Ladies and gentlemen, thank you for standing by, and welcome to Merlin Properties 9M20 Results Presentation. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I must advise you that this conference is being recorded today, Friday, 11/13/2020. I would like to hand the conference over to first speaker today, Ines Arellano.
Please go ahead, ma'am.
Thank you. Good afternoon, ladies and gentlemen. Welcome to Merlin's 09/2020 results presentation. First of all, we hope that you're all safe and sound. The executive summary distributed last night and available in our website will be the supporting materials used today in this presentation.
Our CEO, Mr. Mario Clemente, will start with a brief introduction followed by a Q and A session for which both Miguel Ollero and David Brash will be at your disposal. Without further delay, we pass the floor to Ismail. Many thanks for your attention. Ismail?
Thank you.
Thank you, Ines. Good afternoon, everyone. Welcome to Merlin nine months twenty twenty results presentation. We are proud to report what we believe is a good performance in the circumstances, showing very high resilience of our business and even some little growth capacity, which is not more fit. Retail has obviously been heavily affected by the mobility and gathering restrictions.
Their offices are showing an almost immaculate performance. Logistics are shining. It's hedge and tails with shopping centers as a result of e commerce penetration. We are enjoying extremely high collection rates, basically similar to business as usual. And our litigation is negligible at present with only 35 pending procedures in court out of 1,800 contracts.
In terms of numerical performance, our gross rents diminished by 3.5 as compared to the same period last year. However, you need to account for the change in perimeter. So in like for like terms, that would have been a 1.4% increase. Our FFO per share went down by 16.8%, clearly affected by the tenant relief measures given in shopping centers, which have posted us so far 39,600,000.0 recorded as a one off expense, optically eroding our normally high operational margins. However, the good thing is that we have been successful in keeping the occupancy cost ratio of our tenants at reasonable levels, currently standing at 12.2%.
Our peak was 12.9%, down to 12.6% and now 12.2%, which is resulting in extension of contracts and what I would say a certain goodwill with in the partnership we have with our tenants in the different shopping centers. The NAV per share is 3.3% up, but there has it is meaningless because there's been no revaluation in the period that is simply dragged from last year. Very importantly, the business the incentives we are giving in an ordinary business are declining. So the company continues to perform reasonably,
I would say,
unaffected as compared to the pre COVID situation. We continue to be not fond of ordinary incentives. You know that if you have followed us in the past years. We try to have to make our rental contracts as close as possible to reality and do not abuse that much of incentives. And even during this difficult period of pandemic, we continue working hard in this regard to make sure that the picture we give to you every time we get in front of you is as true as possible.
The FFO per share of €0.42 is on track to exceed the updated guidance we gave to you in March. I mean we at the very least, we were almost bang on in our assessment of the situation in March. Of course, we are missing €0.11 €3 are attributable to the change of perimeter and €08 are attributable to the COVID measures because otherwise we will already be at the 0.53 That was our objective for this point of the year. In terms of business performance, our office portfolio as I said is showing great resilience with 3% growth in rent like for like, 1.3% for shopping centers. That corresponds basically to the step ups that we have had in the shopping centers and 2.9% in logistics.
Release spreads are also quite sound with 4% in offices, 4.1% in shopping centers and 8.5% in logistics. And we have managed to increase our occupancy by 22 basis points to 94.1%. So in other words, our vacancy is 5.9% portfolio overall, which I believe is an interesting sign of resilience and strength of our portfolio, particularly our tenant roster. I mean the quality of our tenants is fantastic, and this is now shining in a difficult environment like the one we are in. In offices, we have transactions close to 200,000 square meters with the referred like for like of 3% and the release spread of 4%.
Many of you are asking us what is the pre COVID, post COVID comparison. So I have asked for the exact numbers and will release to you. In the first Q pre COVID, we signed 12,000, 11,977 square meters of offices. That is new contract signed that excludes completely renewals and rollovers. In the following two quarters, second and third, we have signed $55,000 $54,680 That is an achievable remarkable achievement.
In terms of comparison to ERV, which for many of you is important, pre COVID we were running at 5.8% above ERV first quarter. And in the second and third, we have achieved 10.2% above December 2019 ERV, which I believe reflects the strength of the market and of course the hard work by our asset managers. The renewal rate, which is very, very important particularly in these times, was 59 in the first quarter. And that was also consequence of one particular break of negotiations. I mean normally we are in 75%, 80%.
