MERLIN Properties SOCIMI, S.A. (MRL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to First Half 2021 Results. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to first speaker today, Inés Arellano. Please go ahead, ma'am.

Thank you. Good afternoon, ladies and gentlemen. Welcome, and thank you for joining MERLIN's First Half 2021 Results Presentation. First of all, we kindly ask you to abide by disclaimer containing the presentation. As usual, Ismael Clemente, CEO; and Miguel Ollero, COO, will walk you through the presentation. And thereafter, we will open the floor for Q&A. With no further delay, I pass the floor to Ismael. Thank you.

Thank you, Inés. Good afternoon, everybody. The first half of 2021 has been relatively an eventful period, very similar to the one of last year. However, there has been a notorious improvement pattern over the period with the first quarter delivering around EUR 0.13 free cash flow versus EUR 0.14 on the second and we expect that growing patterns to continue in the third and the fourth as a couple of big buildings that we're heading with will come into operation, and we start producing rents, plus we expect to continue reducing little by little the incentives applied to the shopping center activity. Valuations have come out flat versus December 2020. Offices is slightly up 0.4% and logistics, well, better with plus 4%. Those from the positive territory and then retail down 1.5% and hotels, although anecdotical in our portfolio significantly down as well. In shopping centers, the accumulated adjustment taking into account this and past year exceeds now 10%, which so far seems relatively commensurate with the behavior we are seeing in the rent -- in net rents after incentives in the reletting that we are conducting so far. We have distributed EUR 0.30 to shareholders, and that has driven our LTV to 40.5. It should normalize a little bit towards year-end as we accumulate more cash flow of the period. We have continued actively managing our balance sheet, having issued a EUR 400 million overall bond with a maturity of 9 years that will serve for the repayment of the bond -- originally [indiscernible] bond maturing in 2022, that we will saving around 100 basis points starting in the maturity date of the bond and will probably payed in February. In terms of operating performance, after a significant decline in occupancy offices, we expect them to start showing some signs of recovery in the second half. In fact, you might remember, last year, we ended up at 91.1%, having lost in the year 1.7% occupancy. The first quarter was negative at minus 1.9%. In the second quarter, we have had a further 0.2% adjustment, which basically takes us exactly to the point we sign out to the market as the maximum deterioration in occupancy. We said we expected occupancy to fold this year between 150 and 200 basis points. Those 200 basis points are exactly the point in which we are now. We expect to slightly recover in the third and more importantly, in the fourth quarter and bounce back something in the region of between 89.5% to 90% at the end of the year. The lead -- and activity in the market has clearly improving. This is no wonder, it's simply a reflection of what is happening in the economy. There is employment growth now. Of course, the first employment to be created are the most, let's say, unskilled or unspecific ones that it will follow suit with managerial jobs. And of course, 1, 2, 3 quarters afterwards, you start immediately picking that up into the occupancy of the portfolio. In logistics, the performance has been very strong, particularly in lease up. It continues to be a market which is very, very active with lots of people looking for a new shift. Rents are relatively stable, however, and this is a consequence of a chain effect. Online retailers are all in negative territory. They are losing the shares in their activity. As a consequence, they impose a tremendous, sometimes exaggerated pressure on the logistic operators and logistic operators, therefore, cannot afford to pay EUR 0.01 extra rent in the facilities they occupy. It's this [ cycle ] that let's see what the type of fruit it bears in the future. But certainly, this is a consequence of the -- what we are seeing in the -- in terms of online growth. We have improved significantly the occupancy more than 1.5%. As we commented in the last conference call, it was simply the consequence of a number of contracts that we have done last year on temporary basis in order to give a hand to our tenants, to our clients because they were very wrong in the calculations of online activity in 2020, and they desperately needed extra space to store the goods. So we provided help to everybody on a temporary basis. And during the first half, we have been regulating that activity and extending the contracts to a normal lease low standard. In shopping centers, the performance and the resiliency of the segment is probably surprising even us, I mean, of course, all of you, but even as because the asset class is performing slightly better than we could have hoped. The release spread has been 5.9%. This is not so important because approximately 3, 3.5 points of that contractual step-ups. So the rest is in's and out. The re-tenanting rate of spaces vacated as a consequence of additions since March 2020 now stands at close to 98%. I know this is mind boggling for many of you how can people be interested in retailing in shopping centers because they make positive margin in their sales. So we are seeing now a growing pattern of not only small and medium tenants but also the big name expanding the format of their successful shops in order to capture more sales with positive margin, and this is throughout the portfolio. We are seeing that in the portfolio. So what we are doing now is a little bit [indiscernible] of making sure that we move to the addicted shop we move to somebody else, which is close to a shop, which is operated by one of the big names so that the big name can expand the activity into the other shop. But having said all that, probably the most important activity that we have conducted during the half has been making sure that we tackle with enough anticipation the maturity wall that we were facing in 2022. As you might know, as a consequence of our commercial policy, we provided help to our tenant that we requested in exchange extending their contracts until 2022. As a consequence of that, we were facing a renewal well in 2022 in the region of 44% of our contracts. So of course, that was something we should start taking anticipatedly, and this is what we have been doing. So they are around 10% volume breaks in which we have confirmation that there will be no break plus the 11% new contracts that are in final phases of negotiations, draft exchange or similar. So we consider -- out of the 44%, we consider around 21% to be out of risk. And as a consequence, the remainder, which is 23% is more similar, more akin to what is our normal renewal rate in any given year. So we will continue working on the remainder of our renewals for 2022. Regarding value creation activities, it is important to note that Landmark I, our office building program is now almost complete. We have delivered fully occupied Castellana 85 and Monumental, and the only width which continues in place is Plaza Ruiz Picasso in Madrid in which works are basically starting right now. So it will be delivered beginning of '23. Flagship is completed with the deliveries of Porto Pi and Saler. On track with their respective business plans. And in terms of Best II and III, we have taken a significant dent into our land bank. We used to have 900,000 square meters. We currently have less than 600,000 because the activity has been frantic over the past 1.5 years. And just in this half, we have to deliver a lot of assets, 100% let and have pre-let for constructions that will start now, another 90,000 square meters in the period. So given that the pending CapEx is now flattening, I mean -- of course, we could always launch Landmark II or a Flagship II project that this is something that we are not necessarily going to be doing right now because in some cases, as you all know, construction costs are slightly going up. So for things that are going to be in relatively normal cap rates in the 6, 6.5 that may take a dent on the returns. So we are going to flatten significantly our CapEx needs for the immediate future, and we are going to use that CapEx capacity to basically fund our data center program. This program, as commented in a number of occasions, was originally, let's say, by product, of our logistics effort. In every logistic -- big logistic development, we always have a corner plot where maneuver for trucks is not ideal, et cetera. And we started thinking about alternative uses for those plots, taking into account that normally the places where big logistic parts are located are places highly irrigated by fiber cables, and with ample availability of electric power. So with that in mind, we started looking at the possibility of developing data centers in there and what started as a niche activity for the company looks like might become a mainstream source of revenue for the future with outsized returns that exceed even the ones we are getting in our logistics program, no matter the fact that in logistics, as you all know, the land bank was accumulated in '16, '17, '18 when prices were still reasonable in terms of land acquisition. So this is all as -- in terms of introduction. I will pass the floor to Miguel Ollero, who will elaborate on the financial results for the semester.

