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

Good afternoon, ladies and gentlemen. Welcome, and thank you for joining MERLIN's First Half 2023 Results Presentation. Before we start, we ask you to please abide by the disclaimer containing in the presentation available in our website. I will pass the floor to our CEO, Ismael Clemente; and COO, Miguel Ollero, who will run you through the presentation. And thereafter, we will open the line for Q&A. [Operator Instructions]. With no further delay, I pass the floor to my Ismael. Thank you.

Thank you, Ines. Good afternoon, everyone. Welcome to our first half 2023 results presentation. The company has enjoyed a solid semester in all business lines, better than expected, I would say. The Spanish economy is not showing signs of abatement so far. I mean it's performing relatively strongly on increased touristic revenues and public spending for the time being but we remain prudent for the second half, a little less prudent than we were at the end of the first quarter. In terms of operating performance, as commented, very strong in all asset classes. The like-for-like rental growth for the portfolio came out at 7.7%, and the occupancy remains at or close to historical highs at around 95%, 94.9% slightly up versus the first quarter. In offices, clearly surprised us on the upside despite all the fears around work from home and San Francisco. We enjoyed a 7.5% like-for-like rent increase and a 3.2% release spread with a solid 92.3% occupancy. Logistics remains very strong with a 4.3% like-for-like, 9.3% release spread and 96.4% occupancy, although there is here a little cut off date effect because at present, we are close to 99%, 98.8% because there was just 1 contract that was signed following the cut-off date for the semester. And the darling of the semester has been retail. I mean believe it or not, after all the retail market down and all the b****** that we have we stood during the last 7 years. Now retail is performing admirably. I mean, with a 10.5% like-for-like growth, 10% release spread, which is really incredible and record levels in terms of occupancy at 96.4%. The -- adding up the whole thing, the financial performance of the cash flow of the company has also been very encouraging at EUR 0.31 per share which is a 16% increase pro forma, excluding 3 as compared to last year and it leads us towards the belief that we are going to beat the original 0.58% -- EUR 0.58 estimate for year-end. So we are upping our guidance EUR 0.60. Some of you may say, EUR 0.31 x 2 is EUR 0.62, but we are expecting a little less income for the second half and also a little more financial expense. We have experienced an overall decline in valuation across the portfolio. We have onboarded 28 bps of yield expansion which takes total to 72 to date since the change in interest rate environment started. You might remember, we discussed at length during the first quarter call about what will be the extent of the correction. We have in many occasions mentioned to you that we expected in the region of 100 bps. So we are getting there. I mean, we will, no doubt, have another additional valuation correction at year-end. But little by little, we are going to be at or around the 100 bps correction we mentioned to you. Of course, whether this will continue or not will depend on the direction that interest rates will take. There are different schools of thought, people says that they are now starting to level and some people who say that there are still a lot of rises in the horizon. Frankly speaking, I am not macroeconomists. I'm not an expert, I don't know. So the only thing we will do is try to have the company prepared for whatever scenario of interest rates and/or cap rate expansion we need to face in the future. The financial situation of the company remains strong with relatively low LTV, virtually all interest rates are fixed and no debt maturities until May 2025. Liquidity, which is made up of available credit lines and cash at banks, it's in the region of EUR 1 billion, which is sufficient for what we need in terms of security cushion. I mean we will continue doing liability management in anticipation of the May 2025 maturity. I mean we will not go slit for the next 2 years. So expect some liability management exercises in the company in anticipation of the May 25 maturity. Regarding minor or major value creation efforts, we have disposed of around EUR 32 million in the semester, including 2 non-core shopping centers that you might remember. And 1 very small industrial asset. This will continue during the second half. I mean, our budget for the year is between EUR 80 million and EUR 100 million in disposals. So we will continue making an effort in this regard. Although that effort is now especially focused on noncash flowing assets. I mean we have basically made a significant exercise over the past years of disposing business lines and assets that didn't fit our strategy. At present, what we are trying to do is make our balance sheet fitter. So in other words, have no assets in our balance sheet, which are not producing cash flow or able to produce cash flow in the near future. So we -- what we are doing basically is eliminating those assets that do not fit with those criteria. Regarding Landmark, nearing completion, Ruiz Picasso will be delivered to the anchor client at the end of the year, in November, December. And now, it's important for us because that asset will contribute around close to EUR 16 million rental income next year. So that is about EUR 0.03 per share, which is very much welcome in the times we are living. Super, super excited about the digital infrastructure plan. We are about to deliver the 3 assets we have been building for the past 14, 15 months. All of them will be delivered by the 30th of September. In 2 of them, the anchor client is already in trying and testing the equipment. So what initially was a concept and then a work in progress is becoming more and more tangible and visible now, and we will be welcoming some of you for rounds of visits. I know that this is not an asset class that is super transparent in the market. Very few people have had the pleasure of visiting one of these monsters. We will be happy to welcome the ones of you that saw want in Spain for visit -- asset visits to our data centers. The -- of course, the flip side of the coin is that this will mean a significant CapEx effort. As many of you are pointing to us in their latest meetings we are having with some of you. But so far, we have incurred around EUR 200 million. By year-end, we will be more in the EUR 300 million mark, but this is already budgeted for the year. And at this point, basically, our intention is to spend another EUR 100 million next year in order to fit equipments amounting to 33 megawatts in the facilities so that we can -- we are not caught short of availability by the potential commercialization because this is, of course, always a fine equilibrium between you need to have the availability of power if you want to commercialize but if you want to have the availability of power, you need to fit it in advance because there is a significant delay between the commissioning of equipment and when you receive that equipment in your facilities. So this is what we plan to do. Without further delay, I pass the floor to Miguel Ollero, who will comment on the financial numbers.

