

The other benefit from the positioning of the -- of Colonial in high-quality assets is when we look at the investment market. As you know, we've been selectively divesting in the last 12 months. We've executed EUR 600 million. That is mainly focused in Spain because the nature of the market, which is most focused on a smaller size kind of assets, makes it easier to implement a disposal strategy.

But anyway, it's relevant to note that in Madrid market, where there has been, according to market sources, a total divestments or total volume of transaction of less than EUR 1 billion. Colonial is representing, roughly speaking, half of everything that has happened in the investment market during the year.

So it's obvious that we have to conclude on the high liquidity of our assets. And since we've been selling this at appraisal value, but more recently at premium, as you can see, we also have to conclude that not only do we own liquid assets, but we own assets that are perceived from a market valuation point of view very well at the moment of disposal.

So not only we are happy about the performance of our [indiscernible] of business and the cash flow generation, I think [indiscernible] the divestment side, but we think that we can so far between [indiscernible].

My final remarks on Page 29 are a little bit to revisit, again, some of the highlights that I've been sharing through the presentation. First statement, Colonial's letting performance continues at historical high volumes. So at the moment, where the office, as an asset class, is challenged, when you talk about a specific kind of asset class as grade-A stock, the scarcity generates a raise to quality that is accelerating bifurcation and this is happening across Europe. And this is because central locations are benefiting from short commuting times, which is a key factor for us -- office usage.

And not only commuting time, but also experience and cultural benefits of central prime office on wellbeing are proving that are here to stay. As a consequence of this, Colonial's assets are capturing above average market rental growth, that's the other statement that we can say, coming from the experience of the year so far.

Rents are rising with accelerating momentum, double-digit ERV growth in Paris, for example. Colonial's net rental income growth in terms of like-for-like growth, it's among the highest in Europe. And we've been, therefore, revisiting our EPS guidance up to the levels of around EUR 0.31 per share.

Not only on the assets that are already in place. Also, the creation of top product is proving to deliver extra value and extra cash flow. Basically, we're proving that Colonial is able to transform urban centers with amenity let space to have the examples of Louvre, Madnum. And this strong track record of urban transformation with outstanding capital value gains is the other evidence of our year so far.

And this, let's say, high end kind of performance, it's not only on the quantitative side, it's also on the qualitative side, and in particular, when we talk about sustainability, where low carbon destinations are also going to outperform the market in terms of occupancy and rental levels.

And finally, we'll remain with the balance sheet with financial strength and discipline, with a low cost of debt, debt that is 100% hedged, that in the -- for the next 2 years, that will remain hedged. And this is very important, not only today, but at very high level in the next 4 years. That means that the spot cost of debt, which is today at 1.7% will remain very low for quite a long time. And in this framework, our divestments are taking place, as I said, at a good level and in line with appraisal value.

So all in all, a good set of results for the third quarter. The operating performance, we believe, it remains quite solid. And that's what we wanted to share with you today.

So thank you. And now, as usual, we'll be open for any questions you may have. Thank you.

[Operator]

[Operator Instructions] And your first question will be from Mark Kulessa at Bank of America.

[Markus Kulessa, analyst]

And congratulations [Technical Difficulty].

[Pere Serra, executive]

Hello? No. Hello?

[Operator]

I'm sorry, somebody has removed his line. We will move to Florent Laroche-Joubert.

[Pere Serra, executive]

Okay, we wait.

[Operator]

One moment please. Please go ahead, Markus.

[Markus Kulessa, analyst]

Two questions, first on the revolving credit facility, you signed, maybe you shared it already and I missed it. What is the cost of the drawn debt for this facility?

[Carmina Cirera, executive]

Yes. The cost is swap plus the spread, and the spread is below the bond spread that we see in the market. So it's in the range of [ 120 130 ], depending on the KPIs.

[Markus Kulessa, analyst]

Okay. Then do you have an indication? I read somewhere that you have disposal signed but not yet executed? Do you have a volume of disposals already signed, which might come in Q4?