Thank you, Ismael. Good afternoon, everybody. Going back to the financial statements for the first half of the year. Just to highlight that as Ismael was mentioning in the first couple of years, the improvement have been growing a little bit with regards to the prior semester in 2020, just 3.2% to EUR 248.5 million, mainly driven by the office segment and the shopping center segment in that we have been commenting. There has been a drop in occupancy in the first semester of the year, 2% that in addition to some assets that we already have had under works during the semester. We have been doing this reduction in rents in the office segment. And shopping centers is more related to the fact that we were selling down 3 shopping centers last year [indiscernible] they have not been with us and they have been affecting also rent generation in that side. On the contrary side, you have logistics. We have been increasing our -- the amount of rents collected. And now in the semester, we have been growing 11.9% with regards to the prior semester last year. Looking at the net trends, we were EUR 196.1 million, which represents a margin of close to 79% [indiscernible] margin in terms of the rent. But going down to the EBITDA level, EUR 178.2 million, also 2.1% margin, quite in line and even better than the one we were able to get last year in the same period. Finally, in terms of flow through FFO was EUR 129.2 million. It is a 52% margin on rent. And it is at a level of EUR 0.27 per share. As Ismael was commenting, first quarter was EUR 0.13, second quarter has been EUR 0.14, and we are to go up in the second half of the year to achieve the guidance of EUR 0.56 per share for the whole year. In terms of EPS, we were EUR 0.41 per share, which is a big growth with regards to the prior period, close to double. And finally, on the EPRA NTA we were advancing 0.6% with regards to the one we were publishing at the end of last year. It is a EUR 15.55. Moving forward in terms of GRI, as I said, we were commenting. The main reason of behind that we have a like-for-like negative of 2.2% mainly driven by offices of 2.9%, certainly there was a level of 2.0%, it was positive, and then this was just the main impact of some deflation in terms of [indiscernible] assets, not in the -- effective change in the main part of the [indiscernible] portfolio of the company. In terms of occupancy, you have to highlight that we think we are bottoming out in terms of occupancy of -- production of occupancy in the office portfolio. We had 89.1%. There was a drop of 20 basis points early in the second quarter as a whole, which are 200 basis points for the whole period, bottoming up out of the next semester. In terms of the listing, as Ismael was pointing out, we were recovering 151 basis points during the quarter, going up to 96.2% and also more important to say, as he was commenting, we are rotating tenants, which were on a temporary basis with tenants, which are not looking on a long-term basis. Then shopping centers, despite the big turmoil that we have been seeing also in the first half of the year because, as you may know, it is not probably the restrictions that we have been suffering different shopping centers all across Spain with decisions taken by the regional authorities. Also, Portugal has been largely affected with lockdowns. But that was not the case that has been in this year. So despite that, we have been increasing our occupancy in the quarter, up to 93.3%, 42 basis points up. And finally, then this is a model where is still occupancy. Now we are going into the specific details of the office divisions and it's management is going to be commenting.