But in the second and third, we are 83%, so back to normal. And that is the renewal rate that we use for the release spread calculation. So this doesn't include rollovers. If we were to include rollovers, we would be up close to 95%, which by the way is the same ratio that Johnson and Asthalle is giving to us as stay go decision result. So now most of the tenants are basically staying where they are.
But very importantly, they are not yet at least reducing any space. I know you are all in London and New York and you are you fear of massive reductions of space and things like that. Maybe. We have no evidence yet. In terms of release spread, in the pre COVID world, first Q twenty twenty, we were eleven point seven percent, which was a very good release spread.
And in the post COVID environment, we are minus two point one percent, but this is technically because the Endesa lease is included. If you exclude the Endesa lease, it's fourteen point two percent. So as David uses to say sometimes, what we see today is evidence that the market in normal circumstances should be accelerating. Of course, COVID has stopped everything, but the market should be accelerating owing to the very low vacancy rates for grade A quality office buildings, which is what really drives the market. I mean macro is important, but macro takes time to damage the market.
But in the short instance, it's more supply and demand and the ratio of occupied space versus vacant space what drives the pricing and absorption of a given market. In shopping centers, we have contracted more than 21,000 square meters with a very light like for like growth of 1.3% and a release spread of 4.1%. In logistics, it's been a great period with 135,000 square meters contracted like for like of 2.9% and a release spread in excess of 8.5%. And what is more remarkable, 100% occupancy in all of our deliveries, which have been substantial in the period. So we are, as I said at the beginning, happy with the way we see the company performing.
The company is certainly, I mean, a managerial standpoint is showing its quality. Everything you touch, every lever you action on produces the results that you would expect to produce, so which is very important to say particularly in different in difficult times like the ones we are on. And we look confident to the end of the year despite the new wave of infections and the new wave of restrictions and closures of shopping centers by different municipal, autonomous community, central authorities. Despite all that, we look confident to delivering good results for the year overall as of December. And we also look confident in 2021.
We are prepared to operate in a no vaccine environment. That is important. So if we have vaccine, all the better. But we believe 2021 is going to be a year in which with or without vaccine, we will be able to beat our 2020 numbers confidently. So without further delay, I think we should we could probably move into Q and A.
We are all the team is here at your disposal, David, Miguel, but also the divisional heads, everybody is here. So happy to answer any questions you might have.
Thank you, Ismail. Operator, could you please open the line for the Q and A session?
No problem, ma'am. Ladies and gentlemen, we will now begin a question and answer ma'am, first question comes from the line of Alvaro Soriano. Please go ahead. Your line is open.
Hello. Thank you for the presentation. Quite instructive. Perhaps three questions. But the first one is why Marlin is suspending the rent relief for retailers?
I wonder if it is the right thing to do under current circumstances or is very much needed to protect the future of your shopping malls? Then the second one is also on retail. We've seen Invesco and also Lara Espana trying to or successfully selling their supermarket exposure. And I wonder how or what can we expect from your Capravo portfolio in the future? Are you expecting to follow your peers and put those assets in the market?
And the last one, the third one, maybe for you, Ismael. How did you see the investment appetite towards the Spanish assets? It has changed in the last three quarters. So we are, I mean, in the same mode. Thank you.
All right. Thank you, Alvaro. Well, for the extension of our measures, this is a measure that we have carefully thought internally. And we have adopted out of what I would call an elementary prudency because we don't know whether the vaccine will be ready now or not, but we do believe that there will be some at the very least logistical complications in the distribution and application of that vaccine to the world's population. So we are preparing for a first half of the year in a no vaccine fear of COVID environment.
As a consequence, we have been observing carefully the trends in terms of footfall and sales per square meter in our shopping centers. And we have been observing the sales per square meter and profitability of our clients, the ones that have accepted our policies. Because when we report footfall and sales overall, that includes the sales of people who are dead. But so after observing all that, we have devised a policy that I am very happy to say that one month into finishing the acceptance period has been already embraced by more than 80% of our retailers. And we are extending our protection of retailers, our partnership with our retailers for the first half in case it is needed.
Maybe it is not needed. Maybe they continue to arbitrage us and so what. So we have reduced the occupancy cost ratio from 12.6% in the past in the end of last year numbers to 12.2%, which means basically that we have been marginally, marginally generous on the relief program we have provided to them. But what's the matter? I mean we will recover from them.
