MERLIN Properties SOCIMI SA
MAD:MRL
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MERLIN Properties SOCIMI SA
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Ladies and gentlemen, thank you for standing by, and welcome to MERLIN Properties 3 Months '20 Results Presentation. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand over the conference to your speaker today, Fernando Ramírez, Investor Relations. Please go ahead, sir.
Good afternoon, ladies and gentlemen. Welcome to our First Quarter Results Presentation. First of all, we really hope that everybody is good, in good health and safe, and all the best for the coming difficult months.Without further delay, I will pass the word to Ismael and the 3 top managers of the company will join today during the call, and will give you light and color on what's happening on the company. So Ismael, the floor is yours. Thank you very much.
Thank you, Fernando. Good afternoon to everybody. Thanks for joining MERLIN Properties First Quarter Results Presentation. I will make a very quick review of the quarterly results because, as many of you in the analyst community have pointed out in your morning notes, they have become disgracefully uneventful. I will, however, be slightly slower and more detailed in the analysis of the post COVID situation, which for us is mainly the month of April, and you can assume that May is very similar to April. April is an almost perfect proxy for what we are seeing in May.The objective for the year was to overcome as much as possible the effects of the 2019 sales in rents and FFO with only organic growth and some new assets entering operation following development or redevelopment. In principle, we were very close to achieving that. The results of the first quarter were slightly better than expected. The idea, our internal targets were to try to be as close as possible or above EUR 520 million in total rents, in gross rents, compared to EUR 530 million last year and around EUR 300 million in cash flow FFO as compared to a little bit in excess of EUR 310 million last year. We were perfectly on track to get there with the quarter and with the remainder of the year, eventually to beat it and have a year as close as possible, if not slightly better than 2019. However, all this is now the past because COVID has come to stay and has completely distorted the normal evolution of the year.So in terms of consolidated performance, in rents, well, whether revenues or gross rents, we have been almost on par with last year. Closer in revenues, EUR 1 million less in gross rents. In cash flow per share, we are below last year by 5.6%, but this already includes a provision for the effect of COVID in March rents because March was a month that rent has already been collected. However, we have decided from an accounting perspective, to include a provision depicting the results of COVID in the second half of the month given our policy in shopping center.In NAV per share, we are plus 5.2%, and we haven't revalued assets in the quarter. So I can say that the business performance was good, generally speaking, in the pre-COVID environment. We have a fantastic like-for-like rental growth and very good release spreads across the board. After the COVID pandemic erupted, we decided to launch our commercial policy granting 100% rent release to our retail tenants whose stores were compulsory closed as a consequence of the declaration of the state of alarm by the Spanish government.So the 3 months 2020 figures, as I said before, include half a month of impact of such extraordinary incentive, which is in reality worsening the aspect of the figures. The FFO per share, even with this figure -- with this effect included, was on track to meet the guidance given for 2020, although, of course, the whole year guidance will need to be reviewed. We had a minus EUR 0.01 effect due to the incentive granted to tenants, and we have a further EUR 0.01 owing to the change in perimeter between '19 and '20 because of the sale of the Juno and Mercury portfolios.In terms of business performance, the behavior of rent like for like was excellent, with a 3.5% increase year-on-year, which breaks down as 4.5% in offices, 3.8% in shopping centers and 3.5% in logistics. Release spreads were fantastic all across the board, with 9.7% in offices where the lack of equilibrium between demand and offer was starting to [indiscernible] in all the renegotiations we were making and renewals we were making with tenants. 3.8% in shopping centers, which was performing quite good. Till the COVID crisis erupted, we were plus 5-point-something percent in traffic and -- sales and traffic, and 8% in logistics.Occupancy was slightly lower at 94%, so minus 0.8% owing mainly to a loss of tenants in Parc Logístic Zona Franca in Barcelona and in Offices Madrid with the exit of a company called Sigla that has since been replaced.So generally speaking, we were heading for a fantastic year, as you can see in the gross rent bridge on the bottom right of the page, where we were only EUR 1.3 million short of overcoming the effect of the change of perimeter of 2019 sales.I will skip the detailed analysis of offices and shopping centers and logistics, because as I said before, probably those have become uneventful for most of you and will move directly into balance sheet, okay? So Page 1, 2, 3, 4, 5, 6, 7, 8. Page 8. In terms of balance sheet, the company took the decision to fully draw down on the existing RCF lines. So the company is now sitting on EUR 1.3 billion of cash and equivalents. We had our credit rating examined by both Standard & Poor's and Moody's in the month of March, and both ratings were affirmed even after having taken the decision already of the commercial policy.The loan-to-value was traditional lately, was further reduced to 40.1%, which is a meaningful 0.5 point less reduction versus December '19. As commented before, no changes in the value of assets in the quarter.I will also skip investments, divestments and CapEx because it's not important and sustainability and move into post closing events, which will give you a picture of what we continue doing during the COVID pandemic. So in May, our subsidiary, Cilsa, ZAL Port in Barcelona has delivered 