MERLIN Properties SOCIMI SA

MAD:MRL

Earnings Call Transcript 2018-Q1

[Operator]

[Audio Gap]results presentation conference call. [Operator Instructions] I must advise you that this conference is being recorded today on the 11th of May, 2018. And now I would like to hand the conference over to your first speaker today, Fernando Ramírez. Please go ahead.

[Fernando Ramirez, Director, Investor Relations]

Hello. Dear ladies and gentlemen, welcome to our first quarter results call. We have just reported our usual quarterly reporting package, including those trailing performance, KPIs, that matter. Ismael Clemente, Miguel Ollero and David Brush will lead this call. Ismael will be making a brief introduction, and then we will move straight into Q&A. First, I pass the word to Ismael.

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Thank you, Fernando. Good afternoon, everyone. The company had just closed a very solid first quarter, where in terms of consolidated performance, we have achieved 5% increase in the gross rental income, 71.5% increase in the earnings per share figure, which is mainly affected by the one-off of the capitalization of the service contract of Testa Residencial and we will comment later on, and the NAV has progressed 18.8% year-on-year, although as you might remember, we don't revalue the portfolio on a quarterly basis. We do only semiannually. It's a set of results which is affected by the capitalization of fees of Testa Residencial that have 2 effects. One effect is the increase in net gain by EUR 53.6 million [indiscernible] wide in EPS growth, and on the P&L, however, it means a loss of close to EUR 2 million of recurring EBITDA that have a newer effect in FFO and AFFO, which was budgeted. Hence why our AFFO remained perfectly on track, in fact above, the forecast figure and the one that was conveyed to the market.Our gross-to-net margin deteriorated, but this is mainly the effect of the loss of the variable rent of the total portfolio, which of course it's a one-off. And then higher incentives owing to the leasing activity, mainly free rent and fit out contributions. Very important to note that the accounting policy of MERLIN continues to be expensing them directly in the year. We don't linearize. That is very important because it is not the same for many other companies out there. In terms of adjusted funds from operations, we are starting at 0.15 in the quarter, and we are perfectly progressing towards our full year objective of 0.58. In fact, we are above and we believe that trend will accelerate during the rest of the year. In terms of underlying business performance, rents grew like-for-like 2.7%, which breakdown of 4% in our -- comes from 4% of released spreads, 3.4% in shopping center, 3.5% in logistics. Our occupancy decreased by 24 basis points to 92.4%, owing mainly to the exit of Huawei in Las Tablas. It's been positive, however, in logistics.In the shopping centers, our occupancy went down by 50 basis points, mainly owing to the exit of CNA in Marineda which has already been, half of it, replaced by another tenant. And the other half, we're waiting to move another tenant in order to replace that this effect will be quickly overcome during the year. So in terms of other operating performance highlights, we should note that we have put in place 3 CapEx plans in order to prove and assign responsibilities within the company that will mean significant CapEx activity in the coming years. In Latin offices, we have put in place the plan Landmark I which basically aims to reposition the quality building in: a, quality locations, mainly in Madrid, Barcelona and Lisbon. That will mean the investment of around EUR 250 million over the next 4 years. In shopping centers, we are simply renovating our leading shopping center, particularly the old one portfolio, the best shopping centers we have in the portfolio because they are first-generation and they need a major modernization in order to cope with the modern characteristics of retail and particularly a new type of client, which is now coming to these assets. And then in logistics, what we are aiming to do is basically continue increasing our footprint, now that we have a direct relationship with another client, which has been in this space for a month, as we grow our footprint in the Iberian Peninsula. It's been a hugely impactive quarter with 350,000 square meters contracted, and we are pretty happy with the underlying market with what we are seeing. The numbers might be competitive in the gearing because you are seeing a big occupancy, however, what I can tell you is that the activity in offices, particularly in [ Meco, ] is frantic and our gearing for end of the year is going to be the same. We told you at the end of last quarter that we are going to be above 90% occupancy. We're also seeing a clear acceleration in rents. We -- last year, we reported 3.4% release spread. In this quarter, we are seeing a 4% that in the forward operations report that we share once quarterly with the different teams, particularly in this case with the team of offices, what we are pointing is toward a 4.5% for year-end. That increase in rents and that improvement in occupancy in offices will have a corresponding effect also in an improvement on the operating margins of the company. So the deterioration you see in gross-to-net is mainly effected by the one-off, but for the end of the year, it go back to normality in the region of 88%-plus. So that's all for today. We have also just for your tranquility, the month of April has been very fruitful in terms of lease-up activity in offices. So the whole loss of the occupancy owing to the Huawei exit has been overcome in the following 30 days, where we have been signing very significant leases of which the most salient are the 9,000-plus square meters signed with CTC in Torre Glòries with an option to another 5,600. The occupancy, the full occupancy of the [ Pulgas ] 210 building, formerly known by people familiar with the area in Madrid, as the Porsche building because there was a Porsche ad on it. That one has been let in [ comparative ] to Allfunds Bank, and then we have registered in the month of April further leasing activity in the Eucalipto 33 building with Global Advisory, 1,800, plus we have another [ 250,000 ] square meters leased with Alcorcon, plus we have another leasing with ADB. So that building is now although it hasn't been registered in April, it will be registered in May. That building is now 66% full. Activity in the market is significant. We are working on a very sizable lease. The market is starting to behave in the way we have described to you many, many times. We're starting to have the first conflict with companies owing to negotiation -- bad negotiation techniques. So head of the estate that come to you and say, I'm considering whether to stay or to leave or...? And then you re-let the estate because we have a very active lease management department. And all of a sudden when they look back at the situation, they receive a notification they have to leave and then they come to you crying and asking for help. So we're starting to have those kinds of situations, which I didn't remember seeing during 2005, 2007 period in Spain. So rest assured that the company is -- remain under very healthy activity. You will see how the numbers progress during the year. For those of you are not familiar, the like-for-like compares quarter-to-quarter, while many other metrics are -- for the first time the company is delivering those metrics last 12 months. So we're delivering trailing 12 months because now we have the luxury of having the data. In the past, we didn't, because we couldn't count a lot on statistics coming from other portfolios that we have [ solved ]. And now, we have decided to publicize our [ monetary issues ] on a last 12 months basis, which makes sometimes comparisons complicated. So with this, I think we can move straight into Q&A because I'm sure you will have many questions. Thanks a lot.