There will be a new normal in terms of rent re equilibrium. We don't know where the needle will settle, but it will settle somewhere. But at least we will be able to recover from where we are now. So the new set of reliefs that
we have applied for the first half
reflect that idea about continuing to protect our partnership with people, particularly now that we are working with some of our clients on the design of the shop of the future, how to put together half of the shop for showroom, half of the shop for automated last mile delivery logistics. We are working with a number of them in a number of initiatives, very interesting initiatives. We want to protect that partnership with all of them. We are feeling is that we will we are in the middle of a disaster that we
will
emerge stronger from this pandemic because thanks to our diversification, which has been demeaned so many times that I have lost account, Thanks to our diversification, we have been able to act in the protection of the interest of our retailers. And ten years from now, it might be shopping centers protecting the interest of our office tenants. So we will see what happens in the first half. If the vaccine is ready distributed and applied to the population in January, we will be miserably wrong in our estimates and our clients will have arbitrage us successfully, no problem. We will recover on the second half.
So this is why we have extended. But don't read in that extension a fear of the retail our magazine. Our shopping centers continue to perform reasonably well. By the way, now elasticity of people movement to the different regulations by the authorities total. So in the first wave of the pandemic, after the restrictions were lifted, people took like three, four, five weeks to come back to shopping centers.
Now it is like a yo yo. I mean, the restrictions are lifted, people are back in the shopping centers. Restrictions are not lifted, people doesn't go to shopping centers. So people have now adapted because the human being adapts to everything, has adapted to looking at the stage official gazette every day before going out of home. And we can report, for example, that last weekend was the best footfall ever for our ex Madrid shopping center, for example, in Alcocone after opening.
So it's curious. I mean people basically react to the orders of authorities. As for the investment appetite, I would say it's a tale of two cities. I mean for shopping centers, it's quite limited. Would say almost nonexistent except for super highly opportunistic players.
But for offices and especially logistics, we still see a lot of investment appetite. And in fact, the recent transactions we are seeing in Spain, but also in international markets are showing us that maybe, maybe what is in front of us is a second wave of yield compressions rather than yield expansions in this segment as we have always been fearing for the short term because in a zero or negative interest rate environment people is hungry for yield and ready to pay a little less for a good quality cash flow. So this is what are seeing in the market. As for the sale of supermarkets, David, do you want to? Okay.
Sure. Pablo, I think you're right in your observations that it's not just those transactions you mentioned, but others. There have been quite a bit of interest in net lease, particularly the supermarket or what I would call in U. S. Poland convenience store assets.
So we are exploring avenues, several avenues, I would say, with regard to the Cabralo portfolio. Nothing advanced far enough that we can make any definitive kind of statement, but we are pursuing avenues because we think that asset class now is high in demand. Those assets are very well located. And so we think it's something that should have good demand. So I would stay tuned.
Don't try to put me to a date, but it is something that we're actively exploring.
Okay. Thank you very much, guys.
You're welcome.
Your next question comes from the line of Selim Hoon. Please go ahead. Your line is open. Hi, everyone. I just have one question on offices.
Can you provide a comment on the 6.8% of the rents expiring in 2021? How much has already been renewed? What kind of level? What are your tenants saying? Thank you.
Well, the renewals in our office portfolio looking forward into 2021 are represent 6.8% of the overall portfolio of the company and 14.8% of the office portfolio. We believe that those renewals in my opinion will be probably surprising the market. We believe we might lose pace, okay, because I have been now very actively after the heat of the pandemic, I have had more time in this quarter to be in the market and talk to the agent. And know, a cynical agent, what he describes to me as the fashion victims will want to reduce the space because they believe they can save space because of the work from home or things like that. In his opinion, this means that they will be doing tenant representation for a couple of years and they will be screwing us up a little bit.
But they also believe that most of those calculations are miserably wrong, particularly because their internal architecture departments are going to start now recommending and applying to interior design much higher densities. So as a consequence of that many people could be terribly wrong in their calculations and they will come back to us in two years' time, in which time they said they will go back into land over representation and they will screw up people back in terms of rent. So for the foreseeable future, we might lose a little bit of space, occupancy, not so much rent because the supply demand remains heavily constrained. I mean in CBD, it's up 3%, the amount of vacant space. And for new business areas is in the region of seven point something 8%.
