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MERLIN Properties SOCIMI SA
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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's MERLIN Properties Results Third Quarter 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, the 14th of May 2019.I would now like to hand the conference over to your speaker today, Ines Arellano. Please go ahead.
Thank you. Good afternoon, ladies and gentlemen, and welcome to our first quarter 2019 trading update.We have started off the year in very good shape and Ismael, David and Miguel are happy to clarify any questions that may come up. First, Ismael will make a brief introduction, focusing on the key highlights, which will be followed by the Q&A session. I would like to pass the word to Ismael. Many thanks for your attention.
Thanks, Inés. Good afternoon, everybody. Well, as Ines was commenting, we are happy to report today what we believe is a very good set of results showing improvement across all 4 metrics and significant value creation for our shareholders in the first quarter of 2019.Starting by the gross rents. We have improved 8.7% as compared to last year. This is reflective of a positive market environment in which we operate and the absence of one-offs, which, as you know, significantly distorted the result in 2018. In terms of FFO per share, which, as you know, for us is a very important metric, we have achieved double digit growth. It now stands at EUR 0.17 per share, which is a 12.5% progress year-on-year. We have also improved NAV per share in the absence of reevaluations in the period, just cash flow, and which now stands at EUR 14.94, which is 10.8% above last year.In adjusted FFO, we stand at EUR 0.16 per share in the quarter, which is perfectly on track to overpass the 2019 guidance of EUR 0.60 per share, which means the company is on track to cover the dividend payment just with ordinary cash flow. So we can leave aside any extraordinary income we might have for either CapEx or debt reduction in the year as planned.Then in terms of margins, the gross-to-net margin has improved above 90%. As you know and as we have commented in previous calls, that was again one of our objectives. This is reflective simply of the fact that we are now better occupied and there has been no significant leasing commissioning during the period because this being a relatively quiet period in this half, not bad, but quiet, owing mainly probably to Spanish elections. So we have improved 56 bps year-on-year as compared to where we were in 2018. The FFO margin has also improved to 60% versus less than 58% last year.And finally, the net earnings figure of EUR 60 million may look low compared to the EUR 114 million of last year, but this is not comparable at all since there was an extraordinary gain of -- related to the cancelation of the management contract with Testa Residencial. So in the absence of that and a number of business combinations, one-offs that we have experienced due to the acquisition of both these assets, we will also be beating last year net earnings figure.Turning to business performance. As commented, the market remains very strong across all the sectors in which we operate. Notably, we are starting to feel very interesting acceleration of the activity in Offices, which, as many of you know, has been the laggard in the Spanish real estate recovery. We continue experiencing a healthy performance of our Shopping Centers this quarter, beating both direct rivals, but also ShopperTrak, the overall market. And a very good performance in Logistics, where rental tension continues to be the norm.So in terms of rents, the like-for-like year-on-year is almost 5% up, which is remarkable. In Office, we have traded almost 160,000 square meters during the quarter with a like-for-like of 7.5% and a very healthy release spread of plus 6.1%. In Shopping Centers, we have contracted close to 32,000 square meters with a positive like-for-like of 3.1% and a release spread of exactly the same, amounting to 3.1%. In Logistics, very little activity in the quarter, barely 2,000 square meters, with a like-for-like of 2.9% owing to the variance in occupancy, which we will cover, and a release spread of 8.7%.And finally, precisely talking about occupancy, we have decreased the occupancy by 84 bps. But this is simply the result of not having come to terms with a client in the A4 corridor in one logistic shed, which has left 24,000 square meters vacant in the portfolio as of cutoff date of the quarter, which, if divided by the 3 million square meters of our portfolio, gives you the 80 bps that make the difference between year-end and where we stand today.So overall, fantastic quarter, fantastic start of the year that we hope we can progress further during the second, third and fourth quarters because the company now is clearly performing sweetly. Of course we are in the middle of a very significant CapEx program that may mean that we have to close for business a number of buildings, et cetera. We may have bleed here and there in cash flow, but, as you know, we do it on a phased way so that we try not to hamper the steady cash flow generation and predictability of cash flow of the company.All right. So without further consideration, I pass the floor to Inés, which will open the Q&A.
Yes, thank you, Ismael. So operator, would you please open the telephone for Q&A?
[Operator Instructions] Your first question comes from the line of Flora Trindade.
I have 2. The first one is on occupancy. In Offices, there was a recovery in the quarter. I was just wondering if you could comment your expectations for vacancy rates in the secondary locations of Madrid. There was some comments in the market around potential double digit vacancy rates in these locations. Can you comment on what's your view there?And the second one is on release spreads. Throughout the year -- there was a deceleration in this quarter. What's your expectation for the remainder of the year? Do you expect this to recover to the levels we've seen last year? Or are there any trends that justify this deceleration in the quarter?