2 warehouses pre-let to LIDL with close to 61,000 square meters, which is set to become their Catalonian hub for online, and Agility, slightly above 11,000 square meters. And these, along with the units that were already delivered to the beer maker, Grupo DAMM, and UPS during the month -- during the quarter, sorry, which add up to close to 60,000 square meters, this takes the total square meterage in operation in ZAL Port above 600,000 square meters, which is a very interesting figure for such a premium logistics space in the close vicinity of Barcelona.On the 27th of April, MERLIN signed a 10-year lease agreement with a top-tier tenant, currently confidential, which comprises 19,500 square meters in Monumental Plaza Saldanha in Lisbon. That pre-let represents 77% of the asset and in a building that is yet under refurbishment and will be delivered to the tenant on the first quarter of 2021 with a very interesting yield on cost. And by the way, this is the largest leasing transaction in Lisbon's CBD on record. I mean, it's the largest third-party leasing transaction on record. There have been some build to suit by the public administration, but this is the largest in the private sector.On April 1, MERLIN delivered close to 5,000 square meters positive/negative cold storage warehouse in ZAL Sevilla to Carbó Collbatallé. So as you can see, and you will also see when David covers leasing activity, we have remained pretty active during the COVID pandemic with the little hiccup of the teleworking affecting significantly the productivity. But the company has remained active and protecting its business during the period.On Page -- in the following page, I will provide you an update of what has happened in the company since the eruption of the COVID pandemic using April as a proxy month. So on the 15th of March, the state of alarm was declared in Spain, followed briefly thereafter by a state of emergency in Portugal. And the calendar to come back to normal lives has only started in May. And in Spain, it's staggered into 4 phases. Portugal is faster, pointing to an end in Spain towards the end of June.During the pandemic period, our primary focus, of course, has been to protect the health and safety of our employees, tenants, contractors and suppliers while preserving our business activity as aforesaid. From an operational standpoint, all of our operating assets have remained open and accessible to tenants during the period, fully serviced with reinforced measures for cleaning, disinfection and air filtering.In accordance with the state of alarm, there have been activities of tenants declared as essential and permitted to open and some nonessential, which have been forced to close, that in shopping centers. Thank God, MERLIN enjoys a broad diversification of income by asset categories, a very good tenant base and a very defensive underlying industry exposure as evidenced by the S&P report, which has helped to mitigate the impact of the pandemic.So in offices, which, as you know, represents around 47% of our total passing rent, we have had mainly ground floor activities, retail activities affected by the lockdown for an amount of around 3.5% of the total offices and 96.5% non affected. In shopping centers, which weighs around 22% of our rents, we have had 89% and 11% non affected. Originally, our first take on it was 77%, which was the legal definition. However, we have decided to include F&B into the affected by lockdown category because despite the fact that the state of alarm allow restaurants to continue working for takeaway, we have seen meaningless activity in that regard. So we have decided to include them in affected by lockdown.In logistics, which currently weights around 11% of our total rents and growing, we have had a 0% incidence of the lockdown, and in fact, the government encouraged light industrial activities and logistics activities to continue throughout the pandemic. And therefore, 100% of our clients have been working uninterruptedly.In net leases, which now represents 17% of our rents, again, 0% has been affected, 100% has been operational. And in other, which, as many of you know, is mostly comprised of hotels, 97% has been affected by the lockdown and 3% unaffected. So that has been the extent of the damage inflicted by the COVID pandemic to our business.Following page, we discuss our commercial policy. So as soon as we saw what was coming, we fast reacted and implemented a commercial policy with the idea of sharing with our tenants the difficulties arising in the pandemic environment. We provided them with relief during their compulsory lockdown. And very interestingly, I think, in retrospective, it's been a good decision, the policy met widespread acceptance within our tenant base without affecting too much our collection figures as compared to what we are seeing across Europe but with the big difference that there's been no litigation against any tenants.So we believe in the long term, this will have neutral or mildly positive or positive effect in our brand value, and eventually, will pay off in terms of business performance in the long-term, and we will keep you abreast of how this evolves.The policy was enacted on the -- starting on the 17th of March 2020 following the declaration of the state of alarm. The tenants eligible were those affected by the compulsory shutdown set forth in the state of alarm regulation. The conditions to apply were to be completely up-to-date in contractual obligations, including the payment of any past rents due or common expenses. And the policy provided 100% rent relief since mid-March, declaration of the state of alarm and up until the earliest of the end of the compulsory shutdown or 31st July, whichever would have come first. The compulsory charges continue to be paid by tenants, and the tenants have to waive rights to take any further actions against MERLIN as a consequence of the COVID-19 pandemic.In offices, the eligible universe was only the ground floor retail, around 3% of the rents and 100% of the tenants accepted. In shopping centers, the eligible universe, as commented before, was 89% and more than 85% have accepted. And we believe many more clients will continue to accept till the end of the month, which