Colonial SFL, Socimi S. A. (COL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Inmobiliaria Colonial Second Quarter 2023 Conference Call. The management will run you through the presentation which will be followed by a Q&A session. [Operator Instructions] I'm now pleased to introduce Mr. Pedro Vinolas, CEO of Inmobiliaria Colonial.

Thank you. Good afternoon. This is Pedro Vinolas speaking. We are very pleased to introduce you today the results for the first half of the year. I'm on Page 3. The way we are going to structure this presentation is first of all, I'm going to deliver some views on the highlights of this first half of the year. Then afterwards, Carmina will step in with information on the financial performance. Carlos Krohmer, we'll provide additional details on the portfolio performance and on the progress that you're having on the pipeline. And finally, I will go through some comments on a future growth of the company and some conclusions to summarize the presentation. The highlight about our performance in Page 4. We wanted to highlight 5 outstanding topics for our performance so far this year. The first of all would be to say that the first characteristic of our performance it's very powerful delivery in terms of cash flow, EBITDA and EPS. We are finishing June with an EBITDA that grows 18% reaching EUR 152 million compared to EUR 129 million of a year ago. Even instead about EBITDA we talk about EPS, our EPs in June would equal 0.16 per share that is 14% more than a year ago. What's behind this outstanding performance in terms of cash flow is first of all, the strong letting volume, point 2. We've been finishing June with close to 100,000 square meters, which are more or less equivalent to EUR 43 million of annualized rents. And these strong letting volume means an outstanding occupancy. This occupancy, it's now at 97% in excess of 97%. So it's practically a full occupancy. In fact what is exactly full let is everything that we own in Paris. So I think that results cannot be higher a 100% in Paris 97%, for the group. And we would like to emphasize that it's not only about volumes, it's also about quality. What more and more is providing color not to our occupancy is that it is based on international consultancy firms and luxury brands as leading tenants demand. Besides EPS, and I mean the growth is not only volume and occupancy, it's also rental growth. Rental growth remains a driving force. We've been signing contracts which are -- which mean a 7% ERV growth compared to the ERV for December '22. And that means not only a very good number, but it means also an acceleration of rental growth that is happening. And of course, one of the driving forces, not the only one, as we will see, is a solid capture of indexation, which is happening there. And again, here, the comment would be also on quality. Besides or behind these numbers, I think that is also the driving force of the ESG characteristics of our assets that are also playing a main driver -- playing a main role in this capacity to attract the interest of tenants. As a result of that, we finished the first half of the year with what we believe it is a resilient valuation. Gross asset value goes down 3% like-for-like. So in relative terms, we believe it's outstanding. It's on the high end. It's a negative number, but it's very good in relative terms. And that is because value creation through projects, the ERV growth that we've seen, this is offsetting the fact that, of course, yields are going up. In fact, we would like to highlight that after this figure of NAV that you will see for 2023, June 2023, what is there, it's already 57 basis points of cumulative yield expansion. So it's -- let's say, we are a long way into this repricing of the assets with a certain work done while the valuation becomes quite resilient. And the final point is about discipline in the capital structure. We've been able to deliver in the 6 month a relevant amount of disposals, EUR 550 million is divested around appraisal values which means that the ratios like net debt on EBITDA are improving significantly, but we remain, in any case, with a very important hedging strategy that ensures our interest rates remaining below 2.5% in the long term. In this first section, maybe what I would like to do is also to provide a little bit of our views