Okay. Well, starting by the second. Part of the deceleration you see is simply because the base for calculation is growing, but in absolute numbers we continue to increase our rents very healthily. Particularly taking into account that our release spread figures include the removal of a large tenant with 42,000 square meters increase in size in the A1 corridor, which has been done at a flat release spread. So that is of course included in that number, as it couldn't be different, and that creates a little bit the cosmetic idea that release spread is smartly reducing.If you exclude that cosmetic difference, we continue to significantly lift up our rents in the renewals and the market remains particularly strong. I mean, there a number of big leads out there. Of course tenants tend to be these days over advised and it takes relatively long to close the contracts and particularly the legal contract, which is when we normally announce. And sometimes you have quarters which are more quiet, quarters which are more active. The first quarter has been relatively quiet purely owing to the Spanish election or whatever. So not a lot of business decisions have been taken, and as a consequence, it's been relatively quiet.However, the tension remain there, the leads remain there. And by the way, that tension in our view -- of course there might be people with better perspective than us, but in our view that tension is widespread. It's not only CBD. It's not only new business areas. It's CBD, new business areas and periphery, which you know periphery is relatively a small part of our property. But still -- I mean, even in periphery we are charging up on the renewals. And most of the big leads, the leads 5,000 square meters and above are concentrated -- as it couldn't be different, because in CBD there is almost 0 vacancy -- are concentrated in the First Ring Road and Second Ring Road of Madrid and also in peripheral areas of old Barcelona and Lisbon.So what we see doesn't point to any softening of the Office market as we speak. As you know, our release spread excluding [ Technical Zomida ], if we were to give you that comparable, will be 7.5%, which is stronger than earlier. So -- but we prefer to calculate it the right way.
Your next question comes from the line of Bart Gysens.
It's a question I've asked you guys before I think. The discount to NAV remains pretty wide. At what point do you consider buying back stock?
Bart, well, the answer is also the same as in other occasions. We closely monitor our discount to NAV, and when we think it is starting to be a little bit structural, we buy back some shares. We do it historically, we don't do it on a programmed fashion, because we want to keep the control of the cash at the company and not be surprised by any eventual hardening of the conditions in the cycle or in the debt market or whatever.So we do it. We did it in the past. We are sitting now on a nice capital gain by the way on the acquired shares and we will continue doing it as we deem appropriate. But we don't want to make it a program to simply beef up the price of the shares and then be calculated by the contrary -- by the hedge fund community taking contrarian positions to what we have announced to the market. So happy monitoring every day the share price, and when we see it fit, we will intervene.
Your next question comes from the line of Celine Huynh.
I have 3 questions if I may please. The first one is on the like-for-like rental growth in Offices. Can you please clarify if the 7% like-for-like rental growth include the loss of rents from Monumental and Castellana 85? And if yes, does that mean that the like-for-like should have been higher?My second question is on the guidance. You're on good track to beat your FFO and AFFO guidance. The only metric which could materially move down your FFO should be the disposals. But you also said during the last conference call that you'd be more likely to sell at the end of the year. So does that mean that you'll be more likely to beat the guidance by the end of the year then?My third question is a more technical one. You excluded Arturo Soria 343 from the Office occupancy rate calculation. But this asset is not part of the work-in-progress in Offices or Landmark. I understand it's part of the flagship for Retail. So I was just wondering if there is any specific reason why it's accounted for into the Office occupancy rate.
Celine, this is Inés. For your first question, the like-for-like rental growth, Castellana 85 it's still included, we have not taken out of the inventory, because we've haven't started the work yet. It will be excluded by the end of this year. But Monumental we've already excluded it from the inventory as we have started to vacate the building and started the works.
Of course. So that in principle should make the like-for-like slightly higher because...
Slightly.
Because Castellana 85 after the departure of [indiscernible] is a relatively high vacancy building. And that's -- I mean, it's not meaningful in a 1.3 million portfolio.Then on the -- on beating the guidance for the year. Yes, in principle we should be beating. However, we want to keep that trump card in our sleeve because we might elect -- if we see we are running ahead in cash flow, we might elect to close one building slightly earlier or -- we are in the middle of very significant CapEx activity, so it's good to be safe. So we -- in principle, multiplying our first quarter number by 4 could or could not be completely right as of end of the year because we might decide to close one building or eject a certain tenant before in order to start works here or there.And then regarding Arturo Soria 343. This is a building where we are in conversations with a tenant, a large tenant that requires significant refurbishment. So we have closed the building. We will refurbish it. Completely closed to the public, because the refurbishment includes the façade and the technical installations. And once it is finished, we will go back to market and try to deliver on free let or [ speculative ] leasing.
Your next question comes from the line of Jose Cravo.
Can you hear me?
Yes.
So just 2 questions on my side. The first one is with regards sold off 2 -- you sold 2 assets in Logistics. It seems that you guys are underweight still versus your performance objectives in regards to the weight on the GAV. Can you tell us a bit more on why did you sell these assets?And the second question. Ismael, you've commented that you're seeing an acceleration in activity in Offices. Can you give us more color on this and whether you see -- or what level you could you see in terms of occupation for your rent, especially in Madrid?
