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

Good day, and thank you for standing by. Welcome to MERLIN Properties 2021 Results Presentation Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Ines Arellano. Thank you. Please go ahead.

Thank you. Ladies and gentlemen, welcome, and thank you for joining MERLIN's 2021 results presentation. We remind you that the presentation for today's call is available on our website on the homepage and please ask you to verify a disclaimer. Today, our CEO, Ismael Clemente and our COO, Miguel Barrera will walk you through 2021 results and provide the guidance for 2022. With no further delay, I pass the floor to Ismael. Thank you.

Thank you, Ines. Good afternoon, everyone. Another good day to present results today. So we promise that we are going to be relatively brief in our remarks today. The year has been a quite challenging one. We started in the first quarter with a clear hangover from 2020. It was a very, very difficult quarter. The second quarter, although cosmetically not good looking because the occupancy figures looked low, started to yield better results in terms of cash flow conversion. And that trend continues -- continued towards the year-end with each quarter producing EUR 0.01 extra cash flow as compared to the previous. So at the end, the company ended up posting a EUR 0.58 per share. You might remember, we guided towards 56%, although it was completely clear that we would exceed that guidance. The only reason why we didn't want to reguide was because there was some uncertainty, particularly in November once Omicron erupted. And we didn't know what will be the performance of our shopping centers during the Christmas campaign. But they ended up doing a very decent, very good Christmas campaign. And at the end, we could secure the EUR 0.58. That represents a 4.1% increase compared to last year. The GAV of the company has also performed slightly better than expected. In this case, owing mainly to the logistics revaluation. Logistics continue to be in wine and roses at least in Spain, I guess, this is widespread in all across Europe, which represents an increase of 14.5% like-for-like as compared to last year valuations for that specific subsector of our activity. Very important for us, we continued delevering despite the tough times, so the policy that we put in place of retaining a little bit of cash flow plus boosting a little bit our noncore sales program yielded good results. So net debt figures are slightly below last year and have continued reducing during this 1 -- during this year. So we posted a 39.2% loan-to-value as of end of the year. And finally, between dividends distributed in the natural year and appreciation of assets, we could achieve a total shareholder return of 7.1%, which is of course, not optimal, not super good, but I believe, quite decent given the challenging year in which we operated -- challenging environment in which we operated. We managed to grow occupancy in all asset categories as compared to the previous year. It was notable the recovery in offices during the second half because we frankly believe that we will finish the year with minus 150, minus 200 bps as compared to the previous, so between [ 89.1% and 89.6% ], but the second half was much better than expected, given the pent-up demand, the [dam] effect, the people that have been waiting on the sidelines and finally decided to take a decision during the second half. So we improved almost 100 bps versus our trough that was on the second quarter 2021. Logistics, we managed to increase the income by 1.6% like-for-like with very interesting 4% release spread. There is a general consensus that rents are going to accelerate in the coming years. We are a little bit more prudent probably the market is. But certainly, it looks like -- it is -- we are in front of a benign future for the logistics operation in our country, in Spain and Portugal, 2 countries. In January -- in February, we occupied 16,000 square meters in the southern corridor. And with this, we have now reached virtually full occupancy in our portfolio. I believe it's 98.2%. So from there, we cannot go significantly further up. So eventually, what you should expect for this year is a very good cash flow generation from logistics. And towards the end of the year, we are waiting -- we are expecting vacancy in 1 specific shed, in which we are moving the tenants from these to a newly built 1 in our portfolio. So the numbers as of year-end might look slightly lower than they are today, but cash flow-wise, it will not make a big difference. Retail has been the positive surprise of the year, despite Omicron. I believe the resiliency of the footfall and the consumption patterns of people being notable. So footfall and sales, of course, cannot compare to the ones in 2019 because they are completely dissimilar years, but they have kept improving significantly as compared to 2020. And in some of the months, notably in September, October and November till Omicron started, we had a number of shopping centers, 8 that were performing above 2019. There is a strong disparity between the behavior of different cities that creates an average that in reality looks cosmetically low as compared to '19, but that is completely spread between areas in which restrictions have been very strong, like Catalonia and Lisbon. And restrictions -- areas in which restrictions have been less strong at no special cost in terms of virus transmission, but that has kept respecting a little bit more free economy. And as such, the difference between pre-COVID levels and current levels is much, much lower. We achieved a 5.8% release spread in retail and exceeded by not much. I mean, by a little tad, our best historical occupancy, posting a 94.2% with close to 34,000 square meters let in the year at a rate slightly above 1 in terms of replacement of problematic or zombie clients. In terms of value creation or capital recycling, we disposed of EUR 238 million of assets with a 5.4% premium to gross value, shedding some light on the valuations of the company because, of course, what we disposed not precisely our prime assets. In terms of evolution of the Landmark plan with the finishing of Castellana 85 and Monumental, we are almost completing the plan with only Plaza Ruiz Picasso currently with works underway, both buildings. The 1 in Madrid and the 1 in Barcelona were delivered 100% occupied. As for Flagship, we completed the plan after the delivery of Saler and Porto Pi. We will -- now can be considered -- it was -- pre-pandemic it was part of the plan, but we took it out during the review of CapEx in 2020. But we are now -- have now received license for Callao in Madrid and are about to start works there, which could be considered also part of the Flagship plan. In terms of the logistics development, the Best II and Best II plans, we continued a significant progression with those. We let 90,000 square meters in the period with the most notable lease being Logista in Cabanillas II with 47,000 square meters. And we fully completed the development of available land in ZAL Port in Barcelona with the delivery of more than 100,000 square meters during the year. In our digital infrastructure plan in Mega, there is nothing significant to report yet. Although, I guess, during the year, we will have significant news, but at least from an internal standpoint in a company, we are glad because we got our first license. It's the license for the first module in the Basque country in Ribarroja de Ebro is only 3 Mega, but we are in advanced conversations to pre-let it for about 2/3. And we expect that this will act as the spark for the obtaining of the remaining licenses in the program. And by year-end, we have either started or are about to start different developments, of course, on a phased way. So we will go little by little, trying to match absorption with CapEx. I mean we don't want to be grand in this plan. We will wait to get the demand. Without further delay, I will pass the floor to Miguel Ollero, who will guide you through the financial results of the year.

