MERLIN Properties SOCIMI, S.A. (MRPRF) Q4 2023 Earnings Call Transcript

MERLIN Properties SOCIMI, S.A. (OTCPK:MRPRF) Q4 2023 Results Conference Call February 29, 2024 9:00 AM ET

Company Participants

Ines Arellano – Investor Relations

Ismael Clemente – Chief Executive Officer

Miguel Ollero – Chief Operating Officer

Conference Call Participants

Celine Huynh – Barclays

Stéphanie Dossmann – Jefferies

Adam Shapton – Green Street

Ferran Barniol – Kepler Cheuvreux

Fernando Abril-Martorell – Alantra

Thomas Rothaeusler – Deutsche Bank

Ines Arellano

Good afternoon, ladies and gentlemen. Thank you for joining MERLIN’s 2023 Results Presentation. You can find the materials that will be covered in today’s call available in our website.

I will please ask you to abide by the disclaimer contained in it. Our CEO Ismael Clemente; and our COO, Miguel Ollero, will walk you through the main highlights of 2023. And we’ll, thereafter, open the lines for Q&A. [Operator Instructions]. With no further delay, I will pass the floor to Ismael. Thank you.

Ismael Clemente

Thank you, Ines. Good morning, good afternoon, everybody. Okay. 2023 clearly exceeded our expectations, particularly in the second half, and ended up being an excellent year from an operating perspective for the Company. We were almost able to make up for the absence of 1/2 of the rent. We fell short only by €6 million, which is remarkable.

The Company also, I believe, will remember this year as a historic year because we finally set a foot in our promising new business line, data centers, with the opening of our three first facilities. The only negative aspect was the fact that we are not immune to decreasing valuations in real estate.

From a purely operating performance perspective, the Company achieved a very strong like-for-like rental growth of 6.5%. And the good work in the different business lines of the portfolio, particularly this year in offices, where we had slightly worse perspective than what we finally saw at the end of the year, the Company has reached an all-time high occupancy of 96.2%, above and beyond the less than 95% that we reached in the good old times, in which we still had the secular weapon of the 100% occupancy of the BBVA portfolio. So we are pretty happy and pleased with the performance of the different business lines and the hard work they have performed during the year.

As commented, offices, I know it can be mind boggling for some of you, but continue to perform very well. We continue onboarding a very modest positive risk spread. Of course, we have been charging significant CPI indexations for the last three years, and the reversionary value of our rents will end up suffering. I mean according to our appraisers, we are minus 5% as compared to market. That — this is clearly narrowing. We obtained like-for-like growth of 6.1%, owing mainly to inflation, as commented, and could maintain the occupancy that we have reached during 2022. At the beginning of the year, our expectation was to lose between 100 and 150 basis points.

We found no surprises in the performance of logistics, where, just by chance, we reached full occupancy of 99%. This is not normal. I mean it cannot be expected for the future. I mean beyond 96% is full occupancy already. So we have to take that into account. And achieved very good organic growth with a like-for-like of plus 4.8%.

The retail, formerly the Cinderella of our portfolio, transformed into a princess and achieved a 7.7% like-for-like growth with a 12% release spread and occupancy close to historical intra-year record of 96.2%. And what is more important, with our clients being quite comfortable paying our rents with an OCR of just 11.7%.

In terms of FFO, of course, we couldn’t make up for the whole of the BBVA effect, which is not taking into account is performed in the top line in sales and EBITDA. But in FFO, we couldn’t make it up completely for it. So we had a total FFO of €0.61 per share, one decimal below what we had achieved the prior year. But excluding the effect of the Tree portfolio, it would have been 9.6% above the prior year.

We had an overall decline in valuations across the portfolio, which in net terms stood at minus 3.4%. However, on gross terms, we experienced declines in valuations of around 5%, both in offices and shopping centers that were only compensated by gains on developments, mainly in new projects in logistics and in our new data center business line, of which I will comment further down the presentation.

The yield expansion that we onboarded during the year was 42 basis points. But more importantly, since values started correcting, we have already swallowed 95 bps since end of 2020. As commented on a number of other calls, we were expecting re-rating of the values — gross values of the portfolio in the region of 100 basis points. We believe that we should be reaching an end, at least in shopping centers. I believe the correction will continue in offices for at least the new year and maybe beginning of next.

In terms of financial situation, LTV stood at 35% with 100% fixed in terms of interest rates. And our CFO department made an outstanding effort in flattening out all maturities till November ’26 and keeping the same liquidity levels we used to have. I mean you might be confused by the fact that we had €1.8 billion at the end of the last year, but that was only because we had a bond expiring immediately in the new year. And as such, we have accumulated the cash at the banks of the Company.

In terms of value creation, very muted activity in acquisitions and disposals with less than €40 million in disposals and some €30 million that have come into this year. So we — it was not a strong year in disposals, but it was pretty similar to other historic years of the Company, reflecting a market which is not good at present in terms of liquidity. And unless you are absolutely forced, this is not a good time to dispose of assets.

Regarding Landmark land, Plaza Ruiz Picasso was the last building to be delivered according to that plan and was delivered to IBM in December. And now Globant and SAP have occupied the respective floors during the new year of 2024.

Importantly, in BEST II and III, we continue converting land bank into cash-flowing assets with the Cabanillas Park II B shed of 47,000 square meters finished and delivered to Pepco, so fully let. And as commented at the beginning, I would believe that what is really important for us this year is that we were able to finish the construction of our three data center facilities in Madrid-Getafe, Barcelona, Parc Logistic and Bilbao-Arasur and fitted only three megawatts in each, being a little bit shy — too shy with insight regarding the perspectives of cloud adoption and hence commercialization to cloud specialists in Spain. Clearly, we were wrong and our American engineers were right. I mean there was more water in the pool than we initially assessed.

And as a consequence, what we have done since has been to accelerate to the extent possible the supply of new equipment in order to be able to correct that shortfall in equipment and exploit the situation in which we are at present in the market, which is privileged from IT capacity standpoint.

Without further delay, I will pass the floor to Miguel, who will comment on the numbers of the financial results.

Miguel Ollero

Good afternoon, everybody. This is Miguel. We move on to Page 6 of the presentation. We have here the numbers, which are a mirror of the operational performance that Ismael has been commenting on for year 2023. I’m pleased to highlight that in terms of our rents, we were able to grow 5% over the year to €475.6 million. We take into account the full revenue generation of the group. It was €488 million, which a 6% growth overall for the year. NOI was enhanced on a 6.6% basis. So there was also an improvement in the operational efficiency of the portfolio.

And if we’ll move down to EBITDA, we were reaching the €367 million mark. That was 9.7% ahead of 2022, which is also remarkable figure, providing us a 77.2% EBITDA margin in the Company, enhancing from 73.9% for the previous year. So as Ismael was commenting, the operational performance, coupled by inflation, release spread and increase of occupancy has proven to be the driver of our efficiency and EBITDA generation during the year.

In terms of FFO, as Ismael was commenting, €284.2 million. It is slightly below last year, taking out the effect of BBVA portfolio that was part of the portfolio during the first half of 2022. It is close to 10% higher. So we are, little by little, catching up and putting the Company into the same level of rents and cash flow generation that it was before the BBVA portfolio disposal.

