MERLIN Properties SOCIMI SA

MAD:MRL

Earnings Call Transcript 2022-Q2

[Operator]

Hello, everyone and welcome to the Six Months 2022 Results Presentation for MERLIN Properties. My name is Emily and I will be moderating your call today. [Operator Instructions] I will now turn the call over to our host, Inés Arellano. Please go ahead, Inés.

[Inés Arellano, Investor Relations]

Thank you. Good afternoon everybody. Welcome and thank you for joining MERLIN’s first half 2022 results presentation. The materials for today’s call can be found both in our website and the webcast. We are pleased to [indiscernible] by the disclaimer contained in it. Both Ismael Clemente, our CEO and Miguel Ollero, our COO will walk you through the presentation and we will thereafter open the line for Q&A.

With no further delay, I pass the floor to Ismael. Thank you.

[Ismael Clemente, Chief Executive Officer]

Good afternoon. Welcome to MERLIN Properties first half 2022 results presentation. It’s been, I would say, a very productive semester for the company. Particularly, I am proud about the performance in the top line, because in all the three asset categories that we operate, we have experienced very interesting like-for-like rental growth blended to 7.1% at the company level.

While many people believe that this is owing to inflation, let me explain that inflation is less than 40% of that figure because although it is very easy to do the math, that inflation is 5.4% and therefore – 5.4% of 7.1%. The truth is that in this 5.4% for the whole year. And then not all clients renew and apply new inflation on January 1. So in reality, the inflation-driven like-for-like increase is 39% of the total figure. The other $60 million is basically net occupancy gain and nominal rent increase, which is important, I believe. Occupancy stands now at 95.1% overall in the company, despite having sold the BBVA portfolio, which as you all know, contributed with 100% occupancy to our overall portfolio. In offices, we had a very good performance, I would say, with a 5.5% like-for-like, a 6.3% release spread that I think it was even surprising for us, and a 90.4% occupancy, which still is below what you might expect that we hope will significantly improve towards the second half of the year and we maintain our 91.5% guidance for full year.

Logistics has been a fantastic semester. It’s being all wine and roses, and the cutoff date effect this time has been favorable to us. So, all staffs have been aligned, no clients have left just before the cutoff date. And as a consequence, we have recorded 99.2% occupancy, which is incredible even for us. 9.3% like-for-like growth, 6.7% lease spread, which is strong and very good prospects for the rest of the year. In fact, given the situation, we are resuming at least one spec development in order to have some product because otherwise we will run out of product during the year. Towards the end of the year, there could be – although we are working to change it – there could be a significant exit of a client that will create a cutoff date effect in 31st December. We are losing a client where – in fact, not losing, we are moving to a different share of our portfolio, a client of 38,000 square meters that eventually might create the optical impression that occupancy has gone down in the fourth quarter.

But again, I believe the expected performance for logistics this year is going to be very similar to the one we have had so far. Also very interesting operating performance in retail that keeps surprising us, let alone all the retailer [indiscernible] followers, with a 6% like-for-like growth, 5.4% release spread and a 94.3% occupancy, which includes our 3 non-core shopping centers. I mean in the absence of those, it would have been much, much higher. We expect that occupancy figure to even go up slightly in the second half of the year. We are not in denial of the fact that the second half of the year is going to be operationally more challenging. I mean, we are perfectly aware that starting in September, there could be a significant disruption in the market, et cetera. But these things are a little bit more predictable than people believe in companies like MERLIN.

Regarding financial performance, we have produced €0.34 of FFO per share, a 19.5% increase. But in this case, it is a consequence of better margins because we have better top line and we have been withdrawing also the oxygen we provided during the first half of last year to our retail clients. So of course, there is nothing to brag about the improvement in margins in our business.

Revaluation was relatively flat, plus 1.2% in the period. And the interesting thing is that talking about passing yields we have taken on some yield expansion of about 15 basis points. If it would have been my choice, I will have preferred a little bit more expansion because I am concerned about what is like in front of us, and I believe it’s a little bit dangerous to play too much of continuing to inflate values at this point of the cycle. I believe it is better now that we have a lot of rental growth, it is probably better to get more yield expansion so that we go back above 5% in passing gross, 4.5% in passing net as soon as possible. I believe this is sound, good, and healthy. I mean companies, apart from revaluing assets, need to produce cash flow, and it is our objective to continue to have one objective in line with the other.

In terms of the BBVA portfolio disposal, it has allowed us to pay in excess of €2 billion of total debt, the €670 million of associated mortgage loan debt, €850 million of the syndicated – the bilateral syndicated loan we had with banks and as you may know also we have already paid €548 million of bond in February. So all in all, we have gone down to 27.4% LTV, which pro forma once we pay the extraordinary dividend owing to the BBVA sales in mid-August, will be 30.4%, which is more or less the number you should more keep in mind rather than 27.4%, which is extraordinarily low, but it is not the good number looking forward.

Interestingly, of course, now all of our debt is 100% interest rate fixed. We have very marginal bank debt. The rest is bonds. So it’s fixed by nature. 98% of that is now unsecured. And as you also may know, we re-qualified all of our bonds as green at the beginning of the year, which I think will be interesting in terms of tapping the market in the future because it’s clearly the pool in which there is more money available. Total shareholder return has been 7.7% during the semester, although part of this is attributable to the capital gain generated in the sale of the BBVA portfolio. So it is not fully operational, and therefore, you shouldn’t multiply by two in estimating the full year total shareholder return.

Value creation. Apart from the BBVA disposal, which has been affected a 17.1% premium to GAV, we have sold more than €110 million of, let’s say, ordinary non-core disposals. As you know, we had a target for the year of around €150 million. So we are now very, very close to reaching the yearly target. And what we have done during the semester has been executed at an 8.9% – at a 9% premium to GAV. In Landmark plan, as you might remember, there’s only one building remaining that continues with its works normally, the Plaza Ruiz Picasso, and is now in the sweet moment in terms of pre-leasing. We are now moving to market and we are finding very, very interesting demand, and we hope to be more specific before year-end.