But if you exclude the non grade A buildings, it's also relatively limited. So this is what we are expecting for next year. Let's see any way how the year plays out. A very important calculation that we have been making now that we have a little bit more time is the following, which is probably not known by many of you. The percentage of cost of an average employee including fixed and variable of salary represented by real estate in Spain according to CVRA is 4.2% comparing to 8% in The U.
S. We have run our own calculation, taking the average salary fixed variable of the IBEX 35 and taking our average cost of offices, which is between Madrid and Barcelona is $1,775,000,000 euros plus expenses that we have assumed to be $375,000,000 around 20%, 21% of the fixed office cost component. If you do that calculation, if you do that math, you will come to the conclusion that it is 4.1%. So bang on with the number that Richard Ellis gave us. In the case of Merlin, we also did the double check of both.
In our case, it's 2.6%.
So for
those people who believe that by shaving on real estate and the quality of life of your people, you can save significant amount of money, probably wrong place to look at. In the words of a Human Resource Director to which I was commenting the results of our research, so every guy I fire, I make room for 25. And I said, yes, exactly, at the same cost. So and I said, then I know I have more inefficiencies in staff than I have in real estate. So this is the reality.
This is a little bit like the naked Andersson's tale of the naked emperor. The people we are talking to, HR directors, CFOs, tell us that they need more space, not less. However, they also tell us in recent conversation with the head of Big Four, Mucinexion in Spain, they also tell us that if they tell that to Chicago, they will be fired. So nobody says it. Nobody comments it in public that people know they need more space.
Thank you, Ignacio. Can I just cut you here? Can you just quantify what you just said? That was very interesting, but can you quantify it out of the 6.8% RevPAR in next year? And also when you said that you could surprise the market, is that in a negative way?
You want me to give you the rents at which I will leave the 6.8%? When I leave, I will know the rents. I don't know yet.
Okay. Fair enough.
Helene, do you have other questions?
Yes, ma'am. We got another question comes from the line of Fernando Abreuil. Please go ahead. Your line is open.
Hello. Just well, three quick questions. First, on the commercial policy that you recently launched for 2021. Just if is there any feedback already from your clients? And what is the level you expect for, let's say, problematic clients for 2021?
Then second, on dividends. What should we expect for the dividend policy in view of the situation going forward? And also for the well, the part of the dividend that was put on hold from 2019 results, if there is any well, I don't know, if you could provide any kind of guidance going forward. And then last question is, well, you've already mentioned some of this, but how do you see the investment market in offices? Is it recovery or is it still mute?
And if we well, how confident do you feel to preserve values in the current environment? Thank you very much.
Okay. Thank you, Fernando. Look, in terms of the extension of the policy to the first half of next year, what I was commenting is that still there is still like one month to adhere to the policy, but it has been already accepted by more than 80% of our tenants. There are many of them who are still passing their internal constituencies. We expect a level of acceptance that will be in line with what we have had in the past, which has been in the region of ninety ninety two percent.
In terms of what happens to the nonacceptors, The nonacceptors are people to which the policy is not applicable. I mean there are clients to which the policy is not applicable because they haven't been forced to close or whatever. And then and we know they are trading well. The for the rest, we have a, let's say, constant surveillance of performance, And we have identified like two point five percent at present, which we believe are dead, dead. Many of them are already in our litigation.
So many of them are already accounted for in our litigation figures. So some of them have already been evicted, thirteen of them have already been evicted and the other thirty five are in current eviction procedures. Then we have a further three percent, which is a little bit borderline.
I mean
we don't know which side they will go. And there could be maybe another three percent, which is either non applicable or people that we believe will come back will survive after the crisis. So it will depend on next year's evolution of the pandemic to see whether those figures go up or down. But those are the orders of magnitude we are talking. So in principle and I think this is consistent with what we explained to the market at the time we adopted the policies in the first quarter, our effort has been aimed at freeing up our asset managers from the burden of extending contracts in 2021.