is the term given to accept the policy. And in other, the eligible universe was 97%, and it has been embraced by 100%.On March 19, we provided an update to the Spanish CNMV, to the market regulator, quantifying the impact of the commercial policy at below 10% of our total income. That calculation assumed only the policy in shopping centers and only the loan linked to the state of alarm declaration, assuming that 100% of the eligible tenants would choose it and that the release persisted up until July 31, i.e., 4.5 months of full application. However, on April 28, the Spanish central government published the general guidelines for the return to the new normality over the next 8 weeks. In principle, all of our stores within shopping centers will reopen as from May 25 or around because it varies from province to province, depending on whether they make it into Phase 2 or remain in Phase 1.In Phase 2, the footfall is reduced 60%. So the permitted affluence is only 40% and there are distancing restrictions to comply with social distancing measures. As from June 8, the shopping centers footfall reduction will be eased to 50% and common areas will be allowed to be used for more income generation purposes and also for recreational purposes, namely the activities related to key leisure areas, et cetera.So as a consequence of what I have just commented, the impact of the commercial policy that we put in place on March 15 will be slightly lower than we originally projected, well not slight lower, it's approximately half. But however, we are not going to recover that money. We are going to make a new partial relief policy available to our tenants to cover the post-COVID-19 trading period. The details will be announced once communicated and agreed with all of our tenants, but it will have a very beneficial effect in the weighted average and expired lease term of our contracts. So we will at least obtain the benefits of extending most of our tenant base beyond January 22.While I will not disclose the exact details by retail segments of the policy until it has been communicated to our tenants, I will give to you the round number of how it will affect our year gross income and cash flow. So we estimate the total effect of these plus eventual moratoriums or zombification of clients that we might have in offices and logistics that I will discuss afterwards in between EUR 65 million and EUR 70 million total impact per year. That is between 12.5% and 13.5% of our gross rents.Given the cost-cutting measures implemented, do not assume that there will be a complete flow-through to FFO. We estimate that the flow-through to FFO will be minus EUR 10 million. So this is the effect that you -- the ones that are going to go back to their models after the call, this is the effect that you should take into account for the company for the full year, okay? Please understand that we are providing more information and more degree of details and more degree of analysis than we have seen in some other cases. This goes with a prevention. The prevention is that all this is assumed taking into account that the deescalation calendar put in place by the Spanish sanitary authorities goes as expected. If we start having back and forths in the different provinces, and eventually, we end up with a disaster in terms of come back of the COVID strains of COVID during the fall or the winter, et cetera, eventually, the results of what I am saying will be slightly different. But this is the effect that we are calculating, taking into account that life goes back to normal during 2020 and eventually the recovery starts in 2021, which we are not going to project, because we need much more information on how the whole pandemic and economic crisis arising from the pandemic evolves.In the following page, we have made a table with a detailed analysis of our collection rate. As many of you know, the common practice in Spain, which is di-similar in Portugal where normally quarters are invoiced in advance, the common practice in Spain is to invoice on a monthly basis in advance. Given the quality of our tenant base, we have been lucky, and we have obtained relatively high collection rates, as illustrated in the table. So you will see that in offices, we have for pure office tenants, because ground floor retail has been added into shopping centers, we have 0% client affected by commercial policy and 95.2% collection rate and 3.2% in-process. Many of you may wonder what in-process means. For the vast majority, 90%, in-process means public administration, which by law or by fact, pay whenever it wants. However, it always pays by rule of law. So this is not in question.The uncollected stands for April at 1.6% of the total rents. Out of this, we believe that approximately 0.5 point is at risk, meaning clients more or less in zombification process. So the rest is people that is either making legal consultations, they need to -- they have multinational policies. They thought the Royal Decree moratorium will be more beneficial to them, and they are trying to apply the Royal Decree moratorium but they don't want to show us their books. So these people, which is a little bit now under discussion, very importantly, 2x the amount at risk, 2x the 1.6% is covered by guarantees. So we have a little bit of benefit of time to think about what we do with the different situations here and with the different clients here, whether we legally proceed against them or simply continue negotiating, trying to reach a meaningful solution, okay?For shopping centers, 58% of our income has been affected by the commercial policy, 28.2% has been collected, 0% is in-process because in shopping centers, we have elected not to make any guessing, not to make polls as to whether somebody has delayed on purpose or as always, and we have moved all the people in uncollected.So out of the 13.8% uncollected, many of you are asking what is the level of zombification. So what is the amount truly at risk that may become future vacancy. Our best estimate with the visibility we have today is around 5.5%, which is the clientele that has either no cash or no payment morale to face their obligations, and therefore, will be treated according to law. For the rest, we are talking