Inmobiliaria Colonial SOCIMI SA

MAD:COL

Earnings Call Analysis

Strong performance with increased EPS and robust rental growth expectations.

Inmobiliaria Colonial reported exceptional third-quarter results, with EPRA earnings of EUR 147 million, reflecting a 15% year-over-year increase. Gross rental income rose 6.5% to EUR 293 million. Notably, Paris led growth at 7.4%, with an overall portfolio rental growth of 5%. Occupancy remains strong at 2.7%. The EPS surged to EUR 0.26, a 9% increase, with full-year EPS now projected to exceed EUR 0.32. The company also emphasized its strategic position in prime markets and urban development projects, fostering sustained future growth despite potential regulatory changes in the REIT landscape, which may impact earnings minimally.

Strong Q3 Performance Driven by Prime Assets

In the third quarter of 2024, Inmobiliaria Colonial reported impressive results, completing the quarter with EPRA earnings of EUR 147 million, marking a 15% increase from the previous year. The gross rental income for the company reached EUR 293 million, reflecting a solid 6.5% growth on a like-for-like basis. This robust performance is largely attributed to the company's strategic positioning in prime asset classes, which make up 96% of its portfolio, particularly in key urban centers where demand significantly outstrips supply.

Regional Performance Highlights

Particularly noteworthy is the performance in Paris, where gross rental income hit EUR 192 million, achieving a notable 7.4% like-for-like growth. The re-leasing portfolio showed an impressive release spread of 19%, with a solid rental growth rate of 7%. The trends suggest a pronounced pricing power within the portfolio, fueled by high occupancy levels and strong demand for office space in prime locations.

Guidance Outlook and EPS Expectations

Management has raised its guidance for the full year, projecting that the EPRA EPS will exceed EUR 0.32 per share, an increase from earlier expectations of EUR 0.30 to EUR 0.32. This upward revision is a result of better-than-expected gross rental income and effective cost management on the debt side. The anticipated annual return on the new projects under development hints at a positive trajectory for earnings in the future.

Positive Rental Growth and Market Dynamics

The overall rental growth for the total portfolio has reached 5% compared to the estimated rental values from December 2023. This is supported by various market forces, including a notable 3.4% contribution from indexation and a remarkable 8% release spread indicating signed rents significantly higher than previous contracts. These robust growth metrics underscore the favorable dynamics in the prime real estate market, particularly as demand in CBD (Central Business District) areas continues to grow.

Debt Reduction and Financial Stability

Colonial's strong liquidity position is evident with over EUR 3.4 billion in total assets, including EUR 900 million in cash. This financial strength is complemented by a significant reduction in debt, amounting to EUR 500 million, resulting in a loan-to-value ratio of 36.5%. This prudent financial management strategy positions Colonial favorably in the market, allowing it to navigate uncertainties effectively.

Future Projects and Urban Transformation Initiatives

The company is actively engaging in urban transformation projects that are expected to deliver substantial returns. These initiatives are projected to yield an IRR (Internal Rate of Return) of 9% annually, driven by developments in mixed-use properties and advanced urban renewal projects. By strategically enhancing both existing and new assets, Colonial aims to bolster its rental income and further improve shareholder value.

Potential Regulatory Challenges and Tax Considerations

A shadow looms over the company with potential changes to the SOCIMI (Sociedad Cotizada de Inversión en el Mercado Inmobiliario) regime. Management estimates that such alterations could result in a 1% to 2% impact on EPS due to tax credits and depreciation adjustments. However, with 65% of Colonial's activities outside Spain, the effective tax burden may not significantly impede overall earnings, maintaining investor confidence.

Conclusion: An Optimistic Outlook

In summary, Colonial's recent earnings call paints a picture of a well-positioned company capitalizing on prime market opportunities. The combination of strong operational performance, effective cost management, and a solid growth strategy through urban transformation strongly indicates a bright future. Investors can take heart in the raised EPS guidance, resilient rental growth, and the company's adept maneuvering through potential regulatory changes.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to Third Quarter 2024 Results Presentation. The management of the company will run you through the presentation that will be followed by a question-and-answer session. [Operator Instructions]

I would now like to introduce Mr. Pere Vinolas, CEO of Inmobiliaria Colonial. Please, sir, go ahead.

[Pere Serra, executive]

Thank you. Good afternoon. This is Pedro Vinolas speaking. It's a pleasure to be here again to present the results of the third quarter of this year. I am together with Carmina Ganyet and Carlos Krohmer, as usual, to drive you through the details of our results for September 2024.

I would like to start with the highlights with our main headlines of the results and then go into the details and also maybe before that, a quick comment on latest events that are surrounding us.

The first thing I would like to say is that the results for the third quarter have been fantastic, have been super positive. You will see the details now. We always say that is strictly linked to our positioning. We are positioned in prime asset class product. And here, it's obvious that the balance between supply and demand drives our performance, is working very strongly as a tailwind for our delivery of results.