on the framework where our activity is happening in a moment that everything related to real estate and particularly to offices are quite challenging. We feel we have to emphasize a little bit the obvious. One of the obvious remarks to be made is that we are benefiting from fundamental differences happening in the performance of Europe versus USA. And despite the fact that, let's call it, the American view is dominating the scene, particularly in capital markets. The actual data are what they are. And what we can see in this slide, for example, is the difference between post pandemic office reentry rate, which remains very high in Europe, particularly high in Paris and in Madrid, nothing close to what may be happening in the U.S. Also, we could make some comments on the net absorption in Europe and U.S. compared to a 10-year average, which is quite positive in Europe as remains very negative to the U.S. You can look at also how the performance is doing comparing the number of quarters with positive net absorption since 2020. You can see here the difference or simply the vacancy rates that you can see in Europe, single-digit compared to USA. And I, obviously, I'm just mentioning data that apply to the whole market, not to the high end or to Colonial's numbers so that would be a comment. Another maybe comment on this very general framework, I think that we are benefiting in Continental Europe from the fact that European offices remain attractive for employees and with an increasing momentum. You can see on Page 6, some comparisons on the office reentry, a path different cities around the world, and you can spot the difference. And some comments also that we are providing on companies and what they're stating about the return to the offer. And on Page 7, maybe a comment more related to Colonial itself. As you know, we have a long-term strategy of being very much concentrated on the prime CBD assets we want to outperform based on the polarization trend that is happening everywhere. And certainly, you can see something happening in Colonial when you look at the high activity that is happening in our markets and what's happening into the office prime ERVs about the scarcity and demand from grade A assets and about the trends regarding international employers in their path to return to the office. In our case, this means high-quality kind of tenants entering into our office buildings. And that means not only very good letting performance, very good annual rents, very good ERV growth. It's a kind of exposure that we like. Page 8 is a simple picture that illustrates here from Paris and Madrid, what's going on with our buildings in terms of occupancy, the very small information regarding the market. Comparing that in Paris 100% compared to 97% in the CBD market, 84% in La Defense Market or in Spain, 97% Colonial occupancy rate compared with 95% in the CBD market, 82% in the outer M30 market. Page 9, remembers reminds us of work buildings of our group are and what kind of performance are we achieving in terms of rental growth, 11% in Paris for example. On the level of rental level EUR per square meter in Paris, Madrid or Barcelona, which are very much in the high end. Because of everything I said, because of what are the megatrends in our markets, what are the megatrends in our specific focus of our strategic approach to the market. Basically, what is happening to our valuation, Page 10, is that it's quite resilient. You can see here a 3% like-for-like impact on our [ EUR 13 billion ] valuation as of December 2022. That translates, including some disposals in 12.2% in June '23. And you can see here that, of course, what's happening to our asset is that they are being impacted by a 57 bps yield expansion so far, which means that during this first half of the year, you have a significant impact in the valuation of our assets downwards. But you can also see to what extent rental growth, indexation, project delivery, it's offsetting partially what's happening to the valuation of our assets. So the conclusion is quite a resilient performance, outperforming in relative terms in the market as a result of these underlying megatrends that are benefiting the position of our company. This will be my introductory remarks. Now I will ask Carmina to step in to talk about the financial performance of Colonial.