Good afternoon, everybody. Regarding the financial results for the year, as we highlight that from the top revenue or gross rents of the company, this has been a flat year, 0.4% increase. This is the result of GRI, which in office, we were losing like 2% in rents with regards to the prior year. It's a combination of sales of assets that we were doing during last year and also in 2021 because that we were selling an office building as well as the drop in occupancy that we had especially in the first and the second quarter with a recovery during the second half of the year. But this has been compensated by the fact that in logistics we will have an increase in rents at around 12%. This is the reason why in the end, we have a gross rental income, as you say, flat. Nevertheless, we have been improving the flow-through of the portfolio in the sense that in terms of incentives, we have been using largely the incentives that we were offering in the prior year 2020, especially the COVID incentives, which has moved down from EUR 45.5 million in 2020 to EUR 24.9 million in 2021. And especially, I should remark that -- and remind you that this policy was in place for the first half of the year and was -- this means for the second half, although we kept it in place for specific activities and sectors of activities in shopping centers is still effective as it was leisure and restoration. But as an indication of how this has been evolving to be disappearing. I should remark that, for example, out of the EUR 24.9 million granted during the year, only EUR 1.2 million were for the fourth quarter of the year. So this is the main driver of the increase in the gross rents under incentives and in all of the company that is close to 5% increase during the year. If we look at the FFO, as Ismael was commenting, we have an FFO of EUR 273 million. This the same EUR 0.58 per share, ahead of the guidance we were providing to the market and was improving with regards to the prior year at 4.1%. Our AFFO was EUR 0.55, EUR 0.3 of maintenance CapEx during the year, in line with the prior year. And the EPS was EUR 1.09 per share. This is documented by the fact of an FFO of EUR 273 million plus a revaluation of the assets of the portfolio of EUR 259 million that we will be analyzing later. Finally, to indicate that the EPRA NTA is reflecting the combination of cash flow generation during the year and the increase in valuation that I was commenting before. Now I move to the following page. We have here in the GRI bridge for the year. As I was commenting before, the like-for-like has been nearly flat 0.2% in mainly because office was down 1.2% and shopping centers and logistics were the ones able to turn around the situation. In case of the leases, the reason of the like-for-like down is that because there was an asset that was not from the comparable portfolio that was sold that was not in trend during the year at some point in time. Now we can move on to the following page. In terms of occupancy and WAULT, as we were commenting before, we have been able to recover during the year and the drop in occupancy that we had in the first quarter. So 132 basis points of recovery in 3 consecutive quarters with positive evolution of occupancy. If we look back to the prior year, it is 21 basis points of higher occupancy to which it has been contributing. Shopping centers that have, as Ismael was commenting before, has been performing very well. Even in this tough year we were leading in 2021. In terms of average WAULT our contracts continue to be very high, 5.2 years, but in line with the prior years we have been presenting to you. You're wanting to know how the different businesses have been performing on a one-by-one basis and Ismael will be taking the word.

Okay. in offices, we couldn't return to breakeven the rental decline that we significantly reduced it during the year because as of first half, we were at minus 2.9%, and we ended up at 1.2%. Madrid showed a negative like-for-like, mainly owing to a reduction in occupancy, while Lisbon despite a very slight reduction in occupancy compensated it with a very strong release spread. On the following page, on Page 10, you will see the amount of square meters transacted. In Madrid, it was a very, very active year with close to 190,000 square meters transacted with a lease spread of plus 2.8%, the most notable leases were Accenture and Castellana 85 and Elecnor. Tecnicas Reunidas, there was a renewal with more than 43,000 square meters, Vass in Avenida de Europa and Roche in Ribera del Loira. In Barcelona, we transacted 45,000 square meters with a lease spread of 9%, above 9%, and the tenants are on the right-hand side, Capgemini, Schneider, Lacer and Facebook in Torre Glòries. And in Lisbon, we transacted close to 34,000 square meters with a plus 18% lease spread in main contracts with the main tenants being Crédit Agricole in [indiscernible], BPI in Plaza -- in Monumental and Essity in [indiscernible] . So at the end, close to 270,000 square meters transacted with a 4.3% release spread overall in the portfolio. On Page 11, we bring information on the Flex Space division, LOOM. As you know, that was 1 of the biggest or most immediate, I would say, victims of COVID. Following COVID, we experienced a very strong fall in the overall occupancy, physical occupancy, of our spaces going from the peak at 66-point something in February '20 to a trough of 37% in October of 2020. The recovery has been remarkable. We are currently at an occupancy of around 70%. Of course, as you can imagine, prices per square meter when compared apples-to-apples are more significantly higher than market. We are currently operating 18,000 square meters and very opportunely, we will bring up our presence in the market, our footprint by about 52% during 2022 with the projects that you can see below on the page that will be adding 967 desks to the 1,877 desks we currently have. In logistics, on Page 13, the like-for-like was positive 1.6%. And most notably, everything we put in the market was already prelet. So it started producing rents right after inauguration. There was widespread like-for-like growth in Madrid and Barcelona with negative posting in other locations, but this is not really significant in our portfolio. With an increase in occupancy in -- also in the 2 main corridors in which we operate in Madrid. On Page 14, you will see that we contracted more than 150,000 square meters with a lease spread of plus 1.8% in 5 contracts, the most significant of which were Carrefour and 4PX, which together with Cainiao, are the logistic operators of Alibaba, which is a very significant relationship that was started about 2 years ago and now is yielding significant results for us. In Barcelona, we contracted 36,000 square meters with an 11% lease spread. And in other locations, we transacted 61,000 square meters of which the most notable is Lisbon, where more than 45,000 square meters were added in the [indiscernible] project with a 100% occupancy at present. So at the end of the year, close to 250,000 square meters with an average lease spread of 4%. In ZAL Port, it was a very, very active year. Don't be misled by the drop in occupancy because that was absolutely temporary. It has already been relet. So we continue to be almost fully occupied there, but there was, of course, a cutoff effect as of end of the year. And very importantly, the FFO grew to EUR 34.4 million from EUR 29.3 million, so an increase of 17.5%, which is quite significant. We have run out of stock, so the work in progress program is finished in ZAL, and we move now into operation mode in this half. In shopping centers on Page 17, the like-for-like was 2.6% positive. It was slightly compensated by a loss of rents of 2.4%, owing to the fact that in comparison terms, we didn't enjoy during January and February of the rents of Thader and La Fira that were sold to Silicius at the beginning of 2020, just before COVID. The fruitful evolution continues to be negative as compared to 2019 but very significantly positive as compared to 2020, both footfall and tenant sales. And what is really important is that despite the positive like-for-like and positive lease spread, the evolution of the sales campaigns of our tenants, together with the onboarding of the first hints of inflation have led to an occupancy cost ratio of only 12.1% which is very, very healthy and it's a very good indicator for the future evolution of our rent in shopping centers. On page 18, you will see that the lease spread was 5.8% in 74 contracts, and there was a net absorption of 6,600 square meters, reaching an all-time high occupancy of 94.2%, almost 50 basis points above the previous year. On Page 19, we have created a comparable -- comparison slide because I know it's been brought to our attention in many conference calls that we were worried about the maturity WAULT that we had inadvertently created as a consequence of our commercial policy. You might remember that in order to be benefited from our commercial policy, our tenants had to extend contracts by at least 2 years in 2022. And at some point, that created a relatively tough looking maturity WAULT of 44% of the contracts as of half of 2022. However, by year-end, we have reduced that figure to 31.1%, and as of today, as of the day, we are speaking, this is now 23.8%, which is absolutely commensurate with a normal year. I mean, in a normal year in shopping centers, we normally have renewals in the region of 25% plus. So -- and out of those, 23.8%, you have to take into account that there is always a certain amount of volume breaks that amount to around 10% of our area that are always present every year in our renewal perspective. Miguel, valuation?

