Ladies and gentlemen, welcome to Third Quarter 2024 Results presentation. The management of the company will run you through the presentation that will be followed by a question-and-answer session. You can ask a question by phone by pressing asterisk five on your telephone keypad. I would now like to introduce Mr. Pere Viñolas, CEO of Inmobiliaria Colonial. Please, sir, go ahead.
Thank you. Good afternoon. This is Pere Viñolas speaking. It's a pleasure to be here again to present the results for the third quarter of this year. I am together with Carmina Ganyet and Carlos Krohmer, as usual, to drive you through the details of our results for September 2024. I would like to start with the highlights, with the main headlines of the results, and then go into the details, and also maybe before that, a quick comment on the latest events that are surrounding us.
The first thing I would like to say is that the results for the third quarter have been fantastic, have been super positive. You will see the details now. We always say that it's strictly linked to our positioning. We are positioning prime asset class products, and here it's obvious that the balance between supply and demand drives our performance.
It's working very strongly as a tailwind for our delivery of results. Our prime asset class is delivering the strongest performance in absolute terms, as you can see, and as you will see also in relative terms. We have a company, Colonial, that is positioned in prime asset class. 96% of our product is prime asset class. It's very well diversified among different regions, with super pricing power accounting for 91% of our assets.
And this allows us also to extract value through our strategy of urban transformation projects in two ways: with high-quality office assets in supply-constrained locations and also driving new mixed-use approaches. Let me go to the specific numbers. Page five of the presentation, I think, that describes itself, the outstanding results for this quarter. We finished September 2024 with earnings EUR 147 million. This is 15% more than a year ago.
Revenues, gross rental income is at the end of September EUR 293 million. This is 6.5% like-for- l ike. Again, at the very high end of our industry, at the very high end of our expectations, so very good. The release spread of the company is 8%. That means signed rents versus previous contracts and related spaces. And the rental growth for the group total portfolio is 5%.
Remember that this 5% is what is signed so far this year compared to ERV December 2023. The EPS, EUR 0.26, it's 9% above last year. I mentioned the revenues for the group. The GRI in Paris, in particular, maybe deserves special comment. It's EUR 192 million. This is 7.4% growth in terms like -for- like. In Paris, you can see also very significant release portfolio, 19%, and a growth in rental growth in Paris of 7%.
So fantastic results in relative terms, in absolute terms. And this is the consequence of our specific positioning of where we are. You can see on page six is the same description that you always see about this company: where we are, what's the occupancy of each and every building that we own, and therefore the best performance that can be expected from this situation and from this location.
I would like to stress the fact that we are benefiting from a strategy that is based on the expectation and reality of a bifurcation happening in the market, where prime CBD is showing a very much better improved outlook than any other market. And that is not just a question of occupancy. It's also a question of rental growth.
In this page, for example, number seven, you can see the expectations of prime capital values for different locations where we are based from where we are to 2029. So, I think that our performance is very strong, but I also think that what's happening in our market is a sentiment of improved outlook, a sentiment of change in the cycle that is very particular of the locations where we are. I always defend that our market is a submarket with its own rationale of limited supply, excessive unattended demand, and therefore this kind of dynamics in capital value and in rental growth.
And in this page, by the way, it's not a minor comment. You can see out of this CBRE research that I was mentioning to, what are the prime capital values and where is our appraisal value today in June 2024.
So that also gives you a sense of how much additional performance we could expect from our assets. So fantastic performance. You will see through the presentation that this fantastic performance is in terms of leasing activities, is in terms of occupancy, is in terms of rental growth, and also affecting existing assets and also new projects that are having a very nice development as we speak. That's the introduction of where we are today.
I think that in this moment, maybe it's also good if I give some comments on the recent events that have gone through in the last few days and maybe provide a little bit of information or guidance on this. In a nutshell, as you may be aware, in the last few days, there's been a new debate about a potential change of regime for REITs in Spain.
There were already discussions going on for the REIT regime to be enhanced in Spain for those REITs that have a specific exposure to residential. The discussions that were going on were about to additionally improve the benefits for those kinds of REITs. That was one discussion that was taking place at the regulatory level or the government level as a potential avenue for REIT regime in Spain. On top of that, there was another avenue more recent of the last few days talking about a potential change of the tax treatment of existing REITs in Spain.