Good afternoon, everybody. We should go now to Page 6 of the presentation. I will be very brief on the financial performance of the company as Ismael has been commenting. We have a very good operational performance, who has been already translating into the financial figures of the company. Consequently, on gross rents, we were increasing 6.9% with regards to the same period for the prior year, 2022 reaching the EUR 237.8 million for gross rents within the company. Important to remark that on an EBITDA basis, we were close to EUR 182 million, which implies a further increase of 9.6%, much higher than the gross rents increase during the first half of the year. And most important to highlight that the EBITDA margin was at the level of 76.4%, surpassing close to 200 basis points with regards to the prior year. On FFO basis, EUR 147.4 million which on a like-for-like basis, taking on a pro forma basis, taking into account that in this semester, we have not been enjoying the portfolio. We have to place the FFO of 16.7% basis. What also implies, I'm pleased in the margin from 56.7% to 62%. It's a great improvement in gross only EBITDA margins for the company. So on FFO basis, we were commenting is EUR 0.31 a share for the first semester and as Ismael was commenting, we're expecting EUR 0.60 per share for the year-end. With regards to the EPRA NTA, it has moved from 15.67% by year-end to 15.36% we were disputing EUR 0.24 per share during the second quarter this year. We have been also being affected by the fact that we have a negative impact on valuation of the assets, but still the NTA of the company continues to be robust on a very high level. We move to the next slide. It's just a brief reminder of how our rents have been performing during the year with a like-for-like improvement of 7.7% all across the portfolio. Big shopping centers, the ones who have been growing the most on a double-digit basis, 10.5% on shopping centers. Following offices at 7.5%. Logistics is a little bit down, but it's more related to the fact that we are almost at full occupancy. So it's mostly driven by CPI indexation but in the end, we already got EUR 16.2 million of additional sales of revenues of rents during the first half of the year. If you move to the next page, Page 8. In terms of occupancy, the company, as Ismael was point at before, is the highest corresponding levels of occupancy at around 95% occupancy. So you highlight that office is at 92.3% holding up with the occupancy, we were reporting by the year-end. Remember that in 2022 was a year which we were improving largely our occupancy in the office portfolio that was the best performer in the company in the prior year. In logistics, we are reporting 96.4%. This is mainly driven by our cutoff date. There is a logistics set that got buttoned, but now it has been relet so considering that this is a relet in the month of July, occupancy will go up to around 98.8% but this means that we go back again to full occupancy in the portfolio. Shopping centers, 96.4%, higher occupancy than we ever had in our portfolio. So as Ismael was commenting, shopping centers is not only a question of higher rents, it is a question of very high occupancy. Finally, I should highlight that the company itself is transforming all as business line at it best. Now we are moving on in the specifics of fixed asset class, and Ismael will guide through them.