Thank you, Miguel. Moving to offices, Page 10 of the presentation. Well in the period, as commented before, we have suffered a like-for-like decline in rents. This is mainly due to 3 effects. The increased vacancy in the period, the negative CPI indexation that we have experienced in the first quarter, relatively flat in the second, and we expect highly positive in the third and the fourth and the out of stock, which mainly Plaza Ruiz Picasso, included in the planned Landmark-1 and then 2 small buildings in 2 of our business parks Atica and Cerro Gamos, which we have emptied and have started refurbishment in anticipation of pre-lets in the future. So in Madrid and Barcelona, we have experienced a negative like-for-like, in Lisbon, positive. Lisbon continues to perform very, very well as a CP and as a business hub. In Madrid, we are now going out in terms of occupancy drop 87% to 86.8%. In Barcelona, we suffered 1 reduction of space of French multinational that was canceled in 2 new business lines in Barcelona and vacated part of 1 of our buildings. And also, we also had an exit in Torre Glòries which has now been replaced and will revert occupancy drop in the third and fourth quarters. In Lisbon very similar with 20 basis points or a little less 14 basis points up. Regarding leasing activity, well, the number in the period, no matter how difficult the period has been, remains extremely high compared to all of our peers close to [ 180,000 ] square meters, which, to the best of my knowledge, almost triples what other people is doing in the market. So we continue to have an industrial dimension and continue to be a very good proceed to what is really happening in the market. We have been capturing a significant chunk of our reversionary potential in the portfolio. the latest appraisal by JLL, CBRE and [indiscernible] point, at 11%. I mean, remember, we were 13%, then 12%, now 11% delta on passing rent versus market, but we continue successfully capturing that in our new leases and renewals. In Madrid, we signed 110 contracts with some very big names, new contracts with accenture and elecnor and renewals with Técnicas Reunidas and VASS, new contract with Inetum forming [indiscernible] in the A1 corridor, in [indiscernible]. In Barcelona, we renewed with Capgemini and Generalitat de Catalunya but signed new leases with Lacer and Facebook, in the case of Facebook was an extension with a very significant release spread on a regional sample of 36 contracts. In Lisbon the sample was very small but we achieved a very high risk spread in the renewal with Credit Agricole and the new leases with BPI and Essity. So it's been a very, very active period for the leasing teams in the company. On Page 12, you have an idea of what is happening with LOOM, our flex space division. We see the demand for flex space recovering very fast, in preparation for the comeback to office, which for -- particularly for the biggest corporations, we believe should happen after the summer. In Madrid, in our operating facilities, we have achieved an occupancy of 47% now coming from less than 30% at the trough of the crisis, but the forecast for end of the year could be more in the region of 55% to 60%. So certainly, it is a very benign, very positive recovery pattern. We are adding new stock mainly in 2022 with 3 new openings and will be followed by an additional 1 in 2023 when we opened Plaza Ruiz Picasso. In Barcelona, in the operating spaces, we have reached 61% occupancy coming from, again, 35 to 40 to at the trough, and we will be opening in 2022 -- very early in 2022, 3 new spaces in Torre Glòries, Ferreteria which is 22@ and Plaza Cataluña 9. In the case of Torre Glòrie in fact, we have reduced the size of the space because we needed 1 extra floor for 1 of the demands we have from the ordinary clients. In logistics, Page 14 of the presentation, we have continued delivering a very good performance, both organic 1.1% up in like-for-like despite negative indexation in the first quarter and the increased vacancy that we suffered in the first 4 months of the year until we started recovering occupancy in April with a number of leases we signed. But also inorganically, we have seen very significant activity. In Madrid, occupancy has gone up by 260 basis points, very significant activity. In Barcelona, it's gone down by 150, but it's now on the verge of being recovered. It's simply the end of period effect. And in other locations, we are absolutely flat. The activity that you can see on Page 15, the sample is significant with 11 contracts, big contracts and almost 400,000 square meters transacted, with a release spread of 3.3%, which is notable for logistics. The tenants continue to be first rate. Most salient transaction in the period was the delivery of the national distribution hub of Carrefour, which was a turnkey. But also important has been the leases, 2 leases signed with 4PX, which is 1 of the 2, 3 operators that operate logistics for Alibaba. So this is a case in which, of course, we are also in the landlords of Alibaba in Madrid, and we have started capturing synergies and signing with the operators that they have for their logistics activity. Also very important. As you all know, when we started as an unbanked speculative development in Lisbon, that was in the middle of construction during the pandemic. So we have traded a lot because for many months, we have 0% occupancy and the work's going on. So we were investing CapEx and have 0 occupancy. Thanks God, towards the end of the construction period, we started receiving interest for that share, and we are now 85% occupied immediately following the inauguration. And we expect to lease the remaining module within -- by September, maybe October, we should be reaching the remaining module, so we will be 100% occupied there. And in fact, we have started already the landscaping and precharging works because this is much land and we have started precharging 1 extra land plot in order to start another development, which could be pre-let. We might also embark into some further spec development there because we see that the demand is really intense for that location, which is particularly good as regards serving Lisbon from the [indiscernible]. In Page #16, you have the activity in our participated company, [indiscernible], which is in Barcelona. There has been an outstanding increase in FFO close to 27% extra FFO, but this has been simply the result of with moving into operation. So the stock now has been almost maximized with close to 730,000 square meters, and the work is now only 8,000. So basically, we have finished with the availability of land in Barcelona having delivered in the second quarter 96,000 square meters of state-of-the-art facility that will serve as the Southern European logistics hubs for French retailer, Decathlon, which is also our client in shopping centers. So we have basically terminated with the land that we found at the beginning of our activity in this operation. When we took over here, there were close to 400,000 square meters of land and developed which have been since then successfully developed and delivered with a very high level of occupancy. Occupancy in the period has gone from 97.6% to 97.0%. So virtually, we remain in full occupancy with a flat release spread on 325,000 contracted square meters. As for shopping centers, Page 18 of the presentation, as commented, the footfall and tenant sales are recovering. We could easily compare numbers to 2020, but this is absolutely contest. I mean it will only lead to showing very high growth on every aspect of our operation. We have decided to take 2019 as the passing year in which we are going to comparing our activity going forward because we believe this was the last ineffective year prior to COVID, and it will serve to determine which part of the damage inflicted to retail has been caused by the pandemic itself and which part is the growth in sales is used by the pandemic in the online commerce. So this will help us to determine what is the new normal, let's say, in retail. The like-for-like decrease has been 2%, has been relatively small mainly, again by negative CPI indexation and slightly lower occupancy in the first quarter that has seen significantly recovered. As compared to '19, we are minus 30%, but this is very interesting because we have seen little by little a growing pattern. I mean we have troughed at minus 45% in some months, particularly concerning at the end of last year, beginning of this. And we have seen that these have significantly moved up, and we expect that this upwards movement will continue during the second semester of the year. As commented before on Page 19, we render information about the 2022 experience, which we know were a reason for concern for many of the analyst community in the market. So as you might remember, we had 42%, then moving to 44% expiries when new people signed the commercial policy. 44% expiries in 2022 versus a normal year in which our expires oscillates between 22% and 28% normally in the region of 24%, 26%. Those are the expiries we normally have in shopping centers. So in 11% of those 44%, we are in advanced negotiations for the early renewal of the lease contracts. In most cases, we are exchanging drafts of Agenda. And the economic impact, which I know, again, is of significant concern to many of you, is flat to slightly positive risk spread. You might say, okay, that is on the gross rental income line, what about net rental income line. Prior to COVID, we were running at around 4% average incentives in shopping centers. What we are seeing in the new contract in this 11% sample of new contracting that we have moved in 14% incentive. So the delta between pre-COVID and post-COVID situation is around 10%. We should look at least commensurate with what we have seen in terms of adjustment of value of shopping centers. The rolling breaks, as you know, there are 1 or 2 big super important clients that work on a rolling break basis. Those have already redefined their footprint in Spain. And as commented in previous conference calls, we have been left aside. We have been left and cut. So we have to shift from them assurance as for the intentions they have in the future. And what they say basically is that if we have not been included in the redefinition of the footprint in Spain, we can be tranquil, as to the fact that there will be no exercise of rolling brakes in our portfolio. So in principle, we see out of risk in those contracts as well. The remainder, 23% is a normal tenant with contracts expiring in 2022. And we are in an early stage of renewal negotiations. We will provide more info during the year. Very, very importantly, because I know this could be a little bit mind blowing for some people that out of the 31,610 square meters that we have already vacated as a consequence of basically the addiction of zombie population, which, by the way, remember, we informed about considering between 3.5%, 3.7% of our shopping center clientele zombie. That level has now been reduced to 2.1%, 2.2%. So we have been of course, actively managing and rotating the long delays of our shopping centers. So out of the 30,600 square meters vacated, 30.875 have been let already. So the activity continues to be relatively healthy as mind blowing as it might look for some external service. On Page 20, you will see that we have actually increased a little bit the occupancy around 70 basis points, 67, and release spread has been 5.9%, as I commented, part of our -- most part of that lease spread is explained by contractual step-ups. But anyway, I mean, it's been a relatively active period, which once -- other's to the very active period we also have on the -- in the second half of last year have delivered results we were commenting. I will pass the floor to Miguel for comments on valuation and debt position.

