MERLIN Properties SOCIMI SA

MAD:MRL

Q1-2025 Earnings Call

[Inés Arellano, executive]

Good afternoon, ladies and gentlemen. Welcome, and thank you for joining MERLIN's First Quarter Trading Update Conference Call. As we always do on first and third quarter, our CEO, Ismael Clemente, will briefly go through the main highlights of the quarter, and then we'll open the line for Q&A. [Operator Instructions]

With no further delay, I pass the floor to Ismael. Thank you.

[Ismael Orrego, executive]

Thank you, Ines. Welcome to MERLIN's First Quarter Results presentation. It's been a pretty solid quarter overall. In terms of consolidated performance, gross rents went up by 2.7%, which was okay. And particularly, we improved significantly our margins and the FFO went up by almost 17%, which is good.

We have significantly shrunk the dilution caused by the capital increase. So we are running at present at minus 2.6% FFO per share, which is remarkable given the new share count. And in terms of NTA, despite nothing revalued in the quarter, we are running at minus 4.8%. Let's see what happens in June, but we will continue probably shrinking the dilution of the capital increase in terms of NTA by 30th of June.

It's been a very active quarter. In terms of data centers, we bought 2 sites in Madrid with 115 megawatts readily available which will allow us to develop around 78 megawatts of IT capacity. In terms of commercialization, a block of 18 megawatts IT has been led in our backcountry development in Arasur and small but super important for us, 6 megawatts of our repowering capacity that will arrive during the first half of next year in Barcelona has been pre-let, which is important because pre-lets are relatively scarce, at least in the Spanish market. As commented on many occasions, we believe that the possibility of doing pre-lets was confined was just for existing clients, and this is exactly what we have done. It's not so easy to do it with a new prospective client which doesn't know your ability to operate and deliver the exact product they need.

With those with the 2 data centers in Barcelona and the Basque Country full, including the repowering. We will become the leader in terms of IT in operation in the Iberian Peninsula that will be further strengthened by the lease-up of Madrid when the electricity arrives next year. So it's very, very interesting for us because at the time of the Capital Market Day in 2022, we laid a road map in front to of all of you. And of course, we try to abide by what we say, and it's been as good. We are delivering what we promised. This is very important for us.

On the existing traditional asset base, the quarter has been very strong from an operating standpoint. Beyond the inorganic growth of -- with -- brought into operation in DCs and logistics, the existing portfolio has enjoyed an organic growth of 2.7% like-for-like. The occupancy remains super high at 96.7 which is good, and it's not easy to maintain that kind of levels. And importantly, the FFO has increased at a high double digit, 16.9% compared to the 3 months of 2024, as commented almost offsetting the dilution created by the capital increase.

Very little asset rotations, EUR 37.4 million of noncore sales, double-digit premium. This is a little bit of a bulls*** if you allow us to do this because it's been like 11% or 13% is low double digit. I mean it's not that we have done a 50% premium, but it's okay. And we have a further 15.6 million signed that will be executed in 2025 and some other things in the oven that will end up materializing during the year. As commented, no valuation during the quarter. The NTA per share is a reflection simply of the accumulation of cash flow, so 14.47. We recommended to the Board of Directors and then to the General Shareholder Meeting and approve a final dividend of EUR 0.40, given that we paid EUR 0.18 on account, EUR 0.22 will be paid on May 26 as a complement of the year 2024 dividend.

In terms of business performance, the rents have enjoyed a very interesting period, 2.9 in offices, 1.8 in logistics, which is the only segment in which we are lagging behind a little bit the others and shopping centers, 2.8. The risk spread, don't be frightened by the minus 1.3% in offices. It corresponds to one single transaction in which we have renewed and adapted to market a contract to an existing client, and we have lost a little bit of rent in the process that we have extended the contract that was renewable year-by-year. It's a contract that we inherited from a past acquisition. We have now renewed until 2032, 43,000 square meters, plus we are negotiating now an extension that will be built turnkey of 21,000 square meters for that same client in the same location.

So it's a complex transaction that will significantly increase our backlog and will further strengthen the average occupancy in the A1 corridor that you might remember the headaches and the literature it caused in the past. Now it seems that the problems are a little bit behind us. And the A1 corridor is performing solidly, 4.7% in logistics, which is good because it will translate in like-for-like next year unless we will lose occupancy and 3% in shopping centers, which continue performing like a rocket, it's very, very interesting.

