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Edited Transcript of MRL.MC earnings conference call or presentation 14-Nov-19 2:00pm GMT

Nine Months 2019 MERLIN Properties SOCIMI SA Earnings Call

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Merlin Properties SOCIMI SA earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Inés Arellano

MERLIN Properties SOCIMI, S.A. - Director

* Ismael Clemente Orrego

MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO

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Conference Call Participants

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* Celine Huynh

Barclays Bank PLC, Research Division - Research Analyst

* José Francisco Cravo

Grupo Santander, Research Division - Equity Analyst

* Marie Amelie Charlotte Dormeuil

Green Street Advisors, LLC, Research Division - Senior Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Merlin Properties' 9M '19 Results Conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would like to hand the call over to your speaker today, Inés Arellano. Thank you. Please go ahead, ma'am.

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Inés Arellano, MERLIN Properties SOCIMI, S.A. - Director [2]

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Thank you. Dear, ladies and gentlemen, welcome, and thank you for joining our 9 months 2019 results presentation. Today, we have Ismael Clemente, Miguel Ollero and David Brush with us who will be at your disposal for any questions you may have. Ismael will spend 5 minutes highlighting the key milestones of the results we have released, and we will then pass the floor to the audience for Q&A.

Let me please remind you that these are the first sets of results with the new reclassification of High Street Retail Internet leases. All historical figures have been rebased for comparison purposes.

With no further delay, I will pass the word to Ismael. Ismael, please go ahead.

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [3]

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Thank you, Inés. Good afternoon, everybody. We have had an excellent quarter at Merlin across all divisions with solid growth in occupancy, like-for-like evolution of brands and release spreads.

Gross rents have increased by 6.4% year-on-year with EBITDA reaching EUR 317 million, plus 6.3% year-on-year, which points toward comfortably exceeding EUR 400 million in the whole period.

The FFO per share is up 11.5% to EUR 0.50 in the 9 months to date. In dollar terms, that will be EUR 237 million, which points towards a full year mark above the EUR 300 million, which will be first time in our relatively short history.

NAV per share up 6.5% to EUR 15.27, taking into account that there's been no revaluation in the period. More importantly, our margins continue improving, particularly the cash flow ones. This is due to what we explained to you in past occasions, lower incentives for commercialization given that our occupancy is now reaching higher figures, but also a consequence of liabilities management by our Chief Financial Officer, which is lowering our financial expenses.

In terms of underlying business performance, the like-for-like year-on-year growth in rents is 4.8%. Many of you are worried that this is lower than in June, but in reality, this has to be with the fact that we have cut the quarter in a certain date, but we are heading towards a very strong fourth quarter. So we see no signs of abatement in the market.

The release spreads are pretty encouraging, particularly in offices where we are 6.1%, very good in shopping centers with 2.4% and 4.7% in logistics.

We continue gaining occupancy with 27 basis points added in the quarter to 93.2%. And offices have had a very strong performance with almost 300,000 square meters contracted and like-for-like of 7.6%. We have release spread, as I foresaid, of 6.1%. We continue holding our 91%-plus indication of occupancy for year-end. So the fourth quarter with a slight gain in occupancy from the current 90.7% should look robust as well.

In shopping centers, with 65,000 square meters contracted, we have experimented like-for-like of 3.0% with a release spread of 2.4%. So shopping centers continue contributing well to our performance.

And in terms of logistics, 210 square meters contracted with a like-for-like of 2.1% and a release spread of 4.7%. The like-for-like cosmetically looks low, but this is a consequence of the fact that as of end of the third quarter last year, we were 98.2% occupied. And this quarter, we have registered an occupancy of 95.7%. So this is what makes the like-for-like optically low.

So without further explanations, we get into the call, and let me simply comment on the post-closing events, which are important, some of them. As you know, first, we distributed an interim dividend to shareholders in October of EUR 0.20 per share, which represented an outflow for the company of around EUR 93 million. We made small but interesting progress in our noncore retail sales program by selling 2 self-standing facilities in the Bonaire Unibail-Rodamco-led shopping center in Valencia to AEW for a total amount of EUR 9.1 million, 5% above our latest appraisal. We -- in logistics, we signed post closing -- immediately post closing, we signed 19,000 square meter lease with Mercadona in the cold storage facility of Getafe Gavilanes. And this will on itself -- there will be other actions, but this will on itself raise the occupancy as of year-end to something in the region of 97.3%.

As you all know, we also acquired a 14.46% financial stake in Distrito Castellana Norte, which is the entity leading the development of the so-called Chamartin area in the -- to the North of Madrid, right next to the Castellana Avenue. We also granted an EUR 86 million long-term loan to the seller as a means to ensure their full restructuring and removal of all guarantees at the time of the transaction, which was of the essence for us as a way to take in a pledge the remaining 10% stake as a guarantee of our loan.