Yes. Now we go into Page 21 of the presentation. Yes, you have which is -- which are the constituents of our portfolio by asset class. I will be remarking that we have been able to achieve the EUR 13 billion asset base within the company. As we also highlight that out of the different item asset classes, one that has been receiving a higher valuation this year has been logistics. We are talking about EUR 207 million. This is a result of the combination of putting more assets into production as a result of the development of the different assets, as Ismael was commenting before, combined with the fact that we have a land bank within the company, which is benefiting for being brought into our balance sheet before the crowded market we are living in now in logistics, which everybody is looking at it and has brought to the fact that island land or existing product has been increasing prices. We will see later on, which is the impact of this, how it compares our existing land bank with regards to the current market transactions. So that's -- to let you know that it has been logistics and one driving up our valuation this year. Moving to Page 22. We are bringing here which is the different weighting that within our GAV of different asset classes we have, being office representing more than 50% of this value. EUR 14 out of the EUR 27.8 of total GAV of the company per se. And which compares with EPRA NTA of 16.1%, which compares with our existing current surprise of around EUR 10 that impacts a 38% discount to any NTA of the company. The reason why we're presenting to this is because we have made like a big example of how we should be looking at our valuation in terms of market transactions with regards to how we are valuing the market. We have applied the full discount we have in our asset base in our share price through the office and the shopping centers. So we are making here a comparison which is the valuation price per square meter for offices in Prime and CBD, how it compares with the discounted price because of our 38% discount. So you can see here in Madrid, the valuation is close to EUR 7,800 meters per square meter, but we understand that this is valued at -- value that is applied in our share price is just EUR 5,200 per square meter. Likewise in Barcelona from EUR 6,100 to EUR 4,100. And in Lisbon, EUR 5,200 to EUR 3,500. So this is the result that -- or the difference between entering straight into buying assets direct or being part of the surprise in land search. In logistics, we are making analysis, comparing our existing portfolio plus our land bank. In terms of our land bank, we have a current book value of EUR 270 per square meter, okay? We are pending CapEx just to build our -- the warehouses on that land bank, the total cost should be EUR 708 (sic)[EUR 703] per square meter. So combining this with our existing portfolio, we have a blended value per square meter of EUR 876, which compares to the EUR 1,400 per square meter that has been paid in recent transactions in Spain on average. So we have ability to add value of around EUR 524 per square meter on our full logistics portfolio, not only on the land bank, but also on the existing running portfolio that we have with the company. Finally, in shopping centers the same analysis that we carried out in offices, meaning that our EUR 4,400 per square meter of valuation, it should be trading at a 38% discount well below EUR 3,000 per square meter. If we go on to Page 24, we have here, how has been the GAV like-for-like evolution during the year. As I was commenting before, logistics is the 1 that has been benefiting of the valuation during the year, 14.5% increase, which is coupled with a 50 basis point of yield compression attached to the recent transactions in the market. Offices continue to be creating value, very linked to also yield decompression more or 3 basis points but on a very large asset base because, as I was commenting before, office represents more than 50% of the GAV of the company. Net leases capturing also the effect of inflation. So the GAV portfolio is in inflation -- as a matter of fact, in the year 2022, we have been increasing the rent of almost 6.1% basis. Our shopping centers flat on yield but a little negative in like-for-like evolution. Overall, we have a 2% average like-for-like evolution in the portfolio and a 6 basis points of yield compression. If we move on into liability side of the company. we have a net debt of EUR 5.2 billion by the year-end, quite in line with the prior year. Despite that, we have a gross debt well above the prior year, with a EUR 6,627 million of debt by the year-end. That has been reduced yesterday by EUR 548 million because we were paying back the bond maturing in 2022 for which we were already raising the replacing bond last year. So in the end, we have right now a gross debt and net debt bridging that to the 1 we had before in year 2020. We have been able to reduce our loan-to-value for 39.9% to 39.2%. So we continue leveraging the company. As a result of the bond we were given yesterday, we have an average maturity of 5.7 years. So the 5.3 by year-end has been increased to 5.7 and we continue to have -- to enjoy a very good liquidity position of EUR 1.3 billion after the repayment of the bond made yesterday. In terms of rating, we continue to have same rating we used to have in 2020, but we have improved our outlook from Moody's from negative to stable as a result of the evolution of the different businesses within the company. Now we move on to sustainability with Ismael.