mainly about people who needs to consult with their lawyers, multinational, they need to go to California and back because they have a global policy on payments, people that eventually thought the Royal Decree will be more beneficial to them and delayed giving consent. So there are a number of situations in that mixed bag that what we believe is future vacancy is to the tune of 5.5%.No incidents at all in net leases, as 1 could expect, and 94.9% collection in logistics where no commercial policy was applied, with 3.2% in-process and 1.9% uncollected which, again, is more than 2x covered by guarantees and of which we estimate 1% to be zombi status. Because, as you know, in -- particularly, in light industrial and small logistics, in many cases, balance sheets and P&Ls are very, very thin. So we believe there will be a little bit more effect in logistics than in offices of the zombification.In the following page, very, very quickly, we have simply reminded you that the collection rates you are seeing are a consequence of our tenant quality, which in offices is mainly composed by big corporations, 95% versus 5% SMEs, by headquarters of companies, 70% versus 30% local delegations and by less vulnerable clients operating in less vulnerable industries after the Standard & Poor's definition, which is utilities, industrial, public administration, health care, consumer products, consulting, law, finance et cetera. So we only have a 5% exposure in offices to retail, 3% to transportation, 1% to leisure, 1% to automotive, 1% to tourism and less than 1% to third-party flex space operators.In shopping centers, now we are starting to see a little bit of release in the pressure that we have usually experienced on our secondary exposure because now we have reduced the secondary exposure to less than 5%. So we are 58% urban, which eventually will be the type of shopping centers that will emerge stronger from the current crisis and 37% dominant. In terms of tenant resiliency, 41% of our tenants are listed public corporations, 32% are large private corporations versus only 27% smaller tenants classified as other.And in logistics, the best KPI that can be indicated is that 89% of our logistics is of very recent or brand-new development and shapeable for 3PL, so linked to online commerce versus only 11% now following last year sale of a couple of noncore facilities in Catalonia, 11% now industry related, which in some cases are automotive industry mainly having affected by the consequences of the COVID.In terms of our balance sheet, we benefit from a solid balance sheet, as you all know. We believe it will help us to overcome this very challenging period. We continued reducing the leverage, and we will have continued reducing the leverage to the extent possible, we are now at 40.1% LTV, and we are holding on to cash and cash equivalents position of EUR 1.3 billion as of March 31, 2020. The company, as many of you know, does not face any debt expiries till 2022. We have no commercial paper or any other similar short-term financial instruments. So we are in good shape to continue trading over the next couple of years and fully concentrated in our daily business.The rating agencies have reaffirmed our corporate rating following the COVID-19 outbreak, and we have implemented a number of capital preservation and cost-cutting measures. Those are mainly focused on a restriction on CapEx plans where we have concentrated on the projects which are under execution and have a high level of pre-let and have separated those from the ones that might be deferred perfectly.The project under execution, which will produce future income in the short term, entail an aggregate investment of EUR 247.7 million as informed to the market regulator in due time over the next 4 years, of which EUR 167.4 million are expected for 2020. However, future rents attributable to those projects, of which now 2/3 is pre-let, amount to EUR 37.3 million. So by segmenting our CapEx plans, we have preserved capital in the amount of EUR 458 million in -- while we wait for the evolution of the growth for the company.In dividends, what we have decided is to propose to the AGM the distribution of EUR 0.32 on top of the EUR 0.20 that were already distributed on account in October last year. However, the EUR 0.32 are divided in circa EUR 0.15 payable in cash in July, 1 month after the celebration of the General Shareholders Meeting, and the other EUR 0.17 we expect that the General shareholders' meeting delegates their distribution or not in the Board of Directors who will decide after analyzing the impact -- the full impact of the COVID-19 evolution in the business during 2020 and perspectives for the forthcoming years. By doing so, we have preserved EUR 81 million cash in our accounts.In terms of overhead, what we have agreed with the Board is, for us, senior management of the company, to waive all short and long cash and/or shares incentive for the year, and we will also review situations for the coming years if the COVID pandemic continues, which makes up for between 60% and 80% of our compensation. And we have also agreed for the Board of Directors to reduce their total compensation by around 25% in the year. So by doing so, we are saving in the region of EUR 11 million, which will help overcome the excess of financial expenses that we will have this year as a consequence of having drawn down on the RCF lines and other costs that might be associated with the COVID pandemic, like, for example, the slight CapEx that buildings will require in terms of acquisition of temperature measuring devices, et cetera, in order to comply with the sanitary measures once Phase 3 is achieved.Without further delay, I believe we should now move to Q&A, and you have the full team at your disposal. Please feel free to make any questions you deem appropriate, no matter how difficult. I am sure there will be a lot of debate today, and we are happy to entertain all of your questions and leave nothing unanswered. And if something is numerical or we don't have the response handy, as you know, you can resort to our Investor Relations team, who will, right after the call, brief you with any information you might need. Thanks a lot. Thanks for attending.