Many of you are asking whether we want to modify our guidance for the rest of the year. We are in the first quarter, we better not do it. I mean let's act with a little bit of prudency. The year is just starting, the world is unsafe, subject to lots of fluctuations. I mean, whatever announcement by the U.S. government can derail the economy tomorrow. So we better stay where we are. But yes, I mean, it's clear that we are running on an FFO of 0.15% per quarter. That should point to around 0.60% for the year in full, and I think we said 0.59%. So it's -- we are running a little better, but anyway, it is not a big difference, and I believe it's a little bit childish, to be so obsessed about the guidance or the not guidance. I mean, around 0.59%, if we are lucky, it will be 0.60%, it's okay.

And that's basically all. Well, one comment, which is that offices, normally the first quarter in offices in Spain, given idiosyncratic aspects of the market is where all the renewals are concentrated. So normally, you start the year losing a little bit of occupancy because there's always some churn despite having a renewal rate of around 82%. But this quarter has been strong. I mean a lot of activity, 115,000 square meters contracted, a lot of activity.

We haven't lost occupancy, which is remarkable. And if you pro forma the transaction that I just commented that will be with us this quarter, in the half and in the year. So we will be -- I mean it will be weighing in our numbers for the next 12 months to come. So clearly, it will worsen, it will make uglier our numbers for the next 12 months.

But if you pro forma this single transaction, the risk spread has been 4.1%, which is remarkable and goes hand in hand with the idea that they have expressed sometimes to all of you that, believe it or not, rents seem to be accelerating a little bit, at least in Madrid, not so much in Barcelona, but they seem to be accelerating a little bit in Madrid. As a consequence of the restructuring of stock that I commented is just at the very beginning. We are in the first innings of the game. If the destruction of the stock continues over the next years, I believe this is going to have an effective rent as it had in Portugal a number of years ago. I mean, this is a situation that we have seen in the past.

So without further preambles, I think we move into Q&A. And my colleague, Franc Rivas, is here with me because I'm sure there will be a number of questions regarding data centers. And Ines Arellano is also here in case there is something -- some specific questions about number that I couldn't know by heart, and that's it. So let's go and move into Q&A.

[Inés Arellano, executive]

Thank you, Ismael. So the first question comes from the line of Stéphanie Dossmann. Stéphanie, whenever you want.

[Stephanie Dossmann, analyst]

I will have 3 or 4 questions, if I may, mainly in data centers. The first one regarding the new contract signed. How do they compare to the previous contract timing for '24 in terms of level of rents, step-up close, et cetera.

The second one relates to your -- the phasing of your CapEx in Phase 2. I noticed in your corporate presentation that you -- I'm not sure how to read the change actually. '25 CapEx looks to be cut by more than 15% and even by 5% if we add '26. So is there any unexpected delay in your development plan? Or is it a question of lower-than-expected demand going forward with all the negative narrative since January on development cut from hyperscaler and so on? And how should we approach this in the future? Should we expect additional cuts?

And maybe the third one, what do you expect in terms of valuation changes in your data center portfolio in '25? Are the -- what is the view of the appraisals? Is it blurred with, again, the bad noise I was talking about? Any change there?

[Ismael Orrego, executive]

Okay. Welcome, Stéphanie. Look, regarding valuation, well, this is an exercise that we haven't yet started for midyear valuation. But I can tell you that the discounts that the appraisers have been employing in our portfolio, discount rates are ranging between 10% and 12%. And they were reflective of the, let's say, level of uncertainty pertaining to construction risks, commercialization risks a little bit of everything. So they were using relatively high discount rate.

Now with data centers finished and fully let, it is normal to believe that those discount rates will moderate. And this will have, of course, a positive effect on the valuation of data centers. So I don't know to what extent. I don't have a figure that I can give to you. We will see it in the second quarter results. But yes, we expect a positive evolution of the value of data centers.

And in fact, the other asset classes, given the panorama, given the interest rate environment, et cetera, I believe that eventually, most of the bleeding might be behind us. I mean, I will particularly like a little bit more correction in offices to go from our passing 4.9 to something in the region of 5.2, something around that. But this is my particular taste. I mean, the appraisals may have a completely different view and stay at 4.9 or even shrink and even decrease a little bit the cap rate because we know they are doing that in some other peers in Europe. They are already compressing cap rates. We will not push them in that respect that it could happen. I mean, let's see.

