Good day, and thank you for standing by. Welcome to the Merlin Properties three months twenty twenty one results conference call. At this time, all participants are in listen only mode. After the speaker presentation, there will be the question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Ines Arellano. Please go ahead. Thank you very much. Dear ladies and gentlemen, welcome, and thank you for joining Merlin's first quarter twenty twenty one trading update. We remind you that in accordance with our quarterly results, there is no presentation available.
It only looks like this summary. Today, Ismaio Clemente, our CEO, will do a ten minute update, and then we will open the lines for Q and A. With no further delay, I'll pass the floor to Imano. Thank you.
Thank you, Ines. Welcome to Marine's first quarter twenty twenty one results call. The months of January, February and March have been a tough period for business in Spain, at least for our business in Spain. But as I said, was reading this morning in Kepler Cheuvreux research report, nobody said it would be easy. I mean we want the market and the investors at the 2020 that we expected it to happen simply because basically, our sector of activity, real estate, lacks the real economy by one or two quarters.
And what happened at the
2020
has reflected in the 2021. That means we expect an equally difficult second quarter, slightly better, particularly from an optical standpoint because in the first quarter, you compare year on year against a mostly undisturbed first quarter in 2020, whereas in the second quarter, we will compare with an already disturbed 2020. So figures will look optically better. But in real terms, it will also be a tough quarter. Of course, occupancy erosion will be much smaller, but it will continue to be a tough business environment.
This has reason, which is that Spain is trading behind other countries in terms of vaccination. We are, as we speak, at fourteen percent of the total population, and we do not foresee, to reach herd immunity until at least September, October despite the more optimistic forecast which are being released by public officials. Then third quarter, we expect to be flatter, and the sunshine should be seen again towards the fourth quarter in response to a better sanitary management of the crisis towards the end of the year. However, despite this challenging environment, the cash flow of the company has performed basically as expected. In fact, as informed to our Board of Directors, we are running slightly ahead of budget in the first quarter and perfectly on track to beat our cash flow forecast for the whole year because we expect marginal improvement towards the fourth quarter, plus we expect also some additional rents to be income as a consequence of the entry into operation of work in progress.
In terms of consolidated performance, the gross rent of the company fell 2.9% like on like for like on a year on year basis. The FFO diminished by 15.3%. And net tangible assets, although no revaluation was carried out during the period, stood at plus 0.3%. The business performance, as aforesaid, was heavily impacted by further mandatory closures decided by both central, autonomous, municipal, and you name it, authorities in different, cities. And some tenants are starting to be heavily affected by now, especially in shopping centers.
Many of them may drown before they reach the shore, which is now on-site. But eventually, they may lack the forces to simply continue swimming till they reach the shore. However, as commented in our quarterly report, we are seeing a very interesting pace of return in the shopping centers. And asset managers are finding slightly easier than expected to replace the tenants that we evict. The rent released in the period amount to EUR 11,600,000.0, on track to comply with the EUR 19,600,000.0 that we announced for the first semester because the level of help provided to tenants in the second quarter will be lower as a consequence of more widespread normal trading in Spain, except in Catalonia, where trading continues to be heavily restricted.
And not Spain, but Iberian Peninsula in Lisbon, where also trading is heavily restricted. And in many cases, the schedule restrictions to shopping centers are akin to closing the shopping center because in the absence of certainty about what time people can go to shopping center, they simply do not go. FFO per share of EUR 0.135 represent, as commented, a 15.3% decline compared to the three months of 2020. But as commented as well, this was a mostly undisturbed period. The cash flow is on track to meet the guidance, as commented as well, with additional rents from the WIP to be taken into account for the rest of the year, which will be in the region of €14,000,000 in total, which is approximately €03 per share.
Just in this quarter, the wood delivered amounted to 135,000 square meters, with €5,300,000 of incremental rents in the year. And as commented as well, no revaluation in the period. The MTA stands at 15.5%. As for the different lines of businesses, in offices, we contracted 70,000 square meters with a negative like for like of minus 2.9% and a release spread of plus 2.8%, mainly explained by the fact that our passing rents are trailing market rents. We have commented in many occasions that there is a gap, there is a cushion between the company's passing rents and market rent, which at the 2020 was estimated by the appraisers to be 12%.