[Operator Instructions] Our first question comes from the line of Jaap Kuin from Kempen.
It's -- the first one is on rent collection, I guess, because I think you provided a lot of detail on April so far, which is great and better than a lot of your peers. But given where it has in May, I was hoping in terms you could maybe also discuss a bit -- a month down the line or how May is shaping up? And if you see any indications that this will be different from April? And then maybe a more long-term question, as a second question. Just looking at the future of your offices portfolio, you obviously sold a bit on the bottom end. You still own a sizable chunk of kind of non HQ type of offices. How do you see the usage of that going forward? And also considering kind of shorter lease durations in Spain versus maybe rest of Europe, what do you see as a risk of kind of them starting to gain in the market and actively renegotiating lower rents and kind of the midterm prospects for your office portfolio?
Thanks, Jaap. I'll take both of those questions. I think, first, with respect to May collections, at this point of the month, they're looking very similar to April. So we're not expecting any meaningful deviation in May versus April. Obviously, in retail, because of the commercial policy, that's pretty well sorted because as people sign on to that commercial policy, it dictates the future payments as well. But then in offices and logistics, we're not seeing any deviation in May versus April.Your second question is obviously more complicated. And I think the 1 thing I -- to start with that is I think we have to be careful now at this time to get too prospective about the way work is going to change, right? Because you're seeing a lot of press out there, a lot of articles. And of course, the press want to sell. And so radical change sells better than gradual evolution. And then everybody who's prognostic in speaking has a dog in the fight. So CEOs want to try to push rents down. And consultants want to get fees to advise you on how the new office will look like. But I always go back to 9/11, when I look at 9/11, post 9/11, the world was going to change. No company was going to locate its headquarters in an iconic building in a major city. It was going to be dispersed because you didn't want all of your management in the same location. Iconic hotels and the like were going to be viewed as being high risk. And honestly, when you -- with the passage of time, the only real thing that came out of 9/11 was the disaster recovery center, which ironically enough with everybody now working from home and finding that that's actually doable, the disaster recovery center is probably going to go by the wayside.But the things that I do think are clearly going to happen with regard to the post COVID world is lower density. It's clear that density -- the higher densification process that was going on is going to stop and reverse. You saw densification from 10 square meters per person in some reworks down to 5 square meters per person. That will clearly, I think, go away. As a reference point, our LOOM business are flexible. We never went below EUR 10 -- 10 people or 10 square meters per person. A lower density was always part of our strategy. So adapting our LOOM to the new world is going to be a little easier than those companies that went very high density. And in fact, even across the whole MERLIN office portfolio, our density is about 9 square meters per person. So we're -- I think we feel like we're well positioned to handle that less densification because we had not really gone very far in pushing density.Second is more flexibility. So I think clearly, that's going to be the case. People are going to want to -- and not that it wasn't like that before, 75%, 80% of the space being fixed, 20% being flexible to account for different working conditions. Now that will also be to react to a situation like this where you can maybe reduce your workforce. So more flexibility is clearly coming. I think, again, we were well positioned with that, and growing the LOOM business. And so that will, I think, kind of play in.And I do think this idea of a dispersed workforce is also going to be something that comes into play. And you probably saw the announcement recently of Facebook and Twitter. Twitter is saying that employees may never have to come back to work. They can be in a more dispersed work environment. Again, I think that plays into the idea of what we're doing in flexible space because people aren't -- that doesn't mean just work-from-home, but it may mean 3 days in the office and 2 days into a place that's closer to home. You may want to get your team members and working home together in a space. And so again, I think with the LOOM business, we're kind of in a position to react to that.And that said, to the point of your conversation, one of the things that's been talked about, again, is the whole resuburbanization, if you will, right? People are going to want to because mass transit like, the people are going to want to commute into the city centers where they have to have rely on mass transit or you're going to now perhaps see more of a dispersion into myriad suburbs or more remote. So the whole idea of everything into the CBD is now going to be questioned. I have less visibility on that, but I could easily see how that might become a result of this.So what was formally believed as the CBD is the end-all and be-all, is now, I think, going to be questioned as people think twice about packing into mass transit to come into those central locations, which, again, is why I think diversification is the only way to account for these changing trends that we see. But that's the best answer, I think, I can give about the future. But either way, I think with our little more diversified portfolio and with the LOOM business having grown that and expanded it, I think we're in a pretty good position to respond to the way the market is going to evolve.