We have accepted a deposit in advance of the potential sale of our portfolio of offices that should take place towards the end of November, beginning of December. This noncore sale is for a total of 26 office buildings, although the number of locations is like 8, okay? But there are a number of parks which have different buildings in them and the total square meterage of 133,000. This is a sale which is consistent with the program you all know of refinement of our office portfolio and will result in better prime CBD to NBA periphery ratio and will also create a slight improvement in our occupancy ratio because the portfolio, which is being sold, is occupied at a lower level than the overall MERLIN portfolio.

That's all. We are open to your questions, and you have the full team here. So please go ahead.

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Inés Arellano, MERLIN Properties SOCIMI, S.A. - Director [4]

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Operator, please open the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of José Cravo.

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José Francisco Cravo, Grupo Santander, Research Division - Equity Analyst [2]

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Okay. So just 2 questions, if I may. On the vacancy of the office portfolio, can you quantify what would be the impact on your overall portfolio? And can you also tell us whether this sale was tax efficient? And then my second question would be on the Solvency II regulatory framework. Can you give us more -- some light on these changes on the potential impact that it could have on listed REITs?

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [3]

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I apologize, but the one question I wasn't quite sure on the vacancy, the vacancy of the portfolio, this is fine. I mean we are pointing towards an occupancy as of end of the year in excess of 91%, and this one is not considering the effect of the sale of the portfolio we have referred to before. If you consider that sale, that will pick up in the region of 0.9%, almost 1% in terms of occupancy. So if we end up the year in 91% or 91.2%, you can add comfortably another 1%, that will be our resulting occupancy once we strip the company out from this portfolio.

Has it been tax efficient? Yes, I mean, as you know, we are SOCIMI, and these assets have been held in our balance sheet for more than 3 years. So yes, the sale is tax efficient. There will only be frictional taxes as a consequence of municipal levies, et cetera, but nothing in terms of SOCIMI regime. And the other question, José?

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Unidentified Company Representative, [4]

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The regulatory impact. I don't know if the question about it is regulatory impact of any future changes. I wasn't quite sure what regulatory impact you were referring to.

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [5]

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Can you repeat, José, the second one?

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José Francisco Cravo, Grupo Santander, Research Division - Equity Analyst [6]

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Yes. The second question is on the Solvency II regulatory framework, basically saying that the consumption of capital of insurance companies that invest in REITs could decrease substantially. Can you tell us about your view on here?

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [7]

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Well, it's a much welcomed initiative by the European Union. As you may know, we have been actively lobbying in favor of it through the European Public Real Estate Association. It was completely unfair that insurance companies have better treatment for investing straight into real estate that -- than for doing it indirectly through listed, liquid and, in most cases, super well-managed REIT. So we are happy. Let's see what this means for the Spanish market because there are other more sophisticated markets in Europe, like France, where anyway, the insurance sector was already highly present in the capital of local companies. In Spain, this has not been the case. As you know, most insurance companies in Spain hold relatively heavy real estate departments, which invest directly in real estate. Let's see what is their reaction. Let's see what they do. And let's see what is the impact in the flow of Spanish REITs.

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Operator [8]

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Our next question comes from the line of Celine Huynh.

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Celine Huynh, Barclays Bank PLC, Research Division - Research Analyst [9]

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I was just wondering if you could provide more color around your like-for-like rental growth for logistics. It seems like it's materially down from H1, and I was just wondering if that's temporary.

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Inés Arellano, MERLIN Properties SOCIMI, S.A. - Director [10]

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There's an impact as well on the rental guarantee that has made the number go down. Again, as Ismael pointed out, towards year-end, due to the occupancy, you'll see the number go up. In any case, for logistics, as you know, what is more important is how the market is robust in terms of demand because every day, our portfolio changes. So the like-for-like is not on the whole or, let's say, on the same perimeter of assets.

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Celine Huynh, Barclays Bank PLC, Research Division - Research Analyst [11]

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Okay. Can I ask a follow-up question on that, on Barcelona, especially? The occupancy rate for logistics in Barcelona has not materially gone up. Why do you think is that?

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [12]

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We have lost 3 modules, same ever, I'm talking by heart, in Parc Logístic de la Zona Franca. One of them has been subsequently replaced following closing of the quarter, and the other 2 are currently being negotiated. I mean there is nothing related to the unrest -- the social unrest in Barcelona or anything like that. I mean Barcelona continues to perform and rock solid in offices and in logistics. The only activity which is impacted, as naturally expected by anyone, through the social unrest and the protests is retail, which is subject to a number of interruptions of trading and partial closures, which have -- take a toll in traffic and sales per square meter. But other than that, Barcelona continues to be the same robust and solid city that it always was.

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Operator [13]

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Our next question comes from the line of Marie Dormeuil.

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Marie Amelie Charlotte Dormeuil, Green Street Advisors, LLC, Research Division - Senior Associate [14]

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I just wanted to know if you could give us a little bit more color on your investment in Distrito Castellana Norte. And what is the future really for this? How grow can it -- how big can it grow into your developments and so on? So just give us a little bit more color.