Thank you, Ismael. Regarding valuation as commented on beginning, it has been flattish in this first half of the year, slightly up 0.5%, mainly driven there by office analytics of 0.4% and logistics 4% continues to be the asset class that is performing better than any other one, not only in the company but also within the market. This increase in logistics implies also 16 basis points in compression as well as in other 3 basis points of given compression as well. Offices continues to be an asset class very demanded by investors and we'd be monitoring the market and the market continues to be bullish and some construction happening always reaching record yields up 4% or even below. With regards to [indiscernible] it was slight up 1%. And then in terms of shopping center was 1.5% down. As Ismael was commenting, we have a previous year valuation reduction, we are right now at a 10% area of cut down of valuation for the shopping centers of the company. Moving forward, with regards to the debt position of the company, the main action during the year has been continuation of 5 -- 9 years, EUR 500 million bond. It was during this year. This is already replacement of repayment of the bond matured in May this year. We have been reducing the cost of this bond with regards to the target that was a 5-years bond by 100 basis points, that was an outstanding execution and will be also helping us to further reduce the average cost of the debt, while enhancing or enlarging the maturity profile of the company from the debt position. Our average cost today all in is to consider 6 on a spot basis is 176. And our average maturity is close to 6 years. From a rating standpoint, we got continuation from S&P of the current rating of the company with BBB- equivalent to Baa2. But we are thinking that we'll be improving over time as you will see that not only the company performance, but also the behavior of the economy in Spain and Portugal in the coming 12 to 18 months. So from the standpoint on Page 26 of the presentation, we are giving you a report on how we are collecting the rents every single month. As you can see, in offices, analytics, there is no news or as it is in the case [indiscernible] because in [indiscernible] we are only still at 2% of rents uncollected, which are mainly related to one [indiscernible] and that is in collection process which appear in the following months. Logistics, as I said, 0% full collection. And then this is for collection in shopping centers. We have been producing with regards to the [indiscernible], it is at 3.2%. And consequently, we should say that collection rent of rents is coming now to [indiscernible]. So in principle, we are going to be stocking according for the following quarters unless something is changing, but we see that this has been now a stabilized situation which shows profitability. Finally, we should highlight that for the first half of the year, EUR 19.6 million has been the cost of the second -- the third phase of the commercial policy put in place for this semester, which is well behind prior year, 29% below. And totally in line with the guidance we were providing in previous year that we were already taking note that this would be a EUR 19.6 million for the first half of the year. So [indiscernible]. Now we are moving on in the following sessions, and Ismael will be covering starting by sustainability.