Okay. Thank you, Miguel. Well in offices, you have here the bridge of the income. We are running now at rate for full year of around EUR 250 million of billing in offices, which will be our historical record. I mean inflation is clearly helping us because we have disposed of a number of buildings in the past years but little by little offices is holding up as a very important contributor of the income of the company. Like-for-like growth has been surprisingly high in Madrid because this is, of course, the biggest sample and normally, it is lower, that is being surprisingly high, very good also in Barcelona and a little less impressive in Lisbon. But it's -- I believe it's simply a blip. I mean Lisbon continues performing very, very well, and you will see it shining in the second semester occupancy, as you can see on the bottom right of the page is 100% at present in Lisbon. Regarding leasing activity, a lot of leasing activity, 160 -- in excess of 160,000 square meters contracted. Very good tenants and very good release spread, although clearly, the CPI and release spread in offices are countering forces. I mean they are opposite forces because if you want to really update to market any given contract when it comes to expiry, the tenant will request a capital on inflation. And if you want to apply full inflation, it will not accept bringing the contract up to date. So that -- this is something that we have commented already in past conference calls, and now it is more visible in the portfolio. In the second half, we expect the performance to worsen a little bit. I mean so for those of you, when I say worsen go from 90% to 80%. Now it's going to be less than 1 point. So we are expecting something really meaningless, but we expect a little in performance. And I believe also that the indexation will not be that positive in the second half because as you know, there is a big disparity in Spain between core inflation and nominal inflation. We index on the basis of nominal inflation. However, as you know, interest rates normally trend towards core inflation, they try to tackle core inflation. So there will be 1 or 2 quarters or maybe 1 or 2 more in which we are not going to be as able as in the past of increasing rents via inflation because inflation, nominal inflation is already going down in Spain. It's the July print was like 2.3%. It came out today. In LOOM, we have opened 2 spaces, Castellana 85 and Plaza de Cataluña in Barcelona. We are now at close to 27,000 square meters. And 2,700 desks with an 85% occupancy and an ADR of 380. So by space, we have reached now positive EBITDA in all of them. At the top, we are still EBITDA negative because the business is not able to absorb all the overheads. We believe the breakeven will be reached between 36,000 and 40,000 square meters open. So in the coming year, we will be in that kind of situation. But we are reporting occupancy and ADR for your convenience. In Logistics, very strong quarter and semester the like-for-like has been 4.3%. The growth has been higher in Barcelona and in other locations within Spain than in Madrid because it's a much deeper. I mean, market more contracts. But occupancy remains super strong. Madrid as commented is now close to 99%, and the rest of the portfolio is also virtually fully occupied. So we are going to go to market with a significant amount of new offer for the coming year so that we can cope with the demand that we are perceiving at present, in which also we have -- we are relative winners because the touristification in the logistics market is coming to an end. And most tourist investors can no longer find financing or capital. So many of the tenants that were pretty speculative in the past and were in doubt of whether going to your facility or any other facility that was to be built by somebody now come to you and it's clearly is making our relative negotiating position a little better. As you can see, for example, in the yield of the upcoming projects, which has increased a little bit versus the one we had anticipated in prior versions of what we consider Best II and Best III yields. The consequence to a lesser extent, prices of construction are coming back a little bit coming down. But it's more that rents continue to grow in our -- at least in the important markets in which we operate. In ZAL Port, very good period of activity. The occupancy remains -- I mean, point up, point down remains very close to full occupancy. And generation of FFO is solid, a little lower than last year, that is not really meaningful. Shopping centers, as commented, super strong semester and the visibility for year-end remains also super positive. I mean we are seeing an incredible footfall. The footfall is now steadily above what it was in 2019. As you know, it's been so far our black spot because we were obtaining better sales per square meter over the past months that we never exceeded -- we never managed to exceed the 2019 total figures. Now we are also above the footfall figures of 2019. And with the recent cinema blockbusters, we believe that those will increase further towards year-end. So very, very interesting behavior of shopping centers. The recovery of tourism is clearly helping us and for us, what is really, really important is that the occupancy cost ratio has set a new record low at 11.7%. So the tenants are clearly comfortable in our facilities, they are not suffering to -- they are not struggling to pay the rent they are quite -- they have quite a lot of room for maneuver. And on Page 19, we have the different clients and let me pass the word to Miguel for valuation and debt position.