[Pere Serra, executive]

No, no, not yet. We are working on the interest that we have received from several investors in certain assets, but we are not disclosing any evidence on this yet. We believe that we'll be able to show additional disposals, but we cannot be specific at this time.

[Markus Kulessa, analyst]

Okay. Looking forward to it. Then I wanted to ask you if you are looking at raising secured debt? Maybe on the cost, the spread, which would be similar to the one you just gave me. But especially on your SSL part because you -- as you're probably aware, your EPRA LTV is pretty high because of the treatment of your minorities on the asset side and not on the liability side. Is there anything you're looking to do to address this and maybe raising more secured debt, especially on the Paris asset?

[Carmina Cirera, executive]

No. We treated the balance sheet as a group. We have 98% of SFL, and as well, the rating agencies are looking at the balance sheet as a group. We don't have today any secured debt. So all the debt is corporate through bonds and through long-term club deals. But the fact that we manage the balance sheet as a group and without putting additional leverage for any reason of KPIs, of loan-to-value that has been decided. So this is why we stick with the criteria that the rating agencies are looking at us.

[Operator]

Next question will be from Ignacio Dominguez at JB Capital.

[Ignacio DomÃnguez Ruiz, analyst]

Two questions, if I may. Firstly, how do you think the recent increase in bond yields could spread out to your portfolio valuation? And how much deal expansion do you think is left in your portfolio?

Secondly, do you plan to continue with your asset divestment program in 2024? And if so, would these proceeds continue to be used to reduce leverage?

[Pere Serra, executive]

Yes. Well, we believe that 2023, it's being a year of repricing of the assets in the market. Our yield has already moved up roughly speaking, 60, 70 basis points. I think this is not finalized. I think that where exactly the market will finish this adjustment, of course, it's unclear at this moment. We believe that we've gone a long way, but probably not finished yet, and we may see additional components of repricing by the year-end.

Having said that, what I wanted to highlight is that this pricing adjustment is a result of nominal interest rates that go up because inflation goes up. If we think about it, that means that as of now, we are observing the first leg of this adjustment happening with this yield expansion happening. This may end soon, not so soon. But as we said, we've gone a long way, but it's a one-off. Once this is done, this is over.

And then comes the second leg, which is the fact that we passed through in our cash flows the inflation as it is happening. So therefore, it's kind of a v-shape kind of performance, the one that should be impacting in our valuation, not also in our relation but in the valuation of our sector.

But to answer your question, as I said, we believe that having gone a long way, this is not finished yet, and we may still see further adjustments by year-end. The asset divestments in our company will remain a driver of our strategy. As we have shown up until today, it's been quite healthy, the way that we've been able to handle this with divestments happening in very good terms.

In other words, at implicit NTAs, very attractive, in line with the NTA that we have. So if you can do more of this, it's not only that you are improving your capital structure with a healthy LTV, it's that compared to capital market valuation, you are creating value every time that you dispose of an asset way above -- way higher that where the price of the stock market is in capital markets today.

So we will keep on doing this. You can see that we do not -- we are not specific about assets or figures because I think that right now, we have to be talented to find the right windows, the right moment, the right way of managing the market. So far, I think we've done quite well, and we'll remain like this, being mainly opportunistic about things that can be done without attaching a specific number or a specific name to this strategy.

[Carmina Cirera, executive]

So Ignacio, there was a question about the use of proceeds to [ consol ] the debt. As of today, we would like to keep that liquidity and not to do any, well, liability management or other use of proceeds. First, because we don't have any stress about ICR according the cost of debt we have today. And as of today, the decision has been keeping the liquidity because already it's an option of value to keeping the liquidity today.

[Operator]

Next question will be from Adam Shapton at Green Street.

[Adam Shapton, analyst]

A couple probably for Carlos. One just on Mendez Alvaro, 2 things. The market rent growth you've seen in Madrid, do you expect to capture that in Mendez Alvaro as you lease that up compared to what you were underwriting 12, 18 months ago for that? And then secondly, on that, are you -- do you expect to be fully let by delivery? Or are you a bit more relaxed about waiting to capture further rental growth there?