So we are picking up on that gap. And as a consequence, we had a positive relief spread. We suffered negative indexation of minus 0.6% on average in offices in the first quarter, although we are seeing inflation quickly picking up in Spain and European Union and Portugal as well. So we believe that we will recapture part of these during the rest of the year in the renewals of contracts. In logistics, we contracted 144,000 square meters with a like for like of 0.8% and a release spread of 2.9%, in this case, consequence of the strength of the market because indexation was also negative at minus 0.6 for logistics.
In shopping centers, we relet 7,600 square meters with a negative like for like of 2.9% because we lost occupancy, but a positive release spread of 5.5% despite negative indexation of 0.5% in shopping centers. I mean frankly speaking, this plus 5.5% in release spread has surprised us. It has been mainly concentrated in shopping centers, which have been recently refurbished. So people clearly seems to be betting on those. And that pleases us because they are also showing significant resilience in the current circumstances.
So with no further delay, we can move into the Q and A, the disposal, the whole team here for your questions. Thanks a
Operator, could you please open the line for Q and A? Thank you. Yes, of course. Thank you, dear participants. We will now begin the question and answer session.
The first question comes from the line of Pedro Albert from CaixaBank. Please ask your question.
Hi, good afternoon. Thank you for taking my questions. I have two, please. The first one, regards to the reports of persistent increase of vacancy in pretty much every submarket of Madrid. I know you had correctly flagged this trend in your previous communications to the market.
Just wanted to know how confident you are that in the second half of this year, occupancy can start recovering? Because according to some press sources, there are apparently some some cases in which companies reduced significantly, in some cases, 50% their office space needs. So based on the conversations you are having with tenants, are you still string still seeing a strong winter for occupied demand? And second question related to this, your expectation for for rental prices considering this pressure in occupancy. And also appreciate your comment on the incentives because in that incentive as a percentage of your gross rental income increased from previous quarters.
Thank you very much.
Okay. Well, Pedro, regarding vacancy, our forecast for the whole year continues to be between 1.52% loss of occupancy as compared to 2020 or where we finished 2020. Clearly, we are operating under no hopes of a very significant recovery towards the end of the year simply because we won't be on time. I mean most of the effects of the recovery will only be felt in 2022. So towards the end of the year, we might pick up a little bit.
In fact, we believe we will pick up a little bit in occupancy. Very important data for you. This year, we had 15 office contracts for up for renewal, of which 13% fell in the first semester and 2% in the second semester. Out of the 13% that fell in the first semester, 8% fell in the first quarter and 5% in the second quarter. So the visibility, as you can imagine, from that 13% is extremely high right now.
So we have either gone through the renewal or know how the renewal will look like because it will happen before the June 30. And of course, the situation is tough. Companies are destroying employment. Particularly in 2020, the destruction of employment in Spain was very, very significant. And I know many people is not linking one thing to the other, but it's very simple.
I mean when Spain is creating employment, 80% of those employment are blue collar, go to factories. 20 are white collar and appear in carpeted areas. And those carpeted areas, some of them are ours. So of course, every time you see in the headlines, employment being created, occupancy trends up. And when employment goes down, occupancy trends down, particularly in a portfolio like ours, which is heavily exposed to industrial companies, companies which are heavy on workforce.
I mean, of course, in all the CBD portfolio, which is full of law firms and consulting firms and investment banks, that's all okay. But in the real world, in the new business areas and in the periphery where you have industrial companies, you are extremely sensitive always to employment destruction. So we I mean, we are under no illusion that there will be a miracle during 2021. 2021, as commented last year, we mean it was going to be a tough year. Although we know that towards the end, there will be time for us to start recovering part of the occupancy loss and picking up a little bit on our office activity.
Regarding rents, well, you have seen the underlying trend, and we continue enjoying a significant gap between passing rent and market rent. That gap provides us with a very significant cushion, security. So no matter there is pressure on as you correctly pointed out, normally translates with a certain lag into pressure in rents. But first, we need to wipe out completely the difference the delta between passing a market, And this hasn't happened yet. I mean, as of 2021, we will see what is the appraisal and what the appraisers say in terms of what is the new data between passing and market that as it stands today in the region of 12%, we normally pick up on the contracts with renew.