Thank you, Ismael. Now we are coming into the recent deposition of the company. Page 21. As you know, we conduct a vision twice per year. So for the first half of the year in 30th of June, we conducted valuation. The outcome of the valuation mainly is the negative point of our financial set of results because we were getting a 1.4% like-for-like reduction in valuation of our portfolio. We are pointing out here that gross yield stands between 4.6% in offices to 5.9% in shopping centers where an average gross yield of 4.9% all across the portfolio. We should highlight that in terms of valuation, what we had was a 2.5% like-for-like negative revolution in offices which implied 24 basis points of yield expansion in the office portfolio. Logistics, despite a 20 basis points expansion in yields were getting a 4.1% up in valuation. This is mainly driven by the fact that our -- as you know, we have a land bank on logistics which now is advancing. Ismael will be commenting later on how advanced we are of around 180,000 of square meters, which are coming into -- operate into development and operation on a prevalent basis, which is driving up our valuation with regards to this land bank. Finally, on shopping centers, we had a 2.9% platform like reduction in value and 32 basis points of yield expansion. We take a view of the last 16 months of our portfolio. In offices, we have had a yield expansion of 63 basis points. from Logistics 47 and new shopping centers, 97 basis points of yield expansion, which on a portfolio basis means 72 basis points of yield expansion in the last 18 months within the portfolio. Moving to the financial structure of the company. We should say that the company continues to be very solid from the financing standpoint, we should be highlighting that in the first half of the year, we have been refinancing the bond, I was expecting in the month of report for such purpose, we were entering into bond financing guide than bond financing with a very attractive cost well below what you can get on the bond market. We were ending up with a net debt of below EUR 4 billion with a gross debt of EUR 4.16 billion, which is EUR 80 million below on a gross debt basis with regard to the situation we had on year end. So the company, as of today, has allowed to value of 33.9% with the vast majority of our debt is fixed rate. We have 98% of our return office maturity basis with an average maturity of 5.3 years, having the first maturity only in May 2025, so close to 2 beyond and with liquidity of above EUR 1 billion. We have been reducing our liquidity with regards to the EUR 1 billion we had by the year-end 2022, partially because we were advancing on the refinancing of the bond maturing in April, and we have been using part of this liquidity going down the bond financing that we put in place for this replacement during the first semesters. But -- and as a consequence of it, it has been reduced. However, I should be highlighting that in terms of volume facility. We have been expanding it. We used to have EUR 700 million. We have been expanding it into EUR 740 million and also enlarging the maturity of it now is maturing in 2028 with the capacity to a large additional 2 years. Finally, from the financial standpoint, we should be highlighting that the 2 rating energies, moving and SMP, we have been conducting their value and both of them have maintained our current rating stance, also keeping our positive outlook that was set 1 year any ago. And I think this is it from the financial standpoint. To remark again that we are pretty well set with debt on a long-term basis, no maturities ahead of 2025 May and fixed rates all across the financial portfolio. Well, in terms of sustainability, the semester has been quite active in terms of the Pathway to net-zero program. We have now reduced the Scope 1 and 2 footprint from -- our target is 85%, and we have achieved 71% already. So we are clearly progressing towards achieving our 85% mark, then the rest will need to be compensated. And in terms of implementation of the green clause that will take a long time before we can really change that closing all the contracts that exist in the company that, at least in the semester, the progress has been good with 100% of the new leases signed in the logistics department incorporating already green clause and 37% of the leases signed in offices, mainly the ones with the bigger tenants incorporating the green clause. In shopping centers. We have not yet started incorporating the green clause. It will take a little bit of time to design or to implement it in the different contracts because the contracts have different shapes in some cases, depending on where they were coming from Metrovacesa, the ones in Portugal and Marineda shopping centers we bought. But we will continue doing it and reporting progress. Value creation, we invested a little bit of money in the purchase of a vacated department store in Marineda our intention basically is to expand the mall of Marineda to adapt to a number of requirements we have from existing tenants that want to enlarge the space and we will be making use of around 18,000 square meters of the new buildability acquired. The rest will remain untouched for future use in case we need it. We disposed of 2 noncore shopping centers, 1 in ville de Cannes and the other in Aldaia, Valencia, near the Bonaire shopping center operated by Unibail-Rodamco and 1 industrial warehouse in Tres Aguas Mall one. Plaza Ruiz Picasso already commented, near in completion by the end of 2023 should be opened. The most important thing here is that you can tell is fantastic. I mean we have signed with IBM for the national headquarters in Spain. Globant, which a technology company also for their headquarters in Spain, Willis Towers Watson fencing, SAP fencing. And then we are also putting in a LOOM that we will use to cushion the flex space needs of all the AFCA neighborhood in which we have 1, 2, 3, 4 buildings. So we will be using this LOOM as a way of providing services to the immediate neighborhood. On a more bread and butter kind of thing, we finished the facelifting of Cerro de los Gamos, small buildings, so nothing really important. But as you can see, the change of aspect was very significant. I mean somebody should have shot the architect that designed the building you have on the bottom left of your page. But the new design is clearly has been welcomed by the market, and both buildings are now the ones that we have refurbished are now full. We will continue working on this business park because it's a business park that is a top performer, always in high demand because of its close distance to super affluent residential areas. So we will continue refurbishing the rest of the buildings of the -- or facelifting the different buildings of the business park. Regarding logistics on Page 31, we will start in the semester, 180,000 square meters, 160,000 of which are already under agreed terms and the other 20,000 maybe speculative just because they are side-by-side 1 of the pellets that we are going to build. So once we pre-charge the land for one of the developments, it is very easy for us to precharge the land, which is closely adjacent it makes sense for us to do both at the same time. And we are sure that it will be led before it is finished because it is in an area of high demand. We will be progressively starting construction during the second half for delivery at the end of 2024. In one case, we believe it might slip into 2025 first quarter. But remaining investment is EUR 109 million with on cost of 7.4% I mean we were projecting with the rise in construction costs that we experienced over the past 18 months. We