In terms of sustainability, the company keeps improving its internal standards and is now devoting significant efforts led by the specific commission created at the Board level and a specific team also, which is leading the company's effort in this field. We have made strong progress in the year in GRESB. We have improved our best historic scoring of 80%. Now we are 81%, which puts us above the global average and specifically our peers. In CDP, we have a B. And in S&P Global, we are -- we have a scoring of 58%, which puts only 13% of the industry above us. I mean we are on percentile 87. We continue certifying buildings with the idea to finish the program as of end of this year. We are now more than 91% certified silver or better. Good or better in BREEAM. And we hope that we can put an end to this program towards year-end. We continue certifying also for ISO, for accessibility. And this year has been important for us because we have finally been included in the Dow Jones Sustainability European index, which for us is an important achievement. On Page 28, we simply bring your attention to the fact that we are giving the finishing touches. In fact, it's already finished, pending approval by the Board to our pathway to net zero. We hope that we can present this to you in an upcoming Capital Markets Day that we hope will be presenting again, hopefully. And you will be surprised by the way we have devised our strategy in this respect, putting our money where we put our mouth and not only reducing very significantly, which is already done. We have significantly reduced our operational carbon but also reducing embodied carbon in our developments and trying to be pioneers in the cooperation with our clients towards reducing scope 3 emissions. And of course, when we reach the point in which it is impossible to go beyond, we will also make an effort -- original effort in terms of offsetting the unavoidable emissions. As for value creation on Page 30, we simply report the divestments carried out in the year, which, as I commented at the beginning, have been achieved at a 5.4% premium to gross asset value. We don't discuss here BBVA because it will be discussed on Page 45. It didn't happen in 2021. It's more forward looking for 2022. On Page 31, you will see pictures of our buildings in Castellana and Marqués de Saldanha in Lisboa fully let, with very significant yields on cost, very accretive for our shareholders. And on Page 32, we make a summary or we bring to your attention a summary of what has been achieved money wise in our planned Landmark. So we have captured more than EUR 20 million of incremental rents. This does not include the expected rents in Plaza Ruiz Picasso and the ones that will be added through the new observatory on the top deck of plus -- Torre Glòries in Barcelona. That has transformed into EUR 475 million of GAV accretion in our assets, 100% let, with the exception of Castellana, Diagonal 605, where we are 94% is a multitenant building, with very remarkable tenants. I mean, outstanding tenants that you can see on the bottom right-hand side of your page. EUR 175 million of backlog of contracted rents, which is also very important for -- in terms of stability of our tenant roster with a WAULT of 5 years. And we are still delivering -- or we need to deliver yet for the fall of 2023, the Plaza Ruiz Picasso building in which certainly we are depositing significant hopes because it will be an ultra-modern building with an incredible floor plate that we believe will be a commercial success in Madrid. In Page 33, despite having finished Landmark plan, of course, we are not inactive. We continue doing refurbishments within our portfolio. We will progressively refer the Churruca Business Park that we have converted into university campus. So we have 1 client here that was about to leave in order to build or because they have built their own headquarters in a plot of land of their ownership. And as a consequence of that, when evaluating the options we have in front of us, we decided to reposition as a university campus. So we have secured a 20-year lease with Cunef, 1 of the leading business and law educational institutions in Spain, privately owned. And therefore, 17,000, 18,000 square meters will be let for the very long term. In Cerro Gamos, we also will engage in a progressive refurbishment of the complex, starting by the building, which is going to be used by Fujitsu as a headquarter. And we will continue refurbishing the remainder of the park as we complete further pre-lets over time. On Page 34, we explained our picture here the -- what we -- the activity in Best II and III during the year. In ZAL Port, we have delivered 104,000 square meters with a rental value of EUR 5.7 million and a yield on cost of 9.7%, 100% let to Decathlon, which is the bulk, the lion's share of the 104,000 square meters, 96%, and the other 8,000 to Maersk. In Lisbon Park, as you know, we launched a spec development that by completion was fully let, about 45,000 square meters with a rental value of EUR 2.1 million and yield on cost of 7.1%. In Cabanillas Park I, I and J, we completed our development fully let to DSV with 45,000 square meters at EUR 1.9 million of rents and a yield on cost of 7%. And in Cabanillas Park II, we have just opened the park with a first let to Logista of 47,000 square meters with an ERV of EUR 2.1 million and yield on cost of 8.1% plus the option to twin shed of this 1 of about the same size that should be decided by the client between this year and next. Making a recap of what have been the achievement of our logistic plans on Page 35, you will see that we took a risk, of course, a commercial risk in 2017, 2018, which was accumulating some land bank for logistics. As you all know, we are not big believers in land bank, because it's clearly a nonyielding asset. But we bought some interest in land bank at the time because we thought prices would eventually ramp up significantly. And that decision has yielded very significant results because we have been moving that land into WIP and WIP into operational product with more than 17 million of incremental rent, plus another EUR 21 million in ZAL Port Barcelona, and EUR 257 million of value created, 100% leasing, very interesting tenant base and EUR 80 million backlog, plus EUR 189 million backlog in ZAL Port because of 1 very long lease, which is the 1 of Decathlon. So the remainder of the land bank associated with those purchases in '17 and '18 will continue fueling our growth for the upcoming 3, 4 years as we continue moving land into WIP and WIP into operational product. In Flagship on Page 36, we delivered Saler and Porto Pi completely refurbished. The yield on cost, as you can see, are much lower because there was clearly a defensive component on both actions. I mean this was partly offensive CapEx, partly defensive CapEx that both shopping centers have reacted fantastically well to the refurbishment and are now virtually fully occupied in some cases, in the case of El Saler, having become now the reference shopping center in Valencia City as we speak. On Page 37, we comment on the whole Flagship plan with more than 230,000 square meters refurbished, and it's been an eminently defensive land, Brazil, we have achieved very interesting financial results with this plan. And we are still pending the refurbishment of the Callao building, Plaza del Callao in Madrid, which is the primest commercial area in the city that we will transform into high street retail with -- coupled with very interesting fine dining areas on the roof top terrace. As for the digital infrastructure plan on Page 39, we simply remind the characteristics of the plan and how efficient it is from a sustainability standpoint and what is more important, the availability commitments, which are now part of our pre-let agreement, which is six 9s, 99.9999% availability, which is on top with -- together with the best -- at the top of the standards at least in Europe. What is worth mentioning in this respect is that, as commented at the beginning, we got license for 3 Mega works in our Ribarroja de Ebro plan. So we will finish with the construction tender and start construction by summer with the expectation to deliver the facilities to the client by -- towards end of next year. So you will receive more information about a Mega plan if and when the pre-let agreements are signed because at this stage, it is better not to disclose any further information on the plan. The remainder of the data centers continue waiting for license -- the 1 in Barcelona is the most immediate 1 we expect to receive. Getafe is going much slower than expected, and Lisbon is going on time, but it's more complex because it's a hyperscale. So it will take a little longer to get all the clearance for the reorganization of the land plots and the construction license. The numbers for the program continue to be the same as depicted on Page 43. And as commented on many occasions, our aim here will be to replace like-for-like, the rent that eventually are going to be lost as a consequence of the sale of the BBVA portfolio over the next 3 years with data centers. Finally, on Page 45, I will comment on the outlook for 2022. You all know what we said during the third quarter results presentation that basically, our energy and resources, our 100% coverage is now turning into monetizing the value that we have hidden within the BBVA portfolio. We voluntarily didn't want to provide the market with any guidance in terms of pricing or timing. And that continues to be the case. So I will beg your pardon, first and also we beg your patience and understanding that at this point, it is better not to give any further details about the precise moment of this transaction. Our aim is to move into