MERLIN Properties SOCIMI SA
MAD:MRL
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MERLIN Properties SOCIMI SA
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Good morning, ladies and gentlemen. Ines Arellano speaking. Welcome, and thank you for joining Merlin's 2022 Results Presentation. Before we start, we ask you to please abide by the disclaimer contained in the presentation. The materials are available in our website, and there will be also shown on screen if you dial in. Today, our CEO is Ismael Clemente; and COO, Miguel Ollero, will walk you through the main highlights of our set of results. Thereafter, as always, we will open the line for Q&A. [Operator Instructions]
And with no further delay, I pass the floor to Ismael. Thank you.
Thank you, Ines. Good afternoon, everyone. Thanks for joining Merlin's Financial Year 2022 Results Conference. It is particularly difficult for me to address an informed group of people like all of you in a year like this. It's difficult because I necessarily have to feel very proud about a fantastic 2022, in which solidity of our operations has surprised even us on the upside and where we have achieved all of our key objectives in terms of noncore sales and strengthening of our balance sheet in anticipation of a period of quantitative tightening reduction of monetary mass and increased cost of funding, both debt and equity. It's difficult too because I am also confident in 2023, despite all the uncertainties surrounding us, not only because 2 months are already behind us, and nothing has happened, but also because given the highly stable nature of our business, we have already very good visibility on the financial year 2023 results. And we know that we will grow like-for-like in all of our key P&L magnitudes.
But the main reason why it's difficult is because we also need to report that nominal valuations of our assets have started to come down in 2022. And as a consequence of yield expansion induced by higher interest rates and will continue to do so in 2023. We are happy to take that thing because we knew it will be coming and have prepared the company balance sheet to absorb it. In fact, we would prefer appraisers permitting to accelerate this value adjustment now that we have a solid operational performance that allows us to partially offset it because learning from other cycles, if the value adjustment phase is followed sometime in the future by a weaker operational market in our traditional asset classes, we know that we count on a separate weapon to compensate income and values through additional income and value creation for shareholders brought to the table by our digital infrastructure plan. After many years of silence, invisible CapEx spending in a new asset class that today is not yet identified by the market in our balance sheet and valuation is not yet impacting our -- given that the valuation is not yet impacting our P&L. I mean we are not yet reflecting any income after so many expenditures incurred.
Well, let me explain in greater detail how 2022 evolved in all of our divisions, and we will be glad to address the Q&A afterwards to talk about the future, whatever is of interest to all of you. In terms of operating performance, 2022 was a year of fantastic alpha. We obtained outstanding performance in all 3 asset categories, 7.3%, and the occupancy grew 60 basis points to 95.1%. And -- many of you may think that the like-for-like rental growth of 7.3% is all attributable to inflation. Far from being the case because the effect of inflation is less than half, and the rest has been nominal variation of rents and a nominal positive valuation of occupancy. Offices surprisingly delivered excellent operating behavior with a 6% like-for-like rental growth and a 5.8% release spread, reaching a 92.5% occupancy at the end of the period, thanks to a big lease we signed in the A1 corridor towards the end of the year. In logistics, we experienced strong dynamics with an 8.6% like-for-like growth. fueled by indexation and the reversionary potential captured. And we are currently in virtually full occupancy across our portfolio. In shopping centers, again, surprisingly to most of external observers, we obtained a 7.5% like-for-like growth with a 5.2% release spread, and we have reached 95.0% occupancy. The sales, which started showing a solid trajectory starting in June approximately exceeded the pre-COVID levels, minus -- plus 2.7%. I know some of you will compare on a real basis. If you want to have that data, it's minus 4.4% incorporating average inflation since 2019. So we are still slightly behind 2019 in real terms.
But it is also noteworthy to explain that after a hesitant beginning of the year with double-digit differences in footfall compared to 2019, we started seeing a sharp recovery during the end of the spring and the summer, and we ended up the year at minus 8.6% in terms of footfall, but with months like December already exceeding 2019, which is a trend that we are also seeing in January and February across our portfolio. Our occupancy cost ratio reached a historical low of 11.8%, showing the relative comfort of our tenants with our rental and common expense costs in our different shopping centers. In terms of financial performance, we ended up producing $0.62 FFO per share, 6.4% year-on-year variation positive, and we were able to be guidance because you know, you all know that we left it at 60, although we had already verbally indicated to you that we were hoping to get to around 62% simply was a prudency stance, the one we took in terms of FFO. We experienced a slight decline in valuation across the board, minus 1.5%. But very importantly, we absorbed a very significant yield expansion of 44 bps. I have read in some of your analysis that it is in the upper range of what has happened in Europe. Happy to be in that group, and we will continue absorbing yield expansion during the year to see at least the yield expansion portion of the value adjustment behind us as soon as possible. We netted off most of this yield expansion with operational strength.
Our balance sheet reflects a very strong financial situation with 32.7% loan-to-value calculated in the old-fashioned way, calculated according to EPRA standards, is 35.8%, which is a 6.5% reduction versus 2021. 100% of our interest rates are now fixed and 98% of our debt is unsecured. And we -- as you all know, we conducted a requalification to green of all of our bond portfolio during the year. The 2023 bond maturity was refinanced. We got a very good cost, mid-top plus 16%, but mid-swap of the time we did it. So it was around 250 something compared to the 320 million, it is now. So this is why you may have noticed that we have a difference between spot and hedged pricing of our debt because now we have a positive value in our derivatives. We have no maturities in the horizon until May 2025. Despite the value adjustment of our portfolio, we achieved a positive total shareholder return of plus 4.7% and distributed €1.20 per share of dividend in the period amounting to in excess of €560 million, which is very, I think, very, very good news. In terms of value creation, beyond the €2.1 billion BDA portfolio disposal that was affected at a 17% premium to euros asset value, we also ordinarily disposed off ancillary real estate assets amounting to $112.8 million at 8.7% premium to gross asset value.