And then in our mega plan, the Bilbao works are underway and well underway. In fact, we are about one week ahead of schedule. The data center is now in structure. Columns are being erected. I mean all foundations were already done. And we are starting to receive also the equipment supplies. So we can deliver in June next year to our client according to schedule. In Madrid-Getafe and Barcelona-Parc Logistic, we got licenses as expected before summer, as we had anticipated to you, and works will start in 3Q 2022. In fact, works will start on 1st of August, I mean next Monday in both construction yards.

As for the extraordinary dividend, the Board approved yesterday the payment of an extraordinary dividend linked to the BBVA disposal of €0.75 versus the previous €0.67. The difference is simply that we were considering a minus 20. I mean, in round numbers, value of derivatives, and at the end when we liquidated the derivatives, we obtained plus 20. So simply we are distributing the difference, the balance as part of the ordinary – of the extraordinary dividend. It will be paid on the 18th of August. Shares will go ex-coupon on the 4th of August, for your information.

So without further delay, I pass the floor to Miguel Ollero who will comment on the details of the financial results.

[Miguel Ollero, Chief Operating Officer]

Good afternoon, everybody. We will go – find the details of the financial results for the first half of the year. As you can see on Page 6 of the presentation, the gross rents for the period were €222.6 million, 8.3% higher than in the previous year for the same period of time. It is you can say that if we look at the different asset classes which we have, office was contributing €120 million with a 7.3% increase; logistics, €36 million with a plus 10% – 10.5%; and shopping centers, €61 million, flat 6.2%. So in the end, the three asset categories are – have been contributing very positively in the 8.3% increase in the growth trends of the company. As you can see, we are not improving our gross rents and net leases, mainly the BBVA portfolio, because as they have been sold and was up for sale, we have been reporting it as discontinued operations and we will comment later which is the outcome out of it. So the 3 asset classes, as I said, were very positive.

In terms of net rents, we went up €186.4 million. What implies that close to 90% gross to net, net of incentives. This is mainly driven by the fact that we have reduced largely the rent discounts during this first half of the year. As Ismael was commenting, we will stop this year any [indiscernible] commercial policy, which were already in place in the last year. So we moved from €28.5 million of incentives in the first half of last year to €13.2 million. It is a 54% reduction in the incentives for this period of time. As a result of it, if we look at an EBITDA level, we were at €165.8 million with a margin of 74.5%, well ahead of the 63.3% we obtained last year for the same period of time.

In terms of FFO, 19% increase, €157.5 million with a margin of close to 71%, which implies in per share case €0.34 per share. AFFO, very close to the FFO, €0.33. And then in terms of EPRA NTA, we were €17.10 reported. As Ismael was commenting before, we are going to be distributing €0.75 per share on the 18th of August as extraordinary dividend linked to the BBVA disposal, which implies a straightforward correction or reduction of our NTA to €16.35. This should be like a starting point for the next period.

Finally, to remark here is that the BBVA portfolio sale was generating €252 million of profit. It’s a combination of the premium applied to the sale of the portfolio and also the generation of cash flowing during the period which has been within the portfolio, mainly until the 15th of June this year. Also for the IFRS net profit, you have to bear in mind that €152 million are related to the revaluation of assets, which, as we were commenting before, is 1.2% like-for-like increase.

If you move to Page 7, we have here the GRI bridge for the semester. It is a 7.1% like-for-like increase, also a big contribution for all the asset classes, 5.5% in offices, 9.3% in logistics and 6.0% in shopping centers. So again, they have been driving largely the rental increase. That remains that in like for like. The main contributor, as Ismael was commenting before, has been the CPI indexation and the increase in occupancy as we are talking, an occupancy that is, so to say, the highest one we have been reporting since inception of the company.

Finally, on Page 6, we have here occupancy, as I was commenting, 95.1%. Also we’re seeing that we have taken out the 100% occupancy that we had in net leases. Also in terms of WAULT, we continue to have a very good WAULT. So this base rate is excellent related to the fact that we don’t have any more with us the long-term signing of BBVA. But again, we have 3.2 years as MERLIN Average.

Now I’m passing the word to Ismael. He’s going to be commenting further on the inter-asset classes evolution during the quarter.

[Ismael Clemente, Chief Executive Officer]

I will go very quick on the different asset and asset categories. In offices, performance in the semester has been quite good. In Madrid, we continue to be slightly weaker than in Barcelona and Lisbon, but we believe that during the second half of the year, we will improve significantly our occupancy in Madrid as the works, municipal works on the A1 corridor in the north of Madrid progress. And little by little, we noticed a renewed confidence and interest in the area. We believe that we will have positive news in this regard.

In the following page, you will see that we have contracted 65,000 square meters in 142 transactions with a release spread of 6.3% and very good tenant names, reflecting the underlying quality of the portfolio. In our LOOM subsidiary in our flex office division, we have added already significant footprint and will continue adding during the second half of the year for a total of about plus 50% as compared to what we used to have last year. So we will be adding more than 20,000 square meters for 2,200 desks with a 72 occupancy and 10 spaces, and we will be adding another 6 spaces with almost multiplying by 1.5 the total number of disks. So it is performing well and clients are clearly demanding that formula as part of the total mix. I mean normally, between 85% and 95% of the estate they contract with us is under urban lease law. But then in most cases, they add a layer of flex space that allows them to play with the peaks and valleys of activity and adjust better their P&L.

In logistics, as commented, very, very strong quarter. In Barcelona, it is optical looks that we reduced significantly the occupancy. But remember, this is outside the FinSA perimeter. So this is only our part logistic for [indiscernible], which is about 130,000 square meters of logistic space, so not significant for the rest of the portfolio. And in the rest of Spain, the performance improved significantly with the lease-up of the Zaragoza-Plaza shared to XPO.