What are the comments we have on this? First, as you can see, there's no single scenario. There are two potential scenarios at the very minimum. So one would be nothing happens. The second would be there's something happening, which is enhancing of the REIT regime in the residential area.
The third thing that would happen is a revision of the REIT regime in terms of tax treatment. The message that we wanted to pass on this is that as we speak, there's a high level of uncertainty on which is the outcome out of these three that we should expect as the most obvious. We cannot be more specific about the probabilities that we give to each one, but at the very least, what we can say is that it's not obvious at all that the REIT regime may be changed in Spain.
If the agenda had gone in a different way, and today we're having this meeting with you as we're having, and tomorrow was the day that the decision was expected to take place at the level of the Spanish Parliament, what we would say is, as we are saying, we are waiting for the decision that will be taken, but this decision remains uncertain to us, but this theoretical meeting that could have happened tomorrow, in fact, has already happened. It was expected for today.
It was expected for this morning, and the outcome that we have so far is that there's been no capacity to reach an agreement for the revision of the REIT regime in Spain, and these discussions have been postponed, so that's the reality, and that's the first message that we would like to share with you.
There is a high level of uncertainty, not a given certainty, number one. Number two, this is already what has happened today. It's not just an impression of what could happen in the future. Discussions have taken place. An agreement has not been possible today. The second obvious comment is, okay, but you're talking about three potential scenarios. So, no change in REIT regime, enhancement of REIT regime, taxation, new taxation in REIT regime.
What would be the impact on Colonial of these potential scenarios? Stating the obvious, if no change happened in the REIT regime, nothing. That's the probability that you wish to that. If the REIT regime is enhanced in certain asset classes, again, between nothing and positive, but let's say nothing, no potential change.
What if at the very worst end, taxation happens to take place in Spain as any ordinary company in the future in the case of REITs? Well, I think that in that case, even if I say the probability of this would be not obvious at all, and there's a huge uncertainty on this, I think that we must give a little bit of guidance in this potential low-end scenario. We've seen certain estimates based on the fact that people have assumed that from a zero taxation, we're going to a 25% taxation. I think that there are three elements that have to be taken into consideration.
Number one, let's state the obvious. We have 65% of our activity, which is not based in Spain and cannot be taxed at the local level in Spain. So it's attached to local tax treatment in the other countries, meaning France.
So first of all, only 35% of our exposure as of today is attached to a potential change in taxation, number one. Number two, if you go through an analysis of what could be this taxation, you obviously have to come from, let's say, an EPRA EPS to a Spanish accounting tax-driven EPS, which it's not the same to state maybe the obvious, the first obvious change. You have to deduct depreciation attached to the assets before reaching the fiscal earnings. That's a huge, huge change.
And number three, and that goes back to the history of Colonial, you know that from the past, we had an asset that we did not have to use in the recent history, but that doesn't mean that it's not there. That was a typical topic that we used to mention a few years ago.
But I'm talking about the tax credits coming from the impairment of the assets that took place in the GFC that started 2008. In the case of Colonial, we are talking about EUR 5.3 billion of tax credit that can shelter any impact. That also, according to Spanish law, its use is constrained by certain limitations, and therefore, the impact of this is limited. But anyway, still, it's a relevant element of compensation. So, these are the three main considerations.
That means in practical terms that the tax on income just because of the use of the tax credit, the tax percentage that is applicable to Colonial should be not 25%, should be 18.75%, and should be based, as I said, in a different number and would be only applicable to Spain, to Spanish assets.
Just to summarize, when you look to the impact on this, our estimates is that the impact in the EPS of Colonial in this potential scenario that, as I say, is uncertain, would be between 1%-2%. That's our estimate, and that's the guidance that we would like to provide for this scenario. In a summary, and this is where I leave this point, if anything is to happen is uncertain, not certain. If something has to happen, there are different alternatives, either taxing REITs or going in a different direction of just enhancing and changing the REIT regime. Different scenarios.
The guidance for the worst-case scenario is that the impact on earnings, according to our calculations, would be between 1%-2% of the EPS. Besides this, my comment would be, well, there's no agreement that has been reached today.
We'll have to be open to potential scenarios in the future that will follow closely. But the base case is that we have a strong case for being reliable, for being comfortable on all the scenarios. We have a geographical diversification. We have a number of characteristics into our balance sheet that gives us comfort in the future that this scenario may have. I finished my comment on this. It's a pity maybe that this happens this week because we are really happy with the results that we are having.