Shopping centers are also correctly valued. I mean -- and there are now significant transactions in the market that give you very interesting price points. Yes, the one most people notice is the C and B shopping centers that, I mean there are also some negotiations on A and B class shopping centers. And so there is now clearly a reference and in logistics [indiscernible] although the logistics investment market is a little bit more muted these days because it's, I believe, digesting a little bit of overbuilding by a number of tourist developers in the main regions of Madrid and Barcelona.

Regarding the phasing of the CapEx, Ines will take that question, and I will comment on the negativity of the hyperscalers because I know that this is terrifying you the negativity of the hyperscaler, but I will give you a very easy example and you will understand why there is not such a negative.

[Inés Arellano, executive]

Stéphanie, basically on the rhythm of CapEx, bear in mind that we're always be about committed CapEx. This is not incurred CapEx. And with the changes that we've done in Phase 2, basically reducing our exposure to Portugal and bringing Madrid forward, this is what we have right now as the most updated figures for committed CapEx.

Nevertheless, for stabilization figures and timing, we remain the same. So don't be afraid of seeing a different amount of CapEx committed because we think we're going to be on time to meet the business plan that we provided to you.

[Ismael Orrego, executive]

But of course, the CapEx is alive. I mean there will be variations during the period. And sometimes, we incur a little bit more in the quarter, sometimes we incur a little bit less that are in the [indiscernible] variations. But I mean, none of the existing construction yard is experiencing any particular delays or are we having problems regarding CapEx. And remember that one thing is the CapEx that we record in our accounts and a very firm one of the CapEx that we commit, which the numbers we give to you is the CapEx committed, which includes the accounting plus the commitment.

So if I buy 30 generator sets from mtu and I commit a further 30, to me, I have committed 60, okay? Although in my accounting, I will only reflect eventually 30% of the price of the first 30 and just around payment for the jump in the queue on the remaining 30. So there will be variations. I don't -- I mean if you want to be very specific, you can come here and talk to our team but I wouldn't try to reconcile because I believe it's wasted time.

On the negativity of hyperscalers, there's been a lot of conversations regarding this. Look, for the ones who were here doing logistics in the past, I remember about -- it was like 2, 3 years ago, there was a big terror in the market because Amazon was giving back the keys of a number of contracts and they were not pursuing some deals. And in some cases, for example, the fulfillment center, they built in Barajas and another one they built in, I think it was Huesca or León. Those ones were finished, and they have never operated, so they have the fulfillment center ready, but nobody has ever operated from there. So they have security, et cetera, but they are not using it because they did it from their own balance sheet. That was specific to Amazon, that wasn't a problem of the market in general. So we continue -- I mean we were not super high in Amazon risk, and we continue performing pretty solidly with the rest of the market with other 3PL operators without a significant problem.

Regarding the hyperscalers, there is the following situation in the market. The big enterprises are, in some cases, building their own models, in some cases with the help of hyperscalers. Because the hyperscalers have a very easy way to commercialize with big enterprises because they enter through [ Optimatics ], they enter through the search engines, they enter -- there's always a way or they enter through cloud applications. But there is always a relatively easy way to establish a relationship for the hyperscaler with a big enterprise.

However, once you have trained your model and you start doing inference, the amount of computing capacity that you consume becomes very important because it's going to cost you a lot of money. So in those cases, sometimes the enterprises switch the inference to a different supplier. In some cases, an artificial intelligence as a service supplier because they tend to be significantly more cost efficient than the hyperscalers. The hyperscalers are too big. They have internal departments that are specific in doing inference. But the cost at which they build, the cost at which they buy, the cost at which they buy the barbed wire, the equipment, the racks and everything tends to be high. And they translate that inefficiency and cost sometimes to the clients. So there is an effect of migration at some point in which the clients once they really need to squeeze the model that they have been training and start doing inferencing, they move into a different supplier.

And of course, that means that the market share they used to have in the grower market share is always little by little being eroded by the myriad of new entrants in the artificial intelligence as a service space that we have commented on many occasions. So we know that Microsoft has been the protagonist of a number of situations, particularly in the U.S., in which they have pulled back from existing deals. They have relinquished capacity that they were entitled to, et cetera. Well, that is -- it's Microsoft, but we don't see an abatement in demand. I mean we see a lot of demand in the market. We see a lot of new entrants trying to build capacity.