Regarding clients, we transacted more than 150,000 square meters in total transactions with a 6.7% release spread and fantastic client, our tenant roster. In ZAL Port, we achieved 100% occupancy. Again, I mean this is just a little bit by chance, but sometimes it happens. More importantly, the FFO increased by double digit with a 35.2% increase, which is simply a consequence of the new deliveries. I mean we delivered new product in the ZAL Port. We have now run out of space here and that caused the FFO to increase so significantly.

In shopping centers, excellent performance in the quarter. We are already at 19 figures. You might say, no, we are still 1.5% down in sales and 11% down in traffic in footfall. At the end, this is mainly attributable, I would say, almost exclusively attributable to cinemas. I mean this is an industry which is, of course, going through a difficult situation. It is, in fact, the only part of our tenant base that remains with a little bit of oxygen in our portfolio. And of course, they are causing a little bit of discrepancy in performance as compared to 2019. But I will say that the rest of the tenant mix of our shopping centers is already at or slightly above, in fact, the 2019 performance figures.

We leased up close to 35,000 square meters with positive new absorption and occupancy slightly up to 94.3%, with excellent prospects for the rest of the year. And more importantly, we remain with a very sound occupancy cost ratio of 12.5%, which, in principle, it is well in the low range of the comfort zone. So we expect that the rest of the year, despite the difficulties that we anticipate for the end of the third and beginning of the fourth – on the fourth quarter, we believe it will be relatively peaceful in our shopping center portfolio.

Miguel, valuation on debt position?

[Miguel Ollero, Chief Operating Officer]

Yes, regarding valuation, as we were commenting before, we had a 1.2% like-for-like uptake in the valuation mainly driven by logistics and office. In fact, office was aligned with the average of the portfolio, 1.2%. Logistics continues to be the one producing more value creation within the portfolio as we are – we continue developing our land banks and looking banking from the very well acquired and low entry price land banks that we are holding to our balance sheet.

In terms of shopping center, it was 0.4% down. So again, approaching the landing point in terms of valuation of shopping centers. Regarding yield compression or expansion, there was yield expansion all across the different asset classes, mostly compensated by the cash flow improved mainly due to better – due to CPI and also positive release spread that we have been commenting on the portfolio.

Regarding financial structure and net debt position, first of all, we should say that we have reduced like €2 billion of our gross debt position with regards to beginning of 2031 – ‘21, sorry. So we moved down from €6.2 billion of gross debt to €4.2 billion of gross debt. So 1/3 of the debt of the company has been repaid in the first half of the year, linked especially to the sale of the BBVA portfolio, which allow us to pay back the whole debt attached to the portfolio, €670 million on top of €850 million of the syndicated bank loan that we had in that group of funds. So in the end, our debt composition by now is mainly based on bonds. Out of the €4.2 billion, we have €4.05 billion of bonds under the minority position of the debt financing.

Our average cost is 1.94. We have, I should say, 100% of our debt on a fixed rate basis on an average life of 5.4 years, so very well placed for the future, especially in the interest rate hike in the environment. We have a long-term maturity base within our portfolio on a fixed term basis in terms of interest rate. Also liquidity position is strong, close to €1.8 billion of liquidity within the company. Only in cash with the books we have more than €900 million as of today. So very positive. Also as a result of the BBVA transaction, both trading companies were reviewing the rating on a positive outlook. So this is like the first step towards to get a rerating of the company in the following months.

Looking at our maturity profile, we should say that, first of all, we remark we don’t have sort to say commercial papers within our balance sheet. Our first maturity will take place in April next year with a bond of €745 million that we are working on for the refinancing in the following months. We are not in a hurry, but at the same time we are working on it. As we said, we have different options and we’re exploring all of them. In addition to that, it’s important to remark that we have also €700 million of our developing facility in place on top of the large amount of cash that we have in the bank accounts, as I was commenting before. Once we surpassed this ‘23 maturity, the next one is coming only in 2025. So again, the company has delivered fixed interest rates and our ability profile that is very comfortable on spending wise.

Finishing with this, I pass the word back to Ismael on the sustainability section.

[Ismael Clemente, Chief Executive Officer]

Thank you, Miguel. In the first semester, we have achieved 3 main milestones that we will like to share with you. The first one is that we officially launched our pathway to net zero, first, by reducing our operational carbon in Scopes 1 and 2; second, by reducing our embodied carbon in development; third, by trying to reduce the Scope 3 emissions in close cooperation with our clients, putting our money where we put our mouth; and 4 in by offsetting our unavailable emissions that we will try to reduce to the minimum amount.

We also successfully qualified all of our spending bonds into green bonds. And we are proud to say that our certification program in shopping centers is completed. And in offices and logistics, it is 94% and 91%. So we are approaching our commitment to the market, which was at the end of 2022 to have close to 99% of our portfolio certified. And in fact, come the end of this year, we will stop reporting on achievements in terms of certifications, although every building which has been certified will need the certifications to be renewed on a constant basis. So it will be a significant ongoing effort for the asset managers of the company.

In terms of value creation, of course, the most remarkable achievement was the sale of the BBVA portfolio, but we have already touched on this. The amount of the extraordinary dividend is €351 million. Very importantly, it is very, very close to the – or almost equal to the IFRS capital gain. So for those of you who are thinking about €0.75 that have been sold of assets of the company, actually this is not the truth. The detail was simply the capital gain. The principle of that portfolio, the base value of that portfolio is what has been employed in reducing our debt.

In terms of the ordinary non-core portfolio disposals, we sold four office buildings comprising almost 34,000 square meters, three of them located in peripheral locations and one in what we call new business area. The premium was close to 9% to the latest GAV appraised. So we are happy of the performance so far. Let’s see what happens in the second half of the year. We expect a tougher investment market environment. But anyway, we will continue trying to rotate what we think makes sense to be rotated.

