Good day, and thank you for standing by. Welcome to the MERLIN Properties three months 2021 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. To ask a question during the session, you need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero on your telephone keypad. I would now like to hand the conference over to our first speaker today, Inés Arellano. Please go ahead.
Thank you very much. Dear ladies and gentlemen, welcome, and thank you for joining MERLIN's first quarter 2021 trading update. We remind you that in a quarter on quarterly results, there is no presentation available. It only includes summary.
Today, Ismael Clemente, our CEO, will do a 10-minute update, and then we will open the lines for Q&A. With no further delay, I'll hand it over to Ismael. Thank you.
Thank you, Inés. Welcome to MERLIN's first quarter 2021 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. As I was reading this morning in a Kepler Cheuvreux research report, nobody said it would be, and we warned the market and the investors at the end of 2020 that we expected it to happen simply because basically our sector of activity, real estate, lags the real economy by one or two quarters. What happened at the end of 2020 has reflected in the beginning of 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 second quarter of 2020. Our 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 a reason, which is that Spain is trailing behind other countries in terms of vaccination. We are, as we speak, at 14% of the total population, and we do not foresee to reach herd immunity until at least end of September, October, despite the more optimistic forecasts which are being released by public officials. 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 rent to be in 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-for-like, on a year-on-year basis. The FFO diminished by 15.3%, and net tangible asset, although no revaluation was carried out during the period, stood at plus 23%.
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. 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 in sight. 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 re-tenanting in the shopping centers, and asset managers are finding slightly easier than expected to replace the tenants that we evict. The revenue in the period amounts to EUR 11.6 million, on track to comply with the EUR 19.6 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 a more widespread normal trade 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. 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 represents, as commented, a 16.3% decline compared to the three months of 2020, 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 rent from the WIP to be taken into account for the rest of the year, which will be in the region of EUR 14 million in total, which is approximately EUR 0.03 per share. Just in this quarter, the WIP delivered amounted to 135,000 sq m with EUR 5.3 million of incremental rent in the year. As commented as well, no revaluation in the period. The NTA stands at EUR 15.58. As for the different lines of businesses, in offices, we contracted 70,000 sq m with a net like-for-like of -2.9% and a release spread of +2.8%, mainly explained by the fact that our passing rents are trailing market rents.
As we have commented on many occasions that there is a gap, there is a cushion between the company's passing rents and market rents, which at the end of 2020 was estimated by the appraisers to be 12%. We are picking up on that gap and as a consequence, we have a positive release spread. We suffered negative indexation of -0.6% on average in offices in the first quarter, although we are seeing inflation quickly picking up in Spain and the European Union, and Portugal as well. We believe that we will recapture part of this during the rest of the year in the renewals of contracts. In logistics, we contracted 144,000 sq m 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 -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. 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. People clearly seem to be betting on those and that pleases us because they are also showing significant resilience in the current circumstances. With no further delay, we can move into the Q&A. We are at your disposal, the whole team here, for your questions. Thanks a lot.
Operator, could you please open the line for Q&A? Thank you.
Yes, of course. Thank you. Dear participants, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad. The first question comes from the line of Pedro Alves from CaixaBank. Please ask your question.
Hi. Good afternoon. Thank you for taking my question. I have two, please. The first one regards to the records of a persistent increase of vacancy in pretty much every sub-market of Madrid. I know you had correctly flagged this trend in your previous communications to the market. I just wanted to know how confident you are that in the second half of this year, occupancy can start recovering. According to some press sources, there are apparently some cases in which companies reduced significantly, in some cases 50%, their office space needs. Based on the conversations you are having with tenants, are you still seeing a strong winter for occupied demand? Second question related to this, your expectation for rental prices considering this pressure in occupancy. Also appreciate your comment on the incentives.
Seeing that incentives as a percentage of your gross rental income increased from previous quarters. Thank you very much.
Well, Pedro Alves, regarding vacancy, our forecast for the whole year continues to be between 1.5% and 2% 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. Most of the effect of the recovery will only be felt in 2022. 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 have 15% office contracts 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.
The visibility, as you can imagine from that 13%, is extremely high right now. We have either gone through the renewal or know how the renewal will look like because it will happen before the 30th of June. Of course, the situation is tough. Companies are destroying employment, particularly in 2020, the destruction of employment in Spain was very, very significant. I know many people, it's not linking one thing to the other, but it's very simple. When Spain is creating employment, 80% of those employment are blue collar, go to factories. 20% are white collar and appear in capital areas. Those capital areas, some of them are ours. Of course, every time you see in the headlines employment being created, occupancy trends up.