Landmark plan, which we had already flagged to you was finalizing will be -- the Grid Picasso building will be delivered to clients in the month of December, November, so end of this year and is now virtually fully let with only one retail space remaining, which is auctioned by one of the existing clients. And we have achieved top rents. I mean, in fact, above the advertised average prime rent for Madrid. In the mega plan, we are glad to report that the works in Bilbao Azure in Madrid and in Barcelona are absolutely on track, both in terms of time and costs. And all the 3 assets will be delivered in the second half of 2023, somewhere between October and November, more or less, and some of them being already accessed by clients earlier than that date in order to start making their own installations, plugging in their own equipment.
Without further delay, I pass the word to Miguel Ollero, that will talk about the financial results.
Good afternoon, everybody. First of all, as a remark, I remind you that the NRC that we are showing right now, even for 42 for '22 and for '21, all of the restated in the sense that we are not considering the net leases of the dividend portfolio income and results for the 2 years in order to make 10 comparable. So when we're talking about top line from the sum '22 is probably considering the ongoing business lines of the company, not considering what has been generated during the year by big portfolio that was sold on the 15th of June of 2022. If we look at the range, €152.8 million, that displays a 7.9% increase with regards to 2021. The decrease that has been overrun asset classes person was plus 6.2% in logistics, 11.5% and shopping centers, 7.9%. So our core business lines not comparing to 2021 were very well performing during the year with regards to the prior year. If we look at gross rents after incentives, which are 42.2% to .2 million. This implies a growth of 13.5% with regards to 2021. The main reason are behind is that incentives we were using largely. 2022 is a year which there was no call expenses recorded. There was no incentives to our tenants, something that was happening in 2021, especially in the first half of the year. So that has implied that we have moved from a 90% margin in 2021 to grow to 95% margin in 2022. So it's not probably that top performance at the top line level, it's also that incentives were highly reduced during the year.
If we look at FFO at is €29.5 million. This FFO is counting on our business lines and also the -- for contributing by BBVA during the time period in which it was already within our portfolio. So this €280.4 million, which per share, 10% 0.62 per share. It's including at around $0.07, which are coming from BBVA portfolio during the year. So in the end, the business lines that continue within our portfolio, we're generating around $0.55 out of the 62 that we rating. This should be also considered the starting point looking forward because BBVA will be no longer with us in the future, and we were save it down BBVA in 2022. Finally, as Ismael was pointing out before, on MTA ,we were at 15.67%, a reduction of 2.7%. But it's important to remark that 2022 was a year at which we have a big amount of dividend distribution, more than $560 million in distribution to our shareholders, especially due to the €0.75 that was a star dividend attached to the BDA disposal transaction. So that in place I think during the year, we were receiving €1.20 per share. That's why the fear for the year is 10% despite the for NPA with regards to the prior year.
We will move forward in terms of top line, as we were commenting before. All the business lines were improving with a like-for-like of 7.3% on DRI and very positive all across the different asset classes, 6% in offices, 8.6% logistics and 7.5% in shopping centers. This has been the main driver of the growth of the company. As Ismael was pointing out, half of it is related to CPI in the season. And then the remaining is more linked to renewals with a positive future spread and also we have been enhancing the occupancy of the portfolio or on the business. On Page 8, we have here our occupancy. Occupancy of the portfolio ended up in 95.1, with growth in editing asset class, especially for is marketable that we were achieving 92.5% of occupancy in offices, whereas our guidance for the year was 91.5%. So we won't achieve. All the other asset classes are approaching or even due to our full occupancy as it is the case for logistics and also in the other activities, we are also very close to 100% occupancy. As you also remark that we were not grow more than 60 basis points with regards to 2021 because from 2021, we were counting on the 100% occupancy of the BBB portfolio. So like-for-like, we should be -- if we propose with us, this should be more than 95%, 5%. So in the end, it was a 100 basis points increase on a like-for-like basis more portfolio. With regards to the average one of the company is 3.2 years. We have introduced, especially because VVA is not reusing more. Remember, this was an asset class with a very long-term lease agreement. So we will not ever that again. But at the same time, we continue to have a very healthy average life in our contracts.
Now we pass over to Ismael to review in further detail on the different business line during the year.
Okay. Thank you, Miguel. I will do it very quickly. In offices, in Page 10, you have the performance of the year. It is important to note that we experienced good like-for-like both in Madrid and Barcelona. In Lisbon, we didn't experience anything because we are fully occupied. The occupancy in Madrid went beyond the 90% mark, which is important for us. And we experienced a very interesting performance in the A1 corridor, where beyond the 14,000 square meters that we led at the end of the year, the total net occupancy gain has been of 36,000 square meters. So there has been a significant improvement in that area, which, as you know, has been endemically problematic to us owing to the monsters for Spanish standards. Traffic jams that normally happen in that area at peak hours. Clearly, the new works, the new road works in the northern area of Madrid, plus the proximity of the Operacion Chamartin now more clear in the horizon are starting to bring new life to that area of Madrid, an area which has been difficult in the past. We also increased our occupancy in Barcelona, mainly in peripheral assets because in CBD locations, we are more or less full. And in this one, that is only happens from time to time, we are at 100% 0.0% occupancy, which is a little weird, but it is what it is.
On the following page, you will see the square meters contracted and the number of contracts with the relevant release spreads. Very important to comment that most of the names you see in the tenant's area correspond to Iberian headquarters. So we continue to be, by far, the leaders in the market in having the headquarters of the different companies with which we operate in our portfolio. More than 70% of our tenants in our portfolio, use our buildings to place their Iberian headquarters, both in Madrid or Barcelona or Lisbon. Regarding Zoom, we opened 5 new spaces in the year and increased the footprint by more than 50%, adding or having now 2,600 square meters with 2,600 desks. Our occupancy stands at 83%, so it's pretty high, particularly taking into account the average prices once they are individualized by square meters. And we have 12 spaces now operating to which we will continue adding new capacity in the future because this is clearly a product which is in high demand from our clients. In logistics, on Page 14, we experienced a very sound like-for-like, very well spread between Marie Barcelona and other locations in the area Penisula. Occupancy is more or less at full. In Barcelona, you see the 9.1% going to 94.7%, but this only corresponds to the assets that we own 100%, which is Parc Logistic de la Zona Franca, which is only 130,000 square meters. So it's not really representative of the whole portfolio. If you add back the 760,000 square meters we operate in SAL, our occupancy will go to around 99% because Intel is virtually full.