[Fernando Ramirez, Director, Investor Relations]

Operator, you can please proceed ahead.

[Operator]

[Operator Instructions] And your first question comes from the line of Ben Richford.

[Benjamin Paul Richford, Research Analyst]

Firstly, on the shopping center side, footfall and tenant sales were a little soft in the quarter, I'd say. Perhaps you give us a little bit more color on why that's the case, I think they're below national benchmarks and some peers. And the second question is, I guess, we were led to believe there was going to be more disposals this calendar year, and it's obviously just Q1 so far. But could you give us an update on potential likely disposals as we look out towards the rest of the year?

[David Michael Brush, Chief Investment Officer]

Yes, this is David Brush. I'll start with the question on shopping centers. I think for the first to highlight, the 6.5% like-for-like and 3.4% release spread, we're very comfortable with those numbers. Those are good strong numbers. The footfall and sales, I think there are 2 things that are impacting us that are beyond the general market. One is our exposure in Barcelona, which we've talked about. Q4 was a significant impact. Q1, still impacted, but as we look at the trend line, we can see that, that negative impact is trending -- it's decreasing in terms of its trend. So Q4 of last year versus Q4 of the prior year had a much higher differential than Q1 this year did to Q1 in 2017. So still impacted by Catalonia, we have a 22% exposure in Catalonia, but the impact of the situation in Catalonia is moderating. The second is you heard Ismael say -- and so by the way, in the Catalonia, you'll see that effect continue to moderate as the situation in Catalonia progresses. The other effect is on the CapEx side. We're at the beginning of our major CapEx cycle in shopping centers, and that really started to ramp up in Q1. So as you see in -- normally in shopping centers, when you start your impact on CapEx, that's going to have an impact on footfall. That's something we expect to see continue because we're at the very beginning of that CapEx cycle. So as we grow that CapEx and grow the number of centers, that's something that we'll continue to see as we move through that. That said, one of the positive things that we see is that the footfall is dropping more than the sales. If we look at our footfall versus sales, sales are actually improving and then performing faster than footfall. So even though the CapEx impact is having its impact on footfall, it's having a less of an impact on sales. So again short-term, the Catalonia effect we think will moderate. The CapEx will actually have more of an impact going forward as we go through this major transformation of the centers. On disposals, we really had, I think, 4 key elements of disposals. The first is probably the easiest to deal with. That's our participation [ Ettis ] homes. The company continues to a trade at level that's consistent with the indications we gave in proceeds and we are absolutely on plan to monetize that position as soon as the lockup comes off in Q4. Second is Testa Residencial, and following the press that company is expected to be IPO-d in June. That process is well underway. And so again we would expect that will generate proceeds to us of north of EUR 300 million in June. The second 2 were both assets in the retail and assets in the office. Moderate in the office, we're trying to trim the portfolio. We have started conversations with specific buyers on both of those, I would say portfolios, but we're very agnostic. We're looking at some that are looking at individual assets, some that are looking at pools of assets. So we're proceeding on multiple levels. We really just kicked that process off at the beginning of the year. So we're advanced. We're having a number of conversations with specific parties, but we're not at the point yet where we can make any kind of announcements to the market. I think we're still confident that we'll accomplish those noncore sales.