In terms of net profit, as commented before, there is a drop. This is a negative effect driven by the mark-to-market of our [DSV] portfolio of €363 million. That has provided us a loss of €83.5 million loss for the year.

Finally on EPRA NTA, as a result of the 3.4% reduction in GAV on a like-for-like basis, our EPRA NTA has gone down 3.8% to 15.08. The TSR for the year is minus 1%. It was in between the distribution of dividend during the year.

If you move on to Page 7. Nothing relevant to remark. We already were talking about it. So the like-for-like growth of our GRI has been 6.5%. Very good results or performance in all the asset classes coming from the 6.1% in offices to 7.7% in shopping centers, which has been the asset class that has been performing better in terms of revenue generation.

And if we move on to Page 8, we have here the occupancy and the portfolio. So we were commenting at the very beginning. This is a record year in terms of occupancy. We have reached 96.2% occupancy mark, even higher than the time we have the BBVA portfolio within the Company, considering that it was an asset class that was bringing a 100% occupancy, considering the specifics of the contract we had with BBVA. And no matter what, this is even better with our current portfolio.

Important to remark that logistic is a 99% occupancy that. Shopping centers, 96.2%, which is the record we have been reporting in the life of MERLIN. And even offices has been able, in a challenging year, has been able to sustain the same level of occupancy that we had one year ago.

Now Ismael will get into the details of the different asset divisions, although we have been commenting [indiscernible].

Ismael Clemente

Okay. Thanks, Miguel. I will go very, very quickly through the different asset classes. In offices, as commented, very healthy rent increase, a consequence of a full pass-through of inflation with a modest release spread after three years of passing relatively high inflation. Barcelona and Madrid were pretty similar in terms of like-for-like growth. This one lagging a little bit behind simply because there were not significant transactions during the year. It’s a portfolio which is almost fully occupied.

In Madrid, a slight improvement in occupancy, particularly stemming out of better A1 corridor. In Barcelona, decreasing pattern in occupancy as a consequence of the oversupply in the 22@ District. And this one remains full and will remain so for a little while.

In terms of leasing activity, with more than 300,000 square meters transacted, it was the third best year in history, pretty much on par with the second best. That was one year right after the purchase of Metrovacesa, in which we touched 450, but just because the Metrovacesa portfolio came out to us with a lousy commercialization, and we have to correct the situation very quickly.

But very, very interesting way of performance of this year. I mean we wouldn’t have — at the beginning of the year, we wouldn’t have predicted that this was the situation. But during the whole of 2023, and we are witnessing the same in this beginning of 2024, we see companies reverting a number of decisions of space reduction that we’re taking a little bit hard-pressed by circumstances like pandemic, the people going home as a consequence of the COVID, too much of an exaggeration in the work-from-home effect, et cetera.

At present, as commented, since the month of November last year, the physical attendance to our buildings have already reached the pre-pandemic levels and measured as through the turnstiles as persons going to the office on an average basis. Yes, there are some peaks and valleys during the week, particularly on Fridays. But the averages are now on line with the ones that we achieved pre-pandemic.

And in the renewals, we are seeing after two, three years in which that was the exception. Now we are seeing many clients which are either holding up to the same occupancy or the same square meters they used to have, or in some cases, expanding. In fact, as commented with you in past calls, particularly with some multinationals, we were kind of reserving some space because we knew they were wrong in their space calculations. And in all cases, they are coming back to us and asking for that extra space that we reserved for them.

The trend for 2024, we have — generally speaking, our guidance for the year is of a relative maintenance of relatively flat occupancy levels. I mean it can go up or down by almost nothing. I mean — but more than 50% of our renewals in the year are now, let’s say, either agreed or at least negotiated with the tenant.

So the office department is doing a very good job. And we don’t foresee big problems in offices, contrary to many other places in the world. I know you will make a lot of questions about how can be that the U.S., et cetera, but we don’t foresee big problems in offices given the supply and demand relative balance in Spain until the moment in which GDP growth starts to stall and eventually particularly when private sector employment starts to fall. I mean this is the real driver beyond the literature about work from home, et cetera.

Then in terms of LOOM, the year was relatively muted in terms of new openings, just one. But we are opening five new places in 2024. We are expanding our successful Plaza Catalunya scheme, which received the Architizer A+ Award for the best co-working space in the world, for which we are really proud.

In terms of logistics, Page 14, good like-for-like growth. Of course, lower in Madrid because the sample is much more significant and bigger in Barcelona. Occupancy, however, in Madrid grew by more than 2.5 percentage points. And it also went up significantly in Barcelona by about 400 bps. As commented in other calls, the occupancy last year in Barcelona had been affected by one exit that was immediately replaced in the new year. And as such, we are going back to normality in terms of occupancy.

Again, I mean, here in logistics, whenever we start having problems with GDP growth or with import/export activity or with consumption because most of our space is linked to e-commerce related activities is when we will start seeing problems in logistics. But as evidenced by the pre-let conversations we are having for our pipeline, the activity in this sector remains very, very strong. The leasing was pretty good with close to 300,000 square meters transacted, which again is on par with the best years of the Company. And in ZAL Port, we went slightly down in occupancy, owing mainly to one big shed that was vacated. But we increased rents and had slightly lower FFO as a consequence of higher land lease payments to the Spanish government.

In shopping centers, well, as commented or as already flagged during the year, the tenant sales kept on surprising us, going beyond pre-COVID levels. And while maintaining very low OCRs, the footfall in ’23 was above ’22, but it was also above ’19. So compared to, let’s say, undisturbed pre-COVID year, we had better footfall, which, as you might remember, was our main worry because cinemas were really not helping that much. And I must say that this increase in footfall has not been driven by cinema.

So it, as you can see on the sales, is people — the transient people that have been going to the shopping centers to consume rather than simply go to the cinema. And you can see it on the tenant sales evolution with a plus 10% print compared to the prior year and already 14% above pre-COVID levels while maintaining a very healthy OCR, 84 transactions carried out, close to 39,000 square meters that transacted during the year.

And I will let Miguel explain the valuation and debt position of the Company. Miguel?

Miguel Ollero

We come again with numbers. Regarding the portfolio valuation, as we have been commenting, this year, we have been getting a knockdown in valuation, mainly focused on shopping centers and office, whereas logistics, especially in terms of developments, and data centers have been the positive. As you say, that overall, we have been able to reach positive yield above 5%, 5.1%. This is as a result of the adjustments in valuation we have been receiving during the year.

If we look at the different asset classes, in office, it was GAV like-for-like evolution of minus 4.7%. But excluding development, it was 6.4%. So this is the big hit in valuation that is more or less in line with what we have seen in the market from other peers. If we look at logistics, despite that we have had a yield expansion of 39 basis points, we have been able to have a 3% increase on GAV on a like-for-like basis. If we exclude development, it should be probably [indiscernible] one. So the existing portfolio has been quite flat, whereas our projects are the ones in the value growth during the year.

In terms of shopping centers, minus 5.2%. So also very well affected by the fact there has been an increase in the exit rates and also in the IRR of — for valuation purposes. So all in all, it was a 3.4% down in valuation. If we look at yield compression or expansion for the year, it was on average 42 basis points. But what is very important to remark is that close to 100 basis have been adjusted since 2020 all across the portfolio.