clear market status within the year 2022. Of course, the preferential acquisition rights of BBVA will be duly respected as per the contract, and they will be offered the preferential acquisition rights, which, as you know, stands for 2 months. Only if they do not reply to the requirement or they simply pass that we will move into a clear market mode. Pro forma of the BBVA disposal, the company will move into doing a number of strategic initiatives that go hand in hand with these specific disposal, which is basically deleveraging pro forma, we will get to around 32% loan-to-value. Our target continues to be 35%, 36%. So that will give us some leeway for releveraging in the future that will fuel our development plans. In data centers, acceleration of the execution of Phase 1 and 2. in logistics, basically finishing or putting an end to our Best II and III plans. And if there is a certain excess of cash, not super significant, we will engage into a potential share buyback. By law an extraordinary dividend will also be paid in order to comply with the SOCIMI regime, consisting of 50% of the capital gain according to Spanish GAAP. And that will mean around EUR 250 million for shareholders. So this is where we are in terms of execution. Very interest in the market. very clear pricing in our mind. I mean, no longer a cloud of points. We now have a very clear price at which we believe we can execute because we have a number of offers which are reaching binding status. So we know where we are, and we expect to deliver further news on this transaction during the year. On Page 46, another point of significant conversations during the past days with you has been the impact of CPI. So we have taken the responsibility and have made the effort to summarize how we are doing in terms of inflation. We have updated 44% of our annual gross rental income already with an average inflation uplift of 5.5%. Of course, the biggest lift has been in the net leases with 6.1% as of first of January. And in the rest, in different points during the year, the uplift have ranged between 5.2 -- 4.9%, the lowest in shopping centers to 5.7% the highest in logistics. So that has been more or less the range at which we have been updating contracts. So we, of course, remain bullish on the year. I mean, if -- barring disaster in the Ukraine, Western world or in the Russia, Western world, risk in Ukraine. This should be a year in which we should add up occupancy in our portfolio. We should have positive indexation and our forward occupancy reports are also pointing towards a positive lease spread. So this should be a year of intense like-for-like growth in normal circumstances. On Page 47, we guide on the main parameters, the ones that you normally ask for, which is occupancy in offices where we expect to recover another 150 bps and in shopping centers where we expect to add another 25 bps. Regarding FFO, we have made an exercise, which is comparing to the 2009 -- 2019, sorry, pre-COVID baseline of the company if that can be considered the baseline because, of course, it was an extraordinary year. But in 2020, the EUR 0.56 we achieved per share represented firing our engine with 84% of the cylinders. In 2021, we have been at 87% of our potential at EUR 0.58. We hope to return very close to normality in 2022 with cash flow production in the range of EUR 0.64 and that represents around 95% of the pre-COVID 2019 baseline. These -- there is a question that comes recently by many of you, particularly in the analyst community, which is why in 2022, we are widening our FFO to AFFO estimate. So why we are losing? Why we have a bigger erosion from FFO to AFFO? Regrettably, this is the cost of being green. So our green OpEx is, of course, now more significant than it used to be. So we are budgeting for around EUR 0.02 of additional erosion from FFO to AFFO as a consequence of measuring units, improvement of the lighting, improving of the cooling, improvement of the boiling systems, electric vehicle chargers. Now there are a lot of things which we are now furnishing or maintaining -- furnishing and maintaining our buildings that cannot be considered CapEx as such because they do not have an immediate return. And as a consequence, we are increasing a little bit the leakage between FFO and AFFO. Regarding dividends, some of the analyst community is also mentioning why the indication on dividend is relatively soft as compared to the relatively strong cash flow performance. And simply to remind that this is a minimum. This is what we are recommending as a minimum to our Board and then the Board is sovereign to decide the exact level of dividend that can be distributed in a given year, in some cases, also with the vetting of the General Shareholders Meeting in the following year. So for this year, on top of the EUR 0.15 that have been paid at the beginning of December, we have recommended to pay another EUR 0.25 following the AGM to total around EUR 0.40. And as for 2022, we proposed to increase these by around 10% commensurate with the increase that we expect in cash flow to paying around EUR 0.20 towards the fall winter of this year and then pay another EUR 0.25 following the AGM on the following year. Very important remark, this is all ceteris paribus which means -- this means those are the magnitudes both in cash flow and dividend payout that we expect to be able to achieve and distribute in the absence of changes in our perimeter. If the BBVA portfolio for some reason is disposed of well before year-end, there will be an affection to some of those estimates. So we will need to reestimate for you. And -- but I hope you can understand as of today, we have to do it, we have to make our estimates ceteris paribus. On Page 49, as closing remarks, MERLIN has clearly improved all the financial and operating metrics during the year. Occupancy, like-for-like rent growth, FFO generation. Important for us, at least internally with our asset managers, it's been the subject of many discussions. We have now lined up 3 consecutive quarters with overall occupancy increases, recovering 132 basis since the trough of the COVID-19 crisis in terms of overall occupancy of the portfolio. That was at the end of the first quarter of '21, which as commented, it was a very tough quarter for the company. Inflation is providing for the first time in many years, in the last 5 easily, inflation is providing us with some significant tailwind. The 44% of the rents that have been inflated in January have been inflated by a 5.5% average with EUR 12 million of uplift, EUR 12 million of additional rents. And this includes the BBVA portfolio with the HICP multiplier. The FFO of EUR 0.58, although predictable by many of you since we produced EUR 0.13 on the first quarter, EUR 0.14 on the second, EUR 0.15 on the third and easily was predictable EUR 0.16 on the fourth, but has exceeded the guidance provided to market. In logistics, we continue enjoying strong tailwinds. And the consensus in the logistics market now is that following the cap rate compression period, it will be followed by a significant rental acceleration period. We are a little bit more skeptic in this regard that, of course, if this happens and it happens widely all across the market, you will all, as shareholders of MERLIN benefit from that trend. In offices, the work from home fears are now fading away. Of course, every quarter, there is a new fear. We have already tackled in the past, the retail Armageddon, the work from home. Now we are tackling the high inflation, increasing interest rates, is like we are living in a roller coaster. It's like choose your own schizophrenia. Every quarter, there is a new thing that hampers the stock listing price and people jump to the roof and comes with new fantastic theories about what should be done or not done with the portfolio. But we bet on continued office occupancy recovery during 2022. Shopping centers continue being resilient. Of course, we cannot say that they are performing at their best because there is a structural effect of the increased market share of online commerce. But in normal circumstances, they should achieve pre-COVID levels at the end of the year, beginning of 2020 and '23. And we have, I believe, by taking the bull by the horns, we have developed very strong relationships with our tenants, which now rely on us. So we have created some goodwill with the tenant community. And also, we were pioneers on strategically CapExing our assets, which has also been a very interesting feature and a very interesting thing to have. Tool for our asset managers during the tough times of the pandemic. In terms of value creation, we have as commented, we have completed or virtually completed Landmark and Flagship with significant value created to shareholders. Also, there is people that asked about the increase in construction costs, et cetera, it is good that the lion share of our construction activity is behind us because we are relatively unaffected by increasing construction costs. And we have generated more than EUR 764 million of value to date through these programs and including the work in progress, we have created or have added around EUR 3 billion to MERLIN's GAV that has more than compensated disposal of residential, hotels, offices in the [indiscernible] portfolio, 3 shopping centers to [indiscernible] , and some scattered -- Caprabo and some scattered disposals that we have been doing during the past years. And we also are gladly on an entry status, but we are at least gradually starting which for us internally is important, the development of the Mega plan with the first license obtained in the Basque Country. So without further delay, it's over back to you. We are open to Q&A. The whole team is at your disposal for comments or Q&A.

