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

Good afternoon, ladies and gentlemen. Thank you for joining MERLIN 6M '26 results presentation. You can find all the materials that will be presented in today's call on our website. I will please ask you to be advised by the disclaimer contained in it. Our CEO is Ismael Clemente, along with the 2 directors, Ines Arellano and Francisco Rivas, who'll walk you through the main highlights of the first 6 months of 2026. We'll then open the line for Q&A [Operator Instructions]. With no further delay, I pass the floor to Ismael.

Thank you, Teresa. Thank you for attending MERLIN Properties First Half 2026 results. I will be following the presentation that we have prepared for the occasion. So regarding the main highlights in operating performance, financial performance and value creation for the period, I would like to remark that we continue enjoying a strong operation in all of our traditional asset classes with a 3.3% like-for-like rental growth. We continue to enjoy a very high overall occupancy with a 94.7%, pending the incorporation of data centers as of 31st December 2026. In the 3 traditional asset classes, the one that showed the strongest performance was, once again, shopping centers with a 6.4% like-for-like growth because in logistics, we had a relatively good risk spread, but we lost occupancy. And in offices, we had a good occupancy performance, but we had a relatively low release spread owing to a string of in and outs in a number of peripheral buildings. In terms of financial performance, we enjoyed double-digit revenue growth, plus 11.7%, which translated into a very solid bottom line performance in FFO, plus 8% and despite the unavoidable increase in financial expenses. That means basically that on a per share basis, we are very close to recover the dilution caused by the capital increase, which is, I think, a remarkable achievement. In terms of value creation, we increased the GAV by 3.7% with most of that growth coming from data centers because actually, [ international ] asset classes, there was a very slight yield expansion, which probably will follow in coming months and years, owing to the interest rate environment that we are going through. We strengthened our balance sheet with EUR 768 million capital increase, as you all know. And we reduced the loan-to-value to 24.5% and with a liquidity of EUR 2.6 billion that will basically takes care of the most immediate maturities together with bank syndicate refinancing that we are preparing for the second half of the year. We maintained our investment grade rating, both with S&P and Moody's. And most importantly, because that brings a little bit more color to the table in terms of value creation, the most salient feature of the quarter or half of the year was a good execution in Mega Plan. In the past quarter, we were at 112 megawatts commercialized. We have now reached 160 because we converted the Arasur 1 situation that in the first quarter was in advanced negotiations. We have signed ahead of terms, and we had attached technical and financial documentation that was now -- it is now signed. And as a consequence, we are 160 megawatts let. We provided to you an indication on the full year results presentation of commercializing this year in the region of 200 megawatts. We believe that we are in a position to far exceed that mark because we have like 3 different avenues that we can explore. The most immediate, I believe, is the conversion into a full format lease of the head of terms and exchange of documentation taking place in Lisbon, where we had significant demand. We had like 4 different tracks open, 2 of them are very well advanced. And we believe that with 1 of the 2, we are going to finish soon documentation and therefore, end up having a full format lease that we can report. But beyond that, we have 48 megawatts in Getafe, which are booked that eventually we can also work between now and end of the year to convert. And we are recently working on a combined pack of 30 and 20 interest [ counters and a moral ] that eventually could result also in a significant lease, although I believe that will probably extend more into 2027 because we are just starting to entertain those conversations. As commented, Bilbao-Arasur 1 and Bilbao-Arasur 2 fully let which is very important because for many years, all of you have been asking whether we were able to sign through pre-lets. And now we are clearly in that situation. My colleague, Fran will comment later on that it's -- we are reaching a situation now in which, in reality, we are going after commercialization. So we are finishing a product behind our commercialization pace, which is a very nice place to be because we are enlarging and strengthening our dominance in the Iberian Peninsula, while we gained a lot of visibility on future cash flow through very advanced releases. If the lease on -- lease is to be converted, the interesting summary is that 100% of Phase 1 will be let, 70% Phase II and yet 25% of Phase III, which I believe will be a remarkable achievement, particularly for those of you who attended our Capital Markets Day in Arasur in March because, clearly, this is exceeding the projections that we internally had and that we conveyed to you on that occasion. And all that, while maintaining a disciplined capital recycling, we have sold EUR 75 million as of July, and we still have EUR 90 million of divestments signed that we will be converting between end of this year and beginning of next. Those thus reinforcing our internal capital recycling and helping the funding of particularly Phase III as we speak. The NTA stands at EUR 15.99 per share, which is very interesting. That puts our shares at a 4% to 5% NAV discount, which eventually, I hope, will be overcome during the week because for some reason today, our trading has been weak. But frankly speaking, I don't know why. This is important because that brings to the table a very significant value creation, which has been always our obsession since we went public in 2014. We have distributed close to EUR 2.5 billion in dividends. But despite that, we have also sent our share beyond 100% above the initial floating price. So we are -- I think we are complying with our social mission in terms of value creation vis-a-vis our shareholders. In terms of key financial and operating metrics, the gross rental income stood at EUR 292 million, plus 10% like-for-like. The total income has been like EUR 307 million. So this year, for the first time, our history, we are likely to exceed the EUR 600 million mark in terms of total income, the top line of the company. FFO-wise, we converted EUR 180 million, plus 8% year-on-year. We cannot simply multiply these by 2 because there are a number of things that are different in first and second half, but that gives us confidence to send or to rephrase our guidance in terms of total cash flow for the year from the previous EUR 327 million to EUR 340 million, that will mean around EUR 0.55 per share, above the EUR 0.53 that we gave you in February. Yes, the FFO per share is minus 1.8% year-on-year. But again, that is because we calculate the per share metrics based on the total shares outstanding of EUR 620 million, which we believe is the correct way to do it because if we were to pay a dividend today, it would need to be calculated on the basis of that number of shares. But if we were to use the weighted metric as many of our rivals do, the increase would have been 2.6% on the per share metric, 0.30. Our loan-to-value continues to be very low, 24.5%. And the increase in GAV like-for-like 3.7%, that basically, together with the operating FFO brings our total shareholder return year-on-year to plus 9% -- 9.1%, which is, I believe, a very interesting mark. And that's basically for the key financial and operating remarks. I will pass the floor to my colleague, Ines Arellano, that will discuss traditional asset classes. And then Fran will talk about data centers.