And then one separate question. Just are there any specifics about the negative releasing spread in Q3 in Madrid, was it certain assets and leases? Any color you could provide on that would be helpful, please.

[Carlos Krohmer, executive]

Okay. Yes. Maybe start with the second question before going into the pricing.

The project will be progressively delivered by phases, not all at once. And it's a large project. So it would not be -- we have to see how quickly this will be let up. But we are also not in a super hurry. So this means we are seeing extremely good demand, a lot of people visiting the asset. We are in very advanced conversations on more than 10% of the office part. And what we are seeing as of today is that the rents are very good and well above our initial underwriting.

So we are really prioritizing high-quality clients with good rents. And this means sometimes to wait a little bit more, but then get a big chunk of demand with a very good rent. But at the moment, the momentum there is very, very encouraging. Honestly, reasonably higher that we could expect at this moment because the asset is not yet finished. And so this is very good.

On the release spread, I did not get very well the question. If you just could repeat on that point. What was your question?

[Adam Shapton, analyst]

Just on Madrid releasing spreads on page -- was it Page 20 of the presentation, just recorded minus 2%. Was that a specific asset? A bit surprising to see a negative number there.

[Carlos Krohmer, executive]

Yes. Good question that you put. At this quarter, the release spread is not really a very meaningful statistical data because it's just in 1 building. It's 1 building where this happened. So a very low activity point. It's a building up to [indiscernible], so not really in the super CBD area.

And there, we had a slight correction to the passing rent. Indexation has been more rapid and earlier in Spain, and this has closed a little bit more the reversion gap, but it's not really statistically relevant because it's just one off.

[Operator]

Next question will be from Ana at Escalante (sic) [ Morgan Stanley ].

[Ana Taborga, analyst]

My question is regarding your comments on market rental growth. So if I understand that correctly, you are saying that market rental growth is accelerating. Therefore, the growth in market rents has been faster in the third quarter versus second quarter.

But when I look at your numbers, and correct me if I'm wrong because there is maybe something I'm missing here, you're saying that you signed rents 3% above December ERVs in first quarter than 7% and then 9% for offices. So the way I interpret that is that effectively, the rental growth decelerated in the third quarter. Could you please clarify that?

[Carlos Krohmer, executive]

Well, no, if we go on Page 20, you can see it. On the Page 20, you see the rental growth. So you see how compare the signed rents with the ERV at the beginning of the year. And what you can see is, for total group Q1 '23, 2%. And for the office part, that is roughly all of -- almost all of the group, 3%. Then we go to Q2, we see 6% and 7% for the office portfolio. And then when we go to Q3, we see 11% for the whole portfolio, and 9% for the office portfolio.

So we are having every single quarter a higher growth on the ERVs that we have signed in our portfolio. So we have an acceleration of the ERV. And also, it's a data point that is not here. And when we look at the maximum rent signed, we have now reached EUR 1,000 per square meter year in Paris, and we have signed at a record rent above EUR 40 per square meter month in Madrid, the Velazquez building.

So maybe I did not understand your sub-question, but here the figures are quite clear.

[Ana Taborga, analyst]

Yes. So my question was that, yes, I understand that the rents at which you are signing new leases are accelerating. But the growth at which that rents are growing is not necessarily accelerating according to these numbers, right?

So I'm talking about the growth rate in market rents not market rents in absolute terms, because if I compare the first quarter is...

[Carmina Cirera, executive]

Sorry, go ahead, Ana. Please excuse me.

[Ana Taborga, analyst]

No, I want -- yes, if for example...

[Carlos Krohmer, executive]

So it's the growth of the growth in itself. Well, I think in today's world, to report an 11% growth on ERV, I think you have to look around a lot if you find any other company that is signing at these levels. And if you want to say, yes, from 2% to 6% or from 6% to 11%, I'm not really sure if this is so much the point because what you also -- I don't know.