Our prime asset class is delivering the strongest performance in absolute terms, as you can see, and as you will see also in relative terms. We have company, Colonial that is positioned in prime asset class, 96% of our product is prime asset class. It's very well diversified among different regions, with super pricing power accounting for 91% of our assets. And this allows us also to extract value through a strategy of urban transformation projects in 2 ways with high-quality office assets in supply constrained locations and also driving new mixed-use approach.

Let me go to the specific numbers. Page 5 of the presentation. I think that this price itself, the outstanding results for this quarter, we finished September 2024, with EPRA earnings EUR 147 million. This is 15% more than a year ago. Revenues, gross rental income is at the end of September, EUR 293 million. This is 6.5% like-for-like, again, at the very high end of our industry at the very high end of our expectations. So very good.

The release spread of the company is 8%. That means signed rents versus previous contracts and relet spaces. And the rental growth for the group, total portfolio is 5%. Remember that this 5% is what is signed so far this year compared to ERV December 2023. The EPS of EUR 0.26, it's 9% above last year. I mentioned the revenues for the group. The GRI in Paris, in particular, maybe deserves special comment. It's EUR 192 million. This is 7.4% growth in terms like for like.

In Paris, you can see also a very significant re-lease portfolio, 19% and a growth in -- rental growth in Paris of 7%. So fantastic results in relative terms, in absolute terms. And this is the consequence of our specific positioning of where we are. You can see on Page 6 is the same description that you always see about this company. Where do we are, what's the occupancy of each and every building that we own, and therefore, the best performance that can be expected from this situation and from this location.

I would like to stress the fact that we are benefiting of a strategy that is based on the expectation and reality of bifurcation happening in the market where prime CBD is showing a very much better improved outlook than any other market. And that is not just a question of occupancy. It's also a question of rental growth. In this page, for example, #7, you can see the expectation of prime capital values for different locations where we are based from where we are to 2029. So I think that our performance is very strong, but I also think that what's happening in our market is a sentiment of improved outlook, a sentiment of change in the cycle that is very particular of the locations where we are.

I always defend that our market is a submarket with its own rationale of limited supply, excessive unattended demand and therefore, these kind of dynamics in capital value and in rental growth. And in this page, by the way, it's not a minor comment. You can see out of this CBRE research that I was mentioning to what are the prime capital values and where is our appraisal value today in June '24. So that also gives you a sense of how much additional performance we could expect from our assets. So a fantastic performance.

You will see through the presentation that this fantastic performance is in terms of leasing activities, is in terms of occupancy, is in terms of rental growth and also affecting existing assets and also new projects that are having a very nice development as we speak. That's the introduction of where we are today. I think that in this moment, maybe it's also good if I give some comments on the recent events that we've gone through in the last few days and maybe provide a little bit of informational guidance on this.

In a nutshell, as you may be aware, in the last few days, there's been a new debate about a potential change of regime for REITs in Spain. There was already discussions going on for the REIT regime to be enhanced in Spain for those REITs that have a specific exposure to residential. The discussions that were going on were about to additionally improve the benefits for those kind of REITs. That was one discussion that was taking place at the regulatory level or the government level as a potential avenue for REIT regime in Spain. On top of that, there was another avenue more recent over the last few days talking about a potential change of the tax treatment of existing REITs in Spain.

What are the comments we have on this? First, as you can see, there's no single scenario. There are 2 potential scenarios at the very minimum. So one would be nothing happens. The second would be there's something happening, which is enhancing of the REIT regime in the residential area. Third thing that would happen is a revision of the REIT regime in terms of tax treatment. The message that we wanted to pass on this is that, as we speak, there's a high level of uncertainty on which is the outcome out of the these 3 that we should expect as the most obvious.

We cannot be more specific about the probabilities that we give to each one, but at the very least, what we can say is that it's not obvious at all that the REIT regime maybe change in Spain. If the agenda had gone in a different way, and today, we're having this meeting with you as we're having and tomorrow was the day that the decision was expected to take place in the -- at the level of the Spanish parliament. What we would say is, as we are saying, we are waiting for the decision that will be taken, but this decision remains uncertain to us.

But this theoretical meeting that could happen tomorrow, in fact, has already happened. It was expected for today. It was expected for this morning. And the outcome that we have so far is that there's been no capacity to reach an agreement for the revision of the REIT regime in Spain. And these discussions have been postponed. So that's the reality. And that's the first message that we would like to share with you, there is a high level of uncertainty, not given certainty, number one.

Number two, this is already what has happened today. It's not just an impression of what could happen in the future. Discussions have taken place. An agreement has not been possible today. The second obvious comment is, okay, but you're talking about 3 potential scenarios. So no change in the regime, enhancement of REIT regime, taxation, new taxation in REIT regime. What would be the impact on Colonial of these potential scenarios? Stating the obvious, if no change happened in the REIT regime, nothing that's a probability that you wish to that.