[Operator]

And your next question comes from the line of Max Nimmo.

[Maxwell Wilson Nimmo, Analyst]

Just a quick technical one on the lease incentives. You said there that you don't straight-line them, so you expense them all in the first year. But in terms of the direction of where they're going, are they -- I would expect to be coming down at this point. Maybe you can give a bit of color on that. And on the developments, in the office developments, Torre Chamartin, have you -- now I see that is kind of should be pretty close to completing. Have there been discussions around preletting there or any on the leasing side? And then finally on growing the logistics side of the business, I think you guys have commented in the press a little bit around the Aena airport plot. And just for my understanding, is it that they're not planning on selling these plots? So this would be a case of partnering up with these guys, so you'd have to partner with them? And so just a bit of information on that.

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

All right. First on the lease incentives. Yes, they are reducing as compared to the past. But as we lease up, we need to concede some incentives. And altogether, they make up for significant figures, not significant for the size of our balance sheet not significant for the size of our total P&L, but significant and they end up [ devolving ] our gross-to-net margin. So it goes hand-in-hand with increasing occupancy. So you expect us to occupy, you should also expect to have some sacrifice in terms of gross-to-net, particularly at the beginning. Then regarding Torre Chamartín, at present we're negotiating with a number of parties involved. There are situations where we are negotiating for an HQ, so full building, and we are also opening the route of a multitenanted building, which price-wise could be also our favorite way. It depends a lot on the way you measure, particularly [indiscernible] and a number of other things because there are pros and cons of going HQ versus going multitenant. I understand you are impatient. We are more impatient, because as soon as we finish with the lease up process of Torre Chamartín, we should be starting the works on right in front on Adequa on building 4 and on the tower. And the market is good at the moment for that, despite the fact that we continue to see occupancy et cetera. Remember, as we have told you many times that we need to keep an eye on rents and occupancy. We may achieve a quicker occupancy hike, but it will be at the expense of sacrificing on rents. Likewise, there are tenants who try to make a trading on that situation and try to get lower rent. In those cases, we prefer to sacrifice occupancy. So to let them out because there is a lot of portfolio building to be done. Remember, we have inherited portfolios from different origins, each of them with their characteristics, and we are trying to unify the criteria and try to be as honest and serious as possible regarding our approach to clients. So on Torre Chamartín, we will report when we can. As of now, as we are speaking now, we cannot yet report any progress in the leasing of that tower. And then the garden, Aena, what can I say? I mean, it's a situation in which we are interested. It's a situation which we have done a lot of work. And if and when this gets defined and comes to the market, we will try to be there, whether in the form of, I don't know, partnership, concessions, straight sales, whatever form or shape it takes, we will try to be there as it corresponds to our leadership position in logistics in Spain. So that's what I can say.

[Maxwell Wilson Nimmo, Analyst]

Okay. So they haven't decided yet exactly how they want to use this land. So they may actually sell large parts of it, and they may partner with some of it, and they may -- is that correct?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Yes, Max. I mean, technically, they are still deciding which adviser they will use in order to define their way forward. So first they need to appoint an adviser. Second, they need to reflect, together with the adviser, on the future shape that these programs are going to take. And third, they will come to market. So there could be some time between now and then, because as you also might remember, there has been a change of leadership in Aena and the new leadership is trying to get completely aware of what's been done in the past and what is the rational and what are the pros and cons.

[Operator]

And your next question comes from the line of Michael Burt.

[Michael James Burt, Stock Analyst & Analyst of Real Estate]