[Carmina Cirera, executive]

But Ana, sorry, probably to clarify, the facts show that the contracts that we have signed in the 3 quarters at 11% more the rent than the ERV in December '22. If you compare these levels of France, the new contracts from the third quarter, if you compare to the first quarter, in the first quarter only was 2% above the ERV.

So in fact, the brands that we are signing now are much higher that the rents that we have been able to sign in the first quarter. So the consequence is, yes, in our portfolio because of this polarization trend and scarcity and the lack of offer, we are able to increase rents in the same building.

[Operator]

Next question will be from Fernando Abril at Colonial (sic) [ Alantra Equities ].

[Fernando Abril-Martorell, analyst]

I have a couple of questions. First, again, on rental growth. Probably, the thing I don't really understand is when I look at your Slide #27, I find out that the Paris rental market is fairly flat at EUR 1,000. But on your side, you are accelerating on new rents. So I guess, this is probably because of your portfolio outperforming the market. But I think that in the medium-to-long term, I think it will be very good news if the market also grows. So I don't know your comments about the rental market in Paris itself. Why is it flat year-to-date?

And second question is on your -- again, on disposal. So I don't know, but if you find a strong appetite for 1 of your prime assets in Paris, at a very attractive price, let's say. Would you be considering selling it? Or instead you prefer to continue on doing bolt-on disposals?

[Carlos Krohmer, executive]

Well, again, first of all, I think when you look at the prime market rental data, you have to keep in mind when brokers put this data point is the 3 transactions with the higher rent that have been signed in the market, something like that, is a very limited amount of pricing really at the top levels.

And yes, maybe we have now a second quarter, we are remaining at the future high level of EUR 1,000. But having said this, what you can see also is that the availability in the Paris CBD market is at 0.6%, and the demand for high-quality space is very healthy. And if we would do a breakdown -- a further breakdown of the demand that it's not in our presentation, for large floor plates, the demand is stronger. And as you may see, when you look at our portfolio progressively in the last years, we have concentrated on assets with large floors. And this leads to situations that, for instance, in the #Cloud building that we reported in the second quarter, we had a tenant that left the building, it was certain level of below EUR 800. And it took us just 6 weeks to re-let this building and at the level well above and close to EUR 1,000.

So really, our product is getting extremely strong demand and success in the market. And all of the contracts that we been signing, we have been signing in excess of the market rent that the appraiser has put on this building. And in excess in terms of double digit, 11% is really super strong.

So coming back to the market, it's very scarce, especially if you then cross grade A with large floor plates, it's absolutely non-existing. So at the moment that we put something on the market, we have really a very strong success. And for this kind of product, the rental growth -- on the prospective of rental growth, we remain very confident.

[Pere Serra, executive]

Maybe there was, Fernando, second part of your question. First, on the first one, just I would not elaborate just a general theory of market rental growth based on the numbers that we see here. The only thing we wanted to say is if you look at what is signed, which is factual, which is actual data, it happens to be 12% above what were in the ERVs of our valuations at December of last year.

And that's a healthy indicator. From this to extrapolate where do we see the number of rental growth in Paris or Madrid, it's always difficult because we are based just on our very selective evidence of our assets. So I would just remain with the fact, well, these are numbers. The numbers that we show as of September. We believe that in these terms are rather good.

And the second part of your question, which was about divestments in Paris. Well, we don't have, let's say, a principle for divestment more than the fact that we look individually at each asset that we own. We look at the marginal return that we expect as this asset remains in our portfolio based on the expectations that we have for each one. The more this asset can capture the general trends of the market, of providing exactly what the market wants and therefore, experiencing higher rental growth, the more is the marginal return that we see in this, then the less inclined we may be for the sale of this asset.