Thank you, Pedro. In this section, as usual, we are going to detail the main indicators and the keys that underline the strong evolution of the results. The results of the first semester as Pedro mentioned, are described in the first place by a strong growth of the cash flow. Revenues increasing 10% like-for-like until up to EUR 183 million as well in the same strong direction, EBITDA growing 18% and 23%, considering the continued operation, recurring net profit increasing 14% year-on-year, 25% without considering the net -- the asset sales and the same growth year-on-year, up the EPS up to EUR 0.61 sacrosanct share. Secondly, the first semester with the valuation update, it's also described by a strong resilience in the valuation of our portfolio, a decrease of 3% like-for-like in 6 months, EUR 12.2 billion at the end of the first semester and the NTA per share at EUR 12.88 per share, 6% decrease in 6 months considering the dividend per share. Additional, we have demonstrated as well the ability to undertake investments in a very narrow market, confirming valuations for a value of almost EUR 550 million updated with recent sales executed in July recently for an amount of EUR 75 million. And finally, due to an active management of the balance sheet carried out on the permanent basis, the debt has been reduced of more than EUR 300 million. We continue as well with a very strong liquidity position, removing any financial risk. And we maintain, as you know, a fixed cost of debt below market levels at 169% a spot. And as well for the following years, well below market levels, which ensures [S&P's] debt coverage ratio according to the credit rating. In the following slide, you can see the model and indicators more visually that show the growth of Colonial cash flow and as well as the resilient profile of our portfolio. If we go to Page 14, we analyze the recurring results. We see that it increases by 14% and without taking sales into account, the increases would be 25%. You can see in the building blocks, the positive contribution of the continuing operation portfolio, EUR 23 million. On the other hand, the negative impact of the disposal of nonstrategic assets, EUR 4 million. And on the other hand, the negative impact of the financial cost of only EUR 8 million, basically due to the rate effect. Remember that in June 2022, the financial cost was 1.3% for our debt compared to the current 169%. The market has increased by more than 300 bps, while the cost for Colonial has all increased less than 40 basis points. Consequently, the EPS increased by 14% year-on-year, up to 16.1 cent per share, confirming the upper range of the annual EPS guidance. This strong EPS is based in a strong growth of gross rental income year-on-year. The portfolio in operation at EUR 14 million, 8%, the entry into operation of the project has also a positive impact of additionally EUR 20 million, 12%. Important to highlight that the Alpha strategy represents 22% of the growth of our gross rental income for this first semester. In the opposite direction, the sales, as you can see the building blocks of nonstrategic assets had an impact of EUR 20 million. And as a result of all the portfolio with the higher quality has shown year-on-year a total increase of the growth rental income of 8%. And where has been this growth and why, I am in Page 16. It should be noted that the 8% rental growth has been positively impacted by a great performance in the Paris market with 14% rental growth. In comparable terms of the portfolios, the 3 markets have performed very positively with an extraordinary evolution in Paris and Madrid. This extraordinary like-for-like growth of 10% is basically due to the combination of rental growth due to the lack of product in the markets where we operate as well as the indexation effect as you can see here in the split of the price impact, thanks to the quality of the contracts and clients. And finally, thanks to the -- an improvement of the occupancy, adding 12% of the growth of this like-for-like increase. And this rental growth is being accelerated. In this page, Page 17, you can see the extraordinary year of the rental growth compared to the last 3 years. But above all, you