I just had a couple of questions on the net rental income margin. If I understand what you said about higher incentives, but my question is really, if I look at property operating expenses, they've increased quite a lot as a percentage rent. So I was wondering what's behind that change? And then just on the incentives as well, I think you made a comment, Ismael, when you said clearly higher incentives go with higher occupancy. Given that there's a target to improve occupancy over the next 2 or 3 years, should we expect that this level of higher incentives is sustained over the next 2 or 3 years that you seek to increase occupancy in the portfolio?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Yes and no. I mean, given that we don't linearize, the fade-out effect of incentives in our P&L is quicker than in other cases for the peers. Second, yes, we are starting from a relatively low point. I mean, we are by far the company with the lowest incentives in the market in Spain. So I understand in offices, our incentives are in the region of 3.8% of total rental income and we are comparing to peers in the region of -- there is anything ranging from 6.4% to 9% or above. So we are starting from a relatively modest base. Expect these to increase a little bit as we progress in occupancy, but also expect those numbers to disappear as the quarters progress, because we are not linearizing. You might think this is conservative or aggressive. We believe it's conservative, and we believe it's the right thing to do. I mean, we prefer to do it that way. As we, for example, do not exclude from occupancy buildings in which we are changing [ trade outs ] just because the tenant has left. So when you see our occupancy, these 2 occupancies with the only exception of the 2 buildings that we have under development that looked like a bombarded city. So Torre Glòries and Torre Chamartín, while they were under construction -- by the way they will come back to inventory one year after finish or delivery of the building, which is what we believe is common market practice. We have been looking at what other competitors do, particularly in the U.K., and we think that could be an interesting -- for Torre Glòries the jump in occupancy we're obtaining will not reflect, will not show, will not change in our portfolio till one year from now. Regarding the delivery date, Torre Glòries, if the last floors will be delivered on the 31st of May, plus worse case, by 30th of June, it will be ready. There is people hassled about why we are considering date of delivery beginning of 3Q. This is the reason. And also the reason is that in Spain you need a administrative license to open a building. So for example, in the case of Torre Chamartín, the works have finished probably end of March. However, we are only receiving the administrative license by 23rd of June. So that building will only, again, will only be operative, up for occupation as of end of June, beginning of July. So there are always some changes in time line, which are involuntary to us and we try to cope with the situation as best as we can. David will answer the question on the OpEx as compared to gross rental income, and I will be happy to resume after this.

[David Michael Brush, Chief Investment Officer]

The biggest impact is when we look at OpEx, that's OpEx net of recoveries. So when we look at the Huawei effect, Huawei affects both occupancy topline, but it also affects our recovered operating expenses. So the operating expense in any given quarter will be a reflection of the vacancy in that quarter. So the bigger impact in why you see that number increasing is less recoveries of operating expenses we're getting, particularly in the office. So over the year, that's why we're confident we get back to 88% because over the year as we increase the occupancy we'll also decrease that margin differential between OpEx to OpEx.

[Operator]

[Operator Instructions] And our next question comes from the line of Alvaro Soriano.

[Alvaro Soriano-De-Miguel]

Yes, 3 quick questions, if I may. First one on the new announced program, CapEx program. Can you guide us through the return on those investments, maybe a year on cost on the EUR 250 million targeted? And then the second question would be on Page 8 of the summary, can you explain, I mean, for the audience what is [ Endesa ] leasing under office acquisition? And finally, on occupancy and how you're going to show the impact of [ Islata Marteen ] and Torre Glòries, so we can assume that until next year we will see occupancy of the old MERLIN as a whole, while in the meantime, you will receive some kind of rental stream, is that correct? Yes, those are the questions.

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Yes, Alvaro. Yes, on the third, it is exactly as you say. In the case of [ CCC ] and Torre Glòries, they [ stuck ] in the [ income ] as we speak. So they should be operating by June, and they start paying rent in September. So they will be paying rent. We'll have some income, however, the lease-up will not show in our occupancy numbers till next year. So you have to choose a criterion. We have chosen that one, provided it is public and rational, I think it's a criterion which is as valid as any other one. There are companies in the market that do 24 months. We, in fact, we are deciding internally and probably we will proceed that way, we are going to give you occupancy numbers commercial and fully loaded, including any buildings we have under refurbishment or under development. We will consider them 0% let so that you have a clear picture of what we have because there is also the differential as compared to other practices in the market. Then regarding [ Endesa ] leasings on Page 8, we see it's a technicality. We inherited from [ Peta ] the [ Endesa ] portfolio under a real estate lease contract. So it was a leasing, technically. So at the end of the leasing, you pay the last quota, which is what we did in January and then in terms of EUR 4 million [indiscernible]. So we paid EUR 124 million, and we recovered the ownership of the building. So technically, it is an acquisition, although in reality, you will probably characterize it more as a repayment of debt, but technically it's the acquisition of a building. The Porto Pi unit is a small unit in Porto Pi. In the shopping center that we are CapEx-ing, whenever a new unit is available, we normally do not shoot it in because that gives us a lot of freedom in terms of the pace of works and access and many, many things. So we normally try to increase our space in both shopping centers. And then return, on return on purely commercial real estate in offices and shopping center, we are shopping for a 6% in logistics compared to [ difference ] and you may expect something north of 8%.

[Operator]

And your next question comes from the line of Pedro [ Arias ].