Thank you, Miguel. Well, in terms of sustainability, we have been asked by a number of you and the analyst community, but also on the Investor Day to start including a utility section about sustainability. Therefore, we have decided to include a first picture in terms of what we have been doing in the certification program because that one is also coming to an end. In future presentations, we will comment about, for example, the solar photovoltaic program, which is -- we believe it's one of the most interesting things we are doing and very interlinked with the future activity in data centers. But in terms of Energy certifications, what started as a white sheet of paper in 2016 because taking the 2015 numbers, we only have 4% of office buildings certified, 0 shopping and 0 logistics. We have now achieved what I believe is a quite outstanding result, which has, for example, moved Spain for 2 consecutive years to the leadership in Libron certification in Europe and position #6, #8, globally given the relative small size of the country that is very remarkable. But that -- what has been lying behind that is the big size of our portfolio. So we have been little by little certifying close to 1.1 million square meters of offices. We have been solving for nothing but silver in Leed and nothing but good in Breeam. We have 2%. So this has been extremely useful exercise for us because, as you know, every time you certify a building, you have to return in the new lease, and together with the new lease, you have the CapEx associated with moving that into done status. So certainly, that certification has helped us to make a sell-in prospection exercise and improve the hardware quality of our buildings. I'm not sure we are capturing that in rents, frankly speaking. But certainly, we are capturing that in liquidity of the buildings and probably sense of loyalty by clients because more and more people now need to be in buildings which have a minimum certification. in Logistics, well, we moved from actually a blank sheet of paper again in 2015 to having certified close to 1.2 million square meters. In Breeam, we have some passes here that most of our staff, 85% of our staff is good or very good. And Leed we have 12% silver, but 88% is either gold or platinum. And in shopping centers, we have now certified most of our portfolio. I think we are just missing 1 shopping center we have in gold ownership. And we have an 11% partner, but the rest is good, very good or excellent, which is close to 90% of our shopping center base. We have also tried to standardize the company with what we see on an international basis and the IR department working with engineers of the company have been trying to position ourselves in GRESB. We got very good score of 78%. Of course, many people compare us with pure-play office operators, but it's not that easy to obtain certain rates when you operate also shopping centers and logistics shares. Likewise, in CDP, we got to be in metro we have been obtained gold since 2017. And now we are embarked in a very ambitious program of ISO certification, which, again, from an operating standpoint, is also giving us very interesting guidance as to how operational, how useful the business are. We conducted a specific certification in the COVID with Spanish certification of AENOR. And we developed together with the Spanish Association for Offices and now are applying throughout all of our portfolio, the AEO certification of technical perfection of buildings. So we have 24 assets already certified and have an extensive pipeline of 65 extra office buildings representing close to 800,000 square meters. So our intention is to pass the AEO certification through all of our buildings to determine whether they are A, B, C or D, and also act accordingly in order to improve to the maximum possible their performances in that certification. As commented, we will continue informing about sustainability capsules in future presentations. Let's move into value creation, Page 31 and following in the presentation. We have made no new investments in the period. We have carried out divestment for EUR 109 million with a premium to gross asset value of 3.4%. Besides the logistics disposal in the first quarter and 1 BBVA branch we also sold in the first quarter. In the second quarter, we have sold 2 supermarket out of the capital sale and leaseback portfolio. And we have sold 1 of buildings in Madrid for residential reconversion to value-added fund. Besides that, we have also sold our stake in Aedas to private investors. Together with the divestments we expect for the second half of the year, currently, we are matching perfectly sources and uses in terms of divestments and CapEx, and we will continue to match sources and uses towards end of the year, in fact, slightly skewed towards more sources and uses. We said at the beginning of the year that our target was to divest between 150 and 200 in 2021. We believe the final number is going to be towards the upper end of that range, and will, therefore, more than exceed our CapEx needs. On Page 32, you see 2 buildings that have been delivered during the quarter, Castellana 85 and Monumental in Lisbon, I think we have touch based on those 2 in other presentations. So there is no need to make more emphasis on those, simply to say that they are now operating to the satisfactions or of their respective clients. On Page 33, you will see that the landmark program is now coming to an end, is almost completed with only Plaza Ruiz Picasso pending. So the figures you see at the bottom of the page, including the yield on cost, are now real figures, no longer forecast. On Page 34, we comment on the Best II and III programs. As commented before, we have delivered a 96,000 square meter share to Decathlon in Barcelona. We have also inaugurated and let the Lisbon Park in Vilafranca da Xira. And more importantly, we have led the pending share we have in Cabanillas I number J or letter J to the Norwegian operator of logistics, close to 45,000 square meters, a total price of the compound. Very important for us, we have also moved from priority 3 to priority 1 and have started -- we have just opened the Cabanillas Park II, with the pre-let to Logista of our 47,000 square meter share plus the option for another 47,000. So that park enjoys 210,000 more or less square meters of GLA and close to half of that could eventually be pre-let to 1 very important operator in Spain, which would certainly open for good the rest of the park for new users. So little by little, we are moving that park into first line of [ win ] production as well. On Page 35, you asked what remains of Best II, which is basically Cabanillas I having let the J. We are just pending H, and I think it's going to be gone in the second half of the year. And in Cabanillas Park II, as commented, we have simply now opened the development with an anchor client and expect to continue delivering products in the coming years. As for in Best III, in Sevilla ZAL we have now pre-let all the WIP. So everything that comes into operation will come into operation fully-let. And in Lisbon Park, as commented, we have reached a pre-letting of 85% in the speculative share we built there, but hope to be 100% by year-end. So again, as commented before, that yield on cost and the total numbers you see at the bottom of the page are more real now than forecast. Flagship on Page 37. Simply to say that both Saler in Valencia [indiscernible] and Porto Pi have been delivered and are now working to the satisfaction of all of our clients with very significant market attention and very significant activity. On Page 38, you will see that flagship plan is now behind us. So water under the bridge at a 7% yield on cost, taking into account that in some cases, there was a defensive component in those CapEx's, I believe, has been a very remarkable achievement for -- and a good test of the quality of our asset management, construction and leasing team. Let's move into the digital infrastructure plan. [indiscernible] finding a better [indiscernible]. As commented before, that used to be -- it initially was conceived more as a byproduct of our logistic activity. However, we have been lighting more and more that segment of activity as we know better what we have in our hands. And as our engineers move deeper into what existed in Spain, what were the prospects for the market and what could be our role in providing our clients with data storage together with storage of goods as we are doing in our logistic activity. Basically, well, on the first bullet point, the move to cloud computing, everything you are perfectly familiar with that. So there is no need in explaining. For those of you that might or might not know, what is important to note is that the location of the Iberian Peninsula is fantastic in terms of strategic importance because it is the landing site for most of the cable that comes from North and South America, plus some other projects that link North and South America with the U.K. and Mainland Europe plus the extension of those cables into Africa. So Project Marea, which was funded by Facebook and Microsoft, was completed in 2017, connect Europe with the U.S. and enters the European region through the back country in Spain. So this is why we have placed 1 specific data campus right next to where it runs. Project EllaLink, project that connects Europe with South America and enters European territory through Sines in Portugal then moves on to Madrid, split into part of it goes to Africa and part of it moves into European Mainland through Barcelona. Then Grace Hopper should be completed in 2022 by Google. And this one is connecting again the U.S. and Europe. And Project 2Africa, which leaves the European territory through in Spain is connecting Europe and Africa. So looking at our logistics portfolio and looking at our existing plots and analyzing them with the perspective of presence of abundant power supply, including substations, and availability of cable -- fiber cable, we decided to move forward with 4 locations that were vetted by our U.S. technology partner, Edged. And those locations basically are in Madrid, Barcelona and 2 big locations for data campuses in these 1 and the rest country. So we are spending significant time and effort now in this program. We will start with a demonstrator that will immediately thereafter roll over into what we call Phase 1, in which we will move to around 17 megas. And then this program could add another 150 where we could triple the capacity of that program in the future through a specific turnkey development in our data campuses with