So contracts have moved straight into 2022, which means our asset managers will devote the full 2021 to re tenanting. So every time an eviction procedure results in the effective eviction of the tenant, they will work in the re tenanting of that shop. That may take a toll temporarily in occupancy, but it is what it is. I mean we need to refresh our shopping centers, particularly considering the efforts we have made in terms of tenant relief. In terms of investment appetite,
do want to I just want to make one observation about the policy too that I think for those who are doing the math to try to determine is it better to litigate not give relief and try to litigate or give relief, what's the math? First, it's art, not science. But that said, in addition to the things that Ismail just said, I think it's also important to know that it is significantly more expensive to find a new tenant than an existing tenant. So if those tenants leave or fail because we're not giving them the relief, then you have no expenses being paid, you have sit out contribution likely for the next tenant coming in and you have commercialization costs. So when you look at all those costs of having to bring a new tenant in and compared to the relief that we've given, in our math, it's pretty close.
So would you rather maintain a very strong tenant relationship, keep the mix and end up roughly the same place financially or take a path of litigation where now you've got a much, much more difficult relationship with all of your tenants going forward. So you have to keep in mind that, that commercialization cost around having a tenant go under is a big factor. It's not simply, well, you grant no grant relief or grant no relief. You've got to look at the other cost side of that equation as well. And that's what we've done in doing this.
And particularly with the second, which is obviously not as significant as the first, you're later now into the pandemic. So all the people who have held on, it's now getting to the point where they need that extra to get across the bridge. We now at least see that the other side of the bridge at least visible. I don't know whether that other side of the bridge is March, June, it depends on a lot of things, but at least we know it's there. And so to grasp that incremental relief to ensure that those who may able to hang on so far don't fall off in the next four, five months, I think that math works out pretty well from our internal calculation.
So I just wanted to make that additional point. Okay.
Just a quick follow-up. I understand your approach, but this I don't know, it's other retailers or other landlords are taking the other way around, no? So why do you think they are doing it?
Because I think the other landlords don't have a diversified portfolio. So when you look at the impact of the COVID restrict COVID incentives we've given, look at the year we just had. We're able to still demonstrate a meaningful FFO because it's only 18% of our portfolio. If you're only a retail guy, that's all you are, you can't afford to do that because it's so much more of your FFO. So if you look at the people like Eclipie or Unibai or LAR, for example, they don't have the flexibility to do that we do.
So I don't think they can even afford to do that math. They need the cash flow now to be able to run the business, whereas we have much more flexibility because of $90,000,000 of rents from BBVA, the rents from Capavo, the fact that our office portfolio has performed pretty much bang on pre COVID levels. That gives us the flexibility to do things in our retail business that
pure play retail owner doesn't have. In other words, Fernando, I have been talking to all of them because all of them, of course, call us and blame us for adopting these kind of policies because they cannot follow suit etcetera. And you know what? I say look everyone plays its own strengths. When we started, I remember roadshowing this company when it was a pure cash box.
And people said, you want to do shopping centers? It's impossible. You cannot do shopping centers. You want to do logistics? You cannot do logistics.
You cannot compete against Prologies. You cannot compete against Unibail. Everyone has its own strengths. For so many years, we have been treated as local rednecks because we have 15 shopping centers. We are not global.
We are not specialized in one asset class. Okay. And everybody took advantage of their strengths. And they those big names were trading at incredible, incredible premium to NAV, etcetera. And we couldn't say anything.
But now times come tough and we can afford a number of humble measures that help our people and they can't. So we adopt those measures. This is the way we see it. Diversification has two phases. We have always been suffering the bad phase of it because we don't look cool for Americans.
But for our little market, we have explained thousands of times that in a 50,000,000 people country, you cannot be single asset class. Nobody believed us. But now it's paying off. In terms of investment appetite, I was commenting before that the way we see the market, people is a little bit waiting on the sidelines. But consistent with what we see in the rest of the world, the amounts of equity waiting on the sidelines are incredible, incredible.
And this time around, we are not talking about opportunistic equity. Opportunistic equity is of course also waiting on the sidelines. I don't believe they will make a big progress in Spain in this occasion. The people who will eventually be able to reap some good harvest in Spain this time is value add and core plus because, yes, there will be some there could be some transactions in the market, Not so much on anything we would like to buy because good quality office buildings Castellana, Diagonal, Marques De Pombal, prime lease long office buildings are not trading. And we don't expect them to trade because the owners of those assets are normally unlevered or very little levered.
I mean they are comfortable with the LTVs. So the assets that we trade will be of other natures. For example, I see a big opportunity for hotels. So some people will be able to profit from that opportunity. But the amount of money waiting for opportunities is massive because the market is this time is much better capitalized than it was in the great financial crisis.