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [15]

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Okay. Well, Marie, what I can tell you at this stage is that we have made financial investment so far in which our aim is to provide as much assistance as possible to our partners in that development, BBVA and Grupo SANJOSE. We are a real estate company, we know the market well, and we can help in terms of planning, execution, infrastructure development, construction and ultimately commercialization of the project.

If you ask us whether it is our ultimate desire to increase our participation in that project, yes, it is our ultimate desire. We would like to increase our participation and our leadership in that project, but this is naturally subject to a multilateral negotiation. That has not yet taken place, and there is no guarantee it may take place in the future. But yes, I mean, our long-term ambition will be to follow a build-to-core strategy, fabricate our own brand quality office square meterage. And as such, if we can take control of a larger share of that project, we will be, in our view, making a good favor for the company's future because this will mean growth for this company for the coming 20, 30, only God knows how many years.

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Marie Amelie Charlotte Dormeuil, Green Street Advisors, LLC, Research Division - Senior Associate [16]

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And on the time line, realistically, what's the time line for this? I mean, of course, it's been in the news for decades now. So do you actually see anything happening, let's say, in the next 5 years or not? And then just another question in terms of your desire to grow, do you -- now that you're on a stake, do you actually have kind of a right of a first bid? Would BBVA actually sell the stake?

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Ismael Clemente Orrego, MERLIN Properties SOCIMI, S.A. - Deputy Chairman of the Board of Directors & CEO [17]

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Okay. Well, 2 things on our right. In the framework of the transaction, yes, legally, there are a number of cross rights as a consequence of our participation in the transaction. Anyway, every movement in this group of partners so far has been taken by multilateral consultation and, say, unanimity, and this will continue to be the spirit in the future.

As for the timing, look, Marie, only God knows. I mean the reason for the delay up to now, which has been a delay on the definitive approval, has been the different perception of the transaction by different political sensitivities. But now we are approaching the moment in which definitive approval is going to be granted by the authorities. So from this moment on, I would say technical aspects will take more protagonism. So it will be more a question of executing on very significant and very complex infrastructure works, plus organization, plus in the future construction of the final product. It is a very sensitive project because it is probably the best location available in -- currently in Madrid towards the end of Castellana and right next to it. And everybody has an opinion on the project, but thanks, God, once the final definitive approval is granted, it will be more a technical work than any other thing.

Yes, there could still be some opportunistic interventions by -- with spurious intentions or with ideologic background that may try to stop the development in courts or something, but I believe this is normal in all countries of the world in development of this scale. And I believe we will be able to handle them if and when they happen.

A very important question that has created some misunderstanding among the analyst community and among investors is that the transaction -- or sorry, the Chamartin development is often cited with the entirety of the square meters involved and the total uses. As such, many people believe that we are taking on 10,700 units of residential in our balance sheet. This is not the case at all. So the total development spans across 2.7 million square meters of buildability with 0.5 million square meters of green zones. But DCN, the company in which we have taken the financial participation, only owns 44.5% of the total, let's say, area of the project, the rest being in the hands of public entities and, in some cases, some small private investors normally linked with residential development. What this means, in practical terms, is basically that DCN, the company in which we have invested, is only responsible for the development of around 2,000 residential units, all of them with, let's say, free legal -- rent-free legal characteristics on them. So there is no protected rent. There is no public rent. There is no restriction whatsoever in rental terms in the units that we are developing.

And this is very, very important because we keep on receiving a number of questions on whether we are onboarding too much residential in MERLIN, which is not the case at all. If -- a breakdown of uses, for you to understand, will be around 860,000 square meters of offices, [Primate] in Madrid, with the best location, and as you can imagine, the most modern at the time they are built. It's around 235,000, less than 20%, 19% resi, which can be sold or can be rented, which, again, if it is rented, will fit with MERLIN's core activity. And the remainder, 9% remaining is retail and hospitality, around 105,000 square meters. But most of this retail is the ground floor retail ascribed to the office building. So don't think of it as the development of a 100,000 square meter shopping center in the north of Madrid. It's mainly the ground floor retail at the ground floor of the office and residential buildings.

So it is very much in line with our corporate goal, with our aim to become the leader in Spanish commercial real estate, in offices, retail and logistics, in this case, by significantly changing the ratio between prime CBD offices and NBA periphery, which, just with 15%, that ratio will significantly change. If for some reason, one day, we end up taking more than 15%, that change will be even more radical in favor of prime and CBD.

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Operator [18]

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(Operator Instructions) There are no further questions at this time. I would like to hand the call now to Ms. Inés Arellano. Please go ahead, ma'am.

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Inés Arellano, MERLIN Properties SOCIMI, S.A. - Director [19]

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Thank you very much. So thank you all for listening to our 9 months 2019 results. As you know, both Fernando Ramírez and myself remain at your disposal for any further questions that you may have. Thank you, and have a good day. Bye-bye.

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Operator [20]

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Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.