We are not only happy about the results that we have achieved looking in the past. We are really excited about what we are going through and what we could expect in the next few months and for the next year.
And we hope that this cloud that we have today is not hiding these fundamentals that we would like to share with you today. Having said that, let's go into the next section on financial performance. I will ask the next speaker to step in, Carmina.
Thank you, Pere. And after this clarification for the benefit of everybody, let's come back to the financial performance of these nine months of the year. So the first one, it's the gross rental income, which is growing 5% again on the back of the core portfolio and the project's deliveries. So, the core portfolio is increasing 6% like- for- like. Thanks to the indexation, we will come later in more details. Thanks to the pricing power and a better average occupancy during these nine months. Second, positive impact with 5%, positive 5% due to the project deliveries that we delivered last year.
These nine months are impacting the full nine months in 2024. These two positive effects, growing 12%, are overcompensating the negative impact on the gross rental income due to the disposals that we did at the beginning of this year and last year. So, the year-on-year rental growth is growing rental income, sorry, is growing 5%. If we go in more details for each market in page 10, again, this gross rental income is growing through the superior pricing power in the three markets.
Outstanding Paris with 7.4%, Madrid 3.7%, and Barcelona 7.3%, again, through the additional pricing power and through the additional average occupancy during these nine months. Basically, the driving forces of this 6.5% are thanks to indexation, 3.4%. The pricing power, meaning rental growth 2%, as I mentioned, this occupancy, high occupancy average during the period of 1.1%.
So consequently, it shows this strong performance, a strong growth on the EPS, accelerating towards the upper range of the guidance that we did at the beginning of the year. So as you can see here, the EPRA earnings is growing 15% year-on-year, with, I mentioned before, a positive impact of the core portfolio and the deliveries, as well the financial impact with a positive impact during these nine years, thanks to a reduction of the debt, so a better capital structure, and as well an active asset management during these nine months.
So it means that this 15% of the EPRA earnings, it's translating into a 9% growth in the EPRA EPS, which commits and we can guarantee that we are beating the upper end of the guidance. So, the full-year EPRA EPS will be above EUR 0.32 per share.
As you see, a strong performance of the operations. And as you know, during the year, we have been able to reinforce the capital structure. And this is why the rating agencies have confirmed the rating. And moreover, Moody's has upgraded during the year our rating, as you can see in the summary of this slide number 12. Basically, based on the leading position in the prime Paris and Madrid-Barcelona office market, again, the capacity to the liquidity and access to the capital.
And today, all of the assets are unencumbered assets. And this upgrade by Moody's reflects this improvement of the sustainability, lower leverage, driven by the conservative financial policies with the benefits of the recent capital increase we did during July. And in the same line, S&P highlights the strong competitive positions in the low-risk market.
Again, they highlight their view to generate this stable and predictable income despite the uncertainty that we passed during the last month of the year. This basically has been translated in the numbers that you can see in page 13. A significant debt reduction in the last months, EUR 500 million, meaning a long-term value of 36.5% with a prior long-term value of 44.2%. When we translate the net debt to EBITDA considering the operating assets, this ratio shows a figure of 10.6% from 12% that it was at the beginning.
Thanks to the capital increase, thanks to the disposals, Colonial is benefiting with a very strong liquidity position, more than EUR 3.4 billion, out of which close to EUR 900 million in cash, which means that thanks again to, as you know, the hedge and the pre-hedge that we were able to close in a very low moment of the rates, we are still benefit of the cost of financing cost of 1.72%. After the cash management actively being managed during the year, the net cost of the old net debt has been translated in these nine months in 138%.
Thank you. Let's now step into the section on portfolio management.
Thank you, Pere. I'm on page 15. Let's see the operations that at the end is also feeding future growth. All of that we signed today will be revenues in the coming months.
So the third quarter in itself has been extremely outstanding. We've signed 47,000 sq m. Let's remind that the third quarter includes July and August, pretty quiet months in a quarter. Last year, we signed 16,000 sq m. So, we signed almost three times what we signed last year in the third quarter. So, momentum is very, very strong. I would even say accelerating. This gives us a year-to-date letting volume of 113,000 sq m. Remember that our normalized run rate is 100,000 sq m.