And we believe that at present, at least, there is no reason to be worried as very well said by David Guarino of Green Street in a recent piece of research. He doesn't know what is the specific amount of new demand that Europe will require over the next 5 years, but he knows is going to be multiple times the existing one. So that basically means that if you are a relative pioneer and you are at the forefront of the sector evolution, you need to continue building capacity because a lot -- half of a lot, twice a lot that it's going to be a very significant increase of capacity, the one that we will see in Europe.

He further compared and also a very important piece of information. He further compare the evolution of the U.S. in terms of capacity demand versus Europe. And he concluded that Europe is lagging the U.S. by about 2 years. So the capacity contracted in the U.S. in '18 was very similar to the one in Europe in '20, '19 to '21 and '20 to '22. But then in '22, artificially -- at '22 in the U.S., artificial intelligence arrived. So the capacity, the demand for capacity, skyrocketed. And this movement has not been mirrored yet in Europe. But if you take the following year, '23 and '24 they more than doubled the previous year, each year more than double the previous year.

So those 2 movements have never happened yet in Europe and will happen over the coming years. We are starting to see European artificial intelligence now playing around in the market. I mean, at least we know one that is very active and has taken a lot of capacity. And little by little, Europe will be catching up with the U.S. So we are not really worried about demand for the moment. If we see it otherwise, we will be the first to tell you openly.

And regarding the new contract in DCs versus past, you can comment on it? Very, very similar.

[Francisco Rivas, executive]

They are basically composed of a 10-year length mandatory with several extensions. Primarily, this is linked to the average life of the different equipment they are implementing and deploying in the building. And this is from the rent maturity point of view and from the rent point of view, as well pretty in line. We are bidding what we share for Phase 1 and even for Phase 2 at the time of the capital increase. If you remember, basically for Phase 1, we were targeting when we did the mass of time like EUR 112.5 kilowatt month for these first 3 assets. And for Phase 2, we were seeing basically an increase up to the EUR 118.5 kilowatt month.

Now if you make the calculation of what we have disclosed, we are above 120. So that's basically the levels are being maintained with the specific clients and with the rest we are talking to.

[Stephanie Dossmann, analyst]

All right. Maybe just a follow-up one, if I may, on logistics. You -- should we expect departures similar to the one of Decathlon? How is the demand behaving?

[Ismael Orrego, executive]

Well, the departure of Decathlon, as you know, Decathlon is now reducing capacity, including in France. And we lost them in Seville and we're able to release most of the space by a new contract with Airbus. That could happen with other players. I mean, what is true is that online commerce is no longer growing at double digit. It's growing at single digit. And this will have an effect on logistics, no doubt. And the flip side of the coin is the excellent evolution of the shopping center. We always conceived logistics as a natural hedging to our physical comers to our shopping center activity. It's played that way on many occasions, including during COVID where the excellent performance of logistics compensated the decrease in cash flow we experienced in shopping centers.

And in the future, it might happen the other way around. I mean logistics might suffer a little bit because online is clearly no longer what it was. And physically, however, is doing fantastically well. And the two activities combined, you might remember that in MERLIN, both activities are coordinated by the same professional. So we have a colleague of ours who is coordinating both activities because we see them as one single activity, particularly now that we have -- we got rid of most of our light industrial. I mean 90% of our logistics today is 3PL related and poor distribution but is coverage related. We sold most of our light industrial. And as such, I believe that we are talking about the 2 sides of the same coin.

We are going to have a significant exit in the second quarter that we know already, which is in Cabanillas Park B in the A2 corridor in Madrid, GXO will be leaving. That will provoke a void. It will provoke a vacancy of around 47,000 square meters. And we will continue working to replenish that share. For the moment, the logistic market is good and active. I wouldn't say active as it was in past years, but it continues to be strong as evidenced by the pace of pre-let that we have been achieving in our existing development. So I wouldn't be too worried about it for the moment. If there are news regarding that, I will disclose in future conference calls, but not for the moment.

[Inés Arellano, executive]

Thank you, Stéphanie. The next question comes from the line of Marios Pastou from Bernstein. Marios, the floor is yours.

[Marios Pastou, analyst]

I've got 3 questions from my side. I'll ask them all at once. One -- firstly is a bit of a follow-up on the Phase 2 pipeline. I think you mentioned that regardless of the CapEx changes, you are still foreseeing in line with business plan. Can I just check that refers to the volume of rents you're expecting from 2027 and through the stabilization? So the CapEx isn't changing things or pushing this out?