Thank you, Ismael. So moving to offices. Our portfolio were EUR 6.7 billion that generates 4.8% on gross passing yield and 4.1% net initial yield. It represents 53% of our portfolio. The momentum is quite positive, demonstrated by 1x high occupancy level in Madrid. Barcelona still suffering, reaching our lowest occupancy level at 84.4% due to the exit of a big tenant in [indiscernible] that you are all aware of, while listen continues to be a very solid market. Demand is very healthy, although clearly concentrated on the very best buildings, which is exactly where MERLIN is invested. And as for Alfonso also perfectly illustrates this opportunity funding more than 10,000 square meters of refurbished office space inside Madrid 1030 has become almost impossible New supply is extremely limited, and there are quite a large number of occupiers looking for flagship headquarters. That explains why leasing is progressing so well. 70% of its space is under advanced negotiations with a leading financial institution well ahead of completion, while the remaining 30% is already leased to LOOM. For us, this is value creation in purest form, transforming an existing asset into one of the most desirable office billing [indiscernible] while substantially reducing leasing risk before delivery. And Liberdade 201 is exactly the same logic but in this win. in Liberdade has become one of the most prestigious business locations in Southern Europe, attracting financial institutions, technology companies [ auntinational ] occupiers. Supply is extremely limited, which is explained by the retail component is already fully pre-let to a leading luxury operator, while around half of the office space is already pre-let or under head of terms. By delivery, we expect this to become one of the benchmark office buildings in the Lisbon market. And Adequa represents another very different but equally very attractive opportunity. As you all know, the Northern [indiscernible] Madrid will increasingly become one of the CT's main business hubs at Madrid Nuevo Norte develops. It is a turnkey for project for [indiscernible], who is the main occupier of the current business park. That validates both the location and the quality of the product while allowing us to achieve an expected yield on cost above 12%. We continue to apply the same discipline to future phases, including Adequa 7 where we'll only pursue returns remain attractive. Moving into Plaza Ruiz Picasso 11. This process is slightly different because it's not only about the building itself. It's about participating in complete transformation of AZCA through the Renazca project, creating much cleaner, more open and more attractive financial district. Today's occupiers increasingly value the experience around the office as much as the pit itself and projects like this one helps to import our disposition as Madrid Premier EBD. For us, that translates into stronger long-term rental growth and better asset quality. So overall, the office portfolio continues to deliver exactly what we'd expect resilient operating performance today, combined with the development pipeline that's already attracting significant tenant interest well ahead of completion. Moving to logistics, which is EUR 1.4 billion in portfolio, generating 5.7% gross starting rents and 4.9% net initial yield I would describe the market as being normalizing rather than slowing. Occupancy stands at 95%. The lease spread, as commented by Ismael reached almost 4% and we signed around 39,000 square meters during the semester. Rental growth remains positive, while valuations also continue to edge towards. What's particularly encouraging is that leasing activity remains broad-based. Barcelona delivered particularly strong rent growth while our diversified portfolio across the main Spanish decoders continue to provide resilient. Texas shows a healthy mix of tenants and positive real spread across virtually every geography. Performance here in South Boris not in extension. It continues to be very robust with 97.3% occupancy with more than 200,000 square meters contracted. So overall, logistics has become a mature income-generating business for MERLIN with consistent cash flow today and an attractive development pipeline for tomorrow. Looking at the oral commitment pipeline, this is where future growth becomes very visible. We already have 275,000 square meters under development. Representing only EUR 96 million remaining investments that will generate approximately EUR 17 million of a stabilized gross rent. And importantly, these are not speculative ambitious overall. These projects have already been committed because they have sufficiently commercial visibility and are attractive expected returns around 7% yield on cost. Delivery will take place over the next 18 months, meaning that the pipeline should progressively contribute to rental income from late 2026 onwards. And the next page of growth is within our land bank. This represents another 184,000 square meters of future development capacity require around EUR 110 million of investment and capable of generating over EUR 11 million of stabilized rent. The important point here is flexibility. Unlike the committed pipeline, this project can be faced depending on market demand. We don't need to build this because we own the land. We build because occupiers demand justifies the investment. And this discipline again has always been one of MERLIN's competitive advantage, and it becomes even more valuable in today's environment. So logistics continues to provide exactly what we want from this asset class, stable operating performance today, together with a very attractive embedded growth pipeline. The true growth is going to come from data centers. So I'll leave to my colleague, Fran to explain a little bit more about data centers -- sorry, about shopping centers. I though it was going to be data center. I think the shopping centers business continues to surprise many investors is a EUR 2.2 billion portfolio, generating 6.6% passing yield and 5.9% in net initial yield. For several years, there's been a perception that physical retail would struggle structurally because of the e-commerce. What we've seen actually is something quite different. Best shopping centers have become destinations rather than simply places to shop retailers increasingly concentrate their investment in dominant assets with high occupancies, high footfall and while weaker schemes continue to lose relevance. Our portfolio is firmly positioned in the first category. During the first half, tenant sales increased by 8.4%, comfortably ahead of inflation, while footfall grew by almost 2%. That combination translated into 6.4% like-for-like rental growth, the strongest performance of any -- of all our traditional asset classes. As Ismael said, the strongest asset class of the traditional portfolio. At the same time, acuity remains exceptionally high, 96.9%. [indiscernible] exceeded 5.5%. And perhaps most importantly, occupancy costs remain extremely affordable at only 10.8%. And that last figure is critical. It means retailers continue to enjoy healthy profitability within our centers, giving us confidence that rental growth remained sustainable rather than being driven by excessive rent pressure. It also gives us comfort to carry on our yield management strategy. So overall, shopping centers remain one of the strongest contributors to MERLIN's recurring earnings. And now yes, I do pass the floor to Fran. Thank you.