specific clients. We will comment on the development time line and the returns later on during the presentation. On Page 41, we explained the fundamentals of our joint venture with Edged. Edged is a subsidiary of Endeavour. Endeavour is a company of U.S. origin that used to be associated with a company that was sold in the U.S. called Aligned, and has now moved into operations in Europe with us. In the framework of that partnership, we will fund and own the assets in the propco and they will be an operating company in which we will act in the inventor with Edged. There will be a right to call that participation with the liquidation of a certain earn-out to our technology provider based on the success results of the program. What we like about Edged is that after doing some extensive research of the market, they bring to a table proven expertise of many years of data center construction and operation. And they also brought to the table what we consider, particularly for the features of the Spanish and Portuguese geography, the most innovative technology available in the market, because it's not only very efficient, I mean, very, very efficient, but also is highly sustainable. Efficiency can be measured in the 1.15 ratio of power utilization effectiveness compared to 1.46 in Europe and 1.59 globally, measured with the Uptime Institute metrics. But sustainability is tested by the fact that they have developed a system, which uses net zero water for cooling of the facilities and the facilities also work 100% with renewable energy, which is also the reason why in anticipation we launched roof and ground-mounted PV installation within MERLIN we that call Project M no wonder. On Page 42, you will have details of 2 of the first locations. One is the former headquarters of [indiscernible] in Getafe, Madri, with a total GLA of 22,500 square meters and a maximum capacity of 20 megawatts. This one now is fully demolished and the land has been completely flattened. And we are just waiting for the obtaining of the municipal license from the municipality of Getafe in order to start construction. We have also been doing the accumulation of most of the power software and materials needed for the construction of the data center. The other one is in Parc Logístic Zona Francafor in the office components of Parc Logístic Zona Franca in Barcelona, with a total GLA of 22,100 square meters and capacity in principal of in the region of 16 megawatts. Those 2 developments are going to be started [ on blank ]. I will explain in the following page what this means for the company that we are going to start construction of those 2 as part of our technology demonstration to the market because this is a market in which there is a lot of noise. There is a lot of chatter but very few people is really developing products. And we, of course, want to take advantage of that and move relatively fast and move first in order to make sure that we put our money where we do our math. The characteristics of those 2 plots are very easy and very understandable for people familiar with the data center business. They sit in locations with very low latency because they sit in very close proximity to 2 big cities and the corresponding infrastructures. They are also highly interconnected in terms of fiber and/or cable. We have researched that with the corresponding tools of Edged and are very impressed and they are very impressed about the interconnectability of those 2 plots. And then they are also very close to power supply in terms of network grid substations together with the PV energy that we can supply from our growth and ground-mounted photovoltaic installations. On Page 43, you have sketches of 2 data campuses we are planning to develop in Álava, in the Basque country and in Lisbon Those are strategically fit for very large cloud players. They can move from 22 to 100 megawatts or more in the case of Álava in Basque Country and in Lisbon in Vilafranca da Xira, those are strategically fit for very large cloud players. They can move from 22 to 100 megawatts or more in the case of Alava and from 24 to 100 megawatts in the case of Vilafranca da Xira in Lisbon. Very deeply interconnected with the fact that they sit right next to the landing stations of the subsea cables coming from the other side of the pond. On Page 44, we provide some color on the timeline for development of this project and the returns that we expect. We expect to start work in 2022. Within the Phase 1, we will, as commented, develop Madrid and Barcelona. If you look at the bottom of the page, that means building 44,000 square meters for only 12 megawatts because we are not filling up, we are not bringing those 2 facilities to the maximum. We are simply building the container. And we are also starting -- or we are building the first module that can be let to the market. The CapEx is EUR 147 million. That excludes land cost because land costs sit within our belly, within our balance sheet and it's not very significant, by the way. And gross rental income is expected to be in the region of EUR 14 million. So the yield on cost, in this case, is a little substandard as compared to the rest of the program, but this is simply a reason of building a little bit of overcapacity because we build the whole container with only the first module of racks and ports. On the Phase 2, once we have demonstrated to the market that the technology works, we will move into the expansion of that program. That can go in phases up to 2026, but could also be significantly accelerated in case of need. Because once you have gained the 2 facilities and you have gained the first building in Alava and Lisbon, you can really run faster in the case of need, the new square meter acreage in rate that needs to be [ viewed ] in Alava and Barcelona will be in the region of 32,000 square meters but the megawatts that can be installed, including filling up on the capacity of Madrid and Barcelona plus starting in Lisbon and the last countries could be 58 megawatts with a CapEx of EUR 428 million and new rents in the region of EUR 59 million for us. So -- and then Phase 3 will be developed on demand and consist basically in filling up the maximum capacity installed in the Basque country and Lisbon, that could add another 150 megawatts of capacity to the program. With all that into consideration, we are obtaining low double-digit year on cost in the region of 11.2%, which is more competitive than the one we are normally obtaining in logistics development. Now in very plain language terms, that means that selling any given noncore office building at 4%, 4.5%, and we're investing in here with 1/3 of the divestiture proceeds, you fund equivalent rent in data centers. So as you can imagine, this is highly accretive for shareholders while reducing or continuing to work in the reduction of the total leverage of the company measured as LTV. So this is what we will continue to do over the coming years, making sure that we match sources and uses in terms of noncore to development of data centers now that the need of our CapEx program linked to Landmark, Flagship and Best II and III is now trading down only the II and III are up and running. As for -- as a wrap-up, for closing remarks on Page 47. We see that the COVID-19 impact on our business is easing a little bit. In the absence of new restrictions imposed by the pandemic, and we fear, of course, new restrictions like you do, particularly in Portugal, which has been relatively anti-business. And every time there is a new surge in contagions the immediate measure is closing the shopping centers, like in Catalonia or Valencia, although that has proven to not result in lower contagion rates but for some reason, they do that. So in the absence of new restrictions imposed by the pandemic, we believe that incentives will continue reducing towards year-end. This, together with the 2 buildings that -- the significant ones, that have now moved into operation will help our effort, and collection rates are now meaningless. So this is why we are convinced that we are going to meet or slightly, very slightly exceed our FFO indication of EUR 0.56 for the year, taking into account also that in reality that EUR 0.56 compared to last year more like EUR 0.58 because there are EUR 0.02 this year of staff compensation that needs to be added back. I mean last year, there was no staff compensation. Over in this year, there will be about EUR 0.02 of staff compensation. After a challenging first half, we see that the occupancy is starting to bottom out in our offices and why we believe we should be at the lower end of the indication provided to the market in the full year 2020 results. That was going down between 150 and 200 bps compared to the 91.1% we closed 2020 at. So we expect to be in the lower end of that range or slightly better towards the end of 2021, and we are working in that regard. Very good performance in logistics. Our super high-quality portfolio is clearly paying back. And we have been the clear protagonist of the market in this semester with close to 50% of the market activity, just attributable to our listing managers. Very positive signs in shopping centers. The retenanting rates are extremely good. We have significantly derisked the 2022 renewal wall. So we look through to 2022 with relative confidence. And in terms of value creation, as commented before, after many years implementing the plan, Landmark is almost complete, Flagship is complete. The returns, therefore, are now returns achieved are real and no longer forecast. And Best II and III continue their execution. We need to have 1.1 million square meters of pipeline, of which 330 have already been delivered, 100% let. 180,000 square meters are now under construction with an 82% degree of pre-let and 590,000, close to 600,000 square meters remain in our value in our balance sheet, and this is land bank that will be developed strategically in order to suit market needs. So we are taking advantage of that flattening of our CapEx requirement. We are launching the digital infrastructure plan to use our logistics plots to develop and process and store data. And we expect returns that will be outsized as compared to conventional logistics and therefore, we'll be addressing a significant avenue of value creation for the future together with logistics greenfield program and some refurbishment, very selective refurbishment of offices that we might do in order to capture reversionary potential. This is all for today. Thanks for attending MERLIN's first half 2021 conference call, and we now open the mic for Q&A. And we are at your disposal.