[Unknown Analyst]

The first one on offices. I'll be interested in what would have been in the proforma like-for-like rental growth in offices, excluding the impact of the exit of Huawei. The second one in shopping centers, I'd also be interested in having your view, more of a long-term view of the evolution of the online shopping trend in Spain and how it can affect the footfall in your portfolio? Is there a risk of seeing a higher level of investment needs per dollar of rents in order to adapt your portfolio to the new customer experience in shoppings? And the third one on logistics, do you think release spreads in occupancy ratio will continue at this level in the coming quarters? And how do you see the supply of logistics spaces evolving in the next 18, 24 months in the locations of your properties?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Okay. On the logistics, over the coming months, I mean, over -- in fact, over our foreseeable future, I mean, the next 18 to 24 months, we will continue having a hard time to cope with new demand. Because we now have a base of tenants who come straight to us in demand of new space. So we have like a rate lease of demand that need to satisfy and it's relatively complicated to cope with it. In fact, what you need to do is make sure that you have -- thank God we have acquired a lot of land over the past. So we from the current [ risk ], that's important because many people didn't know that. For the current [ risk ], the debt to plan, the 500,000 square meters, we already own the land for everything. So it's just a question of putting in the range and developing the shares. It's not that we need to buy land or we are subject to land -- surge in land prices or whatever. For the pipeline, no. We're looking at a number of pipeline situations and we are trying to be prudent. In fact, we are starting to increase a little with our prudency because the market is evolving. New entrants are coming. And there will be one point in which we will stop and go fishing. So that -- this is not yet the time to do with. There is a structural change in this market. So in 1990, there was a structural change in retail in Spain. Shopping centers appeared and modified completed the panorama. So High Street retail needed to compete with the new entrants, it was shopping centers. At the beginning, beginning of the '80s it was only La Guaira. But then a number of other shopping centers developed and little by little High Street retail had to adapt to a new competitor. But in the '90s, there was a need to build shopping centers in Spain. There was a big hike in activity between '90 and 2010 mode of the current type of shopping center was built. That was a structural change and that was why people were developing like crazy. The only sector in which we are not operating to mature market is logistics. In offices, of course, we have a significant stock of offices in Madrid. You can build a little bit more, you can do less, depending on the net new take-up, et cetera, but we are a relatively mature market. Nothing is indicating a structural change in that market, unless we discover oil in the subsoil of La Mancha, the stock of offices in Madrid will remain, plus or minus, similar over the coming 10 years. Likewise, in shopping centers where most of the estate has already been built, Spain is not clearly oversupplied as the U.S. is. So that is important when we talk about online penetration. Remember always that in the U.S., you have 1,602 square meters for 1,000 inhabitants. In Spain, you have 288. So there is a big difference. Still many centers in Spain, secondary centers or centers located in unspecific locations, will suffer because they will need to adapt to the new kid on the block, to a new entrant, which is online retail. But in logistics, we see a structural change. The little stock of modern shares in Spain was quickly bought, in many cases by us, in 2013, 2016 period. And now we are developing 75% of our stock have been developed by ourselves and is state-of-the-art modern and the only way to cope with demand is to develop them. There is no other way to do it because Spain was very late in the adoption of third-party logistic provision of services. Spain is now under a very intense export in industrial activity and third, Spain is very low penetrated by online retail and as online driven penetration goes, we need more logistics space. So that takes me to the online retail question. As you know, Spain is starting from a very low base, around 4.5% in total online retail sales divided by total retail sales went up [indiscernible]. That number is growing by double digit. So expect it to grow very significantly. Believe it or not, simultaneously, the shopping center format is still growing. So from 2007, where it was 14% of total retail sales, to 2017, where it is 18%, shopping centers have continued to gather market share. What is the foreseeable future? Shopping centers will probably stop that progression. So they will not continue gaining market share and the lion's share of the new market share, if I may say it that way, will be gained by online trading. How does it affect shopping centers? Is it the end of the years where you could do it in only those shopping centers? Yes, absolutely. So shopping centers today trade as a discount of future cash [ fill ]. So they are bought as commercial real estate is bought in most of the developed world. So the days in which a potato farmer may develop a shopping center helped by external advisers and helped by this contract with the municipality of city X and then 1.5 years after building it at a cost of EUR 30 million, sell it to [ DECA ] for EUR 110 million, those days are gone. So as you correctly say, now you have to sweat, and win every dollar of yield of performance in your shopping center. You need to be absolutely cutting edge in terms of technology. You have to be absolutely cutting edge in terms of quality, and only then you can have your shopping centers shine, and shining not to the level they shone 20 years ago. So yes, but for a company which is a core like us, it's not a significant problem. This is why we are not panicking or we are not affected by that major trend which is run out of retail while you can because it's going to be [indiscernible] day tomorrow. We don't know whether it will be a [indiscernible] or not. Our bet is that shopping centers will need to get complementary to online, and they will need to adapt. This is what we're doing exactly in our shopping centers. We're trying to adapt to the new format. We're putting in more leisure, putting in more beauty, more cosmetics, more experience. We are putting in what needs to be put in order to defend their trading figures. And this is why we are also keeping update our total exposure to region because it will be very easy for us to grow in shopping centers in Spain. If we wanted, tomorrow we could buy EUR 2 billion worth of shopping centers in Spain, including corporate purchases, but we are not doing it. We are defending the ones we believe we have in the portfolio, which are super high quality. It is true that we have 3, 4 shopping centers in our portfolio which are not the same quality as the rest. We will see what we will do with them. We are seeking to divest from them, but we are not in a rush because anyway the divestiture figure will not be relevant compared to the size of our company. But yes, in that quality trading that David was referring before, this is what we are trying to achieve.