Now if we move into the balance sheet and debt position, it is important to remark that we have a net debt of €4 billion with a gross debt of €4.5 billion with a net of €4 billion interest of net debt. The loan-to-value is 35%, which is quite healthy. It is, as you know, going up a little bit, maybe based on the fact that valuation has been hit. And this is the main driver of the loan-to-value evolution during the year.

Average cost is 38% higher than the previous year, maybe driven by the fact that we have been recognizing debt, not only the one that was maturing during the year but also the one that is coming for maturity in this year. We will get into it later on. We don’t have issues about potential increase in terms of interest rates because all of our debt is fixed, either by fixed coupon or either by hedging in the case of banking financing. We continue to have a very good average maturity, 5.1 years, which is much better than the previous year. And liquidity remains high, €1.3 billion. In terms of rating, we keep having the same positive outlook that we used to have.

And what I would like to highlight is more focus on page or Slide 24. During the year, we have carried out two main actions. The first action was to secure the refinancing of the €743 million bond that was maturing in April last year. That was secured by banking financing. So we were replacing bond financing by banking financing on a corporate basis with a €665 million facility.

On top of that, during the year, we have also been working on the refinancing market following maturity that is only coming in May 2025. Nevertheless, we were raising, in the second half of the year, €180 million seven-year mortgage loan on a monthly financial basis and another €170 million on a 10-year basis. The two of them are very good, attractive margins, between 110 and 125. And this was secured and is part of the balance sheet at the end of the year.

But in addition to that, in the first two months of the year, we have been also to raise €150 million banking financing on a 10-year basis. And we have been able to top up our bond maturing in September 2029 by €100 million. So all in all, this implies that the €600 million bond maturing when we are in two months from now is already secured on a banking financial basis. On top of it, we continue to have the possibility to continue refinancing because if you look at this slide, 2031, ’32 and ’33 years at which we can be placing future facilities and getting into it.

And so to highlight finally that the vast majority of the deal has been done, that this company has been able to refinance bonds on a banking basis at much better prices on a long-term basis. Most important to remark that only [96%] of our debt is on a mortgage basis, so the vast majority of the debt — of our debt continues to be on a corporate basis.

And finally, we’re moving to sustainability. Sustainability, as long as we have been saying that operational — from an operational standpoint, the Company has been achieving very good remarks. We should say that also in terms of sustainability, the Company continues to be putting a high effort to continue making this part of the story of the day to day.

So in terms of green clause, as you know, this is a clause we were already putting in motion last year as part of our way together with our tenants. This is — has been now put into every single new contracts that we are entering into. And we’ll continue also in renewals and new contracts over the following years.

Second thing that I will highlight is that we have a commitment to analyze which is embodied carbon that we are incurring in any single either greenfield program or retrofitting we are making in our projects. And as a matter of fact, we have set for the future maximum limits in terms of embodied carbon for our three asset classes, office, logistics and shopping centers. The three of them are second to none with regards to where we have been analyzing and seeing our peers.

Also, we continue rolling out our solar panels strategy. We have reached close to 15 megawatts installed and in operation. We are aiming to reach 40 megawatts in the following years. And this is getting momentum. Also, as I was commenting before, the €1.1 billion raised during the year was on a green financing basis. So as a part of our commitment with the investors is that we are continuing to have the vast majority of our debt, if not all, on a green basis.

And finally, accolade that is just a result of what we are doing on day-to-day basis. We should be highlighting that. We have been included in the Dow Jones Sustainability World Index for the first time, and this is the only — only five European companies across the world have been able to reach it at some point in time.

Page 27 is just evidence of how we are evolving in energy consumption and carbon footprint. Two of them have evolved very positively in 2023 and will continue evolving likewise in the following years because we’ll continue implementing a lot of measures to reduce it over time.

And finally, Page 28 is just, as I said, the accolades, which are quite remarkable. This is a way to set out how you are evolving on an absolute and a relative basis in this sustainability facts that we will have. And as you can see, all of them have been positive, and we have been either improving or maintaining our position with regards to 2022.

And now Ismael will be entering into the value creation section of the presentation.

Ismael Clemente

Thank you, Miguel. On Page 30, as commented, very modest activity both in investments and noncore divestments. In investments, we simply bought opportunistically the possibility to expand our successful Marineda shopping center. And we are already working on the retrofit for the addition of 18,000 square meters to our existing scheme. We will keep the remainder of the space we bought for the future. In terms of noncore divestments, we sold a couple of shopping centers, one industrial warehouse, one residential unit and a supermarket. So very, very modest year in terms of activity.

On 31, this is the latest render of the Picasso. I mean if you see it today, it is exactly the same with an IBM logo and is now completely full with really high rents in the, let’s say, highly sought-after area of Azca in Madrid, which is subject to future improvement in terms of landscaping quality on the initiative of the municipality of Madrid.

And then little housekeeping things. We kept on refurbishing buildings on Cerro de los Gamos, which is an industrial business park we have on the A6 area of Madrid, which is full. And we refurbished two buildings there, which were delivered completely full. And we will continue doing so because the aspect it used to have, as you can see on the before picture, was very close to criminal. So now we are changing it for something a little bit more serious.

On Page 33, logistics. Well, we commented last year, we wanted to put in motion 180,000 square meters of new logistics. 47 of those have already been delivered. And we go back to the same figure, now 188, of which 160 have already ahead of terms and 28,000 square meters are speculative. Don’t be surprised. It’s simply because that speculative shed is between two sheds that are already pre-committed and need to be built. So once we send the construction company there, it is more sensible to do the whole construction yard at the same time even though the 28,000 square meters are speculative than to the call the construction company in the future and disturb our existing clients in that park.

The total remaining investment will be €78 million for delivery in the second quarter of ’25 of the whole space. And the expected rents are above €10 million for a yield on cost including land price and incurred CapEx of 7.6% million. But if you only take into account the yield on pending CapEx, you will see that it will incorporate what will result in a 13.3%, what is spending compared to the new rents that will be that will be above.

Then for the future, there are another 420,000 square meters closed, too, which resulted in a CapEx of €223 million. Of those 420, about 100,000, we are already working on potential pre-let that should result in deliveries at around 2026 with around €60 million CapEx and yield on cost in the region of 7.5%, 7.6% and yield on pending CapEx in the region of or above 10%.

So very, very important because at present, we need all cylinders in our engine to be firing. I mean we cannot afford the luxury of having idle land sitting on our balance sheet in a moment in which the Company is making such a tremendous CapEx effort. So we hope to move those 100,000 square meters also into it as soon as we can and have only 300,000 square meters pending development in our portfolio.

Regarding the digital infrastructure plan, the data centers, well, some remarks which are important. We have been experiencing some delays in the effective electrification of sites. What does it mean? Basically that sometimes, you have power which is contracted and paid for. I mean you have delivered amounts to your supplier, to a distribution company. However, at the moment of effective delivery of that power, there is no one on the other side of the line.

Why is that? Is a mix of guilts. Sometimes it’s the distribution company itself. But in some other cases, regrettably, it’s public administration. Doing a trench or digging beneath a highway in Spain is a very lengthy process of authorization. It’s a cavalry of papers that you need to fill out in order to get there. But the good news is that in Barcelona, we are done with about two quarters of delay. So we’re expecting very, very soon the effective electrification, so the moment in which the power will be on in our site. This is the first site which is going to be fully electrified in our portfolio.