In terms of the Landmark plan, we progressed on the works in Plaza Ruiz Picasso, which, as a reminder, is a 37,000 square meter building, absolutely state of the art, both in terms of having obtained all certifications possible, but also in terms of its looks and its technology. We expect to spend a CapEx of a little more of €60 million and obtain incremental rents in the region of €6 million with delivery in October 2023 for a yield on cost of 9.2%. Very importantly, apart from the 27% pre-let already in place, we have advanced negotiations – we’re exchanging contracts with clients representing another 46% of the building. So commercialization is going reasonably well.

On the mega plan on Page 32 of the presentation, as commented, construction works significantly underway for Bilbao-Arasur with a 66% pre-let. Madrid and Barcelona, license obtained and exchanging contracts. We will report during the rest of the year. I mean, hopefully, we will have definitive news by year-end. In terms of pre-let in Barcelona, we are negotiating 1.6 megawatts of pre-let out of the total three of the first module that we will fix in the building. And in – sorry, in Madrid and in Barcelona, we are negotiating 0.6 megawatts with an option to a further 1 megawatt in that building.

The four buildings will be linked by carrier-type fiber. So it is clear that this is now part of a network of data centers that we plan to develop in the Iberian Peninsula. They will be first connected to the cables coming from the other side of the Atlantic, whether North Atlantic in the case of Bilbao-Arasur or South Atlantic in the case of Lisbon. And then beyond being the landing station for the cables, they will also be linked by cable to the Madrid and Barcelona edge computing data centers.

So very interesting advancement in our effort to become a leader in the data center segment. The one in Lisbon is taking more time. Things in Portugal administratively are complicated. However, we are also advancing – preliminarily advancing in conversations with another hyperscaler for a specific design of one of the modules that will suit that requirement. So hopefully, by the time the authorities finally grant the licenses, we will be in interesting pre-let position.

Outlook for 2022. Well, simply, the – you know the figures, €0.75 dividend to be paid on August 18. FFO guidance increased from $0.58 to $0.60 and ordinary dividend also increased by €0.02 from €0.40 to €0.42. This is our best visibility on how the year should end despite the difficulties that we expect to encounter in the second half.

And summing up and to finalize the presentation, well, I think we are happy that we have been delivering a strong performance in all of our key financial and operating metrics in the semester: occupancy like-for-like rental growth and our release spread and also FFO. We continue to work on occupancy. In fact, that will become our most important objective from now on, having already worked out the capital structure of the company.

What we will try to do, particularly if next year we see ourselves in the middle of a relatively tough market environment, we will concentrate a little bit in increasing occupancy because that will create some extra cash flow, which eventually might compensate drops, future drops in rents in case they happen. We, of course, do not know what lies ahead of the economy that we are not blind, and we are not deaf. So we read what you write and we listen to the radio and the TV, and we are deeply concerned about what is in front of us.

We don’t see that on the strip at present. We believe we will see it during the fall, but we are not currently – judging by the operational performance of our assets, we are not – we are far yet from being in a recessionary environment. But anyway, I mean, we have to be prepared for the worst. As we have commented in many cases, we are seeing some clouds developing on the horizon, and we are sailing. So we better take a big risk or three risks in the main tail and hoist the [indiscernible] rather than the Genoa because at the maximum, we will lose a little bit of speed, but if the storm is not scow, it is a game, at least we will go through the game safely, I mean, which is, at the end, the most important things, particularly in times of uncertainty.

Inflation is clearly helping us. Hence, why I was commenting that I wanted to widen a little bit more the valuation cap rate because I believe we are at a good moment to do it. I know my colleagues argue with me that it is better to inflate as much as possible, to fall from a higher number. But I can’t argue that eventually that goes against credibility in the market. So we will – during the second half, let’s see what we do with our values that eventually I would like our implied cash flow yields to go back to, let’s say, more normal levels, not the ones that we have had during the past years that were reflective of an extraordinary accumulative monetary policy.

Logistics continues to be the jewel of the crown. We continue seeing excellent performance in our portfolio. However, we have been capturing mainly the gap between our passing and market rents. The truth is that market rents are not going up that much. Let’s see what happens in the future. Anyway, if rents go up by double digit, of course, we will enjoy it because we have a very significant portfolio. We are the leaders in the market by far. So it will continue to be wine and roses. But if it doesn’t happen, I think we are very well prepared to react.

In shopping centers, of course, numbers look fantastic as compared to last year. But to me, what is important is that they look now pretty much in line with 2019, which is our pattern year and, by the way, the best year ever in the history of our shopping center portfolio. So of course, being on par with 2019 is always a good thing. And interestingly, the OCR – we see the clients passing on inflation to their partners, to their clients as well. And as such, the OCR remains pretty much in healthy territory.

Value creation beyond BBVA, we continue seeing tension in the demand in the market. Of course, it’s not a super, super year. But with the take-up figures that we have seen during the first and the second quarter, Madrid seems to be on track to doing between 550,000 and 600,000 square meters of gross take-up for the year, which is above a normal year. A normal year is between 450 million square meters and 475 million square meters, around 500 million square meters max. So this year seems to be a reasonable year in terms of total demand.

And new supply remained very much under control. I mean in Madrid, there is virtually nothing. In Barcelona, there is a little bit more oversupply risk in the 22@ District. But I believe so far, it is being absorbed pretty well by the market and this one is also relatively tight in terms of new supply. And as such, you are seeing that rents are going up very strongly in that market.

Our mega plan goes as expected. We are very, very happy. I’m very proud of it. I know it will not be reflected in our valuations till 2-3 years from now because you will all probably need to see cash flow from that plan in order to attach any value to it. But anyway, we are long-term players. And prior to having cash flow, you need to lay out the foundations for that cash flow, which is exactly what we are doing at present.