Yes. Operator, could you please open the line for Q&A. Thank you.

[Operator Instructions] And your first question comes from the line of Jaap Kuin from Kempen.

Thanks on the elaboration on data centers, very much appreciate that. Just for clarification, in terms of the construction process and the ownership of the asset, will you construct yourself? And what part of the action will you -- for example, will you also own [ fit-out ]? That's my first question.

That one is very, Jaap. Yes, out of what we consider the 3 steps of ownership of a data center. First one is simply the envelope, the container. The second one is all the equipment, everything, including refrigeration, heat extraction, racks and ports, and basic security. We will also construct and operate all that. And we also -- we will only be relinquishing, taking any protagonism on the third step, which is servers, and cloud consultancy and infrastructure because we want to be neutral in terms of operators. So we will be compatible with all possible operators serving all clients in our data centers.

And then because I think in terms of the split, obviously, your construction cost and kind of what you normally had a few hundred euros per square meter and the bulk of the investment will go towards the equipment. Is there any sense you could give us on what the kind of the cost per -- I'm not sure how you calculate it, probably not per square meter, but per something else. Can you kind of clarify kind of the unit cost of that the equipment is?

I will give you very, I would say, ballpark figures. The cost of building just the infrastructure is about 4x the average cost of normal logistics. And the cost of everything once fully equipped is more than EUR 7,000 per square meter. So yes, as you correctly pointed out, you will be in a little more than EUR 1,000 -- between EUR 1,000 and EUR 1,500 for the brick and mortar, let's say, and EUR 7000 to EUR 7,500 in total. So in American terms, EUR 7.5 million per net.

Okay. And in terms of kind of -- because obviously, a high yield, but also kind of a write-down requirement on that equipment? Or what do you see is the kind of lifetime for that equipment?

This is one of the reasons why we are not entering into the server business. I mean we are providing racks and port and the rest, but we don't want to enter into the server business because this is not our cup of tea. And this is where most of the industrial obsoletions of data center is concentrated. Look, we don't know what is going to be the technical obsoletions or when technical obsoletions will fit those facilities. What the technicians are telling us is that there could be fit for around 20 years.

Okay. That's very helpful. And then just a few other questions. I think Prologis just stated that example for other countries in Europe, construction cost inflation, lack of steel has lengthened construction plans for logistics by basically doubling it from 8 to 16 months. Could you comment on the situation in Spain? And then like the last question will be on the offers that you sold. Can you comment on the price versus book?

Okay. In terms of construction costs, we are witnessing a surge in construction costs like everywhere in Europe. This is why we have decided to take a hold in the CapEx program. So we will not rush into making a Landmark II or a Flagship II because when you are getting logistics returns, you can easily absorb shares in construction costs. But we are a little bit tighter on returns because we are developing prime product. Those increased construction costs might significantly damage your profitability. So it is why we are taking a little bit of a break in our construction activity. We will continue doing so in logistics. I can tell you that steel has almost doubled. So there is an increase in the construction cost of any given share between 15% and 20%, but that is it for the moment. I mean the concrete, et cetera, well much, much more moderate increases in cost. What was the other question? In the office assets that we sold was 5.3% premium to gross profit value.

And the yield? Could you...

The yield was a little bit meaningless because the building was 50% occupied. But it was -- let's say, the pro forma yield to full occupancy was in the region of 3.5%.

Your next question comes from the line of Pedro Alves from CaixaBank.

I have 2 questions. The first one, in offices. Your Spanish peer highlighted the increase in polarization between CBD and secondary locations. And that when it comes to the locations outside the M30, very slight time [ increases ] in terms of take-up and some pressure on rent. So my question here is whether you are seeing the same trend and out of the rent that we'll have a break option next year, which I think is 17%. How much does it come from assets outside the M30? And my second question in shopping centers. So you were able to derisk close to 50% of leases of May till next year. So based on the conversations that you are having with tenants, how much do you expect to be able to give it at the end of the year? And whether the 10% cut in effective rent through higher incentive it could be a good reference for the remainder of the portfolio that will be [indiscernible].