can see the growth capacity of rentals beyond the indexation effect basically based on the scarcity and quality of profile of our portfolio, as you will see later in the following section led by Carlos. As you well know, Colonial is characterized by a very active portfolio management in order to recycle capital and strengthen the capital structure. In a market Barcelona was the current one, we have been able to sell almost EUR 550 million confirming valuation. The operation carried out in the month of July have reached EUR 75 million more, including a plot of land bank and a secondary asset with 17% bacon, both asset outside and so see in Madrid. With an average premium of 13% to growth asset value of June 2023. The high -- I would like to highlight that the blended yield of the total portfolio, sought achieved with the prices that have been signed and growth has been at 2.7%. This is the implicit yield at the pricing level of the total portfolio, the total asset program of EUR 550 million. With this new disposal, we have been expanding the investment plan that we have shared with you in the last presentation of topped-up. As we commented previously, the updated valuation of the portfolio shows a clear sign of resilience with a valuation correction resulting from the expansion of yields of only 3% in the last 6 months in comparable terms since December 2022. Basically, the negative impact of this expansion in yields has been offset by the increase in rents and the delivery of the project. In the table on the right-hand side, you can see the yields resulting from the valuation at June. Bear in mind that in Paris the user net and in Madrid and Barcelona that are gross yield and the cumulative expansion to date, 67 bps about 70 basis points in for pipe portfolio and between 36 and 39 basis points for the Spanish portfolio, with a total average yield expansion for the portfolio of circa 60 basis points. As we have been sharing in the each quarterly presentation, Colonial has carried a very active management of the capital structure and the form of the debt and above all, successfully covering the interest rates and any refinancing risk. In this end, there has been a decrease in the net debt of EUR 317 million with a loan-to-value assets dividend, including the dividend that has been distributed in July of 39%. We have a fixed cost of debt at the current rate of 169%. And additionally, as a consequence of the pre-hedged close in 2021 for 50% of the debt at the rate of 67% -- 0.67%, we can guarantee a financial cost in the coming years below market levels in the range of 2.5%. Finally, if we look at debt-to-EBITDA ratio in line with that has been analyzed by the rating agencies and considering the portfolio in operation, income producing in annualized basis. The ratio has been reaching today a level of 12.5x. The same ratio is reached in a dynamic view when the existing project pipeline is completed and generating full income. In the financial management, another important milestone of this separate semester that demonstrates Colonial's ability to have access to the financial market has been the signature of a new revolving facility of EUR 835 million under very favorable conditions and providing additional liquidity to the group. This revolving credit facility is qualified as a green law reference to a very envision premium KPIs that allows us to maintain a strong liquidity position of almost 4x the maturities for the following 2 years and confirms our commitment in the ESG strategy for the group. Finally, the updated NTA calculation that is shown in Page 22 shows the benefit of a quality portfolio and an active portfolio management. The increase in cash flow as well as delivery of projects have been partially offset, the expansion in yields resulting from the increasing rates, showing consequently, a decrease of net NPA of 6% per dividend. EUR 11.1 viewed as per share and a decrease of 8% for dividend compared to December 2022, resulting up to EUR 10.9 per share. It's important also to highlight the additional equity value created through the debt and through our hedge strategy. This has shown in the debt disposal value, reaching the level of EUR 11.5 per share.