Thanks, Ines, and good afternoon, everyone. I'm pleased to provide an update on our data center business and the key achievements delivered during the first half of 2026 across all the 3 phases of our platform. First of all, I would like to congratulate our data center team once again for an outstanding first half of the year. thanks to their excellent execution and a very strong level of activity across the platform, we have been able to secure several significant contracts across our portfolio, which I will cover in more detail in a moment. As in previous presentations, let me begin by summarizing the current position of our data center portfolio across the Iberian Peninsula, as shown on the map on Page 19 and in the table on Page 20. Besides in Page 20, we provide additional details of our 724 meg portfolio, where we include both operational and development assets and show the progress achieved across each of the 3 phases. The perimeter of the 3 phases remain unchanged, as you can see, with the only adjustment being a reduction of 4 megawatts in Zaragoza wind 1, from the previous 150 meg to 144 meg in exchange of significantly advancing our ready-for-service dates that we'll see in a moment. Anyway, we expect as well to recover that capacity through the plant power of Madrid-Getafe 01 and in the following months. Moving to Page 21, let me review each phase individually. Phase I, 64 megawatts are comprising 3 assets, Madrid-Getafe 1, Barcelona PLZF and BIO-ARA 03, all of them now fully fitted out and fully let. Barcelona PLZF 1 and BIO-ARA 03 are fully operational and generating cash flow, including in Barcelona repowering project that has been delivered to the client in this month of July. In Madrid-Getafe 1, which is also fully let, is expected to generate full cash flow once final power connection works are completed during the fourth quarter of 2026, and where we have right now, great visibility. At the same time, we continue to advance discussions regarding a potential report opportunity that will add approximately 6 megawatts of IT capacity in this building. In total, Phase I GRI is estimated at EUR 68 million for 2026. From a valuation perspective, I'm now in Page 22, the successful commercialization of these 2 assets, particularly in Madrid and following the [indiscernible] powering has reinforced the significant value creation achieved to date. Rental levels have exceeded, as Ismael has commented before our initial projections, resulting those in higher expected valuations based on the independent appraisals. From an accounting perspective, we have also recognized the promote accrued to date, reflecting the value created during this period in EUR 101 million. And for those who you have previously asked about the promote mechanism, as we have explained before, it is linked to the profitability of each phase over a 10-year investment period. In this case, in Phase I from 2021 to a potential exit in 2031. However, the accrual is calculated in each quarter, assuming what will be the valuation at the moment in time, in this case, June 2026 and consider this at the hypothetical exit date. As a result, the demand will continue to evolve until the final decoration in 2031, depending, of course, the impact that based on the IRR calculation, moving towards the final 2031 implies on the number. It's also worth noting that part of this promote is paid in advance in year 5 and 7 as it has been the case in March 2026, where we have resulted in a payment close to EUR 20 million. Moving now into Phase 2, which comprises 254 megawatts of IT, the construction across our work in product portfolio continue to progress according to plan. More importantly, leasing activity significantly ahead of our original expectations, reflecting the transition from the mainly speculative development approach that we have in Phase I to a predominantly pre-let near Turkey development model in Phase II and subsequently in Phase III. Looking at each project individually in BIO-ARA 02, it was fully let at the beginning of the year with its full 48 megawatts IT contracted, implying approximately 12 months ahead of the delivery date scheduled for this December 2026. Out of those, the first 20 meg are expected to begin generating cash flow in January '27 with the remaining 28 megawatts following in June 2027. And thus those different dates referred to the client and deploying their fit out. In BIO-ARA 01, which has been also fully let during this second quarter, we have secured entire 48 megawatts again, approximately 18 months before its expected delivery in December 2027. Construction at least on Building 1 and Building 2 representing [indiscernible] of IT capacity is progressing very well. At the same time, work is advancing on the campus of stations, generator buildings and an administrative building, all of which are being developed simultaneously, saving time for Phase III lesson assets. As we have consistently stated, commercialization is now driving construction. Accordingly, we are already in advanced negotiations regarding the IT capacity of the entire [ discon ] campus including not only building 1 and 2 that we reported in last quarter, but also the 3 assets of Phase II building 3, 4 and 5. Madrid is progressing well with demolition work expected to be completed by year-end 2026 and the construction license anticipated during the first quarter of 2027. Importantly, capacity has been already reserved ahead of the start of the construction. Finally, at Madrid [indiscernible] 01 following completion of the planning process, organization works are now underway and we expect to obtain construction license by the end of the year, allowing construction to begin during the first quarter of 2027. [ AGS ] 24, 25 and 26 illustrated the significant progress achieved in BIO-ARA 1 and 2. Many of you will recell recognize difference compared to the site visit during our Capital Markets Day in March as well as the progress in Lisbon, [indiscernible] 01 and 02. Moving now into Phase III, where we have 406 mg under development. At BIO-ARA 4 and 5, where we have power capacity already being secured. The execution of the transmission line by the [indiscernible] company is depending. But meanwhile, the construction license application has been already submitted and is progressing. At the same time, in Lisbon buildings 3, 4 and 5, construction has commenced initially across all 3 buildings following the granting of the construction license, and this decision reflects the advanced stage of our commercialization negotiations for the full campus. As a result, the expected ready-for-sale date of these 3 assets has significantly accelerated. Instead of deliveries originally scheduled for the first half of 2029, building 3, first half of 2030 for building for and first half of building 31, all 3 buildings are now expected to be ready for service during the first half of 2029, just making a quick number under the rents disclosed during the Capital Markets Day, we are talking that we are advancing probably EUR 150 million forward just of this accelerating this construction. Finally, at Zaragoza Wind 01, where the power capacity again has been already secured, we obtained the declaration of regional interest called [ Viga ] approval in July. The next milestone will be the minimum submission of the [ Viga ] which is the declaration of real interest for this specific project, and it will be imminent in submission or obtain construction license expected in third quarter -- sorry, first half of 2027, so we can start construction in the third quarter of 2027. The change as well that we have executed in this project is to move from the regional 2 buildings into 1 single building of 144 megawatts IT that we expect that we expect to have it ready for service during the second half of 2029. Again, the fact that we have a space on that project is moving our initial second ready for service for the first building in fourth quarter 2029 and second building in 2031. So right now, we have set a significant timing during that project. Finally, as a result of the progress achieved in both Phases 2 and 3, we have updated the profile of our capital expenditure commitments. This now reflects higher CapEx deployment during 2026, 2027 and 2028, while at the same time, bringing forward the site rental income and cash flow generation. And now Ismael will close this presentation with the closing remarks and outlook before entering into Q&A.