It's very simple. It's real estate. Of course, I know people are super focused on the headlines and on the TV news, but this is real estate. Incentives are growing a little bit, yes. We had like EUR 3 point something million last year, and we have like EUR 5 point something million this year.
But this is, I would say, normal, commensurate with what is happening in the market. As you know, our practice is normally not to mineralize the incentives given to tenants. So yes, we will need to resort a little bit more incentives. But even in the toughest moment of the past cycle, we didn't see a lot of linkage between gross and net in Berlin. We have our instructions to asset managers.
Asset managers abide by the instructions, and they are obliged to provide us rent measured as net rent so that we avoid that they pay with the facial rent as compared to the true net rent. That transpires through all the company. And as a consequence, we are a company where leakage normally is small. And in this market environment, of course, incentives have grown a little bit. I hope this answers your question.
But anyway, happy if you have further questions.
No, it's perfect. Thank you very much. Thank
you, sir.
Thank you. The next question comes from the line of Marie Donni. Please ask your question.
Hi, good afternoon. I have two questions on my side, which again relates to the vacancy in in the office portfolio. So I want to know if you could give us a sense if the vacancy is just on a few buildings or is it actually wide widespread across the portfolio? And then other another question is, in order to reverse potentially this vacancy uptick, would you would you be able to actually further, you know, have more negative reversion? Or is it's just as you suggest maybe there there is no demand because all your suppliers are just just cutting jobs and thereby there's there's just no demand for the office space.
And then just sorry. And and and just another one just to pull it up. It's the top office fundamentals on the operational side, how does it translate into the investment markets?
Okay. Fantastic. So if I understand well your second question, basically, you mean whether in order to revert the vacancy, we could simply lower prices take a bigger dent on the delta between passing and market. Look, I don't think it will make a big difference because today, we are living a period of simply weak demand, and there is very little you can do about it other than wait, I mean, which is always something you can do. We are in the middle of economic recession caused by the pandemic.
The pandemic is little by little receiving, and we are witnessing what is happening in other countries, which are far more advanced than Spain is in terms of vaccination and attainment of herd immunity. And what we are seeing is very encouraging. I mean, I have been recently reading reports on what is happening in Tel Aviv, New York. And this morning, I was reading about London also being quite interesting in terms of demand. So we need to wait a little bit.
Spain, as you know, is a very cheap country. And then, in the CVRE index of most expensive office markets in the world, I think it ranks 56, okay, on par with Bristol. So there is very little you can do rent wise. I mean we need to wait and see what happens. I mean if we lose some income in office or we have some erosion in our cash flow spending from the office and the performance.
So this, I mean, we will live with it. Thanks God, we are a highly diversified company, and we will withstand that negative. In terms of the vacancy, well, the vacancy, at least the structural part of the vacancy, which is easily eight points in this company, remains concentrated in a few buildings in an area which has been suffering from very significant problems with traffic jams, which is one corridor in the past, and that creates a negative part in the market regarding the hard work. The works for the new communications in the North Of Madrid have already started and are slated to be finished by October 2022. So little by little, with the redevelopment of the North Of Madrid through the operation of Martin, that area will be regaining strength in the future.
So for now, we need to wait.
Very interesting,
the excess vacancy that we have suffered in the first quarter, so not those eight points that we can call structural vacancy, but the excess vacancy that we have suffered in the quarter have been mainly imputable to the activity in Madrid and are limited also to the periphery, where we have had particularly the exit of a couple of tech companies that went failed. And we have also suffered a reduction significant reduction in Spain in space of two call center operators in the periphery. So it's been anecdotally, this is what has happened. Maybe in the second quarter, everything is different. I mean we shouldn't always fear permanent behavior of market by just one quarter as David Rush has commented many, many times in this kind of calls.
I mean only the whole year will provide us with a better picture of what is happening. And of course, the longer the period, the more clear the picture on what is happening in a given market.