On the following page, you have an excerpt of our leasing activity, the corresponding release spreads and the clients with whom we have been signing contracts during the year. On Page 16, you have a detailed snapshot of Zona Franca of SAL. You might see that the lease spread is negative. That corresponds mainly to one tenant to which we were financing part of the CapEx through rents. So now that tenant has moved to a different share within Zona Franca. And as a consequence, when bringing the new tenant to the old one, we have experienced a slight decline in the rent. That is not a trend or it's not creating any sort of warning signs in our portfolio. In shopping centers, well, the year was fantastic. It really surprised us. The footfall came up at minus 8.6%. But as commented, that corrected throughout the year. So this is the full year figure. But throughout the year and towards the end, we started seeing a correction of that difference of that delta compared to '19. And in December, we were already in positive territory, which we continue to be in January and February. So we like what we see. And very importantly, as commented in the intro, the occupancy cost ratio evolution is very positive for our tenants and for us because it clearly strengthens the, let's say, the comfort with which tenants are trading in our shopping centers. On Page 19, you have the risk spreads on different clients.
And let me pass the floor to Miguel to talk about valuation and debt position.
Okay. I will continue with that on Page 21. First of all, I will remind that this year that in average we have been on one side, disposing assets. We have more than $3.2 billion of the assets during the year with a very high premium to the latest valuation. So in the face of the EBA has a 17.1% premium, the additional €110 million of disposals was already around 10% due to latest valuation. At the same time during the year, we were acquiring assets of €144 million, and we were also putting CapEx in our existing assets of 226, mainly devoted to data centers and logistics. In terms of valuation, as we have been commenting in the very beginning, it has been the negative for the year as also expected one. So everybody knows that there was a cancellation of the high interest rates in the -- especially in the second half of the year, and that has been pushing up the demand of a higher yield on investments. This is the one that has been driving the valuation on account of our portfolio. It is true also that the impact of higher interest rates and more demanding profitability financials have been balanced partially by the fact that the higher rents that we have been achieving in our portfolio and also the higher occupancy has been balance sheet partially this impact in our valuation. So all in all, we actually about minus 1.5% like-for-like evolution. You have here on this page the passenger of our different asset classes and areas we are up 47% passenger.
We move forward to Page 22. We have here which has been the impact by asset classes. So the most impacted one is shopping centers with 3.5%. Then offices with minus 1.9%, and Logistics continues to be mainly based on the fact that we have brand new assets in our portfolio that has been developed very recently with a very compelling rate, the ones that have been already driving our valuation in logistics. Even though that there has been a gel expansion in the Fujitsu cases of 39 basis points in offices, 29 in logistics and 65% in certain centers. overall is 44 basis points on average. If we go to the other side of the question, which is the financial structure of the company that is supporting this asset portfolio. We are very proud to say that this 2020 has been a year which we have been delivered in largely the company. We have been able to pay down debt above close to €2.1 billion of debt that's been paid back in 2022. That has driven down our net debt to below €4 billion, €3.8 billion of net debt with a loan to value of $32.7 million. As Ismael was pointing out, also, if we look at the new LTV metric that has been applied for the first 9 years of the year to 35 240. At the same time, important to say that we continue to have an average cost of debt below 2% with existing debt that is fully hedged and with an average maturity by the year-end was 4.9 years on average, but that considering the refinancing that we have been to be applying in the main the month of April due to the refinancing of the existing bond maturing that month, one that's standing to 5.8%. So going back to the point, we used to be back in 2019 in terms of length of our added maturity.
If we move on to Page 24. It's important here to remark the financing that we have put in place for the €742 million bond maturing in April. It has been refinanced on a bank basis, mainly because we had no bank exposures following the €2 billion debt repayment that we were conducting in last year. So in the past, there is a slow of financing that we have been always -- has always been part of our financial structure. We are back to our balance sheet at a very compelling basis, 136 basis points as parole and also fully hedged at levels that we were commenting before of around very well below the swap trades in the market today. So in the end, with this transaction that we were conducting in the last quarter of the year, we have a company with no maturity up to 2026, sorry, '25 in May is a less strong that will be maturing, and we are getting into it with our cash position of up to €1.8 billion within the company. So the company is ready for the future and so in terms of financing.
Finally, we're moving into sustainability remarks for the year that Ismael will be commented with you.
Thank you, Miguel. Well, in 2022, our main achievement was the final launch of our pathway to net zero program, of which we are particularly proud because it is science-based and has been very carefully put together by our sustainability team. That pathway consists, first in reducing our operational carbon in scopes 1 and 2, second in reducing our embodied carbon in the developments, mainly in offices and logistics because we are not developing any further shopping centers. Third, by reducing the scope 3 emissions in cooperation with our clients, which is clearly a relatively new thing in the industry. We apply rent reductions to the most environmentally conscious clients. And this is -- this program is working very well. Clients love it and are joining it massively, and we like it. And fourth, of course, at some point, offsetting the unavoidable emissions when we cannot go further down. We, as commented before, we successfully requalified all of our outstanding bonds into green. And we have continued the certification and recertification program because now every 2 years, you need to recertificate the different buildings in all 3 asset classes, and we are very close to 95% certification in all of our portfolio, which is good because that serves us by putting together the 2 lists that serves us very well for CapEx purposes, we know more or less what to do in every building.