And in any case, when there's interest that is shown to us for individual assets, we do a comparison of to what extent, where the market appetite is compared to this, let's say, marginal return that we expect. Usually, the consequence of this is that the more an asset is aligned with our strategy of flight to quality, less likely we will sell. But that doesn't mean that it has to be here or there. There's no particular constraint in order to say that the market for our assets will be happening in Spain or in France.

What is true is that, as we all know, France, it's more institutionally oriented kind of investment market that has remained, let's say, more cautious during this year. While Spain, because of the size of the assets, it's a market that marginally, it's more biased towards a different kind of investor, more family-office oriented, let's put it this way, where the market is functioning for these kind of assets that we own more efficiently.

And as a consequence, we've done a lot in Spain and less in France. Well, we will adapt to market circumstances relative to the attractiveness of each asset at any moment, but without any specific guidance from our side of where the activity will be placed.

[Operator]

Next question will be from Celine Soo Huynh at Barclays.

[Celine Huynh, analyst]

I was just wondering if you could provide some kind of comment about your Spanish portfolio. So my understanding is that ILAT should still be quite good for the French portfolio next year. And then you've got the CPI in Spain, which is accelerating again from June. And so we can imagine a very good indexation in H1. And in France, it looks like it should be -- it shouldn't be a problem. But in Spain, we're starting to see negative release spread coming through, last quarter in Barcelona, this quarter in Madrid.

So my question is how confident are you on the fundamentals of the Spanish portfolio at the moment? And if you could provide any comments, including reversion and vacancy to be reduced in Barcelona for next year.

[Carlos Krohmer, executive]

Okay. Yes, indeed, from a temporary point of view, indexation started earlier, and some -- rated more rapidly in Spain. So obviously, as a consequence of mathematics, it has narrowed more the reversionary potential of the price effect in Spain than in Paris. In Paris, moreover, is a market that is a little bit stronger in general terms. So this would be the first comment.

The second comment is that, as a whole, our portfolio still remains with a strong reversionary potential on price and also on occupancy. And then it comes down to the second KPI that we here have highlighted and has performed quite well. That is to what extent are we capable to report rental growth. And so far, especially when we look at the Madrid market at the moment, we had a -- in the third quarter an 8% ERV growth. So we are here having a higher ERV growth than the indexation. But yes, the reversionary potential is higher on the Paris part than on the Spanish part, this is factual. And now we have an acceleration not because of the time lag, the ILAT in Paris.

Regarding the occupancy, we typically do not guide on this. It's very difficult to guide in this market in general on this. We think the first thing that I can say is that we have improved the most year-to-date, the occupancy on the Barcelona market. We have improved it by more than 500 basis points year-to-date. So we are working on this. It's very specifically concentrated on 3 assets because the rest of the portfolio is at levels of 98% or fully let.

One of the assets is the renovation program I was talking about in Marenostrum. This is in near to the sea. It's a little bit more international demand driven. And then we have Sant Cugat. Sant Cugat is a more difficult asset in the secondary area. It's one of the few, we have now very few assets that are in secondary areas. We don't like to be in these areas. And these areas are a little bit more difficult.

But yes, we are working on it. We had a lot of progress on Barcelona portfolio. So let's see in the coming quarters where we can come out.

[Celine Huynh, analyst]

Carlos, can I follow up on that? Because I guess if market rents remain flat, like we've seen this year, is it possible to see negative reversion coming through next year in the Spanish portfolio, i.e., my question is, are you over rented? And are you still pushing that inflation up, which is quite positive at the moment? Is there a risk of a negative reversion next year?

[Carlos Krohmer, executive]

The only thing that I've said is that the reversionary potential is, at this moment, higher in Paris, but in Spain. This is the one thing that I said. And moreover, we are still, year-to-date, on all the contracts that we signed in Spain and in France and delivering on top rental growth. So this is what we can say about it and we are confident.

[Operator]

And at this time, we have no other questions registered. Please proceed.

[Pere Serra, executive]

Okay. So thank you all. It's been a real pleasure to share with you these results, and we look forward to meeting you soon again by the end of the year. Thank you very much.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.