In Bilbao-Arasur, we are also getting the power imminently. So this is important. And just in Madrid, we have had to change a little bit our commercialization pattern because we have moved into what we call a capacity lease in which the client will be receiving the space in the moment in which we get the electricity. So we have to adapt a little bit our commercialization to the reality of things.

We have spent already like €300 plus million CapEx-wise that you will see only €258 million in — on the accounting, I mean, as CapEx in data centers. The rest is down-payments and preorders that we have placed. We need to pay, from an accounting perspective, €144 million in 2024. You should subtract the €40 million difference that we commented on full year ’23. And then another €163 million should happen in ’25 onwards, although we are trying to anticipate that to 2024 to the extent possible. So we are trying to accelerate our investment in our data centers.

Regarding total investment, you will see that the total amount has kind of gone up to €565 million. This is simply a consequence of the fact that in Bilbao, we have been able to scratch another 2 megawatts in our Bilbao 3 building. So we are no longer talking about 58 megawatts. We are talking about 60 megawatts. And it also owes to the fact that we are now doing the pilot modifications for conversion of Barcelona into direct liquid cooling, which will be followed by Bilbao-Arasur.

And well, direct liquid cooling is a little tad more expensive than air cooling. And as such, we will need to incur a little extra CapEx. Just by chance, because the numbers have added up that way, the stabilized GRI is the same, 14.4%, owing to the fact that the rents you get in generative application intelligence are higher than the ones you get normally for cloud services. And the gross to net remains the same. So we will be obtaining plus 10% in stabilized NOI.

Regarding cash flow projections, I mean — and you should take all these with a pinch of salt because this is a moving target. Of course, we do as best as we can in terms of be true on our projections. But in 2023, we finally received only €0.5 million as a consequence of the delay in electrification of Madrid. And in 2024, we are maintaining the same guidance of around €11 million because that could be delays in one side, but I believe there will be acceleration on other side. So for the time being, we maintain the same guidance to market.

What will be different is the total rent, which have gone up to 81 something — million stabilized, not — they will not coincide with natural years. So that should be more or less the rent at the end of 25 times 12 or very similar to the rent in 2026. More or less, that should be the number reconciliation. But the rents have gone up as a consequence of simply better pricing capacity in a market which is really in need of IT loads at present.

On Page 37, you will see some real pictures of the Madrid-Getafe data center, the facade, which is for the old take, the generator set room and the meet-me room where the cable providers are meeting the operators within the data center. We have two of those. Regarding the electricity issue, we had 30 megawatts sourced and paid with the distribution company. But following a number of issues with public authorizations and the like, the new calendar is 8 megawatts that we are going to be supplied by end of this year and another 8 megawatts that we are going to be supplied by end of next. And then the remainder, 14 megawatts, will be supplied during year 2026.

As a consequence, of course, we have recalculated our different cash flows. And what is more important, the new equipment that we were receiving in Getafe is being reshipped at present to Barcelona in order to complete as soon as possible the Barcelona data center and start getting cash flow. And whatever is left will be sent to the Bilbao-Arasur data center. So we will be reordering a little bit the equipment supplies depending on the availability of electricity.

That will result in 3 megawatts of equipment already installed as of today and then 5 megawatts extra to be received and installed within 2024. In fact, they are — some of the components have already been received. But we will not end up receiving the lengthiest order, which is the generator set, until end of June. So they will be installed in the data center by September, October and generating cash flow only for a portion of the year. And then the remainder, 12 megawatts, will be received and installed in 2025.

Regarding commercialization, our existing clients are making use of 2 megawatts of IT capacity for cloud purposes, and we have a six plus six capacity lead booked. That will result in filling up the vast majority of the capacity of the data center or 60% of it during the next — this year and the next without need to modify the refrigeration system because this capacity lease has been made on the basis of cloud services. So very — relatively low densities of between, I would say, 15 and 20 kilowatts per rack. So no need to modify our existing refrigeration systems in order to achieve the guaranteed PUE, that we are giving to the client.

On Page 38, you see also actual pictures of Barcelona. Very good-looking data center without the logos on this picture yet. I mean they are being installed as we speak. Generator set room and then the electrical switches and transformers. This data center has been — of course, we have some delays in the effective delivery of electricity. But the pleasant surprise is that we have found a little bit more electricity to be supplied than we initially anticipated.

So we have sourced 24 megawatts, capable of serving around 16 megawatts IT capacity that are — we will be receiving momentarily. And we have found the possibility to increase that supply by around 12 megawatts extra, which could give us a good additional 8 megawatts IT. That looks like a small thing, but the yield on cost of these additional 8 megawatts is very, very good because the column shed is already done. So very, very interesting in order to keep our existing yields on cost.

In terms of equipment, 3 megawatts are already installed, and 6 megawatts will be received within the next quarter and installed right after the summer. And then the other 7 megawatts will be received at the end of the year and installed at the beginning of ’25 according to the ramp-up agreed with the client. In this case, the client is a generative AI operator.

Therefore, we are already modifying the [NEP] of this facility in order to incorporate a direct liquid cooling, which is pretty interesting. Not so many examples in Europe. This data center has significantly improved its connectivity because it is now connected to the first ring of the Barcelona Cable Landing Station. So that effectively means that we are landing station now of Equiano to Africa and Middle East, which has been the reason why this facility, which originally was intended for wholesale colocation, has been moved into or has been converted into generative AI.

Regarding Bilbao-Arasur, well, we have a big contract here of 150 megawatts around for 100 — good for 100 megawatts IT. Probably good for a little bit more. We are making rounding calculations. The distributor will supply the electricity of the first 30 megawatts of electricity very soon, during the next quarter, which is very important. And this is really on track. I mean we have been monitoring the works in the substation the cabling, the anti-firing and everything. And it is really on track. So after — yes, again, with around two quarters of delay, we are going to be receiving the electricity.

Regarding equipment, 3 megawatts are already installed, and then another three will be received by the second quarter of 24% and another 12 before year-end, which — you should add another quarter more or less for installation in order to calculate the time to money. And then the remainder, 6 megawatts, will be received in 2025, most probably in the first half of 2025.

Regarding [Tricom], well, 3 megawatts of IT capacity left. And then we have additional booking of 21 megawatts with a ramp-up, spanning through ’24 and ’25, beginning of ’25. And again, this is for generative artificial intelligence. So it will entail very probably with a high probability at least partial change in the refrigeration systems for direct liquid cooling.

What is much more important, we have submitted the extension license in this data center, concentrating all the remaining power in just one building. So we have the original scheme here was three buildings, BIO03,BIO02 and BIO01. We constructed the first building and fitted well initially 22 megawatts, which at present is 24. But the remainder, the 76 — 78 megawatts that we believe we can scratch from the new facility will be squeezed into just one building. And we will leave the full of BIO01 [indiscernible]. We will leave it for further extensions of the data campus because we are working on making contracts and getting much — significantly much more power in this location with the help of the [indiscernible] public authorities, which have clearly detected the potential of a big artificial intelligence campus in their region and are helping us in this effort.

This data center happens to be the landing station of MAREA, which is the cable that was a laid across the Atlantic by Microsoft and Meta, and Grace Hopper, which is a cable that was laid by Google, and will become also the landing station of Anjana, which is a new cable, which is being laid by Meta across the Atlantic, although it should have reached our facility in 2024. And it looks that it will be a little bit delayed.