were now projecting between 6.8% and 7%, 6.9% around that, but clearly, rents are helping us in this regard and construction costs are also coming down a little bit. The latest construction quotes, we are getting much more moderate than they were in the past. On the digital infrastructure plan where there is being a lot of construction, of course, Bilbao-Arasur nearing completion in this data center, we asked for the license in February last year. The Best government was clearly the 1 that reacted quicker and faster to the need for data storage. So they were very quick in giving us the license. We started development in April 2022. The client will be granted early access on the 15th of September and the final delivery date and will opening dates to follow immediately will be 29th of September 2023. The facade is already completed. General construction around 90% completed interior of the office is 85% and the equipment has been now delivered. So 3 megawatts are already live in the interior of the building. The fiber connections are now being -- at present as we speak are now being connected to the data center. In Madrid-Getafe, we obtained licensing in July 2022. This license costed us almost 1 year, but we finally started development on the same date, and we are now finishing touches. The client is already in. It's already being granted early access and has started paying, let's say, half rent. The final delivery date will be 29th of September, 2023, and in terms of key milestones, the facade is 95% completed. We are now clubbing it with photovoltaic panels that will be capable of delivering up to 0.5 megawatts peak. And the building construction is 85%, interior of the offices 80% and the equipment is already in the premises with fiber being connected as we speak. Barcelona Parc Logístic, the licensing also happened in July 2022, and we started construction immediately thereafter in August. The tenant is already in the final delivery date is on 29th of September 2023. The facade is almost completed. And this one is also being traded with photovoltaic panels. Building construction 85%. And in 2 of the offices, it's a little bit delayed because the priority here was to grant the early access to the client. So what really was the priority for us was the technical room. So we left the offices a little bit on the side, equipment delivery already in completed and connecting to fiber. On Page 36, you will see a number of images of the interior of our data centers, 1 of the data halls, which is already receiving final touches. The aireblocks, air cooling system, which is made in the U.S. by thermal works. The generator sets, big ones made in Germany by MTU Rolls-Royce. The hot aisle, although this 1 is still with the cables is a little bit under construction, the cooling system and the meet me rooms, of which we have 2 in every data center, which are also now with the cable trays and everything almost in final status. Regarding CapEx, we have incurred already in around EUR 200 million and we expect to incur another EUR 90 million before year-end. So I expect around EUR 300 million to be spent in data centers for the 3 fully built sales plus the initial 9 megawatts of equipment. We will continue procuring equipment. It is important to do so because you cannot offer to hyperscalers what you don't have. And there is a significant delay between commissioning and receiving the equipment. So we have already launched a procurement for another 6 megawatts. In the second half of the year, we will probably procuring another 6 megawatts of equipment up to '21. And the whole thing will continue in 2024 with the idea of finishing '24 with around 33 megawatts of installed capacity that of course, is important in terms of commercialization. Commercialization, in our demonstration phase, we are now topped up as compared to the power that we have installed in our data center. We have currently 9 megawatts and have launched the commissioning for another 6. And we have pre-commercialized 4.2, 6.8 between 8.8 and 11.8. So we are already topped up with the current 9. Hence, why we have gone for another 6. And we -- with the intention also to accommodate the options of the existing clients. Two of them are hyperscalers and the other 1 is an industrial client with a technology integrator. So it's a different type of grid as compared to the others. What we feel is that the phases that we initially designed 2027 and 2035 and beyond, should probably be shortened a little bit. So we are seeing significant demand. Generative artificial intelligence is clearly the driver in the market now for demand of the data center storage. So very, very interesting, although from a cash generation standpoint, we are slightly delayed owing to the delay in obtaining the construction licenses. So for 2023, we will only be invoicing meaning less figure, EUR 1 million. And for 2024, where we are going to be invoicing in the region of let's say, our scenario is that we are going to be invoicing in the region of EUR 11 million. So -- but this will very quickly ramp up immediately thereafter. Outlook for 2023, beyond the fact that we up our guidance from 58% to 60%. The idea continues to be to propose an ordinary dividend of EUR 0.44 to the Board, which corresponds to around 80% of the adjusted FFO. Before today, we were a little bit more in doubt of being able to reach that point of cash flow. So we were -- we will be using a little bit of cash at banks in order to distribute the dividend. Now we believe we are going to be comfortably generating the cash flow in order to pay the dividend so that the company doesn't incurring any usage of cash or releveraging in order to pay the dividend. So dividend will be comfortably covered by the cash flow generation of the company. And that is basically it. Strong performance in all key operating metrics. We are very happy, I mean, with the way the first half ended up evolving. We had a little greener picture at the beginning of the year. But clearly, it's been a very good semester. Occupancy remains strong in all asset classes and offices, in particular, is probably more resilient than, of course, many people think. But even ourselves, we had a lower projection for occupancy of offices in this quarter. So we are happy with the way it has resisted. Logistics continues to rock. So we are going to play the wave by putting in the market 160,000 square meters fully pre-let. Plus another 20 spec. Current occupancy is close to 99%, and the demand remains very, very strong. Shopping centers has commented super impressive performance and what is more important with relatively modest effort ratios. So we are happy with what we see, and we believe the second half will be also very strong because the tourist season in Spain is expected to be very strong this year and also the household spending remains high for reasons, probably difficult to understand from an economist mentality, but it remains very, very strong at present. In terms of value creation, as commented, we have been doing some little adjustments in our asset inventory. And the idea is to recommend a dividend of EUR 0.44 to the Board for the fiscal year 2023. So as you know, we normally distribute part of it in the fall around October. The idea would be around $0.20. And then the rest of the dividend is paid after the General Shareholders Meeting approved the dividend in the following year, normally in the month of April and May. So immediately thereafter, we distribute the remainder of the full year dividend. So that's it for now. We are at your disposal for Q&A. So please start making your questions, and we will do our best to respond to your questions.