Our following question comes from the line of Celine Huynh from Barclays.
Just have 2 questions on my side. The first 1 is your estimated impact of COVID-19. Do you mind building the bridge of how you get from a minus EUR 65 million on your top line to a minus EUR 10 million on the bottom line of your P&L? And then my second question would be on the pipeline. What would it take for you relaunch your development projects that are currently on hold?
Okay. Celine, what I was saying is that the top line impact will be between EUR 65 million and EUR 70 million and that when you flow this through to FFO, you should subtract around EUR 10 million because of the cost-cutting measures, not that we are only going to miss EUR 10 million in the cash flow. I wish that was true but this is not the case, okay? And for the second one, I didn't get it well. I mean, David, did you get it?
Yes, I did. Yes, I'm sorry. I understood the question. So if you remember, most of our forward pipeline is warehouse logistics. So -- which is obviously very well positioned for this, right? And so it won't be a one size fits all. But I think it's going to be -- we're going to be looking at how the economy evolves post-COVID, right, because no one really yet knows. You've seen projections have all changed from the original projections to today's projections. Everybody is really flying -- they're flying on a faulty instruments in a thunderstorm, right? So it's very difficult to see which way is going forward. But what we will be looking at is how is the economy reopening? Is that reopening? How is it going in terms of is it -- it's going to come in stops and starts we know, but we'll see how that's progressing. What is the impact beyond Q2? Because we know Q2 is going to be a disaster globally, frankly. And then we'll look and say our capital -- to our capital preservation measures, can we relax those somewhat and say, we now have more capacity because we're more comfortable with the way rents are going to evolve, and we're comfortable with the way cash flow is going to evolve to say we can commit more capital to this pipeline. And we've prioritized that pipeline, obviously. So we'll take those projects that we think are best suited given the amount of capital we may be able to free up from that, and we'll start those projects first.The good thing about it is, as Ismael said, all those projects that we've chosen to defer, we have complete flexibility on. We control the land, we control the projects. So we can start them. It's not a either/or, we can start the ones we think are the highest priority first once we see that the evolution of cash flow is more clear to us.
So when you say you choose the best suited project, does that mean you chose a project with a pre-let agreement attached to it? Otherwise, you would not go ahead with it?
Pre-let agreement? Or again, if you look at logistics, we're still 96% let and there's -- and that's the area where there's continued to be significant demand. In fact, the logistics market is actually today, letting market is even stronger than it was post-COVID because there's more demand for e-commerce and online activity. And so we would just look at the underlying characteristics of the market, it doesn't have to be a pre-lease agreement. Obviously, that's the best thing you'd have. But if we see, we've got our occupancy and logistics is up back above 98%, and we've got a project in a strong corridor where there's very little vacancy, we might be willing to start a project like that. It's -- there's a lot of factors that go into it beyond just the -- just whether or not it's pre-let.
[Operator Instructions] Our following question comes from the line of Beltran Palazuelo from SANTALUCÍA.
I have 2 questions. But first of all, maybe how liquid could your net leases assets be in a moment of pressure like now? And then my second question is regarding the CapEx, if let's say, in a couple of months or a year, we have more visibility, David was talking about continuing with the pipeline of assets that could be already rented with high visibility on future cash flow. What is the financial rationale of whatever thinking about continuing with CapEx when capital is free to invest in the pipeline of CapEx, there's also may be capital to execute the buybacks at, let's say, less than half of the NAV? So these are my 2 questions.
Okay. On the first one, Beltran, on the first one, which is the BBVA sale and leasebacks. Liquidity, only God knows. We believe it continues to be very interesting. And in fact, on the 25th of May, we are selling EUR 13 million worth of branches to clients that have requested them and which we have not withdrawn from the promissory agreement. So it continues to be a very interesting cash flow, I believe, highly valued by the market because it continues to be a pension fund-like type of stream, which is extremely helpful for many Spaniards. So on the retail market, I believe it continues to be a very, very liquid product. And in the meantime, whether we continue selling or not, I believe it's a very much welcome source of income because, as you know, it's completely triple net. And it represents around 3 quarters of our total debt service. So to have now 3 quarters of the debt service covered by a triple net lease long-term in 2039, I believe is a good advantage in these difficult times.For the second, I will leave David to answer you because this has been the object or the subject of numerous internal debate on which returns should be used as a hurdle in terms of giving green light or not to our development because as you know, as you say, as you correctly point out, our share price now is so s***** that eventually buying back our shares will deliver a very interesting result in some cases. David will elaborate on that.