And look, in terms of dividend policy, we will remain we will try to remain a high-dividend company. We have now achieved what we consider financial stability. I mean the company is not clearly in need of capital. And as such, the big difference for the future is that part of the cash flow from non-core sales might be added into dividend payout in case we see that billion payout is at risk because of complicated market environment. So we will try to continue being a relatively high dividend flowing company for those of you who appreciate that type of management side.

And that’s it for today. We are open to Q&A. So please make your questions through the line to the operator, and we will be happy to answer them if we know the answer.

[Inés Arellano, Investor Relations]

Operator, can you please open the line for Q&A? Thank you.

[Operator]

[Operator Instructions] At this time we have no questions registered on the phone, so Inés, I will hand back to you.

[Inés Arellano, Investor Relations]

[Indiscernible]

[Ismael Clemente, Chief Executive Officer]

They can tell you.

[Inés Arellano, Investor Relations]

Yes, you know where we are so – yes [indiscernible], so let’s give them one minute for investor – one analyst to raise their hand.

[Operator]

We do now have a question on the phone line from Fernando Abril from Alantra. Fernando, please go ahead.

[Fernando Abril, Alantra]

Hi. Hello, good morning. Thank you – well, good afternoon. Thank you for taking my question. I have a couple, please. On your strategic plan, so it’s only very few months since you announced that one. So my question is how things are going with your two main, let’s say, future growth drivers, the logistics and data centers, with your initial – versus your initial expectations regarding schedules and CapEx and revenues? And then second question is just if you can remind us how do you report occupancy from your LOOM portfolio? I don’t know if it’s fully rented to LOOM. And then it is shown at 100% occupancy in your portfolio or adjusted by how LOOM is performing? Thank you.

[Ismael Clemente, Chief Executive Officer]

I’m starting by the second, which is the easiest. The space which is rented to LOOM is reported at 100%. And then LOOM occupancy is specifically reported, and you have the number 72% which is more than sufficient to pay 100% of the rent. So in LOOM, we have positive EBITDA at a space level. We are not yet covering in full the corporate overheads of LOOM, specific of LOOM, but we are very close to getting there. So eventually next year we should be there. And that means basically that our rent is fully covered. And in any case, just for your information, it represents 1.4% of our total rent. So it’s relatively meaningless in the totality of our portfolio. Okay?

Then logistics and data centers. Well, in logistics, as you know, we released a bit of pressure from the throttle in light of the rising construction costs that we saw in the market. Now the situation is changing. We have already received a quote I shared recently that reflected at 12% – at 14% decrease versus the same quote 3 months ago. So we are starting to see some, let’s say, appeasement of the construction costs in the market. And that means basically we will resume as soon as possible our normal activity in logistics. That will have resulted – I mean that, let’s say, interim period will have resulted in a delay of about 6 to 9 months in the deployment of our CapEx in logistics. And hence, the future obtaining of the cash flows that you have in your schedules, in the ones you know that the company has been releasing for long. But very importantly, next week we will be delivering to clients and inaugurating our 47,000 shares in Cabanillas through Logista. That one will be, therefore, operational for the majority of the second half and producing rents. And for the year, I think we have no further deliveries. And there is a DSB, sorry, the DSB growth share will also be delivered in the rest – in the second half. But then for next year, we will be reporting in the year-end results the deliveries that we expect, and we will be considering our numbers, the effect they will be having in our cash flow.

In terms of data centers, we are now accumulating a delay of between 3 and 6 months in CapEx, owing mainly to the delay in the obtaining of the licenses. In the back country, authorities have been a little bit more clever, and we have obtained our license in 6 months. But in other parts of Spain, it has costed us 1 year to get the licenses. And in Lisbon, it is impossible to know how long will it cost to get the license. And it’s not that the license is in danger or there is any threat. No, it’s simply administrative process. Hence, the deployment of CapEx in data centers has been also slower than anticipated. So at the end, this will mean that the total CapEx expenditure of the company, total CapEx investment of the company for the year 2022 overall will be lower than anticipated, which will have, of course, a positive reflection in the end of the year loan-to-value. And we will do a new calculation for the years to come.

Regarding commercialization, I believe the data centers have surprised us probably on the upside because we were working on the assumption that data centers are not an easy asset, an asset that lends itself very easy for pre-let. However, we have been very lucky to capture one interesting pre-let that spans across three of our data centers from a big hyperscaler. And this is clearly helping us establishing our, let’s say, presence in the market and also, very importantly, testing our technology because, of course, the pre-let with a big and respected hyperscaler is a proof of validity of technology for the rest of the hyperscalers, and we are already in conversations with other names for our data center network.

[Fernando Abril, Alantra]

Just a follow-up. Can you – are you able to catch up investment once you receive the license? Just to get sense if this is only a one-off or will all the plan will be delayed by 3 to 6 months by 2026 or something?

[Ismael Clemente, Chief Executive Officer]

Normally, you can’t. I believe we have been conservative in this first batch of data centers we are building. We have – on average, we have projected 14 months of construction. The American engineers are telling us that you can go as low as 9, but we wanted to be safe rather than sorry. So – because there is, of course, a learning curve. I mean the first logistics shares we put in the market posted us 11-12 months, and now we can produce a logistic share in 8 months if we need it. So in data centers, I guess it will happen – we will have the same learning curve. So at the beginning, we prefer to be a little safe on the construction period. So yes, you can validly assume between 3 and 6 months delay in the production – in the entering of production of the data center program. So what we have projected for end of ‘26, it will probably move into mid ‘27 but not very significant. Construction wise, it is also important to note that Bilbao is perfectly on time. In fact, it’s one week ahead of the construction schedule. So we are not recovering the delay in the obtaining of the license. At least we are now building absolutely according to the calendar that we negotiated and committed with the client.

[Fernando Abril, Alantra]

Okay, thank you very much.

[Ismael Clemente, Chief Executive Officer]

Welcome.