And as I was commenting also before, what we are seeing across the board, particularly when we look at the outside world, I mean other countries outside Spain, is that yields seem to be tightening, curiously enough. I mean some office buildings are transacting at incredible yields. But also in Spain, have seen recently an Amazon shed sold at 3.7. And there is a portfolio now in the market that will probably transact sub-five including some development, some land. So it's very interesting to see what is happening in the market.
We will keep an eye on the market eventually Against the legend, the legend says we haven't rotated any noncore in the past. In our own computation, we have sold more than €3,000,000,000 of noncore in the past. I mean I think people will have a different opinion on us if we still have our hotel portfolio, our resi portfolio, which is now suffering significant collection losses. We have rotated a lot of non core in the past. We will continue to rotate non core because we know it's a good source of much needed cash in order to keep LTV at bay, particularly when forecasting the future for valuations of shopping centers, which I believe will be affected by a widening of yields.
And eventually, we will try to continue selling some noncore. There is not much now we can sell. I mean we don't have now plenty of noncore in the portfolio. But we will continue rotating noncore, particularly in order to continue funding our CapEx program, which is yielding excellent returns. And if we can delevering a little bit the company because this grace of the COVID has found us three years before plan in terms of delevering plans.
Dividend policy, precisely in line with the delevering I was referring to, the €0.17 that were unpaid corresponding to last year will be retained by the company. So this will be used to increase NAV to repay debt. And as for the future dividend policy on after the General Shareholders' Meeting next year, the Board will need to decide. I mean the Board is sovereign. It has till the end of the year to decide whether to pay interim dividend or not.
I wouldn't be surprised if they decide not to pay interim and accumulate everything in one single payment after General Shareholders' Meeting next year. What amount will they decide to pay? Unknown to me. But my recommendation, as I have commented recently in a media interview, will be to try to share a little bit the excellent production of cash of the company between dividend distribution and debt repayment, because I want to keep an eye always on the L factor of the LTV, because I know the V will go down in shopping centers almost for sure owing to all the pressure we are seeing and also owing mathematically to the fact that the re equilibrium of rents will end up being lower than the rents pre COVID. So as a consequence of lower rent, there will be lower values in shopping centers.
This is undeniable. And as a consequence, we want to keep control on the L factor of LTV.
Thank you very much. Very clear, especially the first question. Thank you very much.
Take care.
Your next question comes from the line of Peter Padacaros. Please go ahead. Your line is open.
Good afternoon. Thanks for the presentation, Isnel and team. I just want to focus a little bit just on the office and especially the A1 and A2 corridor. From the outside, obviously, see very different fundamentals in terms of vacancy rate market vacancy rates and projections of market vacancy rates on a submarket level. For the Merlin portfolio, can you sort of elaborate a little bit how do you see the next eighteen, twenty four months in terms of organic rent growth between CBD A1 and A2 for your portfolio?
Sure. This is David Brush. I would say on the A1, main focus is occupancy as you can well see, because the lion's share of the vacancy in our portfolio is in the A1 corridor. So our focus occupancy and rental growth are always in contradiction with each other, right? So our focus on the A1 is to increase the occupancy of the portfolio and less on trying to generate rental growth above existing rents or ERV.
All the other markets that we operate in, the A2 included, we're seeing our vacancy is relatively low, and we're seeing good growth of release spread. That includes some of the peripheral markets as well. So that's the way I would define it. A1, we're focused on growing that occupancy in whether it's the other markets in Madrid, whether it's Barcelona, whether it's Lisbon, we're actually seeing very good rental growth because of the tighter occupancies that we have in those markets. An
interesting thing also, Peter, is that believe it or not, we are starting to detect some future trend, which may help peripheral location of offices. Because in polls to employees of our tenants, we are what we are detecting is that they prefer today as we speak, maybe in the future things change, but they prefer to go to work in what we call the green buses rather than the blue buses of the city center, simply because in the green buses you have an assigned seat and you have predefined distance to the next seat occupied, whereas in CVD buses, in the blue buses, you are standing up and your nose is right in front of somebody else's. Likewise, people is preferring now aerial train rather than subway in the polls we are doing. So people prefer to go now to peripheral office to work more than they do to CVD. This is not a problem for CVD because vacancy is so low, but it is at least a temporary trend.