With nine months, we have already done more than 100,000 sq m. In terms of economic value, the annual GRI that will generate all of these lettings, it's EUR 43 million, EUR 16 million, so close to 40% Paris assets, and EUR 27 million Spanish assets. Interesting element on the Paris portfolio, EUR 16 million for 16,000 sq m.
Very clear to see the price, average price, EUR 1,000 per sq m. EUR 16 million divided by 16,000. So high-end rate. If we go then to the next page, on page 16, occupancy profile remains super strong. We are today at 4.1%, but 1.4% is non-like for like entry of new elements. On the one hand, is the portfolio of Criteria that has entered now into our perimeter, and that gives us significant additional reversion. And as you may remember, we have renovation programs going on.
We have delivered one in Barcelona, Diagonal 197, that now enters into operation. So, we have 1.4% of space with significant additional rents to be generated, EUR 6 million additional reversion. If we look from a like-for-like perspective, our vacancy is 2.7% vis-à-vis 2.9% at the beginning of the year. Prime Paris is almost 100% let.
The prime Madrid and Barcelona is 0.5%, and 2.1% of the total vacancy is secondary Madrid and Barcelona. If we step to the price performance of the things that we have done, you see it on page 17. Indexation is coming down, obviously, as everybody knows. In Madrid and Barcelona, we are at the 2% level. Paris is still at a higher level because we have the lacking technicality of the index, that is the ILAT index.
The interesting thing is when we compare the ERV growth, all of the contracts that we have signed with the indexation, what you can see is that prime assets significantly outperform normal growth, normal CPI growth. So we have 5% of ERV growth for the full portfolio. This means more than 200 basis points above the normal indexation run rate of our portfolio.
The strongest market by far in terms of letting activity in Europe is Paris prime, 300 basis points of outperformance to the indexation, 7% growth, Madrid 4% growth, Barcelona 3% growth. Release spread remains extremely healthy, 8%, basically driven by a double-digit release spread in Paris. Madrid 1%, Barcelona flat.
Also, a technical element of having had in the last 18-24 months a very accelerated and fast indexation in Spain that has made some sort of catch-up in the passing rents, but the important figure to look at is the rental growth that remains among the highest in the sector due to our prime asset portfolio, and then we have the Madnum project. It's a project that will be delivered in the coming months. We are progressing very, very well. Just to remind you, this part is the office and retail part. The residential part was sold.
It's roughly close to 60,000 sq m, 58,000 sq m. Year-to-date, we have signed or having very strong conversations close to signing of about 17,000 sq m. So extreme good momentum. And more important than that, we are signing rental prices 7% above our underwriting that is implied in the 8% yield on cost. So, what you see on the 8% yield on cost, the prices that are there in that underwriting are being outperformed, are being beaten by 7%. And last but not least, GRESB has come out recently, as all of you may know.
We remain at the European leadership with the five-star rating for the fifth year in a row, 92 on 100 on the investment benchmarks and 99 on 100 on the development benchmark. As you know, one of our key competencies is prime factory to create the top product. Here you see that the top product is also top in sustainability terms.
Thank you. Let me give you a final comment on strategy of future growth and on our vision, so let's start by saying that today, if let's say the average vision for an office company would be, "Okay, here I have an office company. Here I have a bunch of assets that are not particularly appealing because this is an asset that is part of the market with no particular attractive balance between supply and demand, s o no real mega trend that can support the rents going forward and a non-particular exciting vision about the prospects that would be the average view. Our vision for Colonial is Colonial is today two things.
One thing, it's prime positioning in the office market, which is a different market with different fundamentals of supply and demand, with therefore totally different expectations about future growth and value creation. I will go through this in a minute, so cannot be considered in the same way. For us, it's a mistake, and second, it's a platform that is able to develop growth through additional alpha creation based on urban transformation of the existing assets or the new assets through a view of office use of those assets or through a view of other asset class nature for these assets.
And this capacity of transformation, it's a part of the very basic element of Colonial, which has and will deserve relevant returns on this, so that's the story. We believe that it's a different story. When we go more in- depth, I'm on page 21.
First, so let's look at the past. The past is our earnings in 2021 were 128%. Our earnings expected for 2024 are 187%. That means that our earnings have grown in this period, let's say, so challenging for our asset class have been 46%. That is 13% CAGR in terms of earnings. If we talk about EPS, we've gone from 24% to 32%. I will be more specific right now about this. Our history is already for the last few years, the most part of the challenging period has been already double-digit earning growth in terms of earnings or in terms of EPS. Why is this happening?