[Operator]

Your next question comes from the line of Jaap Kuin.

[Jaap Kuin, Research Analyst]

I have one question. First one will be on your office like-for-like also given your guidance to return to kind of normalized NRI margins, around 88%, what would be the associated like-for-like rental growth that will be the office portfolio? And the second one would be, indeed in my numbers, 6.5% for retail, could you break that 6.5% down in, let's say, release uplift, vacancy move, maybe reduction of incentives? Because I don't fully understand where the 6.5% is coming from. And then the third question is on the CapEx. Could you maybe give us some updated numbers on the total size of the program what -- and then maybe are you still leaving at this point let's say maintenance out of the total value and what's kind of the expansionary CapEx?

[David Michael Brush, Chief Investment Officer]

I'll take the first one. We guided to release spread on office. We guided to occupancy on office. Guiding to like-for-like would mean also predicting the rate at which we will lease all of that space over time across the portfolio. We have our budget, and we've also guided to AFFO. So we've given a lot of guidance at different levels. That specific level of guidance we haven't given. So I'll say that there is a lot of information that you have out there to arrive at that level. So we've historically guided to AFFO, we decided this quarter, because the questions, to guide on both on occupancy and to guide on margin and then guide as well on the release spread. So we haven't guided to the prediction of what rates we're going to lease the remaining of that 2% of space that we would need to lease to achieve that 90%. That was your first question. And I apologize...

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

On the 6.5%. Well, the 6.5% is a direct result. You might remember that our first quarter last year, we provided release spread of 9.7%. So that 9.7% release spread we had in the first quarter last year, comparing quarter-to-quarter means the 6.5%, which means, basically, we're north a little bit of occupancy. So this is why the 6.5% looks so high to you. And then the CapEx figure, the 250, Jaap, the 250 is offensive. So remember that the defensive CapEx of this company, which oscillates between EUR 15 million and EUR 20 million per year, are already deducted from the FFO when we guide to AFFO, to adjust the FFO. So all that CapEx is offensive, is basically in the case of offices, which is the 250 you are referring to, in the case of offices, which is CapEx we will spend in -- particularly in the plan is called Landmark I because we have made our first selection of office buildings, which, if I may say, is the easiest. So we have taken the best located building within our portfolio. Those are buildings which are incredibly good locations that today are a little bit invisible to the public. So many of our investor colleagues do not even know we have these buildings. But by CapEx-ing them, you will move them from B class buildings in A locations into A class buildings in A locations, and that translates in a jump in rent. And the payback of those investments are much bigger. So we get much better numbers than dreaming about buying new buildings in the market at prevailing prices. So we are at the very least, as I said, we are solving for a 6, but in many cases, it's much more than that. We're simply making a delta. We're getting a premium as compared to employing our money in buying buildings in the market. It is a natural consequence of the evolution of the company. I mean, beginning of the cycle, we gathered as many quality assets as we could. In the second part of the cycle, we bought companies because the only people out there capable of buying companies were opportunity firms. And we could beat them both by no hold and also by cost of capital. So in both companies, in order to get access to super high-quality collections of assets, and in the third phase of the cycle what we are doing is trimming the quality of our portfolios. So we're taking some of our office and investing to reposition direct assets we have in the portfolio. One day then we'll have planned Landmark II, in which we will do our second selection of assets, because there is life also outside Seville, but we wanted to select Seville buildings because those are the ones where results are more spectacular, particularly for external service [ activity. ]

[Jaap Kuin, Research Analyst]

And maybe just a final question, I think this is applicable to more countries, but probably also Spain. There's a lot of sellers around of shopping centers. So who do you think at this point will be the buyers? And what category do we have to look for to find our buyers?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Well, Jaap, the buyers out there are divided in basically 2 categories: income buyers and reposition buyers. And the profile of those is different. Income buyers are looking for centers who provide a relatively high yield as compared to other asset classes. And the ones which are looking at repositioning situations are mainly either value-added or -- mainly value-added funds. So what you need to basically decide and be good on is determining whether the shopping center you may want to rotate beyond to the income or to the repositioning bucket. And there are buyers out there, I mean, I wouldn't say they are [ infringement ]. There are a significant number of buyers out there, and centers are -- little by little, they are trading. It is true that there will be more centers coming to the market as this year for conventional retail expands and becomes part of the conversation of every linear in every corner of the world that also new entrants are coming and there are companies taking contrarian views. And if you look at the U.S., credible people like Brookview, is, for example, taking a contrarian view and buying retail. So that is the same thing that happened in Europe. You are seeing big European companies taking a big bets on retail as well.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Celine Coyna ].