[Operator]

We have our next question from Beltran Palazuelo with DLTV. Please go ahead.

[Beltran Palazuelo, DLTV]

Hello, good afternoon. Congratulations all the teams for hard work. I have two questions. Maybe the first one is in the investment landscape, you were sounding a little bit conservative. Everybody of us are reading the newspapers. So if you could give us a little bit more maybe of color how you are seeing the financial players in the office, logistics, and the shopping centers and the, let’s say, sales process that’s going on that you’re seeing that maybe the seller is not getting what they ask.

And maybe the second question is on offices. How are your conversations with your clients? Are you seeing your plans more cautious or at the moment they are not as cautious as maybe the news?

[Ismael Clemente, Chief Executive Officer]

Okay. On the investment, Beltran, so far we have to admit that we have been surprised by the robustness of the market, which, in fact, it’s producing some transactional evidence, which goes slightly against widening too much the yields as one would expect following the movement in base interest rates, and more importantly, in credit spreads. So – but this is so far a very different thing at what we expect for the second part of the year. What we are seeing in offices, particularly, is that for big, big tickets, I believe the demand is weaker. So the big, big players are now waiting on the sidelines. Private equity was already out, but now it’s out with a reason, because in the prior 2 years, they were out because they were not obtaining the returns. Now they are out because they simply cannot raise the debt at the LTV levels and costs that they require in order to be a little competitive with the industrial players.

In logistics, the demand remains very strong. Of course, you know my opinion about the yields that we had achieved in logistics, which were a little bit too fantastic for my personal taste. But so far, I mean, it remains an asset class, which is on the radar of investors. And there is no problem of size. I mean whether you sell a shed or you sell a portfolio, the only doubt to me is if you sell that $2 billion portfolio, eventually, that is completely different. But if you sell one shed or three sheds, eventually there is enough interest in the market. In offices, the demand remains concentrated mainly in small ticket buildings. Between €20 million and €50 million, you find enough debt in the market because family offices, some insurance companies, and mutual funds continue buying assets as a protection to inflation. And as a consequence, we have found interest and we have found debt in the market certainly in the first half, and we expect to continue seeing some interest in the second half, although this will be a question mark as you know the recessionary fears translate little by little into the society. And shopping centers is the only asset class in which we are absolutely shocked. There is a lot of interest and people is now transacting shopping centers as if they were no tomorrow. Yes, our yields have gone up a little bit, particularly because all transactions that have happened are mainly of secondary shopping centers. But certainly, I mean there is interest in the market. There is some people going after that asset class. And – the only question mark is what will happen with the two-three big, big, big schemes, which are in the market because those ones, of course, cannot be bought by a PE or cannot be bought by a relatively riskier family office. Those ones need to be bought by industrial counterparties. And this is my only doubt, what will happen to the product that we buy. For example, [indiscernible] in the market, which are excellent shopping centers, and eventually in a normal world, they should meet significant demand. But I don’t know. As you know, we have three non-core shopping centers. We have now at least preliminary conversations on two of them. And let’s see. I mean of course, I will give no hopes or any assurance as to what will be the result of those conversations. But at least some interest has been recovered. And if we can match the prices that we want for those assets, eventually we will keep on rotating what we consider non-core following the three that we sold a couple of years ago. And you also asked about demand, demand for offices. As commented, Beltrán, not bad at all. I think – well, first, WFH fears, work-from-home, etcetera, not significant – not a significant factor that we are seeing. A little bit more important in purely in Prime CBD, because the type of company is a little more prone to the work-from-home comfort to employees and also the price attach – the price of real estate attached to an employee in city center is, of course, higher. But in the rest of the market, not a very significant rate of adoption of WFH. Some expansion of square meterage attached to employees. So, we are seeing now the company is a little bit more concerned about creating good quality office spaces. So, the hen farm style of density is now in clear retrieval. So, that is interesting, of course, because that creates more demand for square meters. And the market remains reasonable. The demand – the problem we see in the market is more a problem of blunder demand, but this is mainly owing to uncertainty. It’s at very similar situation to the one we experienced during the COVID. Companies do not dare to do anything because they are paralyzed by uncertainty. But in reality, this is not a problem of that they do not need the square meters or that they are leaving square meters. It’s simply that they do not do dare to do anything specific because of the fears of recession looming in the horizon. And as commented, our worst year, which is always oversupplied, is completely out of our radar screen in the markets in which we operate. Take-ups in Madrid and Barcelona, gross take-ups have been pretty healthy in the first semester, decelerating a little bit in the second quarter versus the first quarter, but still, I mean, very, very healthy. And one single transaction can change those figures. I mean eventually, we expect a weaker second half of the year, but one or two transactions done eventually by us can change completely the dynamics of take-up in a given city. And this is what we see. Certainly not yet a clear recessionary environment, which if it happens in the future, I will be the first to relate to you.

[Beltran Palazuelo, DLTV]

Okay. Thank you very much for the information and thank you for the hard work. Thank you.

[Operator]

Our next question comes from Allison Sun with Bank of America. Allison, please go ahead.

[Allison Sun, Bank of America]

Just one question from my side. I noticed your average lease term has reduced from 5.2 years to slightly over 3 years after the disposal of this net lease portfolio. So, I wondered, are you – is it a concern that lease term has been shortened and you might have a higher tenant turnover in the future? Especially right now, the macro economy is quite uncertain. Thanks.