When employment goes down, occupancy trends down, particularly in a portfolio like ours, which is heavily exposed to industrial companies which are heavy on workforce. Of course, in all the CBD portfolio, which is full of law firms and consulting firms and investment banks, that's all okay. In the real world, in the new business areas, in the periphery where you have industrial companies, you are extremely sensitive always to employment destruction. We are under no illusion that there will be a miracle during 2021. 2021, as commented last year, we knew 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 trends, and we continue enjoying a significant gap between passing rents and market rents. That gap provides us with a very significant cushion security. No matter there is pressure on occupancy, as you correctly pointed out, normally translates with a certain lag into passing rent. First, we need to wipe out completely the difference, the delta between passing and market, and this hasn't happened yet. As of end of 2021, we will see what is the appraisal, and what the appraisers say in terms of what is the new delta between passing and market. As it stands today, in the region of 13%, we normally pick up on the contracts we renew. It's very simple. It's real estate.
Of course, I know people is super focused on the headlines and on the TV news, but this is real estate. Incentives are growing a little bit, yes. We had EUR 3 point something million last year, and we have EUR 5 point something million this year. This is, I would say, normal commensurate with what is happening in the market. As you know, our practice is normally not to materialize the incentives given to tenants. Yes, we will need to resort a little bit more to incentives. Even in the toughest moment of the past cycle, we didn't see a lot of linkage between gross and net in MERLIN. We have our instructions to asset managers.
Asset managers abide by the instructions, and they are obliged to provide us rents measured as net rents, so that we avoid that they play 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. In this market environment, of course, incentives have grown a little bit. I hope it answers your question. Anyway, happy if you have further questions.
No, it's perfect. Thank you very much, Ismael.
Thank you.
Thank you. The next question comes from the line of Marios Pastou. Please ask your question.
Hi, good afternoon. I have two questions on my side, which again relates to the vacancy in the office portfolio. I wanted to know if you could give us a sense if the vacancy is just on a few buildings or is it actually widespread across your portfolio? Another question is, in order to reverse potentially this vacancy uptick, would you be able to actually further have more negative reversion? It's just as you suggest, maybe there is no demand because a lot of your occupiers are just cutting jobs and thereby there's just no demand for the office space. Sorry, just another one just to follow that. If the tough office fundamentals on the operational side, how does it translate into the investment market?
Fantastic. If I understand well your second question, basically, you mean whether in order to revert the vacancy, we could simply lower prices and 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, which is always something you can do. We are in the middle of an economic recession caused by the pandemic. The pandemic is little by little receding, 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. What we are seeing is very encouraging.
I have been recently reading reports on what is happening in Tel Aviv, in New York, and this morning I was reading about London also being quite interesting in terms of demand. We need to wait a little bit. Spain, as you know, is a very cheap country. In the CBRE Index of most expensive office markets in the world, I think it ranks 56, Madrid, on par with Bristol. There's very little you can do rent-wise. We need to wait and see what happens. If we lose some income in office or we have some erosion in our cash flow stemming from the office and the performance, so be it. We will live with it. Thank 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 15.8 points in this company, remains concentrated in a few buildings in an area which has been suffering from a very significant problem with traffic jams, which is one corridor in the park, and that creates some negative vibe in the market regarding lease. However, the works for the new communications in the north of Madrid have already started and are slated to be finished by October 2022. Little by little, with the redevelopment of the north of Madrid through the Operación Chamartín, that area will be regaining strength in the future. 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 has been mainly imputable to the CBD in Madrid and a little bit also to the periphery, where we have had particularly the exit of a couple tech companies that went failed. We have also suffered a significant reduction in space of two call center operators in the periphery. Speaking anecdotally, this is what has happened. Maybe in the second quarter, everything is different. We shouldn't always infer permanent behavior of market by just one quarter, as David Brush has commented many times in this kind of call.
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 also commented on the investment market. I am very sorry. On the investment market, the first quarter has been much duller than the first quarter last year, -60%, approximately EUR 1.5 billion in offices versus like EUR 3.6 billion last year. In shopping centers, even worse, -85%, almost anecdotal, the amount of transactions happening in the market in the period. The market remains reasonable. We are entertaining conversations with a number of investors regarding some new core, and those conversations continue, and there is no panic in the market. It's simply that, of course, people worry about the level of vaccination, people worry about the level of economic activity, and people worry about the economic management of the recovery from the crisis that the Spanish government may finally do. Other than that, the market remains solid.
There are no rash sales in the market, and things are happening as we would expect. No problems in this side.
You don't see yield extensions happening any time?
I couldn't follow you. I beg your pardon.
Sorry. If not, at least some transactions that have happened.
We've not noticed yield expansion or significant change in values.
Not at all. In fact, counterintuitively, as we commented in the 2020 result call, we continue to see yields tightening a little bit, courtesy of the ECB, of course. That yields continue tightening as we speak. It is curious, it is paradoxical, 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. 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.
Thank you very much.
You're welcome.
Thank you. The next question comes from the line of Oliver Carruthers from Goldman Sachs. Please ask your question.
Hi there. Thank you very much for the clear presentation and clear guidance ahead. Two questions from me. Firstly, on your newly vacant office space, will you look to refurb any of it or do you expect these to be let? That's the first question. The second point is, given that you don't expect Spain to reach herd immunity until September at the earliest, should we expect a phase four of your commercial rent release policy, which I believe expires this June? Thank you very much.