[Unknown Analyst]

I do have 3 questions. My first question is on Torre Chamartín and you consider that you could lease it for the asking price, which is around EUR 17, if I'm correct? My second question is on Adequa I. According to Page 3, it is going through some general urbanization works. Can you define that? Also given that Adequa I has been vacant for a couple of months, why start the works now and not earlier? My third question is still about Adequa 1, now that it is being refurbished or urbanized, does that mean that it was taken out of the vacancy rate calculation? That will be all.

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

The easiest one, which is the third, no, it has not been taken out of our stock, of our inventory, because the whole part is not vacant. It is true we are working on a number of buildings, including the big Renault building, which was 27,000 square meters when Renault went out. We leased the ground floor to Audi. So we have now wiped out 7,000 square meters out of the 27, and we are finishing the refurbishment and the conversions to multitenant of the former Renault space, which was adapted to Renault. So there was an auditorium. There were big spaces for the managers. I mean, it was a building that was clearly a monotenant type. Regarding urbanization works, forgive our non-native English. What we are doing basically, I don't know what would be the right word to describe it, is redoing the alley. How do you call this? The street. The vehicle way.

[David Michael Brush, Chief Investment Officer]

Shall I...? There are 2 things that we're doing predominantly right now with the [ building ] at Adequa I is that building was a monotenant building, which Ismael described. So we first let the ground floor in the bottom, the showroom space, to Audi. The remaining is those 3 buildings need to be disconnected so that they can be occupied as multitenant building. So you're converting what was a monotenant building to a multitenant building. At the same time, we're taking advantage -- when that park was built, Renault wanted to have their position disconnected from the rest of the park. What we now have is we have a significant -- the opportunity to create a very significant environment and presence in that area. So we're not only touching just the building itself and reconverting it from monotenant to multitenant, we're taking the opportunity to completely redo all the environment and reconnect the park. So as Ismael was saying, all the roads and connection points that previously were rather disjointed and disconnected, we are now totally unifying the plan. We're also redoing the old service area, which I would say is more historic and antiquated service area, and creating a very dynamic and interesting area for activities within the park, because amenitizing business parks today is the real future for client retention because for clients, it's their ability to retain talent. So all of that is what's going on within the Adequa park. It's more than just a simple redo of the existing building. We went through a whole planning process there, we went through a competition to create the open-space common area environment. So we did something really special there, and that's really, I think, the timing. And as Ismael said, we've not taken that out because of the fact that we still have tenants in other of the buildings. And on Audi, we made the decision that it wasn't really appropriate to remove that from the portfolio while we did this. So the vacancy that exists in Adequa is still included in the overall broader vacancy. We really only -- included. Included, did I say excluded? Sorry, my English is actually not so good either. But we've included it in the portfolio. The only things we've excluded are ones where it's a major refurbishment that would impact on your tenancy. In terms of confidence, yes, what we're talking about -- and one thing we didn't say in Torre Glòries, in Torre Glòries, we are exceeding by I would say a comfortable margin, the projections that we had made about what leasing would be at Torre Glòries. And I know that was a big question for people, particularly after the events in Barcelona. But that building, all the activity we had and we have significant activity beyond the lease that we've announced, and we're comfortably above the projection. In Torre Chamartín, the conversations that we're having with people are all at rates that are consistent with the underwriting that we made and the guidance that we made. So yes, we are confident that we will let that building at the rental rates that we had indicated to the market.

[Operator]

And your next question comes from the line of Bart Gysens.