Secondly, on Phase 1, I think you mentioned previously about at least would be more likely when the power comes online next year, but maybe an update on Madrid in Phase 1 would be helpful. And then just finally on guidance. Can I just confirm the guidance of EUR 0.54 before making adjustments for capitalized interest still holds true?

[Ismael Orrego, executive]

Okay. Well, regarding the Phase 2 in principle, everything is on track. We are forecasting rents of around 320 million for the whole of Phase 2. Costs are more or less kept a day. I mean, there are some things which are going up, some things which are moderating a little bit. So we are not extremely worried about cost. In fact, in the latest update of our model we are just like 10 bps above in terms of gross yield on cost, which is good. So 326 million with total IT capacity installed of 210.

So business plan remains pretty much in line with the only significant amendment which has been the reduction of capacity in Lisbon and the increase of capacity in Madrid, which has been caused by an unexpected event, which is that mid-February, former Biden administration put in place a U.S. Artificial Intelligence Diffusion Rule and they classified the countries in the world in 3 categories: Tier 1, Tier 2, Tier 3. The close allies, including most European Union countries, were classified in Tier 1. So they are entitled to import to their territories the latest gear they want from the U.S. but for reasons unknown to us, Portugal was placed on Tier 2, together with Poland, for example.

That is not the end of the world. It simply limits a little bit the number of GPUs that you can import to the country. A given operator can import around 50,000 GPUs, which is a lot, but 50,000 GPUs and the base for the calculation is approximately the H100, the Hopper 100 of NVIDIA. Of course, the more sophisticated the GPU becomes, the more reduced the number becomes. So if instead of Hopper 100 is Blackwell 200, the number of GPUs is lower. And for future series of NVIDIA like Vera Rubin at the end of '26, et cetera, the number will keep reducing because what they are trying to do is limit computing capacity that can fall in undesirable hands.

The consensus in the market was that, that was probably a mistake that the Trump administration will correct. Probably the Trump administration has had other priorities. And in reality, nobody has really paid attention to these Tier 1, 2, 3 categorization of the world. But the latest news that we got yesterday, I mean, from an American client in Barcelona is that the latest -- they know is that the Trump administration is thinking about scrapping the whole U.S. diffusion act. And if that is the case, we will rethink Lisbon, I don't know whether we will go from 36 to 108, but maybe we go from 36 to 72 and increase a little bit our Phase 2 capacity just in case in order to make sure that we have more probability of doing our full CapEx deployment and bringing rents to the company.

So this is basically the only thing that has really changed. So we have reduced 72 in Lisbon, but have increased 78 in Madrid. We were looking at 2 pieces of land in Madrid with immediate availability of power. And we have closed on both. One is subject to demolition and cleaning of the site, it was a former steel mill and the other is subject to organization, I mean basically bringing the utilities and then doing the organization works so nothing is really serious. And once we get the hold -- once we get the delivery of those 2 pieces of land, we will start construction. I don't know whether end of this year, but beginning of next should be a good bet. And the idea is to add 78 megawatts of IT capacity in those 2 plots to replace like-for-like the 72 megawatts, let's say, lost in Lisbon.

On Phase 1, I believe -- I don't remember the exact question.

[Inés Arellano, executive]

[indiscernible]

[Ismael Orrego, executive]

Extrapolating?

[Inés Arellano, executive]

The leasing in Madrid.

[Ismael Orrego, executive]

The leasing in Madrid? Yes, the leasing in Madrid, the problem that we have is that we only have a commercializable block of around 5 megawatts because the utility has given us only 8 megawatts of electricity. And as such, that block of 5 megawatts is a little bit insufficient for IT, so for IA. So very probably, we commercialize it together with the remaining 14 megawatts that we will receive next year upon delivery of the electricity by the utility company through 2 area lines that we are bringing -- that we are building and bringing to the plot once we equip the building, which is something that we should finish by end of the year.

I mean, we are receiving the equipment as we speak. We will be fitting out the equipment. It will be ready as of year-end. So we will finish year-end with 42 megawatts equipped and ready for use, but 58 equipped not ready for use or part of it, 16 of those not ready for use, and this will be precisely head-up. Regarding commercialization, once we receive the electricity, I wouldn't be too worried. I mean Getafe-Madrid has a lot of demand. And I mean we are negotiating with multiple parties, and I wouldn't be too worried about it. I believe, during 2026, God willing, we should be able to have it fully let and leave the Phase 1 completely delivered and full and cash flowing, which at the end is our objective in order to have full rent during 2027 as committed vis-a-vis the market, vis-a-vis our view. So this is what we want to do with Getafe.