The result of that 4 and the creation of our sustainability team has been the -- a number of coins and accolades in different international publications and rankings. We have been included for the second year in a row in the Dow Jones Sustainability Index. In CDP, finally, we moved into A minus, but we score very well against the peers. In sustainable, we obtained a fantastic rating 17.2, which places us in the top 1% of the world in terms of environmental risk. In Resi, we are at 79%. We moved down by 2 points. We used to be at 81%. But the industry, the peers went down very significantly. So now the average of our peers is 68%. So we are fantastically placed on a relative basis to them. And S&P Global, we achieved a 70% scoring. The average of the sector 68% is a typo is 21%. It's already been changed in our web page. And in Standard Ethics, we ranked number one in Spain in the ILEX5.We are the most reliable company in Spain according to the standard FX index. In terms of value creation on Page 29, of course, the highlight of the year was the portfolio disposal of BBVA and the remaining ancillary disposals. But more importantly, that money part of that money was employed in 2 deliveries and corresponding to the Best II program in 2022; two, very similar in size shares in Cabanillas Part 1 J and the opening share in Cabanillas II. The one in Cabanillas I was led to DSV road 45,000 square meters, more or less at a on cost of 7%. And the one in Cabanillas Part 2 was led to Larisa at a on cost of 8.1% because we had that land in our books for longer in fact. So that plan was, let's say, cheaper in our balance sheet than the other because as you can imagine, construction costs are very similar in both cases.
On Page 31, you have the final recalculated numbers for Plaza Ruiz Picasso. Tenants which are already public are IBM broad and, of course, LOOM, but there are 2 more tenants in the opening that will be known in due time also belonging to the technology sector. The CapEx went up to €70 million because of cost overruns during construction. But the incremental rents surprised us on the upside. And now we are delivering a 10.2% yield on cost compared 100% bps compared to our 9.2% original year on cost appraised when the transaction went through investment committee. Regarding the digital infrastructure plan on Page 33, the 3 projects are advancing as anticipated, both in terms of timing and cost, which is important. As you know, we started buying equipment in April 2021, and Fanconi so because the bottleneck for equipment delivery in data centers keeps increasing and increasing and is now reaching between 2 and 2.5 years for most of the critical equipment. The building for the first, let's say, the first block of the Bilbao data campus, which consists of 3 maybe 4, but the first block is now completed or nearing completion. As you know, out of the 3 megawatts there, we have 2 pre-lets and the client will be early accessing in April, May, the building with projected opening in October. In Madrid, Bilbao and Barcelona, which can be easily distinguished because of their solar facade because the one in Bilbao enjoys the proximity of ground solar photovoltage installation with whom we have signed a PPA. The ones in Madrid and Barcelona have solar facade and are connected to growth installations within our logistics portfolio. We are advancing on track and we expect to have them open again around October, November this year with the pre-let levels that you can see.
As for closing remarks and outlook on Page 35, simply to comment that Merlin has delivered a very strong performance in all key financial and operating metrics that our occupancy is now at an all-time high. So virtually everything that could have gone well in 2022 went well. It's been an excellent year for us. We started the year with a little uncertainty because of the immediate post COVID situation, but the year ended up being a brilliant year for the company. It's been a very intense year for us in terms of alpha generation of work, not only because of the sale disposal of BBVA, but also because of the ancillary disposals and the different programs that we have now under CapEx. Our technical teams are working hard to deliver everything in time and to the extent possible in cost, which is not easy these days. In terms of outlook, we see 2023 as a transitional year for Merlin after the BDA disposal because the upcoming deliveries of new products are all of them taking place towards year-end. So the real effect on income will be felt more in 2024. I know the market hates the word transitional. But it is what it is. And I prefer not to bullshit anyone because it's a year that, for us, will mark let's say, a new era in which we will try to compensate the income loss due to the sale of BBVA that helped us to strengthen significantly our balance sheet with the income that will come in the future from our digital infrastructure plan in which we will approximately recycle 1/3 of the proceeds obtained from the sale of DDA. So I believe it will be a highly value accretive maneuver for our shareholders. But of course, the results will start to be felt more in 2024 than this year.
The balance sheet strength means basically that our people, our teams are now fully focused on operations because from a balance sheet standpoint, the years in front of us are relatively uneventful. I mean we don't have expected maturities till May 2025. And even the May 2025 maturity is relatively comfortable in terms of size, given the accumulation of cash the company currently enjoys plus the available lines, et cetera. The estimated FFO for 2023 will be 0.58 per share. I know that sounds like less than this year, of course, where we made 62. But you have to take into account that on a like-for-like basis, the cash flow generation without BBVA will be in the region of 54. So we will be overcoming already around $0.4 of the BDA disposal of the one semester, one full semester of BBA that we enjoyed in 2022. The final dividend corresponding to 2022. I know the market consensus because we kind of guided towards it was like $0.22 additional. It might be a little more than that, but we will let the Board vectors decide, and it will be very soon because the general shareholders meeting is in principle penciling for the 27th of April. So the Board of Directors calling it should take place 1 month before. So towards the end of March, I guess, the Board of Directors will be deciding what is the final distribution that they take to the general shareholders' meeting for approval.
As commented in the intro, we expect further decline in valuations. It might well be that some people are saying that the rises in interest rates carried out by the central banks are now over are behind us, and there will be no further rises. And as a consequence, there will be no further yield expansion. I don't know, but I tend to be prudent in these situations, and I prepare for the worst and then enjoy what comes in case it is more positive than we anticipated. We still continue working in a scenario of continued rises in interest rates that will continue expanding yields. And frankly speaking, I would love to see our portfolio at a passing gross passing above 5 with shopping centers at or slightly above 6 offices somewhere between 5% and 5.25% and logistics clearly between 5.5% and 6% as well. So we still have room to go in that respect. We will try to pick up that decreasing valuation as soon as possible, appraisers permitting. If we can do it in the first half nice, if we cannot do it in the first half, it will be absorbed towards year-end. But we would like to have it behind us and we prepare to enjoy a little bit of cash flow growth from 2024 onwards.