[Bart Gysens, Managing Director]

I just wanted to ask a very quick question -- or 2 questions on the like-for-like rental growth. First of all, am I right in understanding, Ismael, I think you explained it earlier, but I wasn't entirely sure I understood. In the past, the assets you acquired from Metrovacesa were not included in the calculation for the like-for-like rental growth. But for the number that you've reported in the first quarter, the Metrovacesa assets are now concluded, is that right?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

Yes. It is right. In fact, many people wonders why if the Metrovacesa portfolio improved occupancy, the like-for-like is similar to the one we provided as of 31st of December. The reason is very simple. October 2016, when we inherited the Metrovacesa portfolio, it was 77% occupied. As of March '17, it was 87%, as of December, to make the story short, it has reached 90%. But owing to the exit of Huawei, it has gone back in March '18 to 87%. So that 87% compared to the 87% of March, which means basically the jump in occupancy in the Metrovacesa portfolio, which, 77% to 87% is 10 points. We had it in the past. We didn't report for it. So we didn't take the glory for it and now, because it has retrofitted a little bit now, we are equally like-for-like. So expect that like-for-like to accelerate during the year.

[Bart Gysens, Managing Director]

Okay. I think as a follow-up question -- I think question was asked, but I'm not sure whether I heard the answer. Maybe I missed it. But have you calculated what the overall like-for-like, the 2.7%, would have been if Huawei hadn't vacated their premises?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

No, we thought about proforma-ing it, then we decided not to do it because we need to accustom people a little bit to the fact that this is not a Hollywood movie. So this is a living animal. The company sometimes you have within a growing trend or a decreasing trend because 10 years from now, it will be a decreasing trend. You have blips in which you have lower than expected or higher than expected. So we thought our proforma-ing. At the end, we decided not to do it, and we haven't calculated. I mean, we can do it now in a split [ second so you can understand. ]

[David Michael Brush, Chief Investment Officer]

The best thing to do on that, because again Huawei is a big effect, there are other effects in there, and we want to be sure that when we -- if we calculate that, we are giving you not a off-the-cuff number. So I think the best thing to do is have a conversation with either Ines or Fernando and then they could have a more detailed conversation, rather than trying to provide you with an estimate at this point because we haven't really gone back and dissected each of the impacts of that move, just in the aggregate.

[Operator]

And the next question comes from the line of [ Arvin Honor. ]

[Unknown Analyst]

Basically another question on like-for-like at this time on the shopping center portfolio. Just I wasn't able to find the presentation on the website, so I apologize if you have put together a bridge for that. But in fact, you report 6.5% like-for-like rental growth, and I can't really reconcile that if occupancy was broadly flat, release spread at 3% and CPI is running at around 1%. If you could just elaborate on that?

[Ismael Clemente Orrego, Executive Vice Chairman & CEO]

It is occupancy last year same quarter. So like-for-like, what I was saying, [ Arvin ] is that in the same quarter last year, we have a 9.7% release spread. So we have a very good renegotiation on rent. I don't remember who was the tenant, but I remember it was in Marineda. So we had a big release spread in that quarter. That 9.7% owing to -- lead the loss of occupancy have led to the 6.5% you are seeing now on a like-for-like, quarter-to-quarter.

[Unknown Analyst]

Okay. But still if I look -- again I can't find the presentation for the Q1. But if I look at the releasing spreads throughout the calendar year '17, which is the closest proxy I can find, the releasing spread is 4.7%. I don't know how many contracts have been re-let, so I don't know 10% maybe. If it's 10%, that only adds 0.5% and a like-for-like of 6.5% is extremely high. I'm just trying to reconcile that.

[David Michael Brush, Chief Investment Officer]

I think if we can -- this kind of detailed question, again we're happy to answer that. I think if you bring either Fernando or Ines, we're happy to answer that.

[Unknown Analyst]

With the most due respect, I'm not sure it's a detailed question. It's about trying to understand first of all, whether it's a gross rent like-for-like or whether it's on the NOI? In which case it could be impacted by an improvement in margin or incentive. It's really, to us it's quite crucial because it's a big 6.5% like-for-like print, which is very strong.

[David Michael Brush, Chief Investment Officer]

It's gross rent on like-for-like. You're talking gross rent and gross rent, and you're talking Q1 of '18 versus Q1 of '17. And then the like-for-like is obviously the rolling 12 months. That's the period that...

[Unknown Analyst]

But again on the rolling 12 months, CPI was, call it, 1%, releasing spread was 5% on -- I would say, 10%, 15% of the lease. That adds another 0.5% to 1%. And the change in occupancy last year was 80 bps, but it came down in Q1 again. So all-in-all I'm struggling to see how like-for-like can be greater than 3%, but if you want to take that offline or come back to me that would be immensely helpful.

[David Michael Brush, Chief Investment Officer]

Happy to have that conversation with you [ with your contact ].

[Operator]

Thank you very much. There are no further questions at the moment. Please continue.

[Fernando Ramirez, Director, Investor Relations]

Okay. So thank you very much for your attention and your time. As we were saying before, Ines and myself are ready to answer any additional questions. We will revert back to you with some of the questions, detailed questions raised throughout the call and talk to you soon. So thank you very much.

[Operator]

Thank you very much, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.