As for the first one, Oliver Carr, the newly vacant space, the one that has been affected by vacancy in this quarter especially, frankly speaking, no need for refurbishment. It will be so easy for us to simply take them out of inventory and refurb. 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. The reason, of course, when we compare Last Twelve Months trading till March 2020 with Last Twelve Months trading till March 2021, you are about in the worst picture possible of retail in Spain.
The LTM trading till March 2020 was a mostly undisturbed trading period, except by 15 days in a 365 day period. The LTM till March 2021 is 365 shity days of performance throughout the year. Of course, -40% in footfall and sales, of course we are comparing about the worst we can compare. Just to give you a brighter picture of what is happening, if you start comparing the weeks of reopening or the months of reopening to the prior months, now that we are starting to reopen some of our shopping centers, you would see that approximately we are posting +80% in footfall and sales as compared to the previous period. It's very simple. I mean, empty shopping centers versus full shopping centers.
We are seeing a much better pattern of consumer behavior as the centers little by little reopen and come back to normality. 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, absurd, and Lisbon, where also restrictions are very heavy. The rest of the portfolio is now little by little going back to normality. We expect a much lower level of incentives in the second quarter as compared to the first. With the remainder of the EUR 8 million to the EUR 19.6 million 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?
Not here with me.
Okay.
The IR will contact you, and we'll share with you. I mean, for what it's worth, internally, we track everything against 2019.
Yeah.
Otherwise, tracking to 2020, it's a rollercoaster. In 2020 we have better periods, worse periods. 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.
You're welcome.
Dear participants, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad. The next question comes to the line of Fernando Abril-Martorell from Alantra. Please ask your question.
Hi. Good afternoon. Thank you for taking my question. Only one. Where do you expect to be footfall and tenant sales by the end of the year? I know visibility is quite low right now, but you are now starting to reopen some of your assets, so you can get kind of a feeling. Of course, if you expect another performance of tenant sales versus footfall, now that consumption is picking up quite fast. Thank you.
You're welcome, Fernando. I think it's difficult to predict a figure with a certain level of accuracy. If I have to make a forecast, I believe it will be picking up from the -40 to the -25 to -30 we are seeing now, as compared to always 2019. We expect that by year-end, it will be clear to us what component of the drop in footfall and sales per sq m was pandemic-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 region of -20. However, I have to admit that some of the trading of some of the shopping centers is now surprising me.
If I look at, for example, what Centro Oeste or Arturo Soria Plaza or even La Vital in Gandia or, of course, X-Madrid. X-Madrid is now wild. If I look at those shopping centers and I see their performance, it might be lower than that -20%. It could be actually something between -5% and -10% for those, let's say, ultra old and 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, Ismael, you mean by the end of the year?
Yes, because now we are simply picking up. Now we are reopening. People come to the shopping centers. They incur in prevention spending, as you correctly pointed out. Of course, sales exceed the footfall because people normally come to spend, not to wander. Yes, 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. Through year-end, we should have a much clearer picture of, I guess is your point, what is exactly the degree of damage inflicted by growing online sales penetration in the total 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. Yes, okay. It will depend on the speed of the recovery, of course. Okay. Thank you very much, Ismael.
No. Fernando, regarding tenants, by year-end, I tell you that at the rhythm we are evicting, by year-end, most of what we track as red line or zombie status in our portfolio.
Yes
Will have been replaced. One of the few things which in Spain is fast is courts regarding commercial evictions. We are obtaining a super high rate of success. We are evicting and re-tenanting. Of course, we are trailing behind a little bit in re-tenancy. In the fourth quarter, we evicted 11,200 and re-tenanted 9,900. We accumulated, let's say, 1,300. In this first quarter, we evicted 8,000 and re-tenanted 7,000 and change. We are accumulating a little lack, but it's surprising us on the positive side.
Okay. Thank you very much. Very clear.
You're welcome.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one on your telephone keypad. The next question comes from the line of Ignacio Martinez from Bestinver. Please ask your question.
Hi. Thank you for taking my question. Just a quick one from my side. I would like to know how much are you planning to invest to develop the data centers, and what yield are you expecting to achieve? Thank you.
Hi, Ignacio. Look, as commented in the end of the year results presentation, the basic numbers of our business plan regarding data centers are going to be released to the market on the first half results presentation. As we are speaking, we are in the position, a couple of buildings. We are now asking for the different licensing projects. We are elaborating t he anti-projectors and proyectos básicos. We are also going through the costing, 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 this project. We will inform the market in due time.
Okay. Thank you very much.
You're welcome.
Thank you there participants as a reminder if you wish to ask a question please press star and one on your telephone keypad.
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.
Thank you, operator. Thank you very much for attending today's call. As always, we will monitor this call. If you have further questions, do not hesitate to contact us. You have our emails, you have our direct lines as well. Keep 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.