Regarding Lisbon, well, Lisbon is another big scheme, big data campus capable of handling around 100 megawatts IT taken to the maximum. It’s been a complicated process in terms of licensing. Yes, the construction itself, it’s — it will take us like 1.5 years, which is — it’s not good, but it’s not terribly bad compared to what we have taken in Madrid and Barcelona. However, in this case, we have to also approve a concentration of land plots in order to make a bigger shed, and that took us another 1.5 years.

So it’s been a relatively lengthy process. Of course, we didn’t want to take any shortcuts, which is always, I believe, a good thing in Portugal. And we are at the end of the process. I mean we are just waiting for the construction license, and we will immediately tender and begin works. We have already started leveling ground, doing the basement and doing the organization of the plot in preparation of the construction. So when we start construction, it will mean actually erecting the building rather than preparing the ground. That will shorten a little bit the total construction time.

Regarding the commercialization approach for this scheme, well, I would say that there is a 25% probability that it could be commercialized in full and developed in one shot and then 75% that it will be commercialized, let’s say, more regularly. And we will start one or two buildings with 30 megawatts to 50 megawatts and then go little very little with the rest. It will depend.

Interest in Lisbon is very, very high. I mean because this data center happens to be also landing station of EllaLink, which is a cable that comes from South America and then to Africa, [indiscernible] as well that we are receiving through the Tagus River. So very promising opportunity that we hope during the year we will inform regarding its development.

As closing remarks on Page 42, strong performance. We already commented on it on our traditional asset classes. Occupancy at an all-time high across the board in terms of value creation. We kept on doing our job, delivering fully let office buildings and logistics. We delivered our three data centers, a little bit poorly equipped. My fault, and I beg your pardon for that. I was a little bit unsure about the speed of adoption of cloud in Spain. That generative AI completely changed the panorama in terms of commercialization speed. So sorry for that. We are trying to catch up as best as we can.

And regarding outlook for 2024, I know you hate the word transitional, but it’s a transitional year for us because very little can be expected from our traditional asset classes, which are virtually full and other than continuing to enjoy good inflation and also obtain some positive lease spreads, if at all possible. And it will be a year mainly of data centers in which we will continue filling up our existing facilities, and we will try to start the new facilities as soon as it is practical for us.

However, from an operational standpoint, sorry, that data centers is a cash-draining business unit until it stabilizes. Why is that? Because an operating data center is an operating data center, which means basically you need to have more or less the same number of engineers and technical people that you will have once the data center is full. So expenses are, let’s say, fully drawn while — however, income will only happen with time through a defined ramp-up with the different clients.

Regarding balance sheet management, it will be an eventful year with no maturities. We will — I mean as commented, the CFO department has flattened completely for the next 2.5 years the profile of maturities of the Company till November ’26. The FFO estimate will be €0.59, which again is lower than this year. But it should start flourishing in ’25 and beyond. There should be a significant jump in 2025 to at least €0.68 per share.

Regarding dividends, we already paid €0.20 on account, and the Board will decide on the remainder. But in normal circumstances, I think it will be €0.44 or similar once they decide on the calling of the AGM approval.

And then regarding valuations, although in shopping centers, we should probably be starting to see the light at the end of the tunnel, in fact, we have seen some of our peers that have actually revalued some of their assets. We fear that we will continue suffering in offices because I believe we will not enter safe territory until we are above the 5% mark in terms of passing yield. Based on existing occupancy, reversion is more that I believe that we will continue seeing declines in the value of office buildings.

However, we have a number of jokers on the lease. The most important is that Lisbon remains valued at zero, the data center. And all the remaining capacity of Bilbao-Arasur is valued at zero. So as we evolve in the construction of those sites, and notably, when we finally open and inaugurate those sites, there should be a significant value jump in those that will continue helping us in offsetting the declines in valuation of other asset classes.

As commented on many calls in the past, I mean, that was precisely the reason why we bet on data centers a long time ago. Because we thought that was the avenue of growth that the Company was needing in order to offset eventual declines in valuation of traditional asset classes as a consequence of the increasing interest rates that are, of course, affecting the values.

So that is all for today. Let’s move into Q&A. And we will be glad to be taking your questions and answer whatever we can answer. Or if there is something we don’t have the information for, I’m sure that Ines and Teresa, will reach out to you and give you the dollars and cents of whatever you want to know in terms of performance of — or data about the Company. Okay. So without further delay, let’s move into Q&A.

Question-and-Answer Session

A – Ines Arellano

[Operator Instructions] We already have the first question. It comes from the line of Celine from Barclays.

Celine Huynh

Can you hear me?

Ismael Clemente

Yes.

Celine Huynh

I got two questions for you. Can I take you back to what you said during this — in 2022, you were talking about how to invest the proceeds from the BBVA sale back at the time. And there’s two numbers that I would like you to clarify today. The first one would be on the FFO guidance for 2026, which you had guided at €0.80. Based on the guidance that you provided for ’25, it implies a 70% growth year-on-year. So basically, two years double-digit FFO growth. I’d like to know if you’re still standing by €0.80 that guidance? And if not, what has delayed the investment case since it’s not going to proceed from the BBVA sale? And also if you could talk about that ’25 guidance, if you take into account a potential dilution from an equity raise.

And on the second point, that would be about CapEx. I think we all appreciate the additional guidance you provided on the data center pipeline. But can you also talk about the DCN project? Because during the 2022 CMD, you were talking about the investment required on the DCN project, which was a total cost of almost €800 million, €300 million in land and infra, €300 million in construction. Construction has started or was guided to start this year. So I was wondering if you could guide a bit more on the CapEx required that needs to be spent on that project and if you already spent €300 million in land and infra, which I guess is not yielding at this stage? And I think overall, if you could just provide a CapEx number that you’re planning to spend this year, adding everything, DCN, offices, data centers and logistics.

Ismael Clemente

Okay. Look, Celine, regarding the 2022 comment on ’26, look, if the FFO in 2025 has been guided to €11 million in 2024, you can assume with the ramp-up from data centers another €30 million to €50 million in 2025. And the rest should happen in 2026. So I will, of course, refrain from giving you a guidance for 2026 because it’s two years out, but it should be pretty much in line.

Remember one very important thing. Our ambition when we sold BBVA was basically to write up our balance sheet and reduce radically our debt and then recycle around 1/3 of the total proceeds in developing our data center arm with the aim of replacing like-for-like more or less the same rents of BBVA with data centers. We are doing that just with the first batch. With the first four of the data centers, we are more or less replacing like-for-like well beyond the €70 million that we anticipated.

So — and even more importantly, the organic performance of our existing businesses have been able to almost make up for half of the BBVA cash flow, which as you know, was triple net. So we’re pretty happy with the way the Company has managed to perform following the BBVA disposal. Remember a very important thing. The world has changed. So the interest rate are not the same. You can see it in our existing numbers. I mean you can see that our financial expenses have gone up significantly. But still, I think you can count on pretty similar numbers to the ones you have in mind, okay?

And then regarding the CapEx and particularly DCN, well, DCN, the amount of CapEx that it will require in 2024, November, assuming we have finally transmitted the land, it’s going to be around €37 million, which is relatively immaterial. And then in the years to come, yes, you remember right. You remember our total figure, total equity — let’s say, total use of resources of €700 million in that project. But that spans over the next 20 years.