Thank you, Carmina. So you can see that in this section, we delivered quite substantially good numbers in terms of cash flow generation. Revenues growing 10% like-for-like. EBITDA growing 18%, EPS growing 14%, and valuations quite resilient. GAV, 3% like-for-like down and NDA 6% after the dividend to the new number of 10.88. Well, that's, I think, it's quite remarkable numbers. Let's now understand a little bit more what is there behind those numbers. Now Carlos will step in to talk about portfolio performance and pipeline.

Thank you very much, Pedro. Let me just start with Page 25 -- Page 24, a short view on the market. As you know, we are the top-notch lives of the market. And why are we there? How is this market behaving? As you can see here, in the CBD area, the grade A product or the top product is almost inexistent in Paris, it's 4.4% today 28,000 square meters, and this has been throughout the last 6 years. So this really scare availability of top product that everybody is looking for is really creating a significant upward pressure on rents. As you can see, it has moved up from EUR 850 per square meter year in Paris CBD in 2017, up to EUR 1,000 square meter per year, and we have many examples in our portfolio where we are setting really the benchmark of these high-end rents. The same behavior in the top segment of the Madrid market. There, the CBD Grade A availability is below 2%, corresponding to 70,000 square meters, also almost nothing available. We have seen that in the last 6 years a growth -- a cumulative growth of 19%, reaching at the moment of prime rent of around 37%, as you have seen in subject to some examples here, but signed even above. So with this, let's go to the Page 25, our letting activity in this first half, as Pedro already mentioned, 1,000 square meters. This is another year in a row really historical high volume. We are at the same level as last year that was historically high, and we are more than 50% above the year 2021. In terms of quality, what we are signing is contract with an average award of 10 years, so really long-term tenants locking into long term. And who's driving this demand is the luxury industry, Tech & Media Advisory Services they account for more than 50% of the projects signed in the first half of this year. Our buildings have delivered strong rental growth. As you can see here on Page 26, in the second quarter, the growth on ERV in the office portfolio has been 7%, outstanding Paris with plus 11%, Madrid Plus plus 1 and plus 8%. If we look quarter-on-quarter, quarter 1 had a blended LV growth of 3%. Now quarter 2 had a blended year growth of 7%, so a significant acceleration. And on the lease spread also very good numbers. Again, here, an outstanding tariff that this really is the strongest market, as you can see, also because of the market data in the market. On top of it, on all of the contracts that had an indexation review during the first half of this year, we have cost through the indexation the total effect, the annualized increase of cash flow that we have put through is 5.7%, 6.3% in towers and 4.3% in Madrid and Barcelona. What is important to highlight the contribution of this increase in our P&L year-to-date is just 3% because not all of the contracts have been signed at the beginning of the first half being signed when the contract is due. So they are coming now progressively into our P&L. To say it in other words, we have secured 6% of rental growth of the pool contract portfolio, of which 3 are already in the P&L and another 3% will come in the coming months. When we go to our occupancy profile, what you can see, as Pedro mentioned, we are at 97%. That's really one of the highest occupancy ratios in the sector, and we have improved in year-to-date 160 basis points. We have improved on every single market Paris is at 100%. Madrid, we have improved 137 basis points and in Barcelona more than 500 basis points. Barcelona is at 85%, but is basically concentrated in 2 renovation programs on 1 secondary asset excluding this impact, the rest of the portfolio is at 95%. When we look on the next page, the overall vacancy rate of the group is 2.8%. And here you see really the benefit of the diversification strategy in many cities. These 2.8 account from 0.7% to CBD Madrid availability or on 0.4% CBD Barcelona and 1.7% renovation program and secondary assets, Sant Cugat sales, secondary assets performed. We have almost no secondary asset left, one in Barcelona Sant Cugat, and fellow secondary asset in Madrid with a 17% vacancy. We just have sold it out. So this would further improve our vacancy profile for the next quarter. One of the very important real estate highlights this first half is the delivery of Louvre Saint Honore, one of our most impressive project. We have signed a contract, 40-year contract with Fondation Cartier with the first bank option at year '20. This asset has been delivered just last Friday as some months in advance of the initial calendar. The yield-on cost is above 7%, and the capital value creation has been in excess of EUR 350 million. So we have created value in excess of EUR 350 million just in one asset. This is a capital gain on total cost of more than 168%. So this is also a big driver of our strategy. We delivered strong value creation and venture growth through urban transformation projects as, for example. With this, we have basically almost project as for pipeline, you know that we have a project pipeline of 8 projects. I'm on Page #32. Out of these 8 projects, 7 have been fully let and fully delivered. So it's just pending Mendez Alvaro, Mendez Alvaro so he delivered during the first half of 2024. Out of this project pipeline no P&L, year-to-date are EUR 34 million of rents, what already has been signed and is not fully in an annual way in our P&L is EUR 58 million of rents. Also to highlight the pending CapEx of the project pipeline is really a residual in the range of EUR 70 million to EUR 80 million, so almost nothing left. So fully derisked the project pipeline. On Page 32, you see basically what is the final execution of the project pipeline, Louvre Saint Honore delivered Mendez Alvaro big non-iconic campus on the way, and we are working on reloading the pipeline with a very impressive additional asset Rives Dde Seine, in our portfolio that we are currently in an analysis stage, and we will in the soon in the future, give some additional details. Important comment on Page 33. It's not just about projects in itself and location in itself, it's also about asset quality and in particular, on this page, ESG credentials. We really have a strong commitment