[Operator Instructions] We have a first question coming from Ignacio Domínguez from JB Capital.

I just have 1 question regarding the evolution of the office market at the outskirts of Madrid. Do you see any difference in yield expansion between offices located in prime CBD versus those located in secondary areas?

Okay. Ignacio, at present, not significant. The difference in the 2 markets is basically huge in terms of rents. So the prime rents now in the prime CBD area revolve around EUR 37, EUR 38 per square meter per month. And in the secondary areas you just commented oscillate EUR 15 and EUR 17. So basically, there's already a huge difference in rents. And also, there is a significant difference in yields. So while in the city center, the market is evolving around yields of I would say, 4% in the outskirts of the city, the yields are 5% and above. So from there, you need to adjust. And this is because or this is the reason because there is no significant discrepancy between 1 adjustment and the other. They are similar because they start from very different bases. Another thing that we are seeing is that prime versus nonprime is also a question of the building. I mean a given building can be prime in its own location. So if the building is the right building, is modern, is well designed with a good resonate. And particularly, it ticks all the marks in terms of sustainability, that is super important because that building will fill up with preference to the rest of the surrounding buildings. This is why, I mean, in the last 12 months, I believe, with a market share of around we have made more than 20% of the take-up in the city because our portfolio is generally speaking, is of better quality and together with Colonial and GMP and very few others, our portfolios are better quality than the generality of the rest of the players in the market. So with a relatively modest market share, we have a very significant presence in the take-up. Before somebody else asked in this same line of thought, there is clearly a trend that we are seeing in the market of reconversion into residential. So the browner buildings that cannot be adapted to green basically, in some cases, are being bid by people with the intention to redevelop into residential. That is important because that is setting the base for a future re-equilibrium of the market in case occupancy for reasons related to economic performance of the country or higher degree of adoption of work on home, which so far, we don't see. But if something happens in the market, clearly, a reduction in the supply owing to the conversion into residential will clearly help long term. This is something we have already seen in Lisbon. We, in Lisbon, in CBRE measurements we used to be talking of around 4.7 million, 4.8 million square meters of office stock. Following the new tax regime enacted by the Portuguese Government and the boom in residential prices it meant a lot of offices were transformed into residential and the office stock sunk to a new low of around 4.3 million square meters. Now it is at 4.4 million and the forecast is that over the next 3 years, it will raise again, it will increase again to something in the region of EUR 4.7 million, but that blip in the stock and that decrease of supply cost the Lisbon market to go really crazy. And this is why in terms of rents, we are already well beyond the peak rents that we experienced in 2007 in Lisbon, whereas in Madrid, for example, we are still at around 80%, 85% of the peak achieved in 2007.

Okay. So the next question comes from the line of Ignacio Carvajal from Cartesio.

Yes. Hello, can you hear me?

Yes.

I have 2 questions. The first 1 was on there seems to be a mismatch between what the -- your share price is telling us. and what sell-side analysts seem to be inputting in their models and then your presentation, especially in terms of rental growth in 2023, but especially in 2024 and 2025, because of your development CapEx. I mean you've given some data points in the presentation. You mentioned the 11 million office building rents from office buildings coming into stream in 2023. You mentioned from the data centers in 2024 and then a ramp-up. But if I add to that, all your logistics assets that are coming on stream, more office space that you are building and the release spreads plus inflation, it seems that at least the sell side, as Bloomberg states it is not considering your potential growth. So I was wondering if you could give us some sort of indication of future rental growth at least in the near term 2023, 2025, '26, I don't know if your comfortable there? And maybe then later I'll make the second question.