So yes, you can assume that around 2/3 of that will be employed in the first 10. But still, I mean, it’s relatively immaterial for the Company. It will only be material if we were the majority owners of DCN. But we have current 15% position. It’s relatively immaterial for the Company. And regarding CapEx — total CapEx reconciliation, I’m sure Miguel and his department will feed Ines with information, and she will be able to give it to you.

But — and another important question you made, which is whether the figures have already taken into account dilution. Not at present. I mean we haven’t taken into account any dilution from the capital increase because the potential dilution of ownership of the capital increase in our calculations, in our model are resulting in very significant EPS accretions.

So whenever we reach that river, we will cross that bridge. I mean we — at present, we are simply doing our bottom-up analysis of the eventual capital increase that the Company needs to do. We know it’s going to be taking to an M&A transaction. So existing shareholders will want their share price re-rated. And new entrants will want to achieve certain returns. The key in order to provide information and tranquility to both parties is our own assessment of the situation.

So we are modeling the Company with different scenarios so that particularly our existing shareholders, the Board of Directors has very good information about what the Company is worth with and without the capital increase. And if and when that moment comes, we will also provide some info to the eventual new entrant so that they can see that ballpark figures, they will get their returns through the investment of the Company.

What is crucial for us as a management team is that, that pipe, that M&A transaction takes place because we need that primary race if we want to continue developing our data center business. Of course, we could simply stop where we are and add €80 million of rents to the Company. But we believe it is significantly better as a fiduciary duty of care of the Company we are running to continue exploiting the success we have obtained in being first movers in this particular field.

Celine Huynh

Okay. Can I ask a follow-up question?

Ismael Clemente

Yes.

Celine Huynh

Now the value correction in your portfolio is very minor so far, and it’s not matching what the other REITs are reporting, which is more double digits. So I was wondering if you could talk about it.

Ismael Clemente

Well, the starting point in Spain is also very different from other countries. I mean yes, you might see the value correction as minor, but you need to take into account a number of things. First, that the gross value correction has been significantly bigger. However, the delivery of WIP in logistics and in data centers have significantly offset the primary fall in value in offices and shopping centers.

And second, we were already running at yields of four plus. So it is very different to be running your property at yields of four plus than to be running your properties at yields of two plus. So because if the new normality has to go, I mean, 10-year risk-free is like 60 to 70. And you need to be between 100 and 300 bps above the risk free, of course, now probably at the top of that range because of the negativity against real estate worldwide.

Well, then it is not the same to start from 4.5 than to start from a 2.5. So I can understand that in other places, things have been different. This is what came out of the appraisal exercise of our appraisers. We were, I must say, relatively surprised, positively surprised. And let’s see what happens during the year. Eventually, they will continue adjusting during this year. I mean there is nothing I can do.

So basically, we’re in the hands of the appraisers, and let’s see what they do during the year. But I am really not afraid. I am not mad. I know you want blood. So as a manager of a listed company, I mean, if it was my particular choice, I would have given you blood because I know you want blood. That is not necessary. I mean this is what has emerged out of the valuation exercise. So let’s see what the year 2024 keeps for us and what is the result of the valuation exercise on the 30th of June and the 31st of December.

We have been — we have seen this movie in the past. We have been discussing in our Board about selling the shopping centers for zero and things like that. I mean we are accustomed to these type of things. We have been in a number of cycles already. And let’s see. I mean we will continue adjusting values if need be, and let’s see what the 2024 is holding for us.

Ines Arellano

Next question comes from the line of Stéphanie Dossmann from Jefferies.

Stéphanie Dossmann

Sir can you hear me?

Ismael Clemente

Yes.

Stéphanie Dossmann

Yes. Actually, I had the same questions from Celine regarding valuation because it’s very, I would say, far lower than for your European peers. And is there any reason why valuation should be more resilient than in the Paris region, for instance, in terms, I don’t know, working-from-home trends the assumptions that appraisers are taking in terms of indexation reversion, this kind of things? And the second question regarding your net initial yield. Something I don’t reconcile is that I had 6.4% for 2022. And now I find 5.6% in your release, going — so falling to 5.4%, if I’m correct. So maybe I’m missing something here.

Ismael Clemente

Okay. Well, first, on the net initial yield, which I understand is the EPRA net initial yield, I have no clue of what you’re referring to. So I will defer to my team to go back to you and do the reconciliation exercise to see what eventually may have happened in terms of EPRA net initial yield. We report according to EPRA standards. We have always done that, and we will see what is — what you are referring to.

Regarding, again, the modest decrease in valuation, there is nothing I can say. I mean of course, it depends on whether the Paris region — I am not an expert in Paris. I know it is a huge market. I know there is a lot of liquidity there. However, in my honest opinion, I don’t see right from God to be exchanging buildings at sub 3%. So let’s see what finally happens there.

Regarding work-from-home trends, I know our own work-from-home trends, which I can tell you are in existence at present in Lisbon and Madrid and a little bit noticeable in Barcelona because it is a little bit more thrown towards programmers and tech industry. So it is a little bit more noticeable in our buildings in Barcelona measured with the term deals, but not in Madrid and Lisbon.

Indexation, well, in Spanish and Portuguese civil code, there is a full indexation every year. In exchange for that, contracts are much shorter. So in Anglo-Saxon countries, sometimes contracts are longer, and there is no indexation. And rather, there is simply a mark-to-market every now and then. So it is the way it is. We are accustomed to this way of doing things. The market is very quick to react in terms of rents. I mean whenever there is a hike or a fall in rents, the market adapts very, very quickly.

And regarding values, well, there is nothing else I can really guess or comment. As commented before, we will wait to see what happens in 2024, whether continue falling, which is my personal, let’s say, forecast. And I am telling you openly. But also, if you want to do what-if exercise with Ines and you want to adjust the office values to 20% below where they are today and see what is the effect on LTV or — well, on LTV of — in the Company, you are free to do so. And we are happy to provide you with information if you want to do these kind of things.

Stéphanie Dossmann

And maybe a follow-up on that because that was the underlying question regarding your leverage. And have you discussed these assumptions on valuation with the rating agencies? What are the assumptions on capital value decline? And how does it translate into the credit metric threshold?

Ismael Clemente

No, no, what I was commenting is that you are free to do your own assumptions. So you call Ines. And if you want to drop the office values by €1 billion, do it. And we can test it in our model more or less what is the LTV, et cetera, which is the only thing that really will change. And this — I mean be our guest. I mean do it.

Ines Arellano

In terms of the rating agencies, Stéphanie, we haven’t had yet our annual review. So, the next question comes from the line of Adam Shapton from Green Street.

Adam Shapton

Just a quick one on shopping centers, just the operational performance. If I interpret the numbers correctly, it looks like a little bit of a slowdown in the like-for-like growth in the second half in Q4. I appreciate that’s one quarter maybe, but what are you observing so far in 2024? And I guess the broad question is, is 12% OCR — you said it was comfortable for your tenants, but do you think they can tolerate much more than that? Or do you think your rent growth can outperform sales growth in the medium term?

Ismael Clemente

Okay. Well, on shopping centers, we were really afraid of a bad second half last year. We were thinking our, let’s say, base assumption was that private consumption would end up falling in Spain as a consequence of increased cost of utilities, higher cost of basic food, and well, general CPI effects in the spending capacity of households. However, the countering effects of those probably weighted more than we thought, and the low level of leverage of Spanish families so far has been holding the private consumption better than we expected. There is also a role of informal economy, which in Spain is significant.