to ESG in order to create low-carbon destinations for our clients. This is what our clients want. We have a clear ambition. We have signed SBTI trajectory pathway. And we have done quite a significant delivery year-to-date, 68% in carbon reduction since our base year 2018. We are top-rated on CDP. We have the highest rating on the carbon disclosure rating, top 1.5% among 19,000 companies across sectors worldwide. And we had in 2022, a solid cargo performance, with a 27% like-for-like decrease. Moreover, we create low cargo destinations. We have here the recent examples, Migaland beyond, both are nearly at 0 buildings with very low operational emissions. And what is more important than that the construction, the transformation of this building has been done in the most efficient way with the lowest embody carbon ratios in the market, 600 kilograms per square meter in Milan 700. Thank you. So maybe some final comments from my side on the strategic level, how do we view the positioning of Colonial as of today. As you can see on Page 35, our main remarks have to do with cash flow. So basically, what we think is happening is that, obviously, market is going through a certain repricing that has to do mainly with the dynamics of capital markets of investment markets. But this is something that will have a certain time framework and a certain extension in terms of how wide it will be. Everyone can do their own assessments about this. On the other hand, there is something expected to happen with cash flows, which, in the short term, will offset at least partially what's happening to capital values. And in the long term, will remain as the only one remaining driver for outstanding performance of any company. So really that cash flow generation is a priority. And basically, we believe that you have to work in different layers of cash flow generation. Inflation is obviously one that we have to prove every quarter that we are delivering what inflation means for our cash flows. We've seen so far what has happened this year with a full pricing power. On top of that, you can see the rental growth coming from the prime positioning of assets. And on top of that, you may think of an additional cash coming from new projects and also from the delivery of acquisitions that are coming at the prime factory level. The result that you can see in this -- at this moment is EBITDA growing 18%, earnings per share growing 14%. I think that this is a very powerful tool in order to be very resilient at this moment of the market. By the way, based on the EPS, you see for the first half, we confirm the EPS guidance that we've given before in the range of $0.28 to $0.30, but we are biasing our guidance towards the upper range, close to 40% and not close to 28%. On Page 36, I would also like to highlight 2 things. One is our cash flow is resilient despite the fact that we are successfully disposing of assets, so we remain above for EUR 400 million of passing rents at the moment where we've sold a relevant part of our assets in the last few months. And the second message, this rough figure of EUR 400 million is expected to exceed EUR 500 million, basically coming from the -- just the pipeline that we are just finishing and for the different projects that the company is involved at this moment. And then the final -- my final comments on Page 37, again, have to do with a more qualitative analysis of the situation. I think that what's happening to Colonial, first of all, is that we are benefiting for certain tenant trends that are happening in certain European City centers. This is an obvious scarcity of Grade A stock -- there's a race to quality that is accelerating this location in Europe, and we are benefiting for this. This is an obvious appetite for low carbon destinations, which are outperforming the market in occupancy and rental levels. We are also benefiting from this. We believe that in terms of behavior of the final user, central locations are benefiting from short committing times from a better appeal for this final tenant from a better experience and cultural benefits of central prime offices with a higher level of well-being. All of this trend of today, so far, it's being proven, and this is creating this superior performance that I think that is positioning us on the higher end. Demand is concentrated on prime assets in central locations. You've seen the high volumes that we are experiencing. You've seen how this momentum has been accelerating, how the ERV growth remains strong? And last but not least, what kind of clients are joining us. You've seen very remarkable deals in the luxury sector, but also in the tech and consulting sector. This qualitative driver is very important. We remain a company which likes to invest in order to grow, to develop additional experience destinations. And we've seen the benefits of the value that is created in projects like Louvre or Mendez Alvaro in Spain, and we have a strong track record on human transformation with outstanding capital gains. You've seen the example of Louvre, for example. Regarding that, we know that we -- this is a sensitive topic. We remain quite disciplined on this. Our starting point is that we have had, believe a successful hedging strategy. I always like to remark that it's not only on spot terms analysis is particularly going forward, where will we will be 3 or 4 years from now, that remains a fantastic differential tool. We are -- because of that benefiting from a spot cost of debt of EUR 1.7%, which are expected to remain quite low for a number of years. And in any case, we remain disciplined regarding LTV with a good track record of divestment so far, EUR 500 million divested at appraisal value. I think that we are disclosing quite positive numbers regarding capital structure. And finally, how does this translate into valuations, there are short-term reductions in valuation, certainly, I would only maybe emphasize a couple of things. One is we're going down the road, more than 50 basis points already in the valuation -- existing valuation of our assets. This is something that has a certain time framework after which -- what remains a sole driver for growth is your cash flow growth. And we believe that regarding this, our prime buildings are outperforming the market and are allowing us to remain very resilient in relative terms to the situation of the market. This was in the presentation of the results for the first half, and we'd be very pleased if in the near future, we can come with the same kind of performance. That's all. Thank you, and now we'll be very pleased to answer your questions. Thank you.