Anyway and to the dismay of many people, the fall in values has been minus 1.5%. And I have been called by many people talking about 30, 20, 40. And at the end, as commented in many occasions, we work in real estate. In real estate, things happening relatively smoothly, particularly when you are compensating falling values with an increase in operating performance, which increases the numerator in terms of cap rates, because you have more income. So let's see how the year goes, but we will continue enjoying tailwind in terms of operations. I mean we expect 2023 to be better than 2022 in all P&L magnitudes. We don't know what will happen with occupancy, but slightly up, slightly down. It will be compensated by inflation, and it will be compensated also by rent respreads, although you all know that we spread are the first victim of high inflation. So normally, when you are in an environment of high inflation, clients are reluctant to respread because they know they are going to be charged at the variation in inflation that can be very significant at times. So let's see what happens during the year, but we do expect a very positive 2023 compared to 2022 on a like-for-like basis. So that's all for today. We are happy to entertain Q&A. I guess there are a number of questions on the line.
And please feel free to make any questions that are of interest to you.
Okay. Thank you, Ismael. [Operator Instructions] The first one coming from Ignacio Mine from JB Capital. Ignacio, the floor is yours.
Okay. I have two. Firstly, could you provide more color on outlook for 2023 in terms of occupancy rates in offices and shopping centers? And the second one is in adjustments. How often the new update wins for inflation?
Okay. The second is easy. 100.0% of our rents have been updated by inflation this year. We have applied an average inflation of 6.3%, which might differ mentally from the one you think is the latest or whatever, but this is the average inflation that has been applied during the year to the different contracts that went up for renewal, taking into account that some of those contracts had last 12 months indexation, some others were indexed to the last month. So they are -- the cases are completely different. But the average inflation applied to rent renewals has been 6.3%, and it has been applied to 80% of our portfolio, which is one minus was up for renewal because in renewals, you apply release spread. You only apply inflation on the part of your portfolio, which is already, let's say, picking up in terms of rent adjustment. Regarding the outlook for offices and shopping centers, it is very difficult to provide one. In the absence of macroeconomic shocks Ignacio, I will tell you pretty flat. And you may say flat, how disgusting. Of course, is very difficult to grow. I mean the only real portfolio in which we can grow is in offices, but I believe the beneficial effects of the A1 improvement will be felt all the time. They will not all concentrated in 1 year, particularly in a year where all companies are affected by a lot of uncertainty. And as a consequence of that, they are not taking decisions regarding expansion or relocation. So because of that, I believe in the absence of macroeconomic shocks, it should be a relatively stable year in terms of occupancy.
However, many people is pointing towards some sort of mild recession towards the second half of the year. If that happens and particularly, if that happens, accompanied by employment distraction, we will, of course, take part of it in our office occupancy because the time you see people getting laid off in the market, you start seeing vacancy or additional vacancy in your offices. We saw it during the COVID. Many of you were worried about work from home and many other popular themes. But we told you during the COVID that the main problem affecting our offices was not work from home. It was simply GDP and employment market destruction. And as a proof of it as soon as the market -- as the economy recovered a little bit. In fact, Spain has not yet recovered the pre-2019 situation that as soon as the economy recovered, we more than proportionally recovered to pre-COVID levels in our office portfolio. And regarding shopping centers, if there is further continued inflation and particularly if they are out, the capacity of households to continue spending with suffer. As you know, Spain is a historical maximum in bank deposits. So clearly, people have significantly saved during COVID, but approximately 1/3 of those savings have already been spent in maintaining the consumption patterns that they used to have pre-COVID. So the cushion is shrinking a little bit. I mean only 2/3 of the extra savings achieved during the COVID are now kept in bank deposits. So we don't know at which point, but we believe that somewhere in the future, there should be an alteration of the consumption patterns of families and households. However, we are -- of course, we are not immune to it, but we know it's going to be sector wide. So it will affect us and all of our competitors with one advantage to us, which is that our occupancy cost ratio is the lowest in Spain, among our peers. So being in one of our shopping centers is a relatively shift thing as compared to being in some of the shopping centers of our competition. So we are very well placed to withstand whatever happens with the consumption if a mild recession or a strong recession for argument sake ends up hitting Spain.
Ignacio, do you have any other questions? No. Okay. Thank you. So the next question comes from the line of Florent Laroche-Joubert from ODDO. Florent, the floor is yours.
So I would have two questions. The first one is on the data center. So when we look at your pelleting level, so we can see that we are not close to 100%. So could you please maybe give us maybe more color on how you can see this predicting level increasing in the coming months? Maybe a second question coming back with your comments on the decline in valuation. So could you please maybe give us maybe some comments on how you see today's investment market? And if we should expect any disposals at Merlin in the coming months and at which premium or discount against appraisal of values? And maybe the last question, could you please maybe give us some color about potential discussions with your tenants in offices and shopping centers in terms of negotiation power in terms of ability to pass an indexation for the next time if it is still high.
Okay. Starting in the same order in data centers. Well, the pre-let levels that you see, in fact, are, I would say, completely abnormal. I mean, in this industry, you normally build spec because the tenant only enters your data center if they try and test it and it works for them. So in our case, what we did was a compromise between sacrificing a little bit in rent and having a very good quality guinea pig client for our 3 projects that allowed us back in the past to go through the Board of Directors and convince them to invest in this new product line in the company. So the pre-lets in our case were the price to pay in order to get that new venture for the company approved, but they are a rarity within the market, except in the cases where the hyperscalers are developing their own facilities, which in Spain is, by the way, not the norm. The second thing that I must say is that, that situation is worsening because there is a general lack of credibility among hyperscalers regarding the data center market, particularly in Europe, I must say, because a lot of projects have been announced, but very few people, and I must say, almost no people has put a shovel in the ground. So the data center community, the hyperscalers are increasingly becoming like David glass says from Missouri. So they only believe in what they see. And they only joined your data center if they can try and test it.