As I was saying, if we look at Colonial just as a platform of offices, we say we are in a particular submarket that has specific dynamics which are relevant for the value generation in terms of rental growth of the future. Let's look at page 22 to give an example. This is Paris. Here you can see the net absorption and net addition in the Paris Center West office rental market. If you go through this chart, basically what you will see is that demand is like three times supply for an asset that has already very low vacancy.
So imagine any asset class, any other asset class that comes to you with no vacancy at the beginning, and for an extended period of 10 years, you have net additions. Here you can see, let's say, 100,000 sq m and net absorption that is like 300,000.
What would you say about that asset class? And what you say we could expect about rental growth, which is what you can see on the right, which is highly correlated with our performance in terms of earnings in the last few years. Of course, it's not the same that if you talk about another market, for example, Paris periphery, where you can say that on average, net additions and net absorptions are roughly the same in a market that has already a certain degree of vacancy.
There you would say, "I don't expect rents to grow." Would you say that those markets are the same market? I would not. I would say that the first market is a different market, and I would look at a company who can show strong positioning in this market in a different way. That's our story about our base case.
Let me be more vocal about it. I think that Colonial is quite unique in this positioning. On page 23, you can see on the left, what's the positioning that we have in Paris CBD? What's the rental growth attached to this positioning? This can be compared to other peers that have a different position. We fight quite a lot to have the position that we have. It's quite different today, and we are quite happy about this. On the right, you can see the same analysis done for Iberia, done for Madrid and Barcelona that can also be compared to other peers in the industry.
So we believe that our positioning is strong, deserves rental growth, has already shown rental growth, and should expect additional rental growth in the future. That is the first part of our equity story.
The second part of our equity story is we are in the mood of urban transformation, which, as you know, it's nothing new for us. And that is adding a substantial additional value through these alpha projects that provide enhanced value for shareholders. We have a number of projects that are able to deliver a 9% on year IRR, an 11% levered IRR that are sitting on a different kind of nature from urban mixed use to business campus to life science and healthcare that can have the capacity to create value from EUR 1 billion to between EUR 1.4 and EUR 1.6 billion.
That's the other driver of value that we are working on. On page 25, you can see the different projects that currently we are working on, both in France and in Spain.
And the specific, that's the one we saw before, and the additional asset management expertise that can provide rental growth and value creation in other renovation programs that we are going through in France and in Spain. In a summary, in 2023, in adjusted terms, so to make it comparable, we were a company that was able to deliver EUR 400 million of gross rental income. As I say, adjusted for certain assets to make it comparable.
We have a driver of new projects that are able to add EUR 80 million of additional gross rental income. We have EUR 30 million additional coming from renovation program and Alpha X assets. We have EUR 50 million potential coming from reversion and indexation. That means that organic growth would lead us to well in excess of EUR 500 million, EUR 560 million, without any value coming from capital recycling.
If there was any capital recycling that we could benefit from, that would give us a full potential well above that figure. So that's the outlook for the future. Conclusion is page 27. It's a fact, the fact that Colonial has already delivered outstanding growth in EPRA earnings. The full year EPS has beat the upper range of guidance. Rental growth and project deliveries have been offsetting any impact coming from divestment. EPS and rental growth are, again, among the highest in the sector. So, it's a reality of our performance that was already happening.
This is based on our prime asset class, which is outperforming the market. It's showing a stronger occupancy with the highest rental growth. We are in an outlook of asset valuation recovering faster. Rental growth prospects very strong for the prime, and in particular, Paris outstanding performance in Europe.
And on top of that, alpha projects adding additional value to our future growth profile. And therefore, I think that very strong expectations for the future so far after this delivery of strong results. Final comment maybe on EPS for 2024. With all year mentioning that we're having a good performance, we were saying that at the beginning of the year, we saw the ran ge of EPS within EUR 0.30-EUR 0.32. As we speak, we can already confirm that by the end of this year, our EPS will be above that range, above EUR 0.32.
And that means that our guidance will have to be revised upwards. That's it for the presentation. And I will be pleased, as usual, to answer the questions you may have. Thank you.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press asterisk five on your telephone keypad. Thank you. We have the first question, Céline Soo-Huynh from Barclays. Please go ahead with your question.