Okay. Well, for year-end we were very specific in the financial year 2018 results call. We said we wanted to be in Offices north of 91%. So this is our objective in terms of net gain in occupancy, which is a notable fit taking into account that we're also vacating [indiscernible] a number of assets during the year. So that is important.Then in terms of why we sold Logistics. In reality, what we sold were 2 more kind of light industrial sheds located in Barcelona. One of them was let to a chemical company and the other one was let to a significant supplier of automotive industry, which have installed in the inside of the building bridge cranes, et cetera. So they were a little bit more light industrial than Logistics. They were very separated, very -- I mean, significantly afar one from the other. And we decided that we wanted to continue betting on assets concentration, where we can extract more efficiency in asset management, facility management and maintenance.So this is why we rotated. We got -- the market is today relatively hot, so we got good offers. And we decided to dispose of them as we decided to dispose last year of the [ La Granal Peneves ] facility or shed, which was in a Prologis controlled logistic park. That was the only building they didn't own and there was no point in being an island in the middle of a Prologis operated logistic park.
We have another question that comes from the line of Jaap Kuin.
This is Jaap Kuin, ING. Also, my first question also on like-for-like Office rents. Here this 7.5%. Could you maybe give us a breakdown of the like-for-like growth percentage points? Let's say, we can all see the 3% coming from vacancy, but can you give the percentage points for other elements like indexation, re-letting and may be the reduction in incentives?Then the second question. I was just reading something on the [ Corto Industrial ]. I think last year there were some newspaper articles. Just kind of to repeat the question, is there anything in the [ Corto Industrial ] portfolio you would like to bid on?And then also maybe a market comment. Looking at the Q1 data points, it seems that indeed the overall data is showing improvement again, lower vacancies, et cetera, higher rents. But the A1 area seems a bit lagging, especially for just the other new business areas. Do you think that is a fair assessment? Or is it, yes, somehow something is lost in that data?
Well, starting -- David, you want to comment on the A1 corridor?
Yes. So I'll take the A1. I think one thing that didn't come out in the numbers is this is -- this quarter on the release spread it was the first quarter that it was positive across all of our categories. So the both -- the new business areas, both the A1 and A2 and the periphery, all are seeing meaningful increase in release spread, which is why Madrid showed the highest release spread it has shown for us since we started reporting those numbers. So there is breadth being exhibited by the market in the overall release spread.In terms of demand, what I can tell you we're seeing -- and it has not yet demonstrated itself enough being able to show a meaningful lease being signed in that portfolio, but our pipeline of activity in that new business area continues to grow. And these are also sizable leases, which on the positive side means that when you do sign it, it's going to be a meaningful increase. On the negative side, big releases take much more time to execute because the decision making process from the tenants takes longer because there are more people involved in the process.So we are still comfortable with the level of activity we're seeing there. We're comfortable that we will exceed the 91% level that we've set in the overall portfolio. And frankly, just given the dimension of our portfolio, that can only happen if we execute leases in the A1 portfolio. So we are confident about that, we see the breadth of increases in rents, and we see the deepening of the pipeline in that corridor. So we're still confident in the numbers that we presented at the beginning of the year.
On [ Corto Industrial ], Jaap, as we have publicly commented and in fact we filed the relevant fact with Spanish regulator, we are interested mainly in joint operations in logistics. So what they have put in the market is a variety of different assets, which are noncore for them. We are closely looking at that portfolio. But in case we are interested for 1 or 2 assets there, is not going to be a needle mover. So it's going to be relatively small considering the size of Merlin.So you can see that there is no logistic in that portfolio and that would have sparked our interest. So for the time being don't expect any game changing transaction regarding those assets in the near future. We will be looking at them, we will be determining our interest in selected assets, but nothing is going to be big or significant. And then there is...
Regarding the like-for-like evolution, Jaap, we do not typically provide that breakdown, which is not market practice I have to say. But in any case, we do have the numbers. This is a pure accounting measure in the sense that we compare the like-for-like portfolio on accounting-wise the top line, the gross lines last year as compared to this year. You may have the hint in the numbers because you have seen the big hike in occupancy coming from 87% end of first quarter of last year and slightly above 90% this year. You have seen a consistently high release spread of 6.1% for the last 12 months. And indexation, it depends on where the contract comes in. That's around 1.7%, 1.8%.So mainly what we can do, Jaap, is having a call. After the call, we will give you a call and try to shed some more light on the hints of how it is composed, okay.
Your next question comes from the line of Jose Cravo.
Hello, Jose?
Jose Cravo.
No, I think he probably left.
Left or...
Because he already asked.
[Operator Instructions]
All right. So if anybody else has any questions, we remind you that both Fernando Ramirez and myself are at your disposal. You know where to find us. And thank you very much for attending the call and see you soon.
Thanks a lot.
Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.