And regarding guidance, well, the guidance that we gave was like 0.54, maybe 0.55, 0.59 pro forma of the capitalization of interest, which is something that has commented, we don't want to do. I mean we will give you the raw number and then the capital -- the number with capitalized interest will be simply a pro forma that we will give for informative purposes. So the pace at which we are running indicates that we are going to exceed the guidance but it is yet to be seen what will be the excess. And we don't have yet visibility. I mean, in the second quarter after the departure of GXO, et cetera, we will see what is the cash flow we obtain. And if we see fit, reguiding as of midyear, we will do it. But not for the moment because it's too early to do it. We believe we are going to beat our guidance, but we shouldn't be too carried away because the year is very long and many things can still happen in the coming months.

[Inés Arellano, executive]

Do you have more questions, Marios?

[Marios Pastou, analyst]

Okay, that's very helpful. Yes, just maybe just a follow-up maybe on Portugal and just maybe a bit more information as it feels quite significant and we're getting questions on this. So I just wanted to check why this maybe wasn't a separate release while we're really just hearing about this now in terms of the changes being made to the pipeline.

[Ismael Orrego, executive]

Sorry, what is the -- I couldn't hear.

[Inés Arellano, executive]

Why the changes of the pipeline.

[Ismael Orrego, executive]

Why the change in the pipeline? Because of the U.S. Artificial Intelligence Diffusion Act. I mean, the reason why we changed the pipeline is because we shrink a little bit, we've reduced the capacity with which we are going to go to market in Portugal. We reduced it to 36 because our clients there in Portugal will need to go through an extra process in the U.S., which is the obtaining of a validated end-user certificate.

So the loophole to the United States Artificial Intelligence Diffusion Act is that if you are a validated end user, you can and you are operating within a data center, which is approved by the BIS of the U.S., you can import the latest technology with a special permission from the U.S. government. So our intuition is that, that further requirement is going to, let's say, make slower the process of decision making of our clients and also might funnel part of the demand to Spain because between asking permission and not asking permission, people is like be my friend. I mean they will go through the easiest route. So this is why we have reduced a little bit in Portugal. It has other implications. It's not going to be super economical for us because we are building the generator building. We are building the transformers building. We are building the admin building, and we are going to do just 1 day the whole.

Yes, not 18, as we have initially designed. It's going to be 36. That it's going to be just 1 data hole. Of course, if you do 3 data holes, 108, you will have a significantly bigger capacity of dilution of all the common infrastructure of the park but life is long and we will continue leasing in Portugal quicker or slower, but we will continue leasing there and do the second building and the third building and the fourth building, and the fifth billing.

There is also another thing that is not really helping, which is that Portugal is in the middle of an election process. So we will only know the new government of Portugal by -- the elections are now in May, I believe. And we will only know the new government depending on the agreements that the different forces need to do by June, July, might be September. So if that is the case, clearly, this is holding back a number of decisions, including one which is important for us, which is the CapEx that the government of the state of Portugal needs to do in a gas metering station that is right next to our plot from which we are getting the gas that fuels our gas generators given back that this is -- this being a riverside location, we haven't used fuel in this occasion. We are using natural gas for the backup generators.

So this is why we changed Portugal for Spain, it's not the end of the world. I mean, if finally the U.S. Diffusion Act is scrapped, as commented yesterday by the client of ours, then eventually, we will increase a little bit the size of the initial bed in Portugal and recover part of the capacity that we decided to postpone.

[Inés Arellano, executive]

Thank you, Marios. The next question comes from the line of Fernando Abril from Alantra. Fernando, the floor is yours.

[Fernando Abril-Martorell, analyst]

I have 3. First, regarding the -- or with partnership. So they've now pre-let the Barcelona repowering almost a year in advance, as you said. And [ Corwith ] a big player and actively seeking to expand capacity in Europe. So do you see a real possibility that [ Corwith ] could act as an anchor tenant in future larger developments such as the Bilbao extension or some other?

Then a couple of follow-ups. First, on data center rents. So you mentioned 66 million in passive rent for the signed capacity. Relative to your 88 million target for Phase 1, this implies an average of around EUR 100,000 per megawatt month. So for the remaining 19 was in in Madrid, which, by the way, I think, is normally has higher rents. So I don't know if this seems quite conservative. So is this simply a matter of prudence? Or is this you see real upside to your rental assumptions for Phase 1 and maybe to your Phase 2 assumptions as well?