Hi, Pere. Got two questions for you. The first one is on your EPS guidance. Is it fair to say that you increased your guidance due to lower disposals? Because I recall a target of EUR 500 million, and you've only done EUR 200 million so far. And the second one is on the SOCIMI regime. Sorry for the question again. In the third scenario that you were mentioning, in which the SOCIMI regime is revised, the 1%-2% impact on EPS you see from higher taxes using tax credit and depreciation, how long do you think it would last before the EPS gets hit more? Thank you.
Thank you. On the first question, no, the EPS outperformance, it's not coming from a revised, let's say, version of disposals. It's coming from a stronger than expected top-line gross rental income. Also, from wise management of financial expenses on the dev side, both things together explain the vast majority of the gap. And let's not forget that this is happening in a year where we strengthened the capital structure of the company with additional equity coming from a new investor. So, I think that it's even better.
It's an EPS revised upward with lower leverage. You know that the usual way of improving EPS, it's exactly the opposite, leveraging companies. We are deleveraging the company and obtaining, let's say, better than expected EPS, mainly driven, as I said, by outstanding top-line growth and, in particular, also very good performance on the financial expenses side.
On the SOCIMI regime, good question from your side. So you're saying, well, Colonial is giving a guidance of 1%-2% impact. You're mentioning two things, the tax credits and the depreciations. Is this going to walk away? Well, no. The depreciations are a standard, let's say, part of our P&L. It's a number, therefore, that is part of our recurrent EPS and our recurrent P&L, number one.
Number two, the particular treatment of tax credits in Spain, it's that you can have a huge tax credit. You can use it without any time constraint, but you can only use it, let's say, to a very constrained limit every year. So, as we mentioned, our tax credit is huge. It's EUR 5.3 billion. It's huge. And according to the Spanish framework, there's no particular limit to use this over time.
There is a limit of how much you can use per year. The guidance we've given, it's already based on these elements. So a limited use per year, that means that the EPS that could be zero impact, well, it's still 1%-2%. But on the other hand, good news is that this is replicable in the future without any potential change envisaged in the next few years.
Thank you.
Thank you. Thank you.
We move on now to the next question by Ana Escalante from Morgan Stanley. Please go ahead.
Good evening. I have two questions, please. The first one is on the figures that you show in the presentation from CBRE, both for rental growth and capital value growth. If I'm reading that correctly, rents are slightly growing or stable in the next three years, but capital value is rising.
Therefore, CBRE is assuming quite some yield compression in the forecast. Is that the way to read it? And whether you think that's feasible or whether you expect higher rental growth than what the guidance like, what do you think that will drive such strong growth in capital values in the next few years? And the second one is related to your releasing spread and ERV growth figures.
So, if I look at the chart quarter- by- quarter or the table quarter- by quarter, I see that in the third quarter, your leasing list is at slightly lower spread over ERV growth than the second quarter. Is that asset-specific, or should we start thinking that ERV growth is slowing down or maybe even trending to zero?
Okay. Thank you, Ana. I will take this question.
First of all, on the CBRE data, I think it's more CBRE to respond, but what we can say is, number one, as we've shown, as an imbalance of supply and demand, there is a very strong fundamental on rental growth. You see it in our presentation. We have several pages on it where there's super strong rental growth in the Paris market. Obviously, then probably on the CBRE figures, there's a little bit of slight yield compression also. But the main element we talk here about fundamentals, we talk about alpha.
We see, we can show factually, and we also see going forward that our product and prime product, and especially the Paris market, has the best growth profile as a consequence of imbalance of scarce supply and huge demand. And the second, on the third quarter, they signed a very little volume in Paris, and it's very contract-specific.
So, we have slightly 1% below ERV. We have signed some things almost at ERV. So, we do not see at all any contraction or slower pace on the rental performance. It's more the other way around. We are extremely confident and see rental growth going forward.
Thank you very much.
Next question by Markus Kulessa from Bank of America. Please go ahead.
Hi, good evening, everyone. Thank you very much for the call. I have two questions on the REIT regime, also quickly, and one on the potential SFL merger. So on the REIT regime, I think you confirmed it just to say that the EUR 5 billion tax credit is included in the 1%-2% EPS impact. So the impact is passed using tax credits, if I understand right. Then why an 18.25% tax rate, I think you said, is applied? Maybe I didn't follow exactly.