So at present, we have like 5.6 megawatts pre-let in our -- out of the -- in our 9. We are in conversations for another 3 that will take us to almost 100% pre-let. But I bet my word that, that contract is not signed. I mean they will drive the fit. That contract will not be signed till our data centers are up and running, and they come and test our facilities. In the meantime, we will go through the Adif's situation of explaining the peculiarities of expansion regulation regarding square meters and megawatts and many other things, which for are highly passionate for American lawyers, and we will continue working to explain that we are different. But at the end, you can achieve the same results if you are intelligent. So -- but this is what I can comment about the level of pre-let. We are very happy with the level of pre-lets that we have achieved in our data centers. And by the way, you must know that the different -- the modules that we have treated in which are like 3 megawatts per data center can be easily double up. So bringing a new 6 megawatts module is not easy. However, bringing 3 extra in an existing fee is relatively easier and can be achieved between 3 and 4 months. So in case we need sufficient demand in the market, we can relatively quickly scale up our operations in the 3 existing data centers.
Regarding decline in valuations and how they compare to investment market and whether we will make disposals. The investment market is as commented in many calls because this is not new. I mean, it has happened for the last 1.5 years. The investment market is relatively dry these times. It is mainly restricted to office buildings of relatively small ticket. So if you sell an office building well occupied at a ticket below 50 or even better 30, you might achieve clients because mainly Spanish family offices are taking -- protecting stance against inflation, and they are buying real estate. However, international investors are now in their headquarters. They are not out there looking for product. So things with a relatively big ticket are difficult to trade these times. That will not be eternal. At some point, there will be price discovery. The new prices will be set and the market will be open. So in the meantime, what you have to do is if you are desperate, you can sell. If you are not desperate, you simply wait, which is what we are doing. So don't expect from us lots of disposals this year. In parallel, we will not be making big of significant investments in existing products. So that is important to note.
Whether premium versus discount. A very important thing is that even in the current market, we are not seeing significant discounts. When bid and ask finally meet and transaction is closed, normally, those transactions are at or a slight premium compared to the book value. However, if you were to sell assets massively in the current market, I believe it will be more challenging. So if you really need to sell assets because you are a fund and you are approaching your termination date or whatever, then I believe you should be prepared to accept some discount. In our case, anyway, the word discount is relative because our trading price is so far from net tangible asset print that we have a lot of leeway in case we want to do disposal, which is, by the way, not what we want to do during 2023. And regarding inflation pass-through, my bet, and I could be wrong, is that in 2023, at least, we will continue passing inflation, I would say, almost in full. Why is that? This is peculiar probably to Spain, but I believe this is -- and this is my opinion. This is due to 2 facts. One is that virtually all of our clients, 82% of our clients have been with us for more than 5 years. So given that in Spain, inflation is applied on the app and on the down, a client that has been with us for 5 years now, in the last 5 years, has experienced 2 reductions in rent, significant reductions in rent, owing to negative CPI, 1 year 0 minus, 1 year 0 plus and this year, 6%. So when they put everything together and they make the computation on 5 years, they will surprisingly discover that the average inflation applied to their contracts has been between 1.5% and 1.8%. This is what we are calculating more or less for most of our time. So importantly, they don't believe this is abusive. And this is the beginning of -- you start having problems normally when clients start believing that what you do with abuse. And this is the situation. This is what we are seeing across our portfolio.
The second reason, which is also very peculiar to Spain, why rents generally speaking, are not so much contested by clients is because we are still far from the historical maximum that they have in the back of their minds belonging to the 2007-2008 period, pre-great financial depression. So at that time, using, for example, prime offices as a proxy, rents for prime offices in Madrid were between €46 and €48. And today, we are signing at 38%, 38.5%. So we are still far from the pretty great financial depression rents. But if you go to logistics in Barcelona, which is the most expensive logistics product in Spain in Sal, we used to sign above 9%, 9.25% in 2007, 2008. And currently, we are signing between 7% and 7.5%. So we are still very far from the historical maximum people have in mind. So again, that helps people not to identify real estate prices in Spain with abuse. And hence, why people is not that reluctant to take on board inflation adjustments. I know in some other places in Europe and in the world, the reality is very, very different. And when people is already seeing rents which are 20% or 30% above the maximum observed in 2007, 2008 of course, when -- when the landlord start inflating from there, from that basis, of course, people doesn't feel very comfortable about it. But this is what I see in Spain and probably what is explaining the peculiarity of being able to do a full pass-through of our inflation. Continental law also helps. I remember having that discussion with all of you during the COVID where you, with your Anglo-Saxon mentality, you thought, okay, people will pay or not pay rent. No, no. If you don't pay rent in Spain, you have a Roman law consequence. And that from a law of consequence is not good. It's not like I feel like paying, I feel like not paying. This is not Silicon Valley. So that is important also to mention.
Okay. So we have another question from Jaap Kuin from Kempen. Jaap the line is yours.
Two questions. So I kind of missed, I think, part of your statement on the dividend. So could you maybe just highlight if you call it a number that you have in mind or maybe explain to us why there was no print of a dividend number on the paper this morning? And then the second question will be, I think, very interesting to zoom in a bit on the leasing in the A1 corridor and the vacancy because I guess it's very kind of emblematic for maybe either success or normal course of business in the kind of a more average quality office assets in Madrid and whether you, for example, needed stronger discounts to get the leasing done? Or if you feel that the rents are maybe right for some upside there or just a bit more color around the old transaction in the area, please.