If the REIT regime is enhanced in certain asset classes, again, between nothing and positive, but let's say nothing, no potential change. What if at the very worst end, taxation happens to take place in Spain as any ordinary company in the future, in the case of REITs? Well, I think that in that case, even if I say the probability of this would be not obvious at all, and there's a huge uncertainty on this. I think that we must give a little bit of guidance in this potential low-end scenario. We've seen certain estimates based on the fact that people have assumed that from 0 taxation, we are going to a 25% taxation. I think that there are 3 elements that have to be taken into consideration.

Number one, let's state the obvious. We have 65% of our activity, which is not based in Spain and cannot be taxed at the local level in Spain. So it's attached to local tax treatment in the other countries, meaning France. So first of all, only 35% of our exposure as of today is attached to a potential change in taxation, number one; number two, if you go through an analysis of what would be this taxation, you obviously have to come from, let's say, an EPRA EPS to a tax Spanish accounting, tax-driven EPS, which is not the same to state maybe the obvious -- the first obvious change, you have to deduct depreciation attached to the assets before reaching the fiscal earnings. That's a huge, huge change.

And number three, and that goes back to the history of Colonial. You know that from the past, we had an asset that we did not have to use in their recent history, but that doesn't mean that it's not there. That was a typical topic that we used to mention a few years ago. But I'm talking about the tax credits coming from the impairment of the assets that took place in the GFC that started 2008. In the case of Colonial, we are talking about EUR 5.3 billion of tax credit that can shelter any impact that also according to Spanish law is used, is constrained by certain limitations. And therefore, the impact of this is limited. But anyway still it's a relevant element of compensation. So these are the 3 main considerations.

That means in practical terms that the tax on income shows because of the use of the tax credit, the tax percentage that is applicable to Colonial should be not 25%, should be 18.75% and should be based, as I said, in a different number and would be only applicable to Spain, to Spanish assets. Well, just to summarize, when you look to the impact on this, our estimates it's that the impact in the EPS of Colonial in this potential scenario that, as I say, is uncertain, will be between 1% and 2%. That's our estimate, and that's the guidance I would like to provide for this scenario.

So in a summary, and this is where I leave this point, if anything is to happen is uncertain, not certain, there is -- if something has to happen, there are different alternatives, either taxing REITs or going in a different direction of just enhancing and changing the REIT regime. So different scenarios. The guidance for the lower -- the worst case scenario is that the impact on earnings according to our calculations, it would be between 1% and 2% of the EPS. Besides this, my comment would be, well, there's no agreement that has been reached today.

We have to be open to potential scenarios in the future that we'll follow closely, but the base case is that we have a strong case for being reliable -- for being comfortable on all the scenarios. We have a geographical diversification. We have a number of characteristics into our balance sheet that gives us comfort in the future that this scenario may have.

Well, I finish my comment on this. It's a pity maybe that this happened this week because we are really happy with the results that we are having. And we are not only happy about the results that we've achieved looking in the past, we are really excited about what we are going through and what we could expect in the next few months and for the next year. And we hope that this cloud that we have today is not hiding these fundamentals that we would like to share with you today.

Having said that, let's go into the next section on financial performance. I will ask the next speaker to step in, Carmina.

[Carmina Cirera, executive]

Thank you, Pere. And after this clarification for the benefit everybody, let's come back to the financial performance of these 9 months of the year. So the first one is the gross rental income, which is growing 5%, again, on the back of the core portfolio and the project deliveries. So the core portfolio is increasing 6% like-for-like. Thanks to the indexation, we will come later in more detail, thanks to the pricing power and a better average occupancy during these 9 months. Second, positive impact with 5%, positive 5% due to the project deliveries that we delivered last year, and these 9 months are impacting the full 9 months in 2024.

These 2 positive effects growing 12% are overcompensating the negative impact on the gross rental income due to the disposals that we did in last -- at the beginning of this year and last year. So the year-on-year rental growth is growing. Rental income is growing 5%.

If we go in more details for each market on Page 10. Again, this gross rental income is growing through the superior pricing power in the 3 markets, outstanding Paris with 7.4%; Madrid, 3.7%; and Barcelona, 7.3% due to the additional pricing power and through the additional average occupancy during this 9 months.

Basically, this -- the driving forces of this 6.5% are thanks to indexation, 3.4%; the pricing power, meaning rental growth, 2% as I mentioned, this occupancy -- high occupancy average during the period of 1.1%. So consequently, it shows this strong performance, a strong growth on the EPS, accelerating towards the upper range of the guidance that we did at the beginning of the year.

So as you can see it here, the earnings EPRA is growing 15% year-on-year, which I mentioned before, a positive impact of the core portfolio and the deliveries as well the financial impact, with a positive impact during these 9 years. Thanks to a reduction of the debt, so a better capital structure and as well an active asset management during this 9 months. So it means that this 15% of the EPRA earnings, is translating into a 9% growth in the EPRA EPS, which commits and we can guarantee that we are beating the upper end of the guidance. So the full year EPRA EPS will be above EUR this EUR 0.32 per share. So as you see, a strong performance of the operations. And as you know, during the year, we have been able to reinforce the capital structure. And this is why the rating agencies have confirmed the rating.