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

[Operator Instructions]

Well, the first question that has been formulated in writing that we can see on the screen, is in regard of occupancy in offices in Madrid. Why it's come down 174 basis points year-on-year and which are our expectations regarding recovery, specifically in Madrid? Well, basically, that is a consequence of a very bad performance in the first quarter. It was GDP destruction. I mean, GDP destruction led to a number of business losses, and we lost a number of clients, particularly on the first and second quarter of 2021. Since then, we have recovered significantly. Although the final print for the year has been minus 1.7% in Madrid. However, if I have to bet for 1 market, in the 1.5% that we expect to recover this year, it will be Madrid. So we believe that Madrid will be the protagonist of the recovery during 2022. I know that you make questions normally about the A1 area. I don't want to sound too much optimistic, but I have already commented in the past 2 results calls with some of you that there is some better tension in that area. If you want to find a specific reason why this is like that, we believe it is because Municipality of Madrid has already started the infrastructure works pertaining to Operación Chamartín. And as a consequence, all their road half of the north of Madrid is being redone as we speak. And I believe the real estate directors are starting to foresee that at the end of that process, traffic, which has been, of course, the battle horse of that area. Traffic should significantly improve over the coming future. So we are seeing a slightly better -- slightly better tone in that area. And eventually, we expect to pick up some increased occupancy between now and year-end in 2022, specifically in that area. In Lisbon and Barcelona, it is difficult to improve occupancy because they are already significantly occupied. Although, of course, we will continue trying to sharpen the pencil in both markets.

Thank you. As your question comes from the line of [Ignacio Carvajal].

It's [Ignacio Carvajal] from [Carthesio]. Just a few questions from me, if I can. First 1, on the BBVA branch sale. Are you looking for an outright sale or a different structure, if you could comment on that? And also in the slide where you show your LTV post disposal, I imagine the 32% that you're mentioning is pre-extraordinary dividend. So if you can confirm that, that would be great. And then second question would be on noncore asset sales outside of BBVA portfolio for 2022, can you give us some indication of what you're expecting. And I don't know if you could give us the breakdown of the 5.4% premium that you achieved in 2021 by asset class, so offices, logistics and net leases.