Okay. Well, Ignacio, it is clearly beyond our attributions, particularly from a legal standpoint to give a very precise 5-year business plan in terms of what we are going to achieve in rent, but the information is there. So it is very easy to calculate that 180,000 square meters of logistics once fully let, maybe December 2024, maybe January 2025, we'll be producing a monthly rent that multiplied by 12 will be EUR 11 million. So that is 1 data point. Then Ruiz Picasso. That will be another EUR 16 million. That's another data point. Data centers, while not a super big contributor, but they will contribute a little bit also in 2024. And what is more important it is clearly the line of growth of the company over the coming years. I mean the way the demand works in this segment is quite exponential. So once you're Guinea pig clients have come into your facilities, and they have tried and tested the technology. Normally, they funnel every extra demand they get in the market through your data center. So we have great expectations in data centers, although predictability of cash flows here is a little bit more complicated because you need to know that when you say that you have let 2 megawatts in reality, you haven't let 2 megawatts. You have let 0.3 till October, another 0.3 in December, but then 0.4 till March. So it's already staggered normally in no less than 2 years because the -- given that the norm in this market is that those dates that you negotiate with your hyperscaler client entail the immediate payment of money. So what they do normally is be relatively prudent in their assumptions regarding the usage of power. So you have to have the power ready, but they will start paying you only in the agreed date. So it's a little bit more difficult to calculate the stream of cash flows. And of course, we will continue having inflation. I mean occupancy cannot improve that much. I mean, only in offices, but it's going to be a little bit counter stream because the -- generally speaking, the literature for offices is at present is completely busted and all clients are thinking that they can save even more space in offices because somebody told them that in the U.S. there -- all of them are empty in San Francisco. And because of that, the climate for office is going to be negative over the coming years. We need to know that. So to reach much higher occupancies in office is not going to be easy, but I will be happy with a relatively modest reduction in occupancy as the 1 we have in shopping centers since 2017 because remember, all the Best literature we have in shopping centers starting in 2017, and we had an 89.3% occupancy in 2017, and we have seen being able to increase it little by little. So those are the, let's say, the building blocks of a model in which you can see the evolution of cash flow of the company over the coming years to give you the exact projection that we have presented to our Board in the 5-year business plan, it is beyond our capacities. I mean even from a legal standpoint, but we -- of course, we like what we see. I mean -- and remember, you are talking to a group of people that keeps faithful on the company and buying shares every semester. So we are happy compared with what we see.

Okay. That's great thinking. There's a lot of detail in that. Just as a second follow-up question on data centers. There's been a lot of talk lately about water shortages. And of course, data centers need a lot of water to cool down the facilities I was wondering if you can give us just a little bit more insight on how that is being done and if it is a problem going forward.

Well, look, we are very lucky in this regard because like given our complete lack of experience in this field, we established a technological joint venture with an American partner with a lot of experience in the development of data centers. Unlike many underdeveloped countries, we have moved from no phone into iPhone. So we have jumped Generation 1 and Generation 2 data center designs. So our data centers are born since we started talking about this with our partner in 2018 are originally born waterless. So we do not use water in the refrigeration secret. We are using -- I mean, in technical terms, I'm not an engineer. They are not diabetic. They are a diabetic. So non-diabetic, and that means basically, we don't consume water in the refrigeration. That is super important because we could only guess that water will become a very important social topic for discussion in Spain and now it's becoming a reality. So we are finding that some of our clients, in fact, are now turning to us because they had designs for data centers in other parts of Spain in which water is a problem, and they are turning to us and asking whether we can replace their design by our design so that it doesn't consume water and is accepted by the authorities in terms of licensing. So that is creating a very, very huge opportunity for us. I believe the other big feature, which is important for us is that all of our DCs are powered primarily by renewable energy. So the one in the about country by a ground installation and the ones in Madrid and Barcelona via mix between photovoltaic panels of the buildings and roof-mounted panels in our logistics shares closed by.

Okay. So the next question comes from the line of Peter Gruenbaum from Kempen.

I got 1 question. If we look at the like-for-like rental growth of 7.7%. Could you maybe give a split of how much of that is driven by indexation? And could you also give per segment, maybe a detail how much of the like-to-like growth is driven by indexation.

Okay. Peter, I'll take this question. So overall is about 63% of the 7.7% like-for-like that we released and by segment. So if you take a look at the offices, about 60% of the 7.5%, so that is a 4.5% comes from CPI. Logistics is actually 140%, okay? Because as you know, occupancy is negative. So it's about 6% being said that we've had from CPI. And in shopping centers, it's out of the 10.5% is 6.5% so that makes for 62% of the whole thing coming from CPI. So the next question comes from the line of Florent Laroche from ODDO.

Yes. So maybe, yes, I would have maybe 2 questions. The first 1 on the guidance and the indexation. So what would be the indexation that we could expect or you have taken into account in the guidance for H2 2023 and at the end. So why should we consider this guidance, the upgraded guidance as a right one and not a conservative guidance? Maybe my second question on data center. Could you please remind you what would be the yield on cost for the data center that you will deliver shortly? And what would be its market share? And so as the answer, should we expect some value creation in -- to be recording in H2 with the delivery of these data centers. And maybe a third question on the shopping centers. So we can see that you have a very dynamic activity in shopping centers. And so what is the project today at MERLIN Properties with shopping centers.

Okay. So regarding the second half CPI, of course, we don't have a crystal ball, but we believe it's going to be between 2% and 3%. Up to now, we have been able to pass around 6.5% in the first half. But in the second half, we believe the nominal CPI should come down significantly, although we remain hesitant because the base effect of the energy prices may soon, let's say, expire. So let's see what happens towards October, November because that will be very important. But at least in August, September, we believe, like in July, the inflation will remain relative, let's say, nominal inflation will remain relatively low because core inflation is super high in Spain, 6.7%. But I mean, regrettably, our contracts are not indexed to core, are indexed to nominal, okay? So expect a lower indexation for the second half. Regarding whether the forecast is conservative or not, I will give the word to Mr. Conservative, who is our Chief Financial Officer, Miguel Ollero.