And moreover, Moody's has upgraded during the year our rating. As you can see in the summary of this slide #12. Basically, based on the leading position in the prime Paris, Madrid and Barcelona office market, again, the capacity to the liquidity and access to the capital. And today, only -- all of the assets are unencumbered assets. And this upgrade by Moody's reflects this improvement of the sustainability, lower leverage driven by the conservative financial policies with the benefits of the recent capital increase we did during July.

And in the same line, S&P highlight the strong competitive positions in the low-rise market. And again, they highlight, they build to generate this stable and predictable income despite the uncertainty that we passed during the last months of the year. And this basically has been translated in the numbers that you can see in Page 13. So a significant debt reduction in the last month, EUR 500 million, meaning loan-to-value of 36.5% with an EPRA loan-to-value of 44.2%. When we translate the net EBITDA considering the operating assets, this ratio shows a figure of 10.6% from 12%, but it was at the beginning.

And during -- thanks to the capital increase, thanks to the disposal, Colonial is benefiting with a very strong liquidity position, more than EUR 3.4 billion, out of which close to EUR 900 million in cash, which means that, thanks again to the -- as you know, the hedge and the pre-hedge that we were able to close in a very low moment of the rates, we are still benefit of the cost -- of financing cost of 1.72%. And after the cash management, actively being managed during the year, the cost -- the net cost of the old net debt has been translated in this 9 months in 1.38%.

[Pere Serra, executive]

Thank you. Let's now step into the section on portfolio management.

[Carlos Krohmer, executive]

Thank you, Pere. So I'm on Page 15. So let's see the operationals. But at the end, is also feeding future growth. All of that we signed today will be revenues in the coming months. So the third quarter in itself has been extremely outstanding. We've signed 47,000 square meters. Let's remind the third quarter includes July and August, pretty quiet months in the quarter.

Last year, we signed 16,000 square meters. So we signed almost 3 times what we signed last year in the third quarter. So momentum is very, very strong, I would even say, accelerating. This gives us a year-to-date letting volume of 113,000 square meters. Remember that our normalized run rate is 100,000 square meters, with 9 months we have already done more than 100,000 square meters.

In terms of economic value, the annual GRI that will generate all of these lettings, it's EUR 43 million, EUR 16 million, so close to 40% Paris assets and EUR 27 million Spanish assets. Interesting element on the Paris portfolio, [ EUR 16 million for 16,000 square meters ]. So very clear to see the price, average price EUR 1,000 per square meter 16 million divided by 16,000, so high-end rent.

If we go down to the next page, on Page 16, occupancy profile remains super strong. We are today at 4.1%, but 1.4% is non-like-for-like entry of new elements. On the one hand, is the portfolio of Criteria that has entered now into our perimeter and that gives us significant additional reversion. And as you may remember, we have renovation programs going on. We have delivered one in Barcelona, Diagonal l97 that now enters into operation. So we have 1.4% of space with significant additional rents to be generated, EUR 6 million additional reversion.

If we look from a like-for-like perspective, our vacancy is 2.7% vis-a-vis 2.9% at the beginning of the year. Prime Paris is almost 100% let, the Prime Madrid and Barcelona 0.5% and 2.1% of the total vacancy is secondary Madrid and Barcelona.

If we step to the price performance of the things that we have done, you see it on Page 17. Indexation is coming down, obviously, as everybody knows, in Madrid and Barcelona, we are at the 2% level. Paris is still at a higher level because we have the lapping technicality of the index that is [indiscernible] index. The interesting thing is when we compare the ERV growth, all of the contracts that we have signed with the indexation, what you can see is that prime assets significantly outperform normal growth -- normal CPI growth.

So we have 5% of ERV growth for the full portfolio. This means more than 200 basis points above the normal indexation run rate of our portfolio. The strongest market by far in terms of letting activity in Europe is Paris Prime, 300 basis points of outperformance to the indexation, a 7% growth; Madrid, 4% growth; Barcelona 3% growth. Release spread remains extremely healthy, 8%; basically driven by a double-digit release spread in Paris; Madrid, 1%; Barcelona, flat, also technical element of having had in the last 18 to 24 months, a very accelerated and fast indexation in Spain that has made some sort of catch-up in the passing rents. But the important figure to look at is rental growth that remains among the highest in the sector due to our prime asset portfolio.

And then we have the Madnum project, it's a project that will be delivered in the coming months. We are progressing very, very well. Just to remind you, this part is the office and retail part, the residential part was sold, it's roughly 50 -- close to 60,000 square meters, 58,000 square meters. Year-to-date, we have signed or having very strong conversations close to signing of about 17,000 square meters of extreme good momentum. And more important than that, we are signing rental prices 7% above our underwriting that is implied in the 8% yield on cost. So what you see on the 8% yield on cost, the prices that are there in that underwriting are being outperformed or being beaten by 7%.