Okay. Thank you, Jaap. Look, regarding the dividend, of course, I have a number in mind, and I know perfectly what I will be recommending the Board on the 20-something of March when they gather to discuss the calling of the General Shareholders Meeting. But I have been instructed not to provide you with our guidance. So basically, this is why I have refrained from providing a guidance because the Board is kind of claiming that capacity, and they will provide the guidance to the market themselves. Regarding the A1 corridor, look, we don't have average quality buildings in that corridor. I mean thanks, -- the buildings we have in that corridor are, I would say, in the upper to top percentage class in terms of quality in that corridor. I mean, of course, we have suffered from an endemic lack of occupancy in that corridor. But I must say that within that endemic lack of occupancy, we have been operating relatively well in the area. Now it's improving a little bit. What means improving? Rental discounts. Well, rental discounts for reasons unknown to me are not very typical in Spain. You can see it in our portfolio. I mean unless you are a fund, in which case you want a high facial rent because you want to flip the rising very quickly, and then you want to have a side letter with a rent concession to the tenant. I mean for industrial companies like us, you might easily divide the gross and the net, and you will see that we are not very prone to rental discounts. We prefer to take the hit on the rent and not -- this is not price. So we don't take the discount as a norm in the way we negotiate. And this is true for CBD, and it is true for the A1 corridor. So -- that means basically that you have to negotiate rents in the area. And in that area, it is clear that because of the high vacancy, you are more a price taker than you can be a price leader.
However, even being a price taker, if you have a good product, which is adapted to the modern standards of the market in terms of layout, quality, cabling, sustainability, which is a very, very important organic growing input in the different RFPs that we get from our clients. Of course, you can be always at the top end of the rent in the area, which are the rents in the area? The closer you are to the 5 towers area, the closer you will be to around €18. In some cases, you can even go slightly below -- slightly above 18% in some cases in our -- some of our best buildings in the area Torre Chamartin, we have gone beyond €18. So I would say that in the first tranche of the A1, the one from La Moraleja to the 5 towers, the rents might oscillate between 15, 16 to 18 or less bigger as you get closer to the city, to the 5 towers area. Then the problems normally start in the second and third tranche of the A1. So beyond La Moraleja, to [indiscernible] and then beyond [indiscernible] which is normally where the complication starts. In those areas, rent can oscillate between €12 and €15, again, higher as you get closer to the city. So this is the reality in the A1 corridor. I believe, and this is my personal opinion, that the A1 corridor will be getting out of the out-of-favor situation it has enjoyed during the last years. And this eventually might impact the A2 corridor.
I believe today, from what I see from the leads we received for our buildings from the visits we received from our buildings I believe the A2 corridor might be a little more now out of the radar than the A1 East and will be because, of course, as the Operacion Chamartin approaches, people become conscious that by setting their headquarters in the area, they are pre-locating in an area which in 10, 20 years' time will be first line of CBD. So this is clearly helping us. Another important fact is that you can see that the difference between '17/'18 and 37-38 which is what we charge in prime, it's a very significant data. So the A1 corridor, and in general, the M30 ring road remains the preferred location for large corporations with large staff. So we normally tend to talk and talk a lot about CBD. But at the end, CBD is affordable by consulting companies, law firms, investment banks, super high value-added companies. And in ancient times, it was also highly affordable for technology companies. Now technology companies are starting to be a little bit more mindful of the P&L. But that has been the main feeder of the CBD. But there is, of course, life in the non-CBD areas in non-prime areas. And most of our let's say, most salient logos in our collection of client globals, the one that you can see in our corporate presentation, in fact, I was not located in CBD. Are located in the outskirts of the city. And I think that's it for the A1, but if you have extra questions, I will be happy.
Thank you, Jeff. We have another question from Fernando Abril from Alantra. Fernando, the floor is yours.
Just a couple, please. First is with regards to the guidance for '23. So basically, if we take the Q4 FFO, which was roughly $0.14 more or less, and we annualize this, we get to €0.56, which is not far from your guidance. Basically, we can add inflation and occupancy, and we can get to the guidance. So I don't know if you expect no contribution from -- or late contribution from Picasso this year and also from data centers or any detail you can walk us through your assumptions would be great. And then second, with regards to the logistics plan with INA that several press releases were out, and they were saying that you were interested again on this project. I don't know if you can comment on this
Okay. Thank you, Fernando. Looking regarding the -- regarding the guidance for 2023, you are right in extrapolating the Q4 cash flow generation that would point to $0.56 in 2023. And the extra 2 cents, you are attributing basically to inflation plus minus net variance in occupation and respread. The reason why you don't see more contribution by Picasso and the data centers is simply because they will be inaugurated towards the end of the year. And between installation of clients and eventually the rent-free periods, there will be very little contribution in the 2023 P&L. So we will be enjoying that cash flow mainly in 2024. Contribution in 2023 will be relatively meaningless. Then regarding INA, look, as you know, there was a very stringent contest put together by the Spanish state, the national authority regarding super prime logistic plot in the immediacy in the close vicinity of the Barajas airport. The context was very well attended. Five offers were selected. We scored #4. The scoring was a combination of your CapEx estimation plus the amount of money you would put in the SPV with the National Airport Authority to compensate eventually cost deviations in the CapEx and/or other working capital requirements of the SPE. We were preceded by SEGRO, Logicor and free I will not talk about the specifics of their offers, but only one of them, in our opinion, estimated the CapEx correctly in the region of €140 million, €145 million, which is where we see it. The other 2 in order to be more competitive kind of underestimated CapEx to between €110 million and €120 million. But then when you read through the legal documentation, you are fully liable for whatever CapEx deviation. So at the end, it is not extremely productive to underestimate CapEx in the bid.