Thank you, Fran. Well, once again, just to stress that we saw a relatively strong semester in terms of operations. with double-digit revenue growth, good FFO growth despite higher financial expenses that we have been anticipating to the market for months or years now and probably will continue in the future. That means basically that the portfolio of quality that has been significantly refined over the course of the past 2, 3 years is now clearly supporting the Brazilian performance of the traditional asset classes. We continue creating value through development pipeline even in the traditional portfolio in offices. We have 2, 3 very interesting redevelopment now going up, and we think we are going to obtain very interesting yields on those. We continue developing some logistics, although it is true that the construction costs are now more difficult to overcome when it comes to justifying the -- going forward with certain projects in certain corridors because between the increase in land prices, which, in our case, is not a factor because we have our own land bank. Second, the increase in urban charges by the municipalities and third, the increase in construction costs. It is now a relatively difficult to justify doing a development of logistics from scratch. Likewise, it starts to happen also in offices, I mean, except in cases where the building is clearly ours, and there is a big delta between the passion rent and the market rent, which is achievable. However, data centers continue to be our main growth factor. [indiscernible] the cycle of data centers is -- seems to be completely dissociated from the consumption GDP cycle that affects offices, logistics and shopping centers. We seem to be affected more by the worries or hypes that the market feels in every moment about the AI, which by way, I believe, is a false debate because those worries or hypes should be broadly associated with the valuations of AI, but not with the adoption cycle because in terms of adoption, as we can evidence every day, the adoption continues to sky rocket. And now we are trailing behind our own commercialization efforts. I mean we are commercializing much quicker than we can deliver product to market because there is now a very significant sample of potential clients. All of them are now looking for actively for IT capacity across the world and particularly in the Iberian Peninsula. So at least, we know that we are in a sector which -- where the demand at present seems to be endless. At some point, it will probably stall, but I believe this is still relatively far in time. And the continued worries about the CapEx expenditure of the hyperscalers. I believe you know my theory, I believe that eventually will end up helping us because at some point, the market is clearly not rewarding high ROE firms like the technology firms in the U.S. entering into very significant CapEx investments. But eventually, I believe this will favor a specialization of capital. And those who are specialized in building data centers will be the data center builders. And those who are specialized in silicon operation will be the silicon operators. So I believe this is a trend which is will help us in the future. In terms of the different phases, the Phase I is clearly fully derisked and cash flowing. The Phase II, well, depending on how you measure. It could be between 20% and 70% derisk or 30% and 70% derisk. And we have started now entertaining conversations for a number of assets on Phase III. Regarding performance for the year, which is the most immediate future, we have slightly increased our FFO guidance by EUR 0.02 per share. I know many of you believe that this is still very conservative, and we can still beat that number, not so sure because the 2 halves of the year are very different in terms of cash flow profile. But anyway, we will do our best to try and bid that new guidance. As commented, I believe, the most salient message for today is that we are very much on track to far exceed the full year 2026 200 megawatts IT leasing guidance. we could perfectly end the year at 340 million, which will be a very significant achievement. And with our current low LTV, high liquidity and no debt maturities on site, we remain uniquely positioned to continue funding our growth pipeline. And delivering growth to all of you while maintaining a conservative risk profile. So without further preamble, I think we should move into Q&A, and we are at your disposal for any questions you might have.

The first line -- the first question comes from the line of Jonathan from Goldman Sachs.