And last but not least, sustainability, GRESB rating has come out recently. As all of you may know, we remain at the European leadership with the 5-star rating for the fifth year in a row, 92 on 100 on the investment benchmarks and 99 on 100 on the development benchmark. As you know, one of our key competence is Prime Factory to create the top product. Here, you see that the product is also top in sustainability terms.

[Pere Serra, executive]

Thank you. Let me give you a final comment on strategy of future growth and on our vision. So let's start by saying that today if, let's say, the average -- the vision for an office company, would be, okay, here I have an office company. This here have a bunch of assets that are not particularly appealing because this is an asset that is part of the market with no particular attractive balance between supply and demand. So no real mega trend that can support the rents going forward and not particularly exciting vision about the prospects that will be the average view.

Our vision for Colonial is Colonial is today 2 things. One thing it's a prime positioning in the office market, which is a different market with different fundamentals of supply and demand with, therefore, totally different expectations about future growth and value creation. I will go through this in a minute. So cannot be considered in the same way for us, it's a mistake? And second, it's a platform that is able to develop growth through additional Alpha creation based on urban transformation of the existing assets or the new assets through a view of office use of those assets or through a view of other asset class nature for these assets. And this capacity of transformation is part of the very basic element of Colonial, which has and will deserve relevant returns on this.

So that's the story, right? We believe that it's a different story. We go more in deep, I'm in Page 21. First, so let's look at the past. So the past is our earnings in 2021 were EUR 128 million. Our earnings expected for 2024 are EUR 187 million. That means that our earnings have grown in this period, let's say, so challenging for our asset class that have been 46%. That is 13% CAGR in terms of earnings. If we talk about EPS, we've gone from EUR 0.24 to EUR 0.32, and I will be more specific right now about this. So our history is already, for the last few years, the most part of the challenging period has been already double-digit earnings growth in terms of earnings or in terms of EPS.

Why is this happening? As I was saying, if we look at Colonial just as a platform of offices, we say we are in a particular submarket that have specific dynamics, which are relevant for the value generation in terms of rental growth of the future.

Let's look at Page 22, to give an example. This is Paris. Here, you can see the net absorption and net addition in the Paris Center West office rental market. If you go through this chart, basically, what you will see is that demand is like 3x supply for an asset that has already very low vacancy.

So imagine any asset class, any other asset class that comes to you with no vacancy at the beginning. And for an extended period of 10 years, you have net additions. Here you can see, let's say, 100,000 square meters and net absorption that is like 300,000. What would you say about that asset class and what you say we could expect about rental growth, which is when you can see on the right, which is highly correlated with our performance in terms of earnings in the last few years. Of course, it's not the same that if you talk about another market, for example, Paris briefly, where you can say that on average, net additions and net absorptions are roughly the same in a market that has already a certain degree of vacancy. There you would say, I don't expect rents growth. Would you say that those markets are the same market? I would not. I would say that the first market is a different market, but I would look at the company who can show strong positioning in this market in a different way.

That's our story about our base case. And let me be more vocal about it. I think that Colonial is quite unique in this positioning. In Page 23, you can see in the left, what's the positioning that we have in Paris CBD, what's the rental growth attached with this positioning. And this can compare to other peers that have a different position. We fight quite a lot to have the position that we have. It's quite different today, and we are quite happy about this.

On the right, you can see the same analysis done for Iberia, done for Madrid and Barcelona that can also can be compared to other peers in the industry. So we believe that our positioning is strong, deserve rental growth, has already shown rental growth and should expect additional rental growth in the future. And that is the first part of our equity story.

The second part of our equity story is we are in the mood of urban transformation, which are, as you know, it's nothing new for us. And that is adding a substantial additional value through these Alpha projects that provide enhanced value for the shareholders. We have a number of projects that are able to deliver a 9% on year IRR, an 11% levered IRR that are sitting on a different kind of nature from urban mixed use to business campus to life science and health care that can have the capacity to create value from EUR 1 billion to between EUR 1.4 billion and EUR 1.6 billion. That's the other driver of value that we are working on.

On Page 25, you can see the different projects that currently we are working on both in France and both in -- and in Spain. And the specific -- that's the one we saw before. And the additional asset management expertise that can provide rental growth and value creation in other renovation programs that we are going through in France and Spain.

In a summary, in 2023 in adjusted terms, so to make it comparable, we were a company that was able to deliver EUR 400 million of a gross rental income, I would say, adjusted for certain assets to make it comparable. We have a driver of new projects that are able to add EUR 80 million of additional gross rental income. We have EUR 30 million additional coming from renovation program and Alpha X assets. We have EUR 50 million potential coming from reversion and indexation. That means that organic growth would lead us to well in excess of EUR 500 million, EUR 560 million without any value coming from capital recycling, if there was any capital recycling that could benefit from that will give us a full potential well above that figure.