Yes. I think to your point, I'd first say, the only thing we would even consider are the existing projects, right? We already own the land. And we've even done the planning, and we have -- because we've been going through the planning process, and we have that kind of increased value that comes through the planning process. Any new project as we said, the capital hurdle now would be so high given where the share price is that even things that we were talking about earlier that would fit our profile, offices in Lisbon or new logistics projects that we don't already control, I think it's highly unlikely you would see us do anything there because, as you rightly point, we'd be better off buying our current portfolio given that it's trading at such a discount.And that said, even the hurdle for starting something new for a new project, if you will, or an existing project that we already own, we'll set the hurdle relatively high as to what we think the return on that would be now. We control the land. We don't have to worry about ultimately being able to complete it, but we'll be looking at that in conjunction with where is the share price and deciding whether we're better to allocate capital in that way or whether better to allocate capital to buyback. So I think that's the best way to look at it. We will take into account that share price as we look at relaxing or opening up any further CapEx commitments than the ones that we've indicated here.
Okay. And maybe a follow-up, if I can, in the first one. As theoretically Ismael commented that, of course, it's a very recurrent asset, the net leases. As long as you divest during this year and more assets of net leases of BBVA, what will be -- exactly when will you feel comfortable in order to be more aggressive with existing projects and with buybacks? Because currently, in order for you covenants, if there's no, let's say, no free cash flow generation, assets as a whole would have to go down more like 33% in order for your covenants to go up. So when will you feel when you divest the net leases in order to be more aggressive? So were those proceeds only for debt reduction? Or when do you feel comfortable or I'm thinking, well, those proceeds for maybe buybacks or going through the CapEx program again?
Mainly for debt reduction at this stage. And the figure I was mentioning is meaningless anyway, EUR 13 million out of our EUR 1.7 billion portfolio but that cash flow will be simply accumulated like eventually any other cash flow that we might obtain from non-core sales. Still we have more visibility on what the future holds because by taking order if we start having more visibility on what the future holds, the first thing we will do is pay back the credit lines and go back to a normality situation, okay? And the second thing we will do is continue in our path to try to deleverage the company towards the 35%, 36% loan-to-value objective, which only God knows whether will be achievable or will be counter affected by a foreseeable drop in values of mainly shopping centers.So in principle, pay down debt till we have more visibility because we wouldn't like to see ourselves in a situation like U.S. companies who have been extensively buying back own shares, and in some cases, now are in need of public sector rescue. So we want to be prudent. And only with true excess cash, eventually, we will go for shares in the market.
We have no further questions at this time. Please go ahead.
Okay. Any other question?
Fernando, just before you close up, there's one thing that I -- it didn't come up in questions, but I think it's important for us to talk about as well. But a lot of the questions that have been seen is what's going to happen to the post-COVID world. So just to remind people that between the lease in Lisbon, which we've already announced and the replacement of the Sigla tenant in Madrid and another lease that we've signed in Barcelona, in the post COVID world, we've signed 29,000 square meters of space. And the economic terms on which we signed those leases are the same economic terms that we were negotiating on those leases prior to COVID. So when we talk about what the post COVID impact is, all we can really talk about is what we've done. The future is still quite clear. But in those major leases that we've signed or LOIs that we've signed or LOIs we've converted to leases that started in the pre COVID world and ended up in the -- end up completing in the post COVID world, we've seen no meaningful change in the economic conditions of those.So that's -- I think it's at least an indicator of how people are reacting now. What the situation like is 3, 4, 5 months from now, obviously, will depend on how the economy evolves. But I thought that was an important piece of information to get across.
And another important piece of information because I know some of you are asking about it, is what will happen to valuations? I know there's been a lot of noise about that. And many people is now hectic about what'll happen to land securities in the U.K. and are reading across to other companies using land sec as a proxy. Of course, there is nothing that we can say, which eventually will allay everybody's fears. But for what is worth, it is important to note that in the U.K. retail was having problems before COVID. In Spain, January and February, we had sales up 5.1%, and footfall up 2.4%. And our occupancy costs and generally speaking, our OCR, our tenant afford ratio across the portfolio is like 12.5%, which is much lower than the tenant afford ratios that are normally seen in other countries where everybody is now completely frantic about what will happen to retail.This is not implying that there is not going to be any challenges to retail. Of course, there will be challenges to retail. Of course, we will try to cope with those challenges. But since we were quick in refurbishing most of our shopping centers, as we indicated to you, part of that refurbishment was offensive, part of that refurbishment was defensive. And our expectation, at least for June, is to take some hit in shopping centers, but not even close to the ones that most people is expecting, opining or writing in the different literature that we are receiving.And for offices and logistics, we expect no or meaningless, I mean, very limited impact on values. In fact, they might even go slightly up in some cases, particularly in logistics. So that is important because I know that the trend is your friend, and now everybody is trying to create downward pressure on everything. But we are not seeing on the ground, the level of desperation that the financial market is expressing. It might well be that the financial market is right and we are wrong. But for the time being, this is what we are seeing on the day-to-day work.