The last 1 is the easiest one, [Ignacio]. We don't provide specific information on the exact premium on every disposal because on every disposal, there is always a counterparty, okay? So we -- this is why we prefer to give aggregated figures to the market. Then regarding -- that is a very good question regarding noncore because I forgot completely. I forgot completely to make a reference to that during the presentation. Our, let's say, ordinary noncore budget for disposals in the year is similar to last year in the region of EUR 150 plus million in this year. In the past year, there were a couple of transactions that happened before year-end that should have happened this year. And as a consequence, we moved into close to EUR 240 million. So -- but for this year, the ordinary, let's say, budget or forecast of disposals should be around that figure. And it will mainly be comprised of offices because, frankly speaking, we have runout of scattered or, let's say, noncore, truly noncore products. So we will raise our bar a little bit in the definition of what we consider noncore because we also need to make room for the ultra-prime product that we will onboard as a consequence of the development of Operación Chamartín. So we will -- between now and completion of the first buildings in Operación Chamartín, we have a long period in which it is important for us to continue unloading some noncore. So that we make sure that we don't exceed or significantly exceed 50% of our rents from source offices. Regarding the loan-to-value, the 32% pro forma is post dividend, is after distribution of the dividend. And then regarding the format of the BBVA sale, as commented on a number of occasions, we are juggling with 2 different types of purchases. On 1 side, you have the net lease real estate purchases that are less efficient because they have a higher cost of capital on the discounting of the cash flow. However, they are better in the understanding of the true value of the vacant possession of the real estate as of end of the BBVA contract. And on the other side, we are also playing with the idea of separating the value of real estate from the cash flow and selling to a cash flow buyer with a deferred payment as of end of the contract. So that they don't need to enter into a discussion on the value of the real estate as of today because they tend to be so aggressive on the price at which they discount cash flows. But in reality, the cash flow payment only is sufficiently close to our book value. So whatever the end value of the real estate is. It is no matter what, it is accretive as compared to our current book. So this is why we are entertaining both types of interests. And I hope this addresses your question.

[Operator Instructions] And your next question comes from the line of Pedro Alves from CaixaBank.

So the first 1 is in your FFO guidance for this year. Just to try to understand your assumptions here I guess, occupancy, you have been pretty clear across the division. But perhaps what is your expected or assumption in terms of inflation contribution for the year in this FFO guidance? And the second question is in terms of the dynamics in offices of the negotiations in terms of contracts for this year. Do you expect this CPI indexation to be smooth? Or could you face some resistance from tenants? Just to have a sense of the elasticity of occupancy or let's call it, occupancy risk based on this larger-than-usual inflation impact?

Regarding elasticity of the occupancy, at present, it is 100%. So it is noneventful. Why is that? For 2 reasons. First, because for the past 5 years, they have been breaking our bones with lower rent as a consequence of negative indexation. So it's a fair retaliation, I guess. And second, because it's the law. So there is very little you can do against the law. And third, if I might add, which is very important, is very relevant for the point is that Spain is nowhere in rents. Lisbon is slightly higher, true, but also inflation there because it's controlled by the government through some sort of hybrid index, which might or might not reflect the true inflation, that is inflation is lower there. But in Spain, rents are nowhere. So there is a lot of catch-up to be done just to be on baseline 2007. So I would be extremely worried as a real estator, if I was operating in a market in which rents have gone significantly beyond all past peaks, and you are already 130%, 140% of the past peaks, and all of a sudden, you get inflation of 5%, 6% per year. However, in a market in which rents are 75% of the past peak. If you get inflation at the beginning, at least for many, many years to come, that inflation will only play catch-up as compared to the past peak. So I would be less worried, particularly given that we are operating in markets, and this is absolutely true for Madrid and certainly for Lisbon as well, a little less clear in Barcelona, where there is no new supply. I mean new supply is clearly under control, because the rents have been so low that new developments have not been warranted, have not been supported by an interesting yield on cost. So as a consequence, there's been no new supply. And the supply and demand balance is quite fair in the markets in which we operate. And regarding the FFO guidance for the year, the inflation that we have assumed is 4%.

And your next question is from the line of Allison Sun from Bank of America.

I have 2 questions, but 1 of them have just been answered. My other question is about your digital infrastructure. So it's a very big picture, can you help me understand, because I think digital infrastructure or data center, it's quite different mode from office and retail. And if I don't understand wrong, you are operating this digital platform by yourselves. Why do you think you have the sufficient expertise or experience in developing the side business?

Look, that's a very interesting question, and it's been internally debated for long. So at the beginning when we started thinking about this all started as a way to make the highest and best use possible from scattered blend we used to have in our industrial parks. So -- we came up with a happy idea of why don't we look at the data center business, send our technical people to the U.S. to learn about the business. David Brush was the father of the program. And we started researching extensively the market. And finally, we came up with a number of ideas. The first 1 is that if we wanted to just develop the scattered land we have in industrial parks that was a nonstarter. So in reality, we have only applied a couple of land plots, which were, let's say, excess land from logistics. The other 2 are specifically office plots in Barcelona and Madrid. The second thing that we discussed extensively internally is how to play this because the most, let's say, the easiest way to play it was, okay, let's joint venture with somebody who is already in the business and our life will be very easy. We get a rent -- and that's it. We don't need to hire engineers. We don't need to hire [indiscernible]. So we don't need to hire marketing people. We don't need to hire maintenance people. We don't need to commission equipment, it will be easier to do that. However, it is not in our DNA. I mean, I have had this question many times, notably in 2014, when we started and people said, why do you believe you can do logistics and be efficient as compared to Prologis because Prologis is global and is American and you cannot do it. So we took the decision to do logistics. We have done logistics, and we are competing on a level playground with our top competitors in the market with Logicor, with Prologis, with SEGRO, with PSP with VGP with everybody, [Paratoni]. So in equal conditions, I mean, they have their strengths. They have their weakness. We have our strengths and we have our weaknesses, but we are competing with them on a level playground. -- you might argue logistics are not high in operation. Well, this is -- might be true, although I tell you it's a very significantly intense business. But we have also faced that same question in shopping centers. Why will you try to compete with Omighty, Klepierre and Levi's. You are not French. You cannot do it because all the retailers are French. So you will fail in competing with them in shopping centers, okay? We decided to compete with them in shopping centers, and we are now in the same retailers association in Spain. We respect them a lot, but they also do respect us a lot. And we operate in equal conditions with all of them. So in data centers, there was significant discussions, particularly at the Board. Because it is the easiest way is to be -- to reach an agreement with somebody from the U.S. and become a qualified mate of them in Spain and Portugal that we decided to do our own operation to hire own staff and try to develop our own business there, including the operation because like in shopping centers, it is a highly operational business. Only time will tell whether we are right or wrong, but at least I believe we are in our own right to make our best and make a try.