So that's the outlook for the future. Conclusion is Page 27. It's a fact the fact that Colonial has already delivered outstanding growth in EPRA earnings. The full year EPS has beat the upper range of guidance. Rental growth and project deliveries have been offsetting any impact coming from divestment. EPS and rental growth are, again, among the highest in the sector. So it's a reality of our performance that was already happening. This is based on our prime asset class, which is outperforming the market. It's showing a strong occupancy with the highest rental growth. We are in an outlook of asset valuation recovering faster, rental growth prospects very strong for the prime and in particular, Paris outstanding performance in Europe.

And on top of that, Alpha projects adding additional value to our future growth profile. And therefore, I think that very strong expectations for the future so far after this delivery of strong results.

Final comment maybe on EPS for 2024, with all year mentioning that we're having a good performance. We were saying that at the beginning of the year, we saw the range of EPS. We've seen EUR 0.30 and EUR 0.32 as we speak, we can already confirm that by the end of this year, our EPS will be above that range above EUR 0.32 and that means that our guidance will have to be revised upwards.

That's it for the presentation. And I will be pleased, as usual, to answer the questions you may have. Thank you.

[Operator]

[Operator Instructions] We have the first question. Celine Huynh from Barclays.

[Celine Huynh, analyst]

Pere, I got 2 questions for you. The first 1 is on your EPS guidance. Is it fair to say that you increased your guidance due to lower disposals? Because I recall a target of EUR 500 million and you've only done EUR 200 million so far? And the second one is on the SOCIMI regime, sorry, for the question again. In the third scenario that you were mentioning in which the SOCIMI regime is revised, the 1% to 2% impact on EPS you see from higher taxes using tax credit and depreciation. How long do you think it would last before the EPS gets hit more.

[Pere Serra, executive]

On the first question, no, the EPS outperformance. It's not coming from a revised, let's say, reversion of disposals it's coming from a stronger-than-expected top line gross rental income, also from wise management of financial expenses on the debt side, both together explain the vast majority of -- and let's not forget that this is happening in a year where we strengthened the capital structure of the company with additional equity coming from a new investor.

So I think that it's even better. It's an EPS revised [ upward ] with lower leverage. You know that the usual way of improving EPS is exactly the opposite, a leveraging companies. We are deleveraging the company and obtaining let's say, better-than-expected EPS, mainly driven, as I said, but by outstanding top line growth and in particular, also very good performance on the financial expenses side.

On the SOCIMI regime, good question from your side. So you're saying, Well, Colonial is giving a guidance of a 1% to 2% impact, you are mentioning 2 things, the tax credits and the depreciations, is this going to walk away? Well, no. The depreciations are standard, let's say, part of our P&L. It's a number, therefore, that is part of our recurrent record EPS and the recurrent P&L, number one. Number two, the particular treatment of tax rates in Spain. It's that you can have a huge tax credit. You can use it without any time constraint but you can only use it, let's say, to a very constrained limited -- limit every year.

So as we mentioned, our tax credit is huge. It's EUR 5.3 billion. It's huge. And according to the Spanish framework, there's no particular limit to use this over time. There is a limit of how much you can use per year. The guidance we've given is already based on these elements. So a limited use per year. That means that the EPS that could be 0 impact, well, it's still 1% to 2%. But on the other hand, good news is that this is replicable in the future without any potential change envisaged in the next few years.

[Operator]

We move on now to the next question by Ana Escalante from Morgan Stanley.

[Ana Taborga, analyst]

I have 2 questions, please. The first one is on the figures that you show in the presentation from CBRE, both for rental growth and capital value growth. If I'm reading that correctly, rents are slightly growing or stable in the next 3 years, but capital values rising, therefore, CBRE is assuming quite some yield compression in the forecast. Is that the way to read it? And whether you think that's feasible or whether you expect higher rental growth than what your guidance like what do you think that will drive such strong growth in capital values in the next 3 years?

And the second one is related to your re-leasing spread yearly growth figures. So if I look at the chart quarter-by-quarter or like the table quarter-by-quarter, I see that in the third quarter, your signed leases at a slightly lower spread over ERV than the second quarter, is that asset specific? Or should we start thinking that ERV growth is slowing down or maybe even trended to 0?

[Carlos Krohmer, executive]

Okay. Thank you, Ana. I will take this question. First of all, on the CBRE data. I think it's more CBRE to respond. But what we can say is, number one, as we've shown as an imbalance of supply and demand, there is a very strong fundamentals on rental growth. You see it in our presentation. We have several pages on it where there's super strong rental growth in the Paris market.

Obviously, then probably on the CBRE figures, there's a little bit of slight yield compression also. But the main element we talked about fundamentals, we talk about Alpha, we see we can show factually and we also see going forward that our product and prime product and especially the Paris market has the best growth profile as a consequence of imbalance of scarce supply and huge demand.