Time will tell whether it settles because in conversations recently with a large asset manager in The U. S, they said to us that they have they are now moving to a big headquarter in New York, but they are opening sub headquarters in White Plains and New Jersey. Let's see what happens in peripheral offices. You would be surprised of the performance of locations as remote as Atica, Pozuelo or Las Rofas. I mean they are performing very, very well.
So vacancy is mainly concentrated in the A1. And this has a reason, which is the lack of infrastructure, Because for twenty three years, Madrid has been waiting for the Chamartin development in order to write the infrastructure around the A1 Corridor. Now, Chamartini is approved, but the infrastructure is not yet ready. It will should start around 2022, 2021. So in the future, it will be easier that we have a number of tough years ahead.
In those tough years ahead, what we will do is simply exert market power, bring tenants to our portfolio. Rents important, not so important. I mean when times get tough, it is important to be big and behave like big, and we will do that. So if somebody cannot cope with us, their problem, that we will be doing our job trying to make sure that we increase our occupancy in that particular weak point of our portfolio.
Understood. Thank you. And my final question is just reading between the lines from your press release with regards to the development pipeline. So you have big projects, big cycle of CapEx, is coming to an end. It seems like you are a little bit more cautious, I guess, justifiably so, in terms of launching new projects in this environment.
How should we think about development CapEx per annum for the next couple of years after this cycle of money spent now in Q1 twenty twenty one, etcetera?
I think your assessment was in between the lines. We were hoping it was actually in the lines themselves. But we are going to be more prudent. When you look at warehouse logistics and ancillary to warehouse logistics, we're still keen to put capital there. Retail, once we finish Ladios and El Saler in Q1 in Q1, Q2 next year, so retail CapEx program is finished.
And then you're just talking about largely finished. And you're just talking about kind of minor things. And with offices, Monumentaro, Diagon six zero five, or Cente Finco, you've got the major parts done, but we still have what we call now Co So You Bay, Luis Picasso, which is right in the heart of Avka. That's a project that's in our priority of capital and we will do that because it's CBD, Madrid, right in Ministelios, it's main in May.
Not only coal, it's hard coal. Exactly.
Retail, very, very you'll see it come down considerably. Office, it will come down simply because we'll have fewer this was the pig going through the python this year with those three big projects. So even though we have Luis Picasso coming, it will fall off relative to. And then warehouse logistics, we'll be we'll continue to be keen to do that, but we'll be doing things that are more tied to direct income. So it's prudent and prudent only because as we look now, as we said, the LTV is going to be critical to bring down.
So we have to be more prudent with CapEx, focusing on those projects that are immediately cash generating just to be sure that we're able to maintain that LTV until we can see where that retail cycle, particularly Mike, bottom out. And I'm just going to amplify what Ismail said earlier because it's something I had said even back in March. I don't see really any reason for cap rates in office to do anything but compress. When you look now at The U. S.
Ten year rate, which even after the recent move is still below 1% and they've joined The U. S. Has finally joined the ZERP world. When you look at the amount of capital that's out there looking for opportunity, I think that's going to continue to push down yield in office. And we're only going to get as people become a little more clear about this whole idea of work from home, work remotely, and you're already seeing some of the mindset change.
The further you get into this, the more people are saying work from home is not for everybody. So the percentage of people that might continue to work from home is less. I make the comment anecdotally, Facebook, they're all trying to work from home, but they
just leased 750,000
square feet in New York City. Amazon just bought the REI headquarters in Seattle. You just had WeWork sold their building in Manhattan. I forget it was either Amazon as well. So these guys are all talking about work from home and they're buying up real estate in major cities in a big way.
So I still hold to what I said early on, which is it's overdone, people are reacting emotionally. Will there be an impact at the margin of work from home? Yes. Is it possible that could be offset by the move back to less density? Entirely possible.
So when you look at what yield we should one want to pay for a good well located real estate asset, I think there's more upside in that than there is downside.
Thanks. Thanks, David.
Sherry, no more question at this moment.
Okay. So I think we'll leave it for today. Everybody knows that we remain at your disposal. You can contact us, both Fernando, Ramirez and myself, if you have any further questions. And well, thank you very much for attending today's call, and we hope that you remain safe and sound.
Talk to you early. Bye bye.
That concludes our conference for today. Thank you for participating. You may now all disconnect.