Thank you. And your next question comes from the line of Alvaro Soriano from BNP Paribas.

Yes. Just in terms of the inflation and following on a previous question, could you provide like a sense of how much of your FFO guidance, your EUR 0.64 you are guiding is driven by inflation to fully understand not only the impact on rents, which you say is going to be more or less like 4%, but also on cost and debt. And then also on liabilities, should we assume the new LTV target to be around 35%, looking at your presentation. Yes, that would be it.

Okay, Alvaro. Look, the LTV target long term is clearly 35%, 36%. Of course, momentarily following a potential disposal of a big portfolio it might go slightly lower than this, I mean, 32%, but this will give us a little bit of releveraging capacity for the future. But at the beginning, we need to repay bonds and bank debt because the cash cost you money and the liabilities cost you money. So the sooner you convert your cash into repayment of liabilities, the better you kill the scissor effect of cost of cash plus ongoing cost of liabilities. Regarding the breakdown of our 64 guidance, frankly speaking, I don't have the data handy with me. I mean call, Ines will be more than happy to try to reconciliate. I mean if I have to talk by heart, I mean, it's a 4% inflation. So 4% inflation. And we are talking about more than 10% increase in FFO.

Okay. And just a last one. In terms of CapEx I don't know if you have provided like the budget for the year? And also regarding Cunef and Fujitsu office buildings, you haven't provided any yield on cost. If you could give a little bit of color on both figures, it would be great also.

We haven't finished the costing of the works because we are talking about progressive works. So we have the costing of the first billing, but not of the remainder. So we will take some time before we can really can appreciate the whole program in full. Anyway, I mean, given their size, not very significant for the size of the of MERLIN's portfolio. And regarding CapEx for this year, it will significantly oscillate because our experience is that given the slowness of the public administration in Spain, it can significantly vary from year-to-year. In fact, this year, we have moved a surplus of more than EUR 100 million into the following because we have been slightly more delayed in the execution of CapEx than we anticipated at the beginning of the year. So again, Ines can give you further details about that.

[Operator Instructions] And your next question comes from the line of Fernando Abril from Alantra.

I have a couple, please. First is with regards -- it's a follow-up from my colleagues one. It's a follow-up on FFO. So it's roughly EUR 25 million or something like that FFO increase in 2022. And so from my point of view, it looks a bit prudent considering that your occupancy trends and guidance, the inflation tailwinds that you are pointing to 4%, which will have a major impact at the FFO level, I guess. Also, some project delivery, I don't know. If you -- and also the use of COVID incentive, which if I recall correctly, it was almost EUR 20 million. So I don't know if you are trying to be prudent or any color of the moving parts would be great. And then second question is with regard to shopping centers. I don't know if you could give us an update with regards to pricing with a new leases that you recently signed. And also, how are tenant sales and footfall doing in January and February compared to 2019.

Okay. Starting by FFO. The amount that you are calculating, EUR 25 million, which is right. You say basically that it doesn't go hand in hand with the expected performance of inflation, et cetera. There is 1 thing probably missing in the calculation, Fernando, which is important, which is ordinary sales. I mean this year, we have sold -- in 2021, we have sold around EUR 7 point something million of cash flow. And in 2022, we are selling also a significant amount of cash flow. I mean, in fact, we have started the year already selling some assets, I mean, that you will see during the first quarter presentation and the second quarter presentation. So that should be subtracted from the application of inflation to our top line. But I admit too that our forecasts and the way we guide the market normally pairs on the prudent side of life. And this is founding characteristic of this company, we prefer to be this way. I mean you don't get too far bul******** people. So we prefer to be relatively prudent in our estimates. Regarding the pricing, it's a very good question because also I forgot to mention. Remember that we used to have a 4% gross to net leakage. In the first contract that we started signing at the end of post summer 2021 forward 2022, I commented to all of you in the results call that we were observing an enlargement or a widening of the gross to net leakage on the basis of tenant concessions normally in the form of fit-out contributions and free rent periods. And we estimated at the time that widening that figure to be in the region of an extra 10%, which was already pretty encouraging because in many calls, we have entertained conversations talking about figures in the region of 20%, even 30%. And we said in our experience is more like 10%. At present, I can tell you that the -- that average is down to 7% to 7.5%. So it continues shrinking. And as commented, the 10% gross to net leakage was in the form of tenant concessions, which, as you know, are -- can be withdrawn over time. And when withdrawing them we have been successful. So it's not that the tenants have become drug addict on the concessions and no longer -- and now no longer relinquish them. They have accepted the fact that they were temporary concessions and we are little by little retiring them from the tenant base. So this is what we are seeing right now. In terms of footfall and sales for January only, I mean, which is the month for which we have data. In Spain, the footfall is around minus 10%, minus 10.6% as compared to '19, always baseline '19 and sales minus 6.9%. So pretty significant normalization. I mean, despite Omicron, which has been hitting hard during the whole month of January. And also, we start to sniff that the tenants are starting to pick up some inflation also on their top line. I mean, they are selling more clearly as we speak. Portugal is lagging behind, it's a little worse because the retail measures, the retail footfall limitation or restriction measures there have been a little bit exaggerated. For January, it's minus 12%, minus 12.4% and sales around minus 7.3%. For February, we only have at present the overall figure, but both Spain and Portugal on footfall because we still do not have the data for sales. We need to perform the sales audits with the different clients. For February, we are at minus 8.3% in both markets, coming, which is also significantly better than January. So normalization in shopping centers continues its path.

I understand there are no more questions. If somebody else wants to raise one. We still have time. Operator, can you please see, if there's anybody waiting to raise a question?

[Operator Instructions]

Nevertheless, I mean, you know that we're always available. So I think we've already taken a little bit of your time. We thank you for joining today's call. And I said, we remain on your disposal for any additional questions that you may have. Thank you very much, and have a good day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.