Florent, in the end, first half of the year has been on the past standpoint, has been above our predictions and given by the fact that we had as Ismael was pointing out a very high inflation attached to the contracts that we were renewing on an annual basis. and also on top of it, as you were already seeing in the first quarter, we had a very good impact from variable rent coming from shopping centers, something we cannot be counting on for the second half of the year. As also on inflation it will be softer, as Ismael was pointing out. So in the end, I shouldn't qualify the guidance for the year as a conservative one. We would like to be as much as restrict as possible. Considering that also for the second half of the year, they are a very clouds in the horizon that you never know how it is going to be. But for sure, we don't think it's going to be multiplying first half of the year by 2. So we are thinking that it's going to be EUR 0.60. Well, regarding the data contained cost at present, the ones we are opening, we remain faithful of the 11.2%. Remember, that 11.2% is once fully occupied. So we, of course, will not happen at the beginning. At the beginning will be a disaster year on cost because it will be the whole box built and just 3 megawatts fitted. So it's going to be piece of s***. But then when the whole thing is finished and fitted, the yield on cost, we are faithful it will be in the region of 11.2%. Remember, the land cost is very modest in our case because that land was already in our belly. It was already in our balance sheet. And we have not updated costs. In fact, that land was valued very close to 0. So in reality, what part of what we are doing is simply revaluing our own land. So that is why it's a relatively meaningful yield on cost and slightly above what other people is achieving in other parts of Europe. Market yields I don't know. And particularly, I don't know when applying to Spain, my guess in the region of 5.5% is a ballpark figure. So yes, if you believe in Santa Claus, then reappreciation should be double so it should come down from 11 to 5.5%. The theory is that they should be worth double as much, but I don't know. And the market is, as you know, these days, the market is crazy. So people will probably take cushions. And the cushion they will take is 100%. So if the yield is 11, so I don't think they will mark down the yield to 5.5% and recognize the value creation. However, that value creation will little by little be recognized by the appraiser. So at least it will help us a lot in the future with our gross asset values. So -- which is important because precisely at the times we are now this semester, having our logistics reappraised up was a big help because they offset part of the fall we had in shopping centers and offices in the absence of that help the negative valuation posted will have been bigger. So data centers will clearly at least on the GAV and NAV consequently basis, there will be of great help for us. And regarding what is our project, regarding our shopping centers, well, we don't have a project as such. I mean it is a valuable business line for this company. We told the market we had 6 shopping centers that because of having assembled our portfolio as, let's say, set of purchases from existing companies like Metrovacesa Testa we inherited a number of shopping centers that we didn't consider are core. But we have been very open to you in saying that we have 6 shopping centers that we consider noncore initially, we disposed of 3 of them, the 3 biggest, I mean, because they represented around 2% of the rent of the company, then there were another 3 that we continue considering noncore that represented only 0.9%, we have already sold 2 and 1 remains to be sold. Once we sell these remaining noncore shopping center, the portfolio will be already the 1 we like. I mean, in fact, at present, given the fact that this noncore shopping center is a performer, it's a very good performer. The only reason why we consider noncore is because it is in a relatively small city. And we only want to be present in cities above 500,000 inhabitants in catchment. So you can see in this presentation that the 96.4% occupancy across the portfolio materializes in no less than in any of our existing shopping centers, which means basically, we now have a bunch of very good performing assets, of which we are happy with. They are chosen by the public, people like them. And what is more important, we have already most of them because remember, in the past years, we engaged in the so-called flagship plan, and we spent a lot of money, in CapEx, in some of our shopping centers in order to bring them back to life, particularly or modernize a little bit their features in order to make them more compatible with an omnichannel strategy. So at present, those shopping centers with CapEx are the ones that are shining the most in our portfolio. We will still be doing some CapEx in some of our shopping centers. It will not be that big. And it will also, in most cases, mean an expansion in the number of square meters of GLA. So our idea is to continue operating our shopping center portfolio. We have demonstrated to market that it is absolutely competitive with our rivals. I mean there is nothing we should end about the way we operate compared to when -- how it unveil operate. So we are coping with them perfectly well. And the idea is what I commented basically continue enjoying the rents that's around EUR 130 million of rents for the company. When we finish the value adjustment cycle towards the end of this year, the yields, the gross passing yields in shopping centers will be trending towards something in the middle of 6% to 6.5% at present, I believe they are like 5.9% already. So I don't see many reasons if your question is why don't you dispose of them? I don't see many reasons why we should dispose of a perfectly performing portfolio of assets yielding 6.25% in an interest rate environment like the 1 we are.