And there is also the fact that the government continued applying a pretty generous fiscal policy. And I guess they will continue to apply that kind of fiscal policy till they can. There is also the effect of the monetary illusion created by salary increases overall. I mean minimum wages have been increased a number of times already in Spain. And as a consequence, there is a domino effect in all salaries, which the only limit is, of course, productivity.

But for the moment, clearly, we were wrong. And during the second half, we didn’t see any slowdown on the private consumption pattern in Spain. If you want to be super picky, the Black Friday campaign and the Christmas campaign was a little tad lower than the year before. However, the Three Kings and the sales campaign at the beginning of ’24 have been above last year. So isn’t that mind boggling? I really don’t see why one thing goes with the other. Eventually, it has to do also with the weather. I don’t know.

But for some reason, we are — in the last attendance or in the last footfall reports we are getting from our shopping centers, we are seeing a very, very healthy pattern of behavior during the month of February and going into March. So frankly speaking, I don’t know what to say. We are expecting, again, for 2024, a fall in consumption. But again, we will prove to be wrong because there are forces which are more powerful than reason when you try to explain the behavior of an average consumer.

Regarding OCR tolerance, look, historically, our OCRs have been ranging between 13% and 14%. Normally, 13.5%, 13.6%. That has been the norm for us in the past. You know that there were some countries in Europe where problems started above an average of 16%. And in the U.S., there were, in some cases, averages above 20 that resulted in chaos. But in our portfolio, based on our experience, between 13 and 14, it’s always been kind of the right ballpark for rents. So whenever we start getting above those ranges, we normally adapt rents. And whenever we go below those ranges, we try to push rents, which is exactly what we are doing as we speak. This is the OCR tolerance I can see.

An important thing. Many people, particularly at COVID, predicted that all shopping centers will move into variable revenue. I can tell you that our 9% variable revenue out of total remains the same. It was 20 years ago. I mean we have had that discussion with a number of clients. We have offered them to move into variable. Nobody wants to move into variable. And I remember this was one of the strongest opinions that people was giving us during the COVID.

Everyone is going to move into variable. The rents are no longer going to be predictable. And therefore, the capitalization rates will need to adjust to reflect. Okay. We have offered most of our clients to move into variable. Nobody wants to move into variable and be audited. So they prefer to pay, let’s say, a fixed rent.

So this is where we are. We will report during the year according to what we see, what we witnessed in our day-to-day operation. And you can rest assured that if things start to worsen, we will report that things are worsening. So we are — have normally been — I mean we are new kids in the block relatively that we have always been pretty transparent in the way we have informed the market, and we will continue to do so. So if we see that in the second half, footfall goes down significantly, let’s say, in a worrying manner, we will immediately report to market, okay?

Ines Arellano

The next question comes from the line of Ferran from Kepler.

Ferran Barniol

You have Ferran from Kepler Cheuvreux. We have three questions, please. Could you provide the net yields for the shopping centers and the office for the portfolio, please? The second one would be regarding the new development at Picasso. Has IBM moved in December as the tenant already? And the third one would be if you could provide guidance on like-for-like CapEx for the next two years, please.

Ismael Clemente

Okay. Net yields, EPRA net yields for offices and shopping centers. With Picasso 11, IBM is already in. And Globant and SAP are already in, and the rest will continue going in till the summer. So I would say more than 50% of the building is now occupied, and it will continue — occupancy will continue growing till the summer. What we are doing now is fitting works. I mean the clients move into the building. We are fitting out and we will continue filling up.

Ines Arellano

Net yield, Ferran, for offices is 3.9. Logistics is 5.0. Shopping centers is 5.1. The overall portfolio is at 4.3.

Ismael Clemente

Okay. And then like-for-like of CapEx, Miguel, if you can.

Miguel Ollero

You mean maintenance CapEx?

Ismael Clemente

No. He means probably offensive CapEx. I mean what is…

Ines Arellano

Ferran, what are you referring to on CapEx?

Ismael Clemente

Offensive CapEx but not like-for-like. So what is the offensive CapEx of budget of the Company for the coming years?

Ferran Barniol

Yes.

Ismael Clemente

Okay.

Ines Arellano

We are focused on data centers mainly and then logistics. So we’ve provided you those are the two pillars of growth of the Company. And then we’ll have a little bit in offices as we went ahead in carrying out in the asset that we view would be important to put them in shape like the one that we’ve shown in [indiscernible]. But as Ismael commented on, the landmark plan is already over. We’ve seen a flagship for shopping centers. So the whole investment is going to be mainly focused on logistics and data centers.

Miguel Ollero

Yes. Ismael already pointed out in the presentation that it’s going to be €145 million. In terms of logistics on the new projects that we are aiming to deploy for year 2024, it will be about €80 million, okay? And there will be some additions, but they will be minor with regards to the other asset classes. In the case of office, we are under the revision of [indiscernible] in Lisbon, and we will expect also the revision of Liberdade in Lisbon as well. And we are going to be adding two more buildings in the Cerro de los Gamos. These are the four main assets that we are already putting 14 office.

And the shopping center is just limited to the [indiscernible] we’re putting in place in Marineda that was bought from Cos Invest recently. And we are talking about all in all 300 million, sorry, the rough number for the year for all asset classes in terms of offensive CapEx.

Ines Arellano

The next question comes from the line of Fernando from Alantra.

Fernando Abril-Martorell

Three questions, please. First, just — sorry to come back with this again. Just to be clear in data centers. So your ambition is to raise capital and address the opportunity, data center Spain. The question is still unknown what would the structure be and also the size of the potential capital increase. This is the first question.

And then second question, again, on data centers. So you’ve mentioned about Lisbon and then the huge interest that you are receiving. I understand that it is still preliminary because you’re still awaiting the license and so on. But I don’t know if it’s fair to assume that you can also reach the 14.4% yield on cost that you’ve achieved for the Spanish assets as well for the Lisbon.

And then third question is about offices. So market trends in 2023 in CBD, they have grown at inflation or even higher than inflation. And non-CBD have lagged behind, flattish, more or less. My question is, what do you expect market trends to do in 2024 between CBD and non-CBD?

Ismael Clemente

Okay. Starting by the end, Fernando. Well, we expect rents in CBD to continue going up. I mean our vacancy in CBD, including Lisbon and Barcelona and Madrid, is like 6,000 square meters. So basically, there is not a lot of space available. And as such, the pricing power is high.

And regarding [non-CBD] area, all in all, I expect the rents to be relatively flat because there are areas which are improving a little bit, as commented, the A1 corridor is improving, but there are other areas like the A2 corridor which are going down. And in Barcelona, well, clearly, the 22@ is now for regular buildings, not for [indiscernible], which is an icon, that for regular buildings, it is an area that is suffering in terms of rents.

So all in all, I believe it’s going to be relatively flat. That — only God knows because the activity in this first quarter has been, I would say, pretty high. I mean it is surprising us on the upside. There is a lot of leads, a lot of visits. There is a lot of people now moving in the market or taking decisions about extensions of contract versus relocation. Let’s see how the year evolves.