[Ismael Clemente, Chief Executive Officer]

Okay. Look, Allison, the lease term in Spain is where it is. So, the Urban Lease Law, the typical contract signed under Urban Lease Law is between 3 years and 5 years with a 3-year or a 5-year extension. So, it is very, very hard in Spain to go much beyond 2.5 years in terms of WAULT. The only reason why we go beyond is because we have like 30% of our portfolio, which is headquarter leases, which are slightly longer than that. This is Spain, but I know that we are always judged from an Anglo-Saxon perspective, and particularly the ones people in the UK is accustomed to much longer leases. So, knowing this, in the IPO, we included in the tenant mix a long-dated lease, which was DeA. With this long-dated lease, we have had or we have enjoyed much longer WAULTs for a big period. And therefore, there were no fears in the investors. But simply because the BBVA lease was waiting for 15% or 18% of our total portfolio, was waiting 20 years or 25 years in every calculation we were making of WAULT. Now without BBVA, you see what is the reality of WAULT in Spain. What are we doing to remedy that, well, two things. One, we have brought data centers on board, which by definition is an asset class with much, much longer lease terms. So, data centers will help us to expand the average WAULT of the portfolio in the future. For the one that we have signed in that country and the two that we are negotiating in MERLIN Barcelona, we are talking about 45-year leases with first break at 15 years with certain penalties. So, we – given that we report on first break, we will report or we will record those at 15-year leases. So, they will help balance a little bit the optically short WAULT that you noticed. The second thing that I am anticipating that I believe will happen 2 years, 3 years from now is that we will start facing from clients a little bit of resistance to a translation of inflation. That is human nature. At present, we are happy campers because in Spain, we are still far from the historical highs in rent, particularly in offices. So, given that people have a maximum rent in Madrid in the region of €46, €48, if you are now inflating starting from €37, €36, you have still a lot of room before you get to a point in which your tenant believes that the rent is too high. So, this is helping us. The second thing which is helping us is that the average permanence of clients with us in the portfolio is far beyond 5 years. So, in the cases of clients that have been with us for 5 years, they have enjoyed 2 years of negative indexation, one, zero and the other slightly positive. So, now if you change – if we now put a 7% rental uplift, when they make the average for the last 5 years, they will go to between 1.2% and 1.8% average inflation applied during the 5-year period, which for them is perfectly reasonable. But 2 years or 3 years from now, eventually if we remain in a super inflationary environment and if we continue with our portfolio looking like Brazil, eventually then there will be a very interesting discussion with investors – or with clients, sorry, that will be rent uplift in exchange for contract waivers, for contract break. So, that will also result in slightly longer WAULTs. Although it will not be, I would say, extremely important. I mean we are forecasting something between 0.3 and 0.5 extra of WAULT if that situation happens. But it is important to have in mind that in that kind of negotiation, you are – you have the upper hand. So, if you relinquish inflation in the contract, which is viewed by law, eventually you will obtain at least rental backlog in the form of a longer WAULT in the contract, which will help compensate a little bit the optically short WAULT you are fearing.

[Allison Sun, Bank of America]

Thank you.

[Ismael Clemente, Chief Executive Officer]

You’re welcome.

[Operator]

Our next question comes from Florent Laroche-Joubert with ODDO BHF. Please go ahead.

[Florent Laroche-Joubert, ODDO BHF]

Yes. Hello. So, thank you very much for the presentation. So, actually, I would have a follow-up question on indexation. So, is there any risk in Spain that the indexation could be capped, I don’t know, by the tenant, by professional organization? Do you – or do you think that it will remain on the negotiation discussion on a case-by-case with clients?

[Ismael Clemente, Chief Executive Officer]

Hi Florent. At present, there is no noise or attempted initiative or nothing in commercial real estate. In residential real estate, as you know, a rental cap has been applied to big owners, which is a completely targeted measure to screw up the American opportunity funds that bought dwellings in the market. But in commercial real estate, of course, there is nothing, nothing attempted or rumored or noise on the street or the sonar voice in the legislative cameras are not delivering so far any noise in this respect. Anyway, you never know because we are in Europe and it’s an increasingly communist continent, and something could happen in the future, but not now.

[Florent Laroche-Joubert, ODDO BHF]

Okay. And so that means that for most of the cases you expect to be able to apply indexation in 2023 if it’s still within – the CPI incretion is still within level?

[Ismael Clemente, Chief Executive Officer]

Well, Florent, the only thing which is absolutely sure is debt and taxes. But I can tell you that so far, we have passed on 100% of inflation. Between now and year-end, we expect to pass 100% of inflation. And for 2023, God will provide, but I believe we will be able to pass 100% of inflation. But beyond, I believe, I cannot be more specific because, of course, I don’t know. But anyway, if we cannot pass on all inflation, at least we will have something valuable to get in exchange like, for example, rental backlog, as I was referring before. Also, importantly, let’s see what happens with inflation next year because we are starting from a relatively high point. So, let’s see what happens with inflation because eventually we might see lower inflation than people is anticipating. I mean we know it’s going to be very high between now and year-end. But then towards mid next year, some macroeconomists are already predicting significant softening of inflation rate, and then inflation will no longer be on the plate when talking to tenants because it will go back to, let’s say, normal levels.

[Florent Laroche-Joubert, ODDO BHF]

Yes. Okay. So, thank you very much.

[Ismael Clemente, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Ana Escalante with Morgan Stanley. Please go ahead.

[Ana Escalante, Morgan Stanley]

Good afternoon. Thank you very much for the presentation and for taking my questions. I have two, please. The first one is regarding guidance. Could you please provide a little bit more color on the reasons for the upgrade? Is it due to better-than-expected operating performance in the first half that you expect will offset a more challenging second half as you said before? And the second one is on potential margin pressures on the retailers or shopping centers. So, you have said that you are back to 2019 levels overall, but the cost base for your tenants will have go up a bit. So, are you worried about lease and how – especially as we go into a weaker economic environment? Thank you very much.