And the second, on the third quarter, then we signed a very little volume in Paris, and it's very contract-specific. So we have slightly 1% below ERV. We have signed some things almost at ERV. So we do not see at all any product contraction or slower pace on the rental performance, it's more the other way around. We are extremely confident and see rental growth going forward.

[Operator]

Next question by Markus Kulessa from Bank of America.

[Markus Kulessa, analyst]

I have 2 questions on the REIT Regime, also quickly and one on the potential SFL merger. So on REIT regime, I think you confirmed, just to say the EUR 5 billion tax credit is included in the 1% to 2% EPS impact. So the impact is post using tax credits, if I understand right? Then why an [ 18.25% ] tax rate, I think you said is applied? Maybe I didn't follow exactly.

[Pere Serra, executive]

Yes, let me answer on this, maybe Carmina can do better. But Spanish law allows for a very limited use of your tax credit which is up to 25% of the taxation that you could have. So imagine that instead of having EUR 5 billion, we had EUR 50 billion, the impact on the EPS would be the same because the most of, let's say, of a tax credit use that you could have per year, it's 25% of your taxable income. And so the 18.75% means that you can have -- take use of your tax credit, which drives you from 25% taxation to 18.75%. Of course, we're only using a very limited part of the huge tax credit we have. It's like having a small -- having a super big pool with is very a small exit.

[Carmina Cirera, executive]

Yes, sorry, but this limit of using this credit tax, we believe that it's going to be approved now. So today, you can have more benefit of the credit tax, but we are now in the worst scenario that trying to reduce because it's a proposal of the percentage of the users of this credit tax if it happens at the end, but it needs to be approved. In the worst, worst case, so SOCIMI regime plus this additional limit of using this credit tax the effective tax rate would be for Colonial 18.75%. This is the worst, worst scenario, okay? This is why the impact is 1.2%, considering SOCIMI taxable and the limit that needs to be approved, it's not now, but needs to be approved of this limit of credit tax.

[Markus Kulessa, analyst]

Understood. Yes. So it's the worst, worst case exactly. On the potential SFL merger, do you have -- I know you don't have exchange ratio, it's not ongoing, but can you guide on the EPS impact? And just to make sure on the potential EPRA LTV impact, it should be 4 percentage points lower LTV just through the -- getting rid of the minorities?

[Carmina Cirera, executive]

Yes. Well, the EPS impact, of course, it will be based on the exchange ratio. So it's not now what we have been started this preliminary works. So we need to do the closing of the year and then about the multi-criteria analysis, the third party, which is in this context needs to be fair and validated for the third party. It would depend, but it's not -- it's -- we are buying -- we are absorbing only 1.76% of the minority shareholders and exchange ratio parity that is fair, so material impact or neutral.

On the loan-to-value -- EPRA loan-to-value, the fact that it's a combined loan-to-value and the only impact will be this 1.2% adding these additional assets and debt. It will slightly improve, but it's 1%, 2% improvement. So it's a material because the stake what we are absorbing from the minorities, it's only 1.7%.

[Pere Serra, executive]

Yes. So just to emphasize what Carmina just said, no matter what -- how we finally execute this merger that would take place next year. The fact that today we own almost 99% of the company whatever we do, we'll have a very marginal impact...

[Carmina Cirera, executive]

And improvement.

[Operator]

Now next question by Florent Laroche from ODDO BHF.

[Florent Laroche-Joubert, analyst]

I will have 2 questions. So my first question, I would come back to the SOCIMI regime. So we have understood what could be your impact on the EPS. But would you have some impact when you dispose of assets or an impact on potential capital gains? And in the midterm, if there is no more SOCIMI regime. So could we imagine that at the end, you change of -- you can think about changing strategy or something like that? So that would be my first question.

And maybe my second question is, if you can come back on the Madnum project maybe to tell us. So now what is the occupancy ratio for this project, operating occupancy ratio for this project? So how we can see the impact in the revenue coming for the coming period.

[Pere Serra, executive]

Thank you, Florent. First of all, if you allow me, every time that we talk about this scenario of a revision of the tax regime, I will emphasize every time that we are talking about uncertain scenario. One of the many scenarios we will have and only the worst-case analysis, let me emphasize. In general, no, I fully understand that it's so interesting in this scenario that we may talk a lot about this, but maybe in the end, what come is that we bring this under the spotlight as it is the central scenario, which is not.

So having said that, I would say that, first of all, any impact on our legal structure on our future, and that's -- have no comments on this, so we will certainly wait for the outcome of this because as I'm going to say, it's very, let's say, uncertain as of today. You were saying if the impact on EPS can have additional consequences in the framework of sales that I leave it to Carmina to answer.

[Carmina Cirera, executive]

And before going to this aspect, as Pere mentioned, if today has not been or has been postponed it because this is no agreement on that sense. So I think we are in the scenario in a very remote but because it's not today, would be approved and agreed and it wasn't the case. So technically speaking, we don't know.