And then there was also the additional, let's say, money to be put in the SPE for working capital and deviations in CapEx, in which there was very, very significant variation between the first offer and our offer that ranked #4. Our offer was kind of 70% below the one that was ranking first. So that looks like stupid, but when you translate into the cost of building 150,000 of logistics, for the first, it would have meant a cost of construction of around 17 -- more than €1,700 per square meter, whereas if you take our offer, you will be at around slightly below 1,200. So it's almost 50% difference. So we are happy that we held the horses and resisted the temptation of let's say, exaggerating our numbers in order to be more competitive. We stood where we thought we should stay. And as a consequence, number of different rebounds have ended in us being back into play for the thing. We will, of course, reevaluate the whole project with our Board, particularly with regard to new construction costs. I can anticipate that they are not significantly different from the ones we anticipated because there are things which have gone up, things that have already corrected. And then we assess the convenience of going forward in this project, which we like because it clearly puts a share in the cake of our presence to in the A2 coverage because we own a lot of super high-quality logistics in the area, but this is -- this will be together with what we have in Coslada and San Fernando, this will be kind of the closest to the Madrid City Center and perfectly suitable for last mile logistics. So let's see. I don't want to anticipate what I -- what the Board will decide. But as you know, we are a very long-term holder of assets. We are not flippers. And we believe that eventually we can make sense out of the calculations.
Okay. Thank you. The next question comes from the line of Ana Escalante from Morgan Stanley. Ana, the floor is yours.
The first one would be on your CapEx. You said in today's release that your CapEx efforts will be pre-let driven. So how we -- how should we look at the CapEx pipeline that you provided last year at your Capital Markets Day in particularly regarding the logistics and data centers plan. Should we expect any changes in that guidance?
Yes, you should expect some changes in that guideline, but mainly time-wise. So in some of our developments, we are advancing employees slightly faster than we anticipated, including pre-let. So we will be, I guess, making announcements during the year. They might or might not mean start of construction in 2023. Some of them might some of them might slip into 2024. But clearly, what we will not be doing except in 2 very specific cases in which we have taken the decision to go spec, one in the Henares corridor, except in 2 cases for rapidly and one in this one for, let's say, standard shares that we believe will be pre-let before we end construction. For the rest, we will be waiting until we have confirmation of pre-lets, which, by the way, continue to be a pretty active market growth in Spain and Portugal.
Okay. So the next question comes from the line of Clara de la Fuente from Kepler.
I was wondering if going forward, do you expect both data centers and logistics, yield and cost to remain less provided levels in November or like close to 8% for logistics and 9.5% to 9.7% for data centers? Or do you expect any changes going forward?
Okay. Look, while in logistics, we have recalculated our yield on cost based on most recent construction costs, and they have gone down by 100 bps. And by the way, this is a moving target. I mean this is what is happening today with the current rents and the current construction costs. If rents continue pushing and construction costs, either stabilized or moderate, eventually, we will recover some basis points in terms of cost efficiency and enhance on yield-on cost. But while in logistics, we have recalculated and we have, of course, identified differences. In data centers, at present, we are not identifying any differences first because they were budgeted after we budgeted most of our logistics plans. And second, because 70% of the expenditure in data centers lies in equipment, and that equipment was commissioned long, long time ago. So the price is closed. So the only variance you can find in data centers could be a slight variation up in the cost of construction. But between land and cost on construction is only 30%. Hence, the total variation in the cost of the data center is not really meaningful. So this is why we haven't recalculated data centers, and we stick once Phase I is finished. So once we have 70 megawatts in operation or at least 60, I mean once we are more or less in full operation of what we call Phase 2, we expect to be in a stabilized yield around the 11.2% provided to market or slightly better than that.
Next question comes from the line of Celine Huynh to from Barclays. Celine, the floor is yours.
Just have one question, please, on the general election this year in Spain. I was wondering if you could share a few words about it, what you're expecting? And if there could be any material decisions for SOCIMI or real estate in general.
Okay. Look, Celine, there are two elections upcoming in Spain, one around May will be local and autonomous regions. And then most political observers are pointing towards general elections towards the month of December, around the 10th of December or so. The effects on our industry for those elections, I must say we anticipate should be limited. Most of the real estate-related measures that are being flagged by the different political parties are mainly related to residential. So residential is clearly at the forefront of the public debate. Everybody is thinking about -- everybody's kind of tendering their ideas for residential. But thank God commercial is completely out of the public debate. So we are relatively tranquil in that respect. What might affect us is particularly in local and autonomous region elections is that by experience, we know that when we approach election dates, normally, the public administration tends to paralyze in full. So basically, people is either not at their jobs or if they are a little bit dispersed thinking about what happens or might happen in the election. So normally, you -- what you can expect is a radiation -- a slowdown in the obtaining of licenses and things with the public administration. The truth is that in that period, it is one of the few good times in our history in that this might happen because we don't have that much these days at stake with the public administration at the local or autonomous region. And at the central government level, the prioritization is exactly the same, even longer in some cases. I mean it can span to 4, 5 months before the elections and 3, 4 months after the elections. But frankly speaking, we don't have too many things to ask or decide with the central government henceforth.
And the next and last question comes from the line of Marie Dormeuil from Green Street.
Just one side question because we've seen a change in regulation in Barcelona with regards to distribution warehouses. And just wanted to get your take on that change in regulation? And how does that potentially impact you in a positive or a negative way?
Okay. Look, Marie, again, thanks God, all of our warehouses in Barcelona, and we are talking about close to 1 million square meters are completely out of that area of regulations. My take of it and I coincide very much with the paper you recently wrote on it, is that they were trying to regulate the kitchens. And at some point, they got a little lost and started regulating the X and Y and Z. So in the definition of what they were regulating, they have been so vague that in reality, you can interpret that even for logistics, that might have an impact. But to the best of my knowledge, what they were trying to regulate were only the kitchens. So I guess, in the future, somebody will clarify. I hope it is clarified. If it is not clarified, and it stays as it is, the take for us is slightly positive, of course, because we are already without competition in the market in terms of proximity to the city center. If restrictions are applied to our competitors, we will be even better in that regard.
Okay. So there are no more questions. We thank you all for staying with us for this 1.5 hours. As always, we remain at your disposal for any further questions that you may have. You know where to find it, and we hope you have a great evening. Thank you very much. Bye, bye.