Yes. If you want, let me answer on this. Maybe Carmina can do it better. But a Spanish law allows for a very limited use of your tax credit, which is up to 25% of the taxation that you could have. So imagine that instead of having EUR 5 billion, we had EUR 50 billion. The impact on the EPS would be the same because most of the, let's say, of the tax credit use that you can have per year, it's 25% of your taxable income.
And so the 18.75% means that you can take a use of your tax credit, which drives you from 25% taxation to 18.75%. Of course, you're only using a very limited part of the huge tax credit that you have. It's like having a super big pool, which is a very small exit.
Yeah. Okay. Perfect. No, good. Good.
Sorry, but this limit of using this tax credit, we believe that it's going to be approved now. So today, you can have more benefit of the tax credit, but we are now in the worst scenario that trying to reduce, because it's a proposal, of the percentage of the use of this tax credit, if it happens at the end, that it needs to be approved. In the worst, worst case, so SOCIMI regime plus this additional limit of using this tax credit, the effective tax rate would be for Colonial 18.75%.
This is the worst, worst scenario, okay? This is why the impact is 1.2%, considering SOCIMI taxable and the limit that needs to be approved. It's not now, but needs to be approved of this limit of tax credit.
Understood. Yeah. So it's the worst, worst case. Exactly. On the potential SFL merger, do you have—I know you don't have exchange ratio, it's not ongoing, but can you guide on the EPS impact? And just to make sure on the potential EPRA LTV impact, it should be 4 percentage points lower LTV just for getting rid of the minorities?
Yeah. Well, the EPS impact, of course, it will be based on the exchange ratio. So it's not now what we have been started, it's the preliminary works. So we need to do the closing of the year. And then about the multi-criteria analysis, the fair parity, which is in this context, needs to be fair and validated for the third party. It would depend, but it's not—we are buying or we are absorbing only 1.76% of the minority shareholders and an exchange ratio or parity that it's fair. So material impact on neutral.
On the LTV, EPRA LTV, the fact that it's a combined LTV and the only impact will be this 1.2% adding this additional asset and debt, it will slightly improve, but it's a 1%-2% improvement. So it's a material because the stake what we are absorbing from the minorities, it's only 1.7%.
Yeah. Yeah. So just to emphasize what Carmina just said, no matter how we finally execute this merger that will take place next year, the fact that today we own almost 99% of the company, whatever we do, we'll have a very marginal impact.
Improvement.
And improvement. Thank you, Markus.
Thank you.
Now, next question by Florent Laroche from Oddo BHF. Please go ahead with your question.
Hi. Good evening, everyone. So thank you for the presentation. I would have two questions. So my first question, I would come back to the SOCIMI regime.
So we have understood what could be your impact on the EPS. But would it have some impact when you dispose an asset or an impact on potential capital gains? And in the midterm, if there's no more SOCIMI regime, so could we imagine that at the end, you can think about changing strategy or something like that? So that would be my first question.
And maybe my second question, if you can come back on the Madnum project, maybe to tell us, so now what is the occupancy ratio for this project or predicting occupancy ratio for this project? And how we can see the impact in the revenue coming for the coming period. Thank you very much.
Thank you, Florent. First of all, if you allow me, every time that we talk about this scenario of a revision of the tax regime, I will emphasize every time that we are talking about uncertain scenario, one of the many scenarios that we will have, and only the worst-case analysis. Let me emphasize because if it's not you, Florent, in general, I fully understand that it's so interesting, this scenario that we may talk a lot about it, but maybe in the end, what happens is that we bring this under the spotlight as if it's the central scenario, which is not.
Having said that, I would say that, first of all, any impact on our legal structure, on our future, that we have no comments on this. We will certainly wait for the outcome of this because, as we can say, it's very, let's say, uncertain as of today.
You were saying if the impact on EPS can have additional consequences in the framework of sales. That I leave it for Carmina to answer.
Well, no. Before going to this aspect, as Pere mentioned, if today has not been or has been postponed, it's because there is no agreement in that sense. I think we are in a very remote scenario because if not today, would be approved and agreed, and it wasn't the case. Technically speaking, we don't know. It's true that any capital gain in the future can be offset partially with the tax credit. Normally, in any change of any tax regulation, we need to look at the transitory rules because it's very difficult in the worst scenario to go from a non-taxation regime to a taxation regime without a transitory period.
So I think we would need to see if it happens, which today we don't know. But in general terms, the same applies to the recovering EPS, which is offsetting partially with the trade tax. The same would happen on any capital gain potentially.