[Operator Instructions] The first question comes from Veronique Meertens from Kempen.

Maybe to start off with maybe a bit of the obvious to the guidance that you finish it off, so it's going to be on the wider end, but you're already reporting at EUR 0.60 now. Cash flow is growing while your debt is stable, cost got stable. So isn't it very conservative that you're the $0.28 to $0.30 for the full year?

So, Veronique, maybe we have a reputation of being prudent and conservative, I don't know. We don't want to lose this reputation easily. So I don't know, yes, the numbers are what they are, and we prefer to stick to the higher end. At the same time, we acknowledge that so far the evolution needs what it is, it's quite strong. But yes, let's call it prudent, but we want to remain on the higher end of our guidance.

Okay. That's good. And maybe assuming a little bit on Spain, specifically Barcelona, you mentioned there's now 15% of vacancy, which is 10% can be attributed to this program? So I was wondering how is that pre-letting going? And what are your expectations in terms of occupancy there. And then also looking at the re-leasing spreads because you do mention one of the highest reversionary potential in Barcelona 15%, but at the same time, the lowest release spread. So I was wondering what happened there and if there were specific leases that you relet there.

I'll start with the general comment and maybe Carlos can be in with additional color. Well, we've been seeing in the last months, maybe in the last year, that Barcelona is not doing as well as Madrid and Paris where, by the way, we have a vast majority of our exposure. We believe that this has to do maybe a little bit with the fact that Barcelona growth was basically driven by the 22 at neighborhood. I think that today, demand is maybe weaker than the average, while supply remains strong there. That means that it may take a little bit more time than needed to grow the occupancy. But in any way, it's growing. You see the last 6 months that has been growing nicely, not to the level of Madrid and privatize, which cannot be better. But I think that's mainly the driver regarding maybe what we read, Carlos, if you would like to add any comment. As I said, on the Barcelona market, the vacancy basically concentrated or mainly concentrated in 3 assets. One is one of our, I would say, almost last secondary assets in Barcelona that is Sant Cugat Nord a difficult market we sold last year and asset in Sant Cugat Nord, here in this asset, this is more challenging in the secondary market. Then the other 2 assets are renovation programs of Torre Marenostrum and Diagonal 530. Diagonal 530 is one of the best assets in the Barcelona market. We have had a lot of progress. We are there ongoing with solid letting momentum. So we will see improvement on that one. And the Torre Marenostrum asset is in the 20 to add. Here, we need a little bit more momentum of international demand, but we remain positive on this asset, but maybe it is a little bit slower than Diagonal 530. Having said this, it's also important to highlight that the weakening of the Barcelona market on the total portfolio of Colonial is really very, very little. So it's a minor impact on the total portfolio. And we did right in having this diversification and asset allocation as we have it today.

Okay. That's helpful. And maybe one last question. Back on the leverage, a question on LTV of 39%. But looking at a proportionate basis, because I actually get to a bit more 4%. So I was wondering, you mentioned briefly discussion with the credit rating agencies. How much headroom do you have or maybe in terms of valuation declines, how comfortable are also the credit rating agencies at this point which are with your leverage?

Well, as you know, the rating agency look at the credit metrics in more dynamic and quality and resilient profile of the cash flow. So when they analyze the metrics and only see or look at only the loan to value, they look at also the quality of the cash flows, the resilience of the cafe, quality of the tenant and how to decline this cash flow when the projects should be completed and some of them you know that are flat. So all they have confirmed, the rating even stretching some valuation as they did in the release, they published at the beginning of this year. So they stress the valuation and we did stress valuation stresses because of the quality and the dynamic cash flow and the class and the potential professional also, they qualified with a stable outlook of trading, so hindsight that it's not only a loan-to-value. It's also the quality of the cash flows and any refinancing risk, thanks to the liquidity and also any debt coverage stress because of the hedge.

The next question comes from Celine Huynh from Barclays.

2 questions for me, please. The first one is on disposals. We can see that you're selling assets with high vacancy, projects and land plot, which is quite interesting because it doesn't impact your P&L. So how much of your profitable do you think you can continue to sell without impacting too much income? And then my second question will be a follow-up to Veronique's question. By how much do asset value need to fall before it hits your covenant?

Well, on the second question, again, it's not having additional expansion that triggers the rating. As I said, additional expansion would trigger when rating. But on the other hand, you have this quality analysis about what I mentioned before. So it's not that now we are in the range that the rating is for Colonial's conservative reply. With this loan-to-value with the rating -- with the metrics they are considering with this updated valuation, we still have room to confirm even with additional expansion, but it's not only a matter of debt plus, debt plus equity ratio, it's also the interest of credit rating.

Sorry, Carmina, I was not being clear here, but I'm not talking about credit rating. I'm talking about your bank covenant.