So it's true that any capital gain in the future can be offset partially with the credit tax, but in this -- normally, in any change of any tax regulation, we need to look at the [ transitory ] rules because it's very difficult in the worst, worst scenario to go from a non-taxation regime to a taxation regime without the transitory period. So I think we would need to see if it happens today, we don't know. But in general terms, the same applies to the recurring EPS, which is offsetting partially with the credit tax, the same would happen on any capital gain potentially.

[Pere Serra, executive]

On the second question on Madnum, Carlos, please.

[Carlos Krohmer, executive]

Yes. The Madnum project is roughly 58,000 square meters. It's different phases, it super large project. As you know, it will be delivered by different paces and blocks. We are having extremely good momentum. We have conversations and commitments of close to 17,000 square meters this on the whole would be close to 30%. We are further advancing on it. As I said, it's also being delivered facially. So we will try our best to really as smart as possible pre-let before delivering, but we are extremely confident it's one of the best products in the Center of Madrid. So this is what we can say today about this project.

[Operator]

Next question, Fernando Abril from Alantra.

[Fernando Abril-Martorell, analyst]

I have 2, please. First is on commercial activity in Q3, which has been quite strong. So my question is around the increase in vacancy coming from the project tax. So based on conversations you're having, I don't know how confident you are in leasing this up. So maybe any comment on this would be very helpful. And then secondly, on -- you've reported quite good financial savings in Q3. I understand that you have put cash received from Criteria to work. Now my question probably to Carmina, I don't know if you can give us an indication of the speed or the cost of debt for the near future, I don't know, for 2025 or 2026 would also be very useful.

[Carlos Krohmer, executive]

Thank you, Fernando. So maybe let's start. Well, the biggest part, I would say, of work that we have received on the Criteria asset is Visionary building. It's a fantastic building. We are totally convinced of the Mendez Alvaro Super Market. It's one of the city center markets in Madrid with the strongest dynamic, with the strongest rental growth in recent years and going forward. So we are really happy to have this product also in our portfolio. So we have there the square meters on this asset. It's an 8,000 square meter asset, 4,000 square meters are still to be let, and we have our Mendez Alvaro project also that is now being delivered. So we are happy of this about these 2 positions there in this super market. It's an extremely good market, and we will have additional rents from it.

So we are encouraged. This is the biggest part. On the other hand, we have fully repositioned the Diagonal 197, it's in the 22@, it's a little bit more challenging, but it's in the prime of the 22@ in the best location. So it should be one of the best performing assets in the 22@. So we also are confident, maybe it's a little bit more work than in Madrid market.

[Carmina Cirera, executive]

Related to the cost of debt, it's true that this year, we have been benefiting of this cash management and some sort of cash pulling among the group to benefit of this extra cash being smartly deployed. But for the next year, you know that we have a bond maturity of EUR 1 billion, EUR 500 million in France, EUR 500 million in Spain. We have 50% of this debt pre-hedge and Euribor [ 0.67% ] Basically, the spread from our bond, if you go to the secondary markets for a paper of Colonial, the spread would be in the range below 120, so averagely speaking, if you consider that next year, we need to renew EUR 1 billion, 50% pre-hedge and 50% at market levels. The cost of debt would remain below 2% basically.

[Fernando Abril-Martorell, analyst]

Below sorry?

[Carmina Cirera, executive]

2%.

[Fernando Abril-Martorell, analyst]

2%, the blended of the EUR 1 billion.

[Carmina Cirera, executive]

Yes, the blended, yes, 2%.

[Operator]

And one more question by Thomas from Deutsche Bank.

[Thomas Rothaeusler, analyst]

There's actually 2 questions. One, sorry, coming back on the tax topic again. As I understand, the main reason for the limited impact on your side is this 65% SFL portion. Just wondering if you would have any idea about the impact without the high contribution from France and also the 65%, I assume refers to the profit contribution. Is this correct?

[Pere Serra, executive]

No. I don't know what to say. I mean, today, we are not a Spanish company, only limited to 35%, so we are 65% in subject to a different regime. Talking about the potential change in the tax regime in a worst-case scenario, these are the numbers that come. And if we -- instead of being at this company, we're another company, well, the impact would be a different one. But I don't know, Thomas, answering your question.

[Thomas Rothaeusler, analyst]

Sure. Just wondering. Okay. The second one is on your updated EPS guidance, you say at the upper end, what you expect. Just wondering if you could get a bit more specific on that?

[Pere Serra, executive]

Yes. I think that we said above 32%, maybe close to 32.5%, that would be our estimate today. But of course, we are in where we are in November and are still not at the end, but definitely above 32% upper level that we mentioned at the beginning of the year.

[Operator]

And there are no further questions. Therefore, I give back the floor to Mr. Pedro Vinolas.

[Pere Serra, executive]

Well, thank you very much. I think that it was a pleasure again to share with you the results. As we said, we are very happy about the evolution and about our trend going forward. So it's -- we're very pleased to have the opportunity to share these results with you. Thank you, and have a very good day.