On the second question of Madnum, Carlos, please.
Yeah. The Madnum project is roughly 58,000 sq m. It's different phases. It's a super large project, as you know. It will be delivered by different phases and blocks. We are having extremely good momentum. We have conversations and commitments for close to 17,000 sq m. This on the whole would be close to 30%. We are further advancing on it. As I say, it's also being delivered phasedly.
So we will try our best to really have as much as possible pre-let before delivering, but we are extremely confident it's one of the best products in the center of Madrid. So this is what we can say today about this project.
Thank you.
Okay. Thank you very much.
Next question, Fernando Abril from Alantra. Please go ahead.
Hello. Good evening. Thank you for taking my questions. I have two. First is on commercial activity in Q3, which has been quite strong. So, my question is around the increasing vacancy coming from the Project X. So based on conversations you are having, I don't know how confident you are in leasing this up. So maybe any comment on this would be very helpful. And then secondly, you've reported quite good financial savings in Q3. I understand that you have put the cash received from Criteria to work.
My question probably to Carmina is, I don't know if you can give us an indication of the spread or the cost of debt for the near future. I don't know if for 2025 or 2026 would also be very useful. Thank you.
Thank you, Fernando. Yeah. So maybe let's start. The biggest part, I would say, of work that we have received on the Criteria asset is Visionary building. It's a fantastic building. We are totally convinced of the Méndez Álvaro submarket. It's one of the city center markets in Madrid with the strongest dynamic, with the strongest rental growth in recent years and going forward. So, we are really happy to have this product also in our portfolio. So, we have there the square meters on this asset. It's an 8,000 sq m asset. 4,000 sq m are still to be let.
And we have our Méndez Álvaro project also that is now being delivered. So, we are happy about this, about these two positions there in the submarket. It's an extremely good market, and we will have additional rents from it. So, we are encouraged. This is the biggest part. On the other hand, we have fully repositioned Diagonal 197. It's in the 22@ that today is a little bit more challenging, but it's in the prime of the 22@ in the best location. So, it should be one of the best performing assets in the 22@. So, we also are confident. Maybe it's a little bit more work than in the Madrid market.
Related to the cost of debt, it's true that this year we have been benefiting of this cash management and some sort of cash pooling among the group to benefit of this extra cash being smartly deployed.
But for the next year, you know that we have a bond maturity of EUR 1 billion, EUR 500 million in France, EUR 500 million in Spain. We have 50% of this debt pre-hedged and your all-in 0.67%. Basically, the spread from our bond, if you go to the secondary markets for a paper of Colonial, the spread would be in the range below 120. So averagely speaking, if you consider that next year, we need to renew EUR 1 billion, 50% pre-hedged and 50% at market levels, the cost of debt would remain below 2%, basically.
Below? Sorry?
2%.
2%. The blended of the EUR 1 billion.
Yeah, the blended. Yes, two. Yeah.
Okay. Okay. Thank you very much.
Thank you.
Thank you, Fernando.
One more question by Thomas from Deutsche Bank. Please go ahead.
Hi, everybody. Yes, actually, two questions. One, sorry, coming back on the tax topic again. As I understand, the main reason for the limited impact on your side is this 65% SFL portion. I'm just wondering if you would have any idea about the impact without the high contribution from France. And also, the 65%, I assume, refers to the profit contribution. Is this correct?
I don't know what to say. I mean, today, we are not a Spanish company, only limited to 35%. We are 65% subject to a different regime. Talking about a potential change in the tax regime in a worst-case scenario, these are the numbers that come. And if we, instead of being at this company, we're another company, well, the impact would be a different one. But I don't know, Thomas, I'm answering your question.
Sure. Just wondering. Okay. The second one is on your updated EPS guidance. You say at the upper end what you expect. Just wondering if you could get a bit more specific on that.
Yes. I think that we said above 32, maybe close to 32.5, that would be our estimate today. But of course, we are where we are in November, and still not at the end. But definitely above the 32 upper level that we mentioned at the beginning of the year.
Okay. Thank you.
Thank you, Thomas.
And there are no further questions. Therefore, I give back the floor to Mr. Pere Viñolas.
Well, thank you very much. I think that it was a pleasure again to share with you the results. As we said, we are very happy about the evolution and about our trend going forward. So we are very pleased to have the opportunity to share these results with you. So thank you and have a very good day.