Great progress on the data center. Not to push you further even. Can you highlight what your progress is on Phase 4 in terms of getting the [indiscernible]. So that would be the first question. More generally, I think you've given already quite a lot of color, but the second one is, can you give us a bit more color in terms of the discussions with potential tenants and what is competition doing currently is being pushed back. Last question, just construction pot. Are you seeing any increase?

Okay. Well, regarding construction costs, we continue to keep them more or less under control, although it is clear that particularly in equipment, we are starting to see a number of bottlenecks in terms of delivery times that might eventually end up also pushing up the cost lines in that respect. What we are doing now is everything that we have announced to you everything that we have now under construction. We have already done all the procurement of all the equipment for those buildings. And we are seriously considering also anticipating a little bit the unspecific equipment a little bit, particularly transformers, although this is a little bit specific to every design. And as Ines said, we are considering about pit of anticipating also some purchases and storing them in preparation of the most immediate future pipeline that we are handling. Regarding Phase 4 and more electricity, well, in [ Nuevo Norte ], as you know, we have been granted 29 megawatts of electricity, which are good for around 20 megawatts of IT capacity. Our intention is to start construction of 196 -- [indiscernible] 96 building as soon as we receive the construction license. And the reason why we haven't mentioned it specifically today is simply because we are finishing the environmental impact assessment phase. We have received a number of comments to the dossier by mainly echo activists, and we need to basically reply or the authority needs to reply to those questions. And only when this phase is duly cleared, we will be in a position to receive a clean environmental impact assessment. And therefore, that will be communicated to the municipality so that they can issue the construction license. So all that in normal world should happen before end of September, but you never know when you are dealing with administrative procedures, it may take a little bit longer. But in principle, we should start constructing at the end of September there. But again, stressing the concept is a big box with just a partial equipment because we are anticipating RFS in case during the 2-year construction period, we get the significant power that has been requested in that substation, which, by the way, has it. So this is a little bit repeating what we did in Phase 1 because we are very conscious that our biggest -- not problem, but our biggest challenge at present is to be able to cope with demand. So this is why -- I mean, eventually, it will be even better to start 2 buildings, but I don't dare, I don't dare to start 2 buildings, which is 2 boxes for 200 megawatts, which with only 20 of granted capacity. So we are a little bit at the mercy of the National Grid Authority. There is a power contest. We are ranking first. We were the ones that provoked the power contest with deposited our down payments in February 2025, that situation in Spain regarding grid is always complicated, not so much in Portugal that we can discuss. And then regarding tenants, what I can say is that we have discussed always in the past about two sources of tenants, hyperscalers and neo clouds. I think at present, we are starting to see a third type of tenants, which is Chinese for those who are good with them and then a fourth type of tenant, which is big model companies. Some of them now in the middle of IPO processes, trying to secure IT capacity so that they can make good their own IT operation forecast to the market, and they are trying to get IT capacity is straight. I mean without depending on neoclouds or hyperscalers alike. So I believe now there is significant depth in the market compared to the past when we started doing data centers, the depth of the market was limited, now it's starting to be much deeper. And I think this is all.

So very interesting. Can you follow up on the new demand, like the change demand and for model companies, it's fine, but also like are you seeing corporate amount like some of these Chinese models that are appearing there need to be run on data centers to, no?

Yes. I mean the Chinese demand that we have seen in recent months -- we have seen [ Alibaba ]. We have seen a Cloud, mainly cloud at present, not so much Chinese model makers. We have seen TikTok I think that [ Tencent Weibo ], I think this is the Chinese demand that we have recently seen in the market.

The next question comes from the line of Marios.

I have 3 questions from my side. So maybe kick them 1 by one. The first is on [indiscernible]. I think at the Q1, you commented there were some hesitations around you signing a full lease, there was some uncertainty around the fulfillment of contractual obligations. So what has changed there for this to result in a full pre-let versus the advanced negotiations?

Okay. So on that one, Marios, thank you for the question. What we commented is that we have always this debate whether how advanced we can sign a contract, what is the visibility we have on the construction, how it evolves on the procurement of equipment, et cetera, on the permitting of different lines, station, et cetera. That's one topic on our side. And the other one is as well how the client is seen to secure capacity to in advance while they try to match reservation of capacity, acquisition of equipment and final clients that will take that computing capacity in the future. So that debate was agreed at the very beginning in first quarter with a keen agreement, which meant that we agreed that we have a contract not yet signed, and then we will look for the right moment to sign it. So both parties, we have enough visibility as said, on the different topics moving forward. We have agreed that we have reached that visibility by 30th of June this year. If you see in the pictures, we are advancing pretty significantly on the building all capacity, all as Ismael said, all the different equipment from our side is already procured. And in terms of connectivity with the utility as well, this is all the different main transformers and lines and equipment has been already ordered. So the level of risk is more and more limited on our side. And from the client perspective, it's exactly the same. So they have seen more visibility probably signing already the final client. And therefore, basically, we agreed to transform that booking agreement into a real pre-let asset still 18 months ahead of ready-for-service dates but with that more visibility as which we have at the beginning of the year. This is a trend that is matter was saying this one is another example, we are seeing more and more that conversation is moving forward and moving quicker that even our development capacities, and it's always this balance between advancing too much in commercialization and preletting almost Turkey projects to people versus how the research we are facing in case of any delay. And as soon as we are seeing more visibility and of course, we're getting more confidence on what we are doing then is when we transform this in real the releases.