Well, on the first one, which is life beyond the M30, look, we will not spend any time and effort explaining. We have recently occupied a building that we'll count come in third quarter, and it was in the A1 corridor. We are working and that was 5,000 square meters. We have recently let one full building to letting close to 9,000 square meters, and we'll continue seeing normal activity. Yes, as you know, we are not a company based on NAV. We are a company based on cash flow. As such, we don't need to oversell the quality of our buildings. So we can be more frank with in terms of what we do because we continue doing it anyway. And there is life in CBD and outside CBD as always was. So it depends on whether would you believe on the magic things or not. We continue having a satisfactory performance outside the M30 with all the corresponding problems, I mean, particularly in terms of traffic, et cetera. But as you know, the Operación Chamartín who works for the north interchanger of -- let's say, network of highway has already been started. So there will be increased traffic problems till the end of 2022. That following that, we believe the whole area will benefit from much, much better infrastructure. We continue to renew. I mean, we have just this year renewed 45,000 square meters headquartered with [indiscernible]. We are flat. I think it was like plus 0.5% release spread. So I will comment not further on whether the extra uncertain offices are shrinking and going to the bottom and being destroyed, then I will not continue on that b******. The other one, which is what is our perspective for shopping centers in the future. I think, although the sample is not really, really big, we think our -- it is sufficient to understand where the market is heading to because the clients with whom we have been renewing or extending a very good sample of a little bit everything in small, medium and big clients within our clientele universe. So for the time being, Pedro, and of course, I have to be prudent on this. But for the time being, I consider that, that delta of minus 4% to minus 14%, so that 10% delta, which you should consider is incentive. So that incentive will be removed over time. Of course, you are free to say this will stay. I mean it will not be removed, et cetera. But if that was the case, the client will have asked a lower rent in the contract. However, they have accepted an incentive that will be removed over time. I have to tell you that this has been better than our expectations. You have heard me in past calls with investors pointing towards something in the region of 20% or minus 20% new normal in shopping centers. For the moment, what we are seeing is minus 10%. And of course, I will continue informing in case we see a deterioration of that in the future or whatever. But for the moment, that minus 10% is a good proxy. This is today. This is what is happening as we speak.

[Operator Instructions] Your next question comes from the line of Florent Laroche-Joubert from ODDO.

I would have maybe 2 questions. The first one is on your commercial policy. So I understand that there will be no further commercial policy in H2 and we hope that this will be okay. But if we make the assumption that we have an increase of, for example, the delta variance. So would you put it again your commercial policy in place? So that would be my first question. And so as a what could be the impact on the FFO? And my second question would be on this sense. So would it be possible maybe to have an update on your discussion with BBVA for buying your stake within the company?

Look, in terms of commercial policy, there is one part of the commercial policy that remains and will remain, which is the fact that we will continue protecting 100% our clients in case they are obliged to close by whatever authorities, whether with real authority or not because in some cases. Many shopping centers in Spain are being closed by people who have zero authority on the possibility of closing a facility of that size and important for the economy. But anyway, we are not arguing with the politicians. So we will continue protecting our clients in case they are obliged to close. We have made a provision for the second half. I will not disclose the amount but we have made a provision for that. But outside that, there is no commercial policy being applied as we speak. Everybody is now paying naked rent, the rent that they agreed with us in whatever time in the past. So there is a renewal next year or in the following. So if you see or if you add up numbers, you will see that with the 2 buildings that have moved from into our operation, and with zero, let's say, help to our tenants, we should be slightly beating our FFO objective. The reason why we are saying that we are going to try to meet that objective of very slightly better is because we remain prudent on whether there could be some further noise in the second part of the year with the delta variant or with the delta or with the echo or with the kappa. I mean, there could be other variants of the virus that could come into fruition and eventually screw up completely our projections. We get a little bit of comprehension. I mean we have been very accurate so far even in the middle of 2020 when the whole shift erupted. But sometimes, we could be wrong. I mean -- and particularly for this second half of the year, we are assuming that there are no further restrictions that -- as we speak right now, we have Lisbon almost closed. I mean they are closing at 2 p.m. on the weekend. We need to close the shopping center. Apparently, they are going to reopen in the 1st of August. And then in the Northeastern autonomous communities in Spain, namely Catalonia and Valencia for some reason, it seems that all the population is public place. So they are closing the shopping centers every time they want. So -- and we need to continue protecting our tenants there. But in the rest of Spain, activity is now the new normal. And therefore, we are not spending money in protecting our tenants because our tenant sales growth are now able to protect themselves. And in fact, you could look at the OCR numbers, and you will see that the OCR is up 12.7%. So we remain relatively stable in OCR because people is little by little coming back to normalcy in terms of sales per square meter and attendance for shopping centers is also improving. So well, I beg your pardon if I cannot be super specific and provide you with the numbers we have in our model, because I believe this is sensitive information. But towards the end of the year, we are expecting a progressive normalization and there is a deterioration, we will stand by our word and continue protecting our clients. As for the other aspects of your question, Florent, with BBVA regarding DCN, there have been no new conversations. So we will remain subject to arbitration. The arbitration court has -- will appoint the arbitrators in principal in September, end of September, and that will take the resolution of the arbitration to February -- I consider probably in the region of February, maybe March there will be a resolution of the arbitration. We need to wait. Of course, there is nothing we can do. I mean we have simply defended our rights because, of course, the write-off acquisition is important for us is, I would say, a very, very important feature and one of the reasons why we decided to get into that project. It is true that we can survive without that, but I believe and I am convinced that we are on our own right. And in fact, in the injunction we seek and obtaining from the arbitration court, the injunction ruling was pretty harsh against our counter party, including the imposition of all costs and expenses to them, including ours. So we need to wait. Of course, they are a super mighty institution. They have thousands of people working in every possible department that you can imagine, including security and whether physical or computer or everything, and we have to be careful. But we believe we are in our own right, and we'll try to defend it.

Sir, we don't have any questions at this moment, and I will pass the call back to Inés.

It's okay. Thank you very much. Well, thank you all for attending today's presentation. For those of you going on holidays, we hope you have a nice time at that. We always -- I mean, as always we remain at your disposal for any questions that you may have. And we hope to see you soon. Have a nice holiday. Goodbye. Thank you.

That concludes our conference for today. Thank you for participating. You may now all disconnect.