[Ismael Clemente, Chief Executive Officer]

You’re welcome Ana. Regarding guidance, Ana, this is simply our internal forecast. I mean we have been producing around €0.17 in the first two quarters of the year with BBVA in because remember, the FFO figures have not been performed. So, it’s actual FFO. So, we have produced 17 basis points – €0.17, sorry, with BBVA in, and we expect to produce around €0.13 for the next two quarters with BBVA out. So, we will be producing like €0.08 less of cash flow because we have 0.5 million shares. So, that will mean around €40 million less cash flow, which is half of the €84 million net income that was provided by BBVA. So, the reason for the new guidance not being 68% is purely that BBVA – we will be lacking the BBVA on the second half of the year. It’s purely mathematical. And then regarding the margin pressure in our shopping centers, look, so far what our tenants are telling us is that they are being able to translate the inflation to their clients so far. What will happen in the future, we don’t know. There are things in favor and things against. The nature of the crisis that we see in front of us is mainly a public sector crisis. So, families and corporates in Spain, the hard way that have significantly de-levered since 2008. So, if you take 2008 and you consider that at the time, the total indebtedness of the country relative to GDP was like 260%, the government, the state at the time was a little over 40% and families and households and corporates were in the region of 220%. Today, we are back into 260%, but the state, the government is 120%. So, families and corporates are 140%. That means families and corporates have de-levered about 80% of GDP. That is €1 trillion more or less. Deposits are at the maximum ever level recorded in Spain reaching 970 – reaching €1 trillion also deposits. So, the elephant in the room is mainly the public sector, which has reached its maximum spending capacity. It’s levered to the bones, 120% of GDP, and still incurring an ever-growing deficits and increasing the salary month of public employees and re-indexing pensions. And that means it will get in trouble very, very soon. And then when they get in trouble, a lot of people will get in trouble. Mainly, in productive part of society that depends on them. So, that is what worries us in the shopping center. We don’t know what will weigh more, whether the average pattern which has no problems, and we continue going to the shopping center and spending or the pattern which is subsidized by the state. And as such, when the state starts getting into that straight, we will see its lifestyle significantly affected. And as such, their spending power will get significantly reduced. But anyway, what is true is that our starting point at 12.5 is, I believe very strong. Certainly, what many of you have doubts about whether we will be able to withdraw the relief packages applied to clients, to tenants during the COVID crisis. And we have withdrawn them without any problem. So, that means basically that our tenants are in good shape. They continue to be in good shape. And in fact, some of them are now thriving, they are faring very well. Other than week days – sorry, fashion, which is always suffering a little bit more, then health and beauty, do-it-yourself, food, beverage, sports, home furniture, all of that is going fantastically well. Very importantly too, the clients that were weaker, they were already affected by the COVID crisis. And we have been rotating all of them because disgracefully, at the peak of the COVID crisis, there was a point in which in our traffic light, internal traffic light between red and yellow, we have almost 8% of the freaking tenant roster. So – but we have been little-by-little rotating all of them with no impact on occupancy. We have, in fact, increased a little bit the occupancy. So, all the tenants that have replaced them are new and sound tenants, which are in our shopping centers because they wanted to be in our shopping centers. So, let’s see. I mean I don’t know what will happen. What I can tell you because I perceive – I was yesterday talking to the Board of MERLIN, what I perceive is that people believe that real estate, commercial real estate company is like a yo-yo. And it will not be the case. I mean you can be absolutely afraid of the performance of the economy and havoc and disaster happening in the next couple of years. But still, I mean we are more resilient than people think. And little-by-little, given our diversification, we have different sources of income, different asset classes, not all of them go bad at the same time as we proved during the COVID recession. So, I think eventually, maybe income goes slightly down, but now our gross income to debt service is like between 6.5x and 7x. So, I mean I think we are in good shape. Eventually, the top line might go slightly down, maybe the value of assets gets slightly down. And so what, I mean our NAV is 16.35 pro forma for the dividend, and we are trading at 10. So, even if our NAV goes down to 15.50 or 14.85, so be it. I mean we are trading at 10. So, the market, as always, is good in detecting directional movement, not so good in orders of magnitude.

[Ana Escalante, Morgan Stanley]

Thank you very much.

[Operator]

Finally, we have a follow-up question from Fernando Abril with Alantra. Fernando, please go ahead.

[Fernando Abril, Alantra]

Yes. Sorry, only one quick one, a follow-up on the inflation issue. So, just that I was wondering if this is something that are you actively pushing to renegotiate contracts by, I don’t know, capping inflation in exchange of 2 years or 3 years extension, or is it something that your tenants are asking for?

[Ismael Clemente, Chief Executive Officer]

No, tenants are not asking for it at present. But of course, our duty is to look beyond the next two quarters. So, of course, looking beyond the next two quarters, eventually there will be a point in which inflation might be protested by tenant. But legally, you have the upper hand because remember during the COVID, many people thought we wouldn’t collect because tenants will not pay. How, I mean tenants have to pay. This is a legal, this is a contract. When they are doing very well, they don’t come to you and increase the rent. So, of course, from a legal standpoint, you have a very good starting point in negotiation. And of course, it’s not capping the rent. What you will do is simply make a modification. So, you will say, okay, don’t worry, the inflation that applies to your contract is 11%, I will only apply 5%, but – this year, by the way. But you owe me one, and the one that you owe me is that you have a waiver or you have a contract break in year 2027 that you will be waiving now. So, that your contract will move to year 2029. So, it’s not something that we anticipate, Fernando. But it’s something that could happen in the future, and we will make use of it. We have seen that in the past in other latitudes. I mean when I was covering Latin America, people, of course, protested inflation because inflation was 50%.

[Fernando Abril, Alantra]

Okay. Thank you very much.

[Inés Arellano, Investor Relations]

Okay. So, operator, are there any questions? Any other questions?

[Operator]

We have no further questions.

[Inés Arellano, Investor Relations]

Okay. Thank you. Well, thank you all for joining us today. It’s been a long call. But yes, really thank you for being here with us. For those who are taking a little summer break, enjoy and do not hesitate to come to us should you have any questions. We will be more than happy to answer them. So, thank you again. Bye-bye.

[Operator]

Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.