Okay. Very clear. And then just secondly, on Lisbon, with now all the phases classified as under negotiation. Is this part of the Gigafactory project or the separate negotiations that you're doing on your own? And if you could provide any color on the types of tenants that are looking at this space would be helpful.

Okay. Well, it's -- we are trying to make it compatible with the Portuguese Gigafactory project. I mean we remain committed to providing the Portuguese Gigafactory home. And we are exploring the possibility of making both situations compatible through a direct dialogue between the potential client and the Portuguese government, but I believe eventually, it might be the same and one single thing. So very, very interesting.

Okay. Clear. So similar that we've seen in the past, if maybe this project doesn't go ahead, you've then got your own agreements in place to then push forward with a lease we like this project going ahead. Is that the case?

Yes. I mean it's exactly, as you said, basically, we have a private deal with a private client, a private counterparty. However, we are trying to make it compatible with including the public side in the equation, assigning to the public side part of the capacity to be recovered in the future through an increase in power in the same campus that we are, of course, requesting power from the National Grid Authority in Portugal. So there are a number of ways in which that can be achieved, and this is what we are trying to get.

Okay. And then just finally, apologies going back to Slide 22, I know we've discussed the promote fee a few times. But can I just make absolutely certain that the EUR 101 million that has been accrued to date is based on the kind of total exit value. So you're not expecting another similar EUR 100 million or so to be accrued based on the estimated value you captured to come ,for example, what are your expectations around that total today on Phase I?

Yes. So the promote what covers is the value created over this 10-year period, which means it's not only an exit value itself is also basically the rents we are considering all over the years. as I explained before, right now, we are in the, let's say, more treated spot of that calculation because we have all the Phase I already completed, 100% let and that is basically capture, as you have seen significantly by the appraisals because right now, what we have is an asset up and running and with a huge market that could be after it. So right now is, let's say, we are achieving the highest level of return. And therefore, the sharing of value is higher going forward because this calculation will be made on a 10-year basis, meaning that we are in year 5 right now. So we need to move on to year 10. What will happen is that we expect to consolidate that value. We also expect that the market will appreciate and convert this asset category in more in a mature market, which means that we will have basically some uplift there in the exit value in 2031. That's, of course, our expectation. And in the meantime, we will receive rents over the period. Which, apart from delivering more margin to our projects at the same time is, of course, reducing IRR from this calculation perspective because we are moving forward from a 5-year calculation to a 10-year calculation. So I think the number right now is always accounted from an outdoor perspective, on the most conservative way, which is assuming that we have a sale. So we have this effective year 10 in every quarter that we are publicly making public our results. So our expectation is if you have -- if you compare for something June 2025, December 2025, there was no reappraised since replace because we were no commercialization at that moment in time and promote decline slightly because of the more timing on that calculation. Same could happen from now 2031 because of the lapse of timing, okay? So that is the way how we are calculating it and what we will expect going forward.

The next question comes from the line of Florent Laroche from ODDO. [Operator Instructions]

So we have 2 questions you can answer one by one. So the first 1 is linked to the data centers and capsules. So we can see that you are quite optimistic to -- to continue to sign [indiscernible] in data centers? And maybe at the end, in which way the fact that you are funded at this stage only partially the development of data centers, so with capital increase can be maybe a blocking point to sink further leases for Phase III for Phase III, yes.

Okay. Well, we are perfectly conscious, Florent, that we are partially funded for the development of Phase III. And we can assure you that we are trying to explore any potential avenues to continue completing our funding. We will we will be active in the market. We will make sure that we have our Phase III completely funded or at least 2/3 funded for the moment. so that if the sheet hits the fan, at least, we can proceed with Phase III, just with a little bit more of debt. But we need to achieve that point of certainty of execution, which I'm sure the market is expecting from us. So I mean, we will be active during the rest of the year.

Okay. That's very interesting. And maybe a second question on shopping centers. So we can see that you are very, very good again this quarter. So how is that sustainable for you the optional performance of your shopping centers at this level?

I am the first to be surprised sometimes about the robustness of the shopping center performance we have been in the business for many, many years, and we thought that the numbers we had achieved in 2019 were more or less repeatable, that we exceeded 2003 probably already in 2023, and then we beat '23 and '24, and then we bid '24 and '25. And this year, again, we are bidding '25. So is this sustainable probably more a question for Bank of Spain, macroeconomics than for me. I believe it is difficult that we can sustain this rate of operation for many, many years. But it is true that for good or for bad, we have a number of factors which are helping data shopping centers in Spain. One is mainly increasing population. Spain is one of the few countries in Europe that without judging whether this is right or wrong, it's importing population from mainly Africa and South American countries. That population increase, of course, that goes to shopping centers. Second, there is the average salaries are going up as a consequence of inflation, although so are going taxes, et cetera. And this is just a factor the average indebtedness of Spanish households is very low. I mean about 41% of GDP. So in reality, we are not in a position like in the U.S. where you have your card debts, piling up, student that credit card, many different types of debt in Spain is mainly mortgage and mortgage is going down, the total stock of mortgages is going down time lapses because the average Spanish mortgage is calculated on a French payment system. So normally, the monthly payment is equal. And at the beginning, it pay is mainly interest starting, I mean, reaching approximately half of the life of the mortgage, you start paying significant amount of capital. As a consequence, the mortgage stock in Spanish banks has been going down for a number of years. Now it's a little bit more stable. And then there is always the factor of informal economy. I mean household services have now completely moved into Informa even residential rents, residential leases have moved into informal because people doesn't want to be under the radar of the legal system because under the legal system, if you have a noncompliant tenant it will be in Europe power forever. But in the informal system, you take it out with other methods very quickly. And that motivates a lot of cash in the system that, of course, is appearing in shopping centers. how sustainable is that? I don't really know. The good thing in our case is that the increase in -- per square meter sales of our tenants has not resulted in us elevating or increasing our rents on a commensurated basis. So this is why the OCR is going down. which means basically we have an ample room for maneuver, where the shopping center industry hit a wall at some point and it wouldn't find us with OCR at 16%, 18%, in which case, we will clearly have a problem.