Excuse me, we have 1 question from the line of [indiscernible] from VML.
I just had a follow-up question on FFO impact you were providing. Some opine between EUR 65 million and EUR 70 million. Does it include the losses from higher vacancy on shopping centers, the 5.5% that you indicated related to not collected rent?
Yes.
Yes, it does.
Okay. So well, thank you very much for your kind attention. As aforesaid at the very beginning, keep safe. And we remain here at your full disposal for any further clarifications. And in especially these days, we, as a company, are making an effort to be absolutely transparent and to convey as much information as possible to the market so that the investors community at least have the proper information to take decisions. Thank you very much.
Would you like to take the last question from [indiscernible]?
No problem. Please.
Okay. Please go ahead. [Operator Instructions]
Okay. Ismael, just a very quick follow-up question or maybe to David, I think he answered the question on this. Just going forward, I know you have very low visibility. But what are you seeing in terms of major differences between this post COVID world to the last real estate crisis in Spain in 2009, 2010? I'm trying to get a sense of what you feel could be the level or the floor level for rents going forward. I know there's a little visibility, but maybe your line of thought would be great on this one.
Sure. Well, 2 things. First, I think: One, the supply situation going into this period now is significantly better than it was previously, where there was a significant amount of supply; second -- so that's a positive. Second is that the rental level relative to general economic activity, are again, much lower. If you think that today, we're still below the prior peak. So we haven't even recovered rents in Spain back to what existed in 2008. So it's a long, long time of declining and flat rents. So the -- it's not as high a perch from which to fall for rents. So those 2 things together, the supply situation and the fact that rents are more in line with where economic activity, I think, give me a better sense.And then the third is, at least to date, and this is, I think, the big thing people are looking at, this is not a financial crisis which are always deeper and longer to recover from. The banks having rebuilt their balance sheets from the last crisis and not having gotten overextended, the banks are stronger going into this. So the spillover effect into the broader financial services should be more reduced. And so the recovery, again, barring the fact that this pandemic goes -- becomes deeper or longer, the recovery should be faster. And even today, when you look at the -- keep a lot of the reports that I pay attention to or listen to, the most conservative ones are saying 3 years to get back to level of economic activity existed pre, and the general consensus is about 18 months.Now some of the early ones, the V Shape, it's going to be a year, were a little crazy, and I thought that the beginning. But now the market consensus is kind of falling into an 18-month period. And that feels -- again, as best I can tell from now, that feels like a pretty good estimate, frankly.And 1 other thing that to point out for us for 2020 in offices, going into the year, we had a 15% expiry. But the first quarter, we took care of 1/3 of that. So from here to the end of the year, we only have 10% of the office leases that come up for expiration. So that's a relatively low percentage, even -- especially in a market where as Jaap pointed out earlier, leases tend to be short. We only have 10% to deal with between now and the end of the year. And then we have a relatively light calendar next year as well, comparatively speaking. So that puts us in a reasonable spot that we're not having to negotiate large volumes of office leases within this next 6 to 12 month period.
I would add in a few -- 3 secondary things, which are also important, which is the general level of indebtedness, so the leverage of families and companies is well below the last cycle. So as you know, in Spain, it has come down 70%, so 70 percentage points of GDP, lower families and corporates. Disgracefully, the state, the government has not followed the same route that families and corporates have significantly deleveraged as compared to the last crisis.The second factor, which I believe is important is accumulation of equity, accumulation of wealth. I mean, there are many full equity buyers still out there, believe it or not, chasing high-quality assets. And this is particularly true for offices and logistics. So as we speak, in the middle of the pandemic, we are still negotiating a couple of noncore sales in offices with full equity buyers. And the third important factor, although secondary, is that the environment of interest rates is much, much, much lower, giving more relevance to any cash flow linked activity. So the price of real goods is better because remember that in the last crisis, at the beginning of the crisis, particularly there was a significant hike in the price of money. And as a consequence, that more than doubled the diabolic effect of the 2008 crisis. That in this one, I believe the multilateral organizations and the central banks have been much quicker to react and price of money is significantly depressed, therefore, holding steadily the value of real assets.
We have no other questions at this time. Please go ahead.
Okay. Thank you, everybody. As aforesaid, you know where we are. So let's keep in contact. Thank you. Bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.