Thank you very much. You And
also commented on the investment market. I am very sorry. So on the investment market, the first quarter has been much better than the first quarter last year, minus 60%, approximately EUR 1,500,000,000.0 in offices versus like EUR 3,600,000,000.0 last year. And in shopping centers, even worse, minus 85%. I mean almost anecdotal, the amount of transactions happening in the market in the period.
The market remains reasonable. I mean we are entertaining conversations with a number of investors regarding Amuncor, and those conversations continue, and there is no panic in the market. It's simply that, of course, people is worried about the level of vaccination, people is worried about the level of economic activity, and people is worried about the economic management of the recovery from the crisis that the Spanish government may finally do. But other than that, the market remains solid. There are no rushed sales in the market, and things are happening
So no problems in this side.
So you don't see your extension happening real time?
I I I I couldn't follow you. Can you repeat?
Sorry. You you've not at least from transactions that have happened, you've not you've not noticed yield extension or significant change in values?
No. Not at all. In fact, counterintuitively, as we commented in the 2020 results call, we continue to see yields tightening a little bit, courtesy of the ACV, of course. That yields continue tightening as we speak. It is corrosive, it is paroxical.
And maybe it is also predicting future increases in value as a consequence of increased activity. We still do not know how things will recover when Spain starts to recover. It is also true that people are starting to take into account much bigger inflation in models. So that inflation, of course, is also putting some pressure on the prices because real estate is starting to be seen as an eventual protection from inflation.
You very much. Thank you very much.
You. The next question comes from the line of Oliver Caruthers from Goldman Sachs. Please ask your question.
Hi there. Thank you very much for the clear presentation and clear guidance I had. Two questions from me. Firstly, on your newly vacant office space, will you look to refurb any of it? Or do you expect to be straight, relapse?
That's the first question. And then the second point is, given that you don't expect Spain to reach herd immunity until kind of September at the earliest, Should we expect a Phase four of your commercial rent relief policy, which I believe expires this June? Okay.
As for the first one, Oliver, the newly vacant space, the one that has been affected by vacancy in these quarters, especially, frankly speaking, need for refurbishment. I mean it will be so easy for us to simply take them out of inventory and refer. This is a very old trick, but we don't intend to do it. As for the second, whether reaching late the herd immunity through September, October will mean exceeding our budgeted help to tenants in shopping centers. We do not expect that for one thing, the reason.
Of course, when we compare last 12 homes trailing till March with last 12 homes trailing till March 21, you are about in the worst picture possible of retail in Spain because the the ATM trading in in March 20 was a mostly undisturbed trading period, except by fifteen days in a three sixty five day period. However, the LTM till March 21 is three sixty five shipping days of performance throughout the year. So of course, when we say minus 40% in food for sale, of course, we are comparing about the worst we can compare. However, just to give you a, you know, brighter picture of what is happening, if you start comparing the weeks of reopening or the month of reopening to the prior month, now that we are starting to reopen some of our shopping centers, you would see that, fortunately, we are posting plus 80% in food for and sales as compared to the previous period. It's very simple.
I mean, empty shopping centers versus full shopping centers. So we are seeing a much better pattern of consumer behavior as the centers, little by little, reopen and come back to normality. So we simply expect a better period in the second quarter, except, as I commented, except Basque Country, where restrictions continue to be very heavy, Catalonia, where restrictions are, frankly speaking, upward and Lisbon, where also restrictions are very, very heavy, the rest of the portfolio is now little by little going back to normality. So we expect a much lower level of incentives in the second quarter as compared to the first. So with the remainder of the EUR 8,000,000 in the EUR 19,600,000.0 we commented to market, I think we are safe.
Okay. That's super clear. And we can follow-up afterwards if not. But do you have that 80% year on year comparison in terms of, I don't know, if it's footfall or sales? But do you have that on a two year stack basis versus, say, 2019?
Don't share with me. But the IR will contact you and and will share with you. I mean, for what it works internally, we track every everything against 19 because because otherwise, you know, the tracking to 20 is is a roller coaster. Because in 2020, we have better period, worse period. It's very difficult to compare.
We normally track to 2019.