The next question comes from the line of Ana Escalante from Morgan Stanley.

So my first question is on the type of tenants. Ismael, I think you've mentioned earlier during the call that you are seeing demand arising from other type of tenants, not just new cloud and hyperscalers. But based on your pre-lets, I know that there is some information that you can disclose, of course, but I wonder, how are you looking at that split at the moment in terms of the pre-lets and the bookings that you are signing right now to what extent you are prioritizing whoever is early or ready to move in or whether you have already started to try to diversify a little bit away from some of the new cloud into other companies to minimize counterparty risk.

Thank you, Ana. So as Ismael said, we are seeing -- for the type of assets we are developing 3 different type of potential clients. Everyone have the traditional hyperscalers, clearly moving from a more cloud type of request to AI. Still, they are in that process, sometimes securing capacity a little bit ahead of what they will need in the future. But considering the type of clients, they are -- I mean they tend to standardize all the different equipment, all the different assets they have or they will let and therefore, the time to market is not as quick as probably others. But still, they are in the market and they continue representing still a small amount of our client base. I'm counting on, as you said, on pre-lets. And bookings as well, but they're becoming more actively, and we are seeing this because the amounts of capacity requested is a little bit increasing and the debt and the time line and the ramp-up that they were considering is clearly moving forward. The second type of clients that we mentioned several times are the new cloud companies that were created in the last years, seen a lack of product of computing capacity between what happens scale is normally contracted and the users, final uses of that computing capacity. So what they have taken basically is the opportunity of jumping into the sector, more difficulties, of course, because of the capital barrier, but little by little, we are seeing different categories between new clouds that they are becoming a little by little bit hyperscalers in terms of size with very good access to capital and debt and more importantly, normally taking capacity as quick as they secure final contracts. So hyperscalers can in a way, take more risk of securing capacity ahead of what they would expect to have in the future. But these new cloud normally because of their financing requirements, equity requirements, they normally take capacity completely simultaneously to the final clients acquiring that competing capacity. So this is something good to know that the risk is more limited. As said, there are 2 categories. There are some of the clients listed companies, coworker examples of those listed on the American Stock Exchange. And there are others that they are trying to jump into that list, and we are pretty sure that in the near term, they will be there as well increasing the amount of potential clients in this classification. And then the third one, [indiscernible] approaching is those that are technically clients of these new cloud hyperscalers but seen or in light of the different of the scarcity of capacity that they are foreseen in the future, what they're trying to do is to move a little bit outward in the chain trying to secure that capacity so they can guarantee their computing services in the future. And then whether they operate themselves or they were subsequently contract somebody to operate that stack for them is a different question, but they want to secure that capacity. All of this remains a little bit what we have seen in logistics. Years ago, where some of the company's operators, they were seeing no capacity available, so they first secure that capacity and then later on, whether they operate themselves or they contract other service providers. But at the end, they are securing those type of locations and we have several examples in our portfolio where we have final clients taking capacity despite the fact that when you go to the warehouse, you see the name of an operator instead of the final client. How this is moving, what initially in a market represented almost everything is hyperscalers and some raising a force from new clouds, in our case, because we are more plan new, new clouds are presented a significant amount of our capacity far above the one requested by hyperscalers. And what we are seeing right now is precisely that these AI models specialists are trying to catch up with this new cloud. So what we are foreseeing is that I would not say 1/3, 1/3, 1/3, but probably [indiscernible] and final clients will represent a little bit higher than hyperscalers, but it's also true that they are trying to catch up. So at some point in time, not yet with us, but at a moment in time, these massive hyperscalers, we'll probably try to jump and in a way, diversify a little bit more our portfolio. And also an understand we're seeing an analyst with that is that originally, we have several other clients within the same building. As you have seen, the blocks of capacity that is being contracted by clients is increasing very, very significantly, and we have more modules to buildings and from buildings to campuses. And that is moving us in order to diversify that [indiscernible] to add more buildings into our portfolio. So what we are doing with the different phases is to bring more buildings and with that diversify the type of client -- clientele and the type of tenants that we will have.

Another interesting thing is that the neo cloud at the beginning, they used to compute mainly for other hyperscalers or large language model companies. And now more and more, we are seeing direct computing for final corporate clients. I mean, big industrial European industrial companies. computing inferencing, basically influencing the models they have already trained, and they are using the services of the new cloud for that kind of inference. So it's very, very interesting because that gives also a new layer of reality to the market, which is very much welcome.

Very clear. And then my second question is again on the promote. I know that cash flows matter a lot, but as Ismael said once, data center is a cash-draining division and destabilization. However, in the meantime, you are creating a lot of value through development profits or revaluations that come earlier than these future cash flows that the data centers will eventually generate. Therefore, for the market, it's quite important to understand how much of those embedded revaluations, you might give away in the form of a fee to a third party? And I'm not sure I have understood yet how much that could be especially for Phase II and Phase III. My understanding is that, that changes, of course, over time because it's dependent on the profitability of the project. But if you could give us a range of I don't know whether that could be 20% of the potential revaluation or to be around 15% to 30% of the potential revaluation of data centers plus 10% of the rents over 10 years, something like that. would be very helpful for us to understand how to think about how much value Merlin is going to take from these super value-accretive story.