Taking into account one very important thing, which is that rents in our three markets are very, very low, particularly when you talk about new business areas and peripheries. We are talking about rents, which, in some cases, are a little tad above logistics. So there is — you should — I mean there’s no significant worry about those rents going significantly below because at some point, they will reach zero. And at zero, they will rebound, I’m sure. So very, very interesting to see what will happen this year.

Regarding the yield on cost of the Lisbon assets, I don’t expect a 14% yield on cost growth in Lisbon for two reasons. The Lisbon side is a river bank. And as a consequence, the basement or let’s say the bedrock, the foundation of the building needs to be done through a very special technique called micro piloting, which is expensive. Plus in the case of Lisbon, like in California and other areas in the U.S., you need to go through significant anti-seismic protections because it’s an area which is above average in terms of seismic risk compared to, for example, Madrid or the Basque Country, not Barcelona but Madrid or the Basque Country.

So I don’t think we will get to 14.4. However, that said, we are seeing tension in rents. We are seeing an eventual narrowing in the gross to net because more expenses can now be recharged to tenants. And well, the market will dictate what is the level that can be achieved in a place like Lisbon.

Regarding the capital increase, we haven’t decided on the structure. Regarding size, very rough numbers. We need to develop 180 megawatts that. Will require €2 billion more or less CapEx, a little less. But just to calculate a little bit in excess. So those €2 billion, our idea will be to make a 50-50 composition of €1 billion capital, €1 billion debt. You may say, okay, but that is 50% that will affect your 35% LTV maximum. The truth is that we believe that upon opening of the data centers, another €1 billion of revaluation gains will be realized. So it will be — at the end, it will be €1 billion of debt divided by €3 billion of value. So we believe we will significantly keep our numbers below the 35% mark in terms of LTV.

This is the way we want — regarding structure, there is no structure at present. We are simply modeling bottom up the Company. We are trying to provide quality information to the Board of Directors so that with that information, they can start negotiating process, which, as commented, I believe a pipe is more an M&A transaction than a public market transaction. There is a new entrant that, of course, wants the lowest price possible, and there is an existing incumbent that wants the highest price possible. So they will need to get to an agreement, and we will simply witness that negotiation and praying for the fact that they get to an agreement and we obtain the funds we need in order to develop our cherished data centers.

Fernando Abril-Martorell

Okay. Just can I make a follow-up?

Ismael Clemente

Yes.

Fernando Abril-Martorell

Yes. You’ve mentioned the revaluation in data centers, and you have reported already in Q4 some value gains. I was wondering what is the appraisers — how are the appraisers valuing the data centers, I don’t know, based on a stabilized gross rental income? What gross yields are they applying basically?

Ismael Clemente

They are doing DCF, Fernando, like in every other asset class. And they are using exit yields at present in the region of 6% to 7% gross, which correspond to 5 to — 5 to 5.5 more or less net. This is what we are seeing. So in reality, in — well, as you have seen in our revaluation this year, only taking into account the existing capacity without attaching any value to the Lisbon side or to the extension of the Basque Country side. The revaluation has been pretty significant in the region of 50%.

So very interesting data point in order to calculate the potential evolution in the future, provided you can maintain the same yield on cost with — which, in our case, given that the land is ours, at least for this first batch of development, should be, generally speaking, maintained, I mean, with the exception of Lisbon, could be a little at lower that they will be more or less maintained. If you were to buy land in the open market, that is a completely different ballgame. But in our case, that we are owners of significant land, we should be able for the next tranche of development to maintain more or less the yield on costs.

Ines Arellano

All right. So the next question comes from the line of Thomas from Deutsche Bank.

Thomas Rothaeusler

One question, a follow-up question on data centers actually. Just wondering how the competitive landscape is involving given the strong demand. I guess it’s kind of first come first serve for power. Maybe you can provide some color on the development pipeline of your main peers. Not sure you have transparency here.

Ismael Clemente

Okay. The sound was not really good, Thomas, but I understand you wanted an idea of competitive landscape and how power is obtained in the market on what is the risk of not getting to it and what is the development pipeline at present. Well — yes, well, competitive landscape, yes, there are two — okay. Regarding the competitive landscape, there are two very, very good incumbents that exist in the market, which is Equinix and Digital Realty, as you can imagine.

They entered the Spanish market through acquisitions, which is very good because they were very quick on time to market and therefore time to money. They bought existing incumbents in Spain that had their data centers relatively modestly occupied. And they immediately improved occupancy in those data centers, which is, of course, always a very good business plan.

The only caveat of that is that those data centers are located in significantly dense urban areas. And as a consequence, their possibility for repowering in those facilities is low. So at present, they do not have too much capacity to offer in the market. Does this mean that they will not react and go and buy extra land in a more remote location compared to the city center and develop data centers? No. Of course, they will. Of course, they will move and buy land and develop data centers in other locations in Spain.

However, between taking the decision, obtaining the funding from the U.S. because in those cases, those are multinational companies and will have Spain competing with other countries in terms of obtaining the funding, buying the land, entitling, getting the power, equipping, constructing and obtaining all the licensing, et cetera, there is a very significant time lag involved. Very, very significant time lag. I mean I will fall shy of quantifying, but between 24 and 36 months easily. I mean it is not easy to simply go and build a data center at present in Spain.

Then above and beyond the really established incumbents, there is a number of Tier 2 data center operators that has been significantly reinforced in recent times by private equity. So we are talking about QTS. We are talking about Vantage. We are talking about DATA4. Those competitors, of course, with the steroids provided by private equity will become very, very significant in the future. But again, they will need to go, find the land, develop and do whatever they need to do in order to have operating data centers.

Availability of power. Availability of power, while generally speaking, Spain is a country which is abundant in power and particularly in renewable power, then for administrative reasons, for bureaucracy, getting that power is not an easy task. Not an easy task. And in some cases, it is really frustrating task. We have our own formulas of doing it. You need to check whether you want to be above the radar of going to the national grid authority or below the radar and going straight to the distributors. You need to take decisions.

We have already learned painfully that — we have already learned how to do things. And we will, of course, put that in practice in the future. But it’s not that easy, although as commented, generally speaking, electricity in Spain is relatively cheap, relatively abundant. And the grid is rapidly strong, and the cabling — well, the cabling is fantastic, both internal cabling, owing to Telefónica, and also some marine cabling with other parts of the world.

Development pipeline. I will — I prefer not to comment too much on that. I mean there was a significant project in Madrid — two significant projects in Madrid. None of them are progressing at the pace we thought they will be progressing. Let’s leave it there. I mean not progressing very quickly. And in this month, there was a very significant competing project happening in Sines, south of Lisbon. That, of course, was very, very powerful rival to us. But that — again, that project is now no longer progressing at the pace it was expected to progress for a number of issues, of legal issues they have had in recent times.

So not a lot of competitive landscape at present, at present. And just — I mean I will refrain from making future statements, but not at present. I mean if you want 20 megawatts in Spain of IT capacity, you don’t have too many doors in which to knock unless you are an owner user like AWS or Microsoft, and you have your own data centers in Aragon, which in the case of Microsoft has not even yet started. And unless you are an owner user, not easy to find IT power in Spain in the way many other people will normally expect.

Ines Arellano

Okay. So there are no more questions. Thank you for being here for almost two hours. And if you have further questions, please do not hesitate to come back to us. And have a good day. Thank you very much. Bye-bye.