Okay. Got it. I'll follow-up afterwards. That's very helpful. Thank you.
The next question comes from the line of Fernando Abriel from Alanda. Please ask your question.
Hi. Good afternoon. Thank you for taking my question. Only only one. So where do you expect to be fruitful in tenant sales by the end of the year?
I know basically, it is quite low right now, but, well, you are now starting to reopen some of your assets so you can get kind of a feeling. And, of course, if there is you expect an outperformance of tenant sales versus footfall now that consumption is picking up quite fast?
I think it's difficult to predict a figure with a certain level of accuracy. But if I have to make a forecast, I believe we will be picking up from the minus 40% to the minus 25 to 30% we are seeing now as compared to always 2019%. And we expect that by year end, it will be clear to us what component of the drop in footfall and headless per meter was mainly related and what component was simply related to the pandemic driven increase in online. Only by then will we know. You have heard us many times saying that we expect this number to be in the middle of 20% or minus 20%.
But however, I have to admit that some of the trading of some of the shopping centers is now surprising. If I look at, for example, what CentroEste or Alturo Sollia Plaza or even La Vita in Gandia or, of course, Ex Madrid is now wide. But if I look at those shopping centers and I see their performance, it might be lower than that minus 20. It could be actually something between minus five and minus 10 for those, let's say, ultra old and ultra dominant, very dominant in their area of catchment shopping centers in the portfolio. Some others will, of course, suffer a little bit more.
Thank you. Sorry, Ismail, you
mean by the end of the year? Yes. Because now we are simply picking up. I mean we are reopening. People come to the shopping center.
They incur in prudential spending. As you correctly pointed out, of course, sales exceed the footfall because people normally come to spend, not too longer. And yes, I mean, that will provoke a gradual recovery of shopping centers, it will not be completely at the beginning because people will take time to continue regaining confidence in that way of spending. But through year end, we should have a much clearer picture of what is exactly I guess, is your point, what is exactly the degree of damage inflicted by growing online sales penetration in the retail sales in Spain in the shopping center format.
Yes. I was a bit more worried on when your tenants will stop burning cash, so they stop being problematic. But yes, okay, it will depend on the speed of the recovery, of course. Okay, thank you very much, Smedes.
Fernando, regarding tenants, by year end, I tell you that at the rhythm we are predicting, by year end, most of the what we track as red line or zombie status in our portfolio will have been replaced. So because one of the few things which in Spain is fast is courts regarding commercial evictions. So and we are obtaining our best super high rate of success. So we are editing and retenanting. Of course, we are trading behind a little bit in retenancy.
So in the fourth quarter, we added $11,200 and we tenanted $9,900 So we accumulated, like, let's say, 1,300. In this first quarter, we added like $8,000 and we tenanted $7,000 unchanged. So we are accumulating a little, little lag, but it's surprising us on the positive side.
Okay. Okay. Thank you very much. Very clear.
You're welcome.
Thank you. The next question comes from the line of Ignacio Martinez from Bernstein. Please ask your question.
Hi. Thank you for taking my question. Just a quick one on my side. I would like to know how much are you going are you planning to invest to develop the data centers? And what deal are
you expecting to achieve? Thank you.
Hi, Matthew. Look, as commented in the end of the year results presentation, basic numbers of our business plan regarding data centers is going to be are going to be released to the market on the first half results presentation because as we are speaking, we are seeing solutions, a couple of buildings. We are now asking for the different licensing projects. We are elaborating the anti projectors and projector verticals. We are also going through the coasting and only when we have more visibility, of course, not complete visibility, but when we have more visibility on which equipment, for example, needs to be imported from The U.
S, which equipment can be locally sourced in Spain and things like that, we will have a better understanding of the numbers of the projects. So we will inform the market in time.
Okay. Thank you very much. You're welcome.
Thank you. There are no further questions at this time. I would like to hand over back the call to the speaker for the closing remarks. Thank you. Thank you, operator.
So thank you very much for attending today's call. As always, we will monitor your disposal. So if you have further questions, do not hesitate to contact us. You have our e mails. You have our direct lines as well.
And stay safe, and talk to you very soon. Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect.
Have a nice day.