Thanks. So as I said before, the way that the promoter is calculated is based on profitability. There are some marginal profitability that we consider that the technology pros and the capacity brought in a way is not improving what we could have found in the sector, and there is some profitability within the 10 years that deserves to share that profit with our partner. So the exit value, of course, in a 10-year discount cash flow has an impact and having an exit value, whether it's much higher or higher or on average, of course, has an impact, but also that's the rent over the period. And you can more or less the timing that if we are getting to a net genocost roughly on the range of 11% out of this 15%, if you apply more or less a gross to net, then it means that every year, what you're getting in reality knowing that the uplift in valuation is at the very end in year 10 is more or less an 11% that will be updated. So -- that is more or less what you should consider that will be the range of appropriation, which will be more in line to the rents than to the exit value. Of course, if we are -- if we are seeing a market that all the sudden matures very significantly and after year -- 10 years of investment and management provokes an uplift in values. Of course, it will have an impact on the total number. But I will say that over a 10-year period, the rent has a lot of things to say during that calculation. In a nutshell, more or less, this is more or less defined to be between the 10% and 15% of the total profit of the portfolio over time. We will be on the low end. If for whatever reason, the market is not appreciating the assets and the conversation we are doing all over the period. and would be on the upper end in the case that the market has set matures, it stabilizes and then all the sudden the Capital Markets Day out there that will price the assets higher than they are right now. So that is more or less the range. I don't know if -- that I have probably answered your question.

The next question comes from the line of [ Paul May ] from Barclays.

Just wondered, firstly, what is the lowest level of ICR on a quarterly basis that you're willing to go to as you accelerate the DC rollout?

Lowest is level of ICR. Yes, on a quarterly basis, just as you roll out the development. Just wonder what you're willing to go to in terms of how low.

Let us check right now. We are at 3.7x, if I'm not mistaken. And which basically drives as well the 25% roughly of loan-to-value that we have right now. as we commented and we have been very open on that, we are not willing to exceed above the 32%, maximum 35% loan-to-value. And on that sense, even if rents is or even interests are raising and cost of debt is going pretty high. With this low leverage, we will never be we have a covenant of 2.5x ICR and I think we have been ever below 3x. And so that's a little bit the spirit of the company that is more linked to the low loan-to-value target we have than to the interest rates. We are less affected by interest volatility as compared to probably other companies were highly levered.

We also take a look at Paul as net debt to EBITDA. So those things, LTV -- 10x exactly way below that.

Below 35%. I mean our model, our initial model was giving us temporary breaking of that LTV ratio at around 37%, but the new versions of the model have gone significantly down because the value creation in data centers is being bigger than we expected and is coming earlier. So the model is now giving 34s max, which is good. And in terms of net debt to EBITDA, in the original versions of the model we were going as high as 11.7%, close to 12x. But now it's also coming down and it's going to be more between 10% and 11-ish during a certain peak but then it will go down to as low as the model is giving us like 7% at the end of the period. So it's -- this is the way we look at it. I mean, of course, I will check into the ICR for a moment. Are you a credit person, -- are you trying to price our debt? Or are you calculating the amount of capital we need are you calculating the amount of capital, right?

No, no, it's clear on the equity side, but just is on those things as you obviously increased CapEx ahead of revenue recognition. Then there could be an impact that comes through. So it would be great if you get back to me on the -- on where that ACR goes on those models that you mentioned rating the LTV and the net debt would be great.

We check with the model and go back to you. But 1 thing is important, I mean, in current times, debt is not so much accretive I mean, with the current cost of issuing debt, particularly if you follow a real benchmark, which is the 10-year unsecured loan of your company, if you take that as a benchmark, I mean there are 2 things that I, of course, come to my mind. First is that debt is not that accretive. So do not play too much with debt because it's delicate. And second, I believe or later, particularly in traditional asset classes, valuations will start to suffer. So particularly LTV might suffer from a completely unexpected factor, which is the decrease of the because the will be constant or slightly growing, but the V will go down. So we be assured that we are a debt conscious company, and we will try to keep debt at bay because debt in reality is the only thing that can kill a success story in the real world. indeed, you're reaching some converters very much an equity plan here.

Just on the -- a few questions on the neo accounts, if you wouldn't mind. Apologies, what proportion of the DC revenue at the moment is exposed to Neoclouds, including a pre-let is it 100% or do you have a spread of tenants? And then how do you feel about the quality or the credit quality of the neo clouds? Obviously, debts been increasing in those businesses and their credit spreads have been widening. So I just wonder what your thoughts are and probably plays into the comments earlier around the spread of tenants. And then I just wondered if you could give any details on the contract terms, I think a 10-year duration. I just wonder what extension and termination terms there are within those would be great.

So considering basically what we have on our books right now, 45% represent are represented by neo clouds. [indiscernible] Represented by hyperscalers and growing and roughly another 45% to 50% are represented by other.

That considering I mean, that considering 340 commercialization, we are taking the political license of considering the 180 let, which is not yet what impurity we should do. I mean it will take time to convert. But yes, considering 340, what Fran told you is the proportion for the 45 neo cloud, about 5, maybe 5 to 10 hyper scalers and 45 to 50 other.