And then third, regarding the Madrid assets brought forward to Phase 2. I know you've mentioned about it, but just to be more clear. So what is the expected time line, specifically, when do you anticipate construction permits, power sourcing and the equipment. Just to get an idea of what is the -- what are the buffers you have in place to ensure these assets are in operation by year-end 2028?

[Ismael Orrego, executive]

Thanks, Fernando. The one on the Madrid side will be taken by Fran. Regarding the relationship with [ Corwith ], it's very important for us that they have committed to our pre-let. I must say that is a relatively natural pre-let because they have significant capacity already in that same data center. They have 20 people, some were engineers working there and our engineers. So it was relatively natural that they will take the expansion might have not happened, but it doesn't mean that they are going to continue doing pre-lets across the board.

But yes, I think it's a very positive development. We are looking at other things with them. But whether they can anchor one of the Giga development or not will depend a lot on the evolution of demand in Europe. If the demand in Europe goes how similarly to what it has gone in the U.S., yes, there will be space for giga development. And yes, there will be a space for doing something together using the relationship as an anchor to one of existing -- all of our existing big developments in Extremadura or elsewhere. But for the moment, don't assume that we are going to be doing everything with [ Corwith ] because it's a 2-way relationship.

First, we need to be mindful of certain dispersion or diversification of rents on our side. On their side, they are also mindful of their own diversification. And they also need to be matching constantly the long-term commitment, they adopt as a consequence of leases with the demand they are finding on the market so we will continue. Of course, we will be -- I mean they are happy with the way things have gone. I mean the remote hands agreement has worked pretty nicely for them. They have been really possibly surprised about the capacity of our technicians and the way we have equipped on their behalf. So things are in very good terms with them, but we need to see how the relationship develops.

Regarding the DC rent, you spotted it right. I mean, if the first [ 44, 66 ] for the first [ 5.2 is 66 ], that means we have been letting at an average of slightly above 120. And as you might remember, for Phase 1, our magic number was 112. So we are bidding our expectations in terms of rent in Phase 1. For the reminder, once we get to 64, yes, it is relatively easy to extrapolate the fact that the 88 is probably short of what the reality should be. So normally, rents should be above 90, but again, I mean, we will see. I mean, we wait until we fill up Madrid. If, for some reason, there could be -- many things are playing at the same time. Imagine in Madrid, the type of client is a cloud player or a hyperscaler, then things are different, rents are different because they could be doing things which are which are not related to artificial intelligence. They could be doing cloud. And eventually, they will not be capable of paying such a high rent.

Let's see. Let's see how it goes. Of course, our efforts are concentrated in getting the maximum rent possible. And if we are successful, yes, the rents will probably exceed 90 million or even something in the ring of 92, something like that. And Madrid construction and equipment [indiscernible] construction.

[Francisco Rivas, executive]

Yes. So [indiscernible] Madrid on the new 2 plots, we have 2 different situations there. The first one basically is the one which is we call the second building capacity. On that one, basically, the plant we acquired is [indiscernible]. So there's already construction, it's an industrial facility already, active there, that they are -- they would be demolished in the next months. And in terms of the project that we need to approve in order to start construction, we are dealing with the same trouble at the same area that we already built an asset there so we are foreseeing basically a more smoothly approval process considering basically that we are almost doubling -- more than doubling basic capacity, but in terms of how it does work and the structure of the building, et cetera, is pretty, pretty similar to what we have right now.

So in terms of timing, we are expecting that this demolition will be ending by the end of this year, beginning of the next. So we should be, right after starting construction, best timing we have right now is first quarter of 2026 to start construction if [indiscernible] basically [indiscernible] and permitting are going in due time.

Interesting thing of this plot, I said is that because it was active, the power is supplied, which means that we are paying the power availability, what we call in Spain [indiscernible]. We are paying this a monthly basis already. So once construction is finished, the power is already there, waiting for us.

Second plot, which is Tres Cantos, north of Madrid, which is basically [ Aria ]. That one basically is a former industrial facility as well, which was basically active there until several years ago. So one part of the land is already urbanized, second one is pending in organization, which can adapt to the type of assets we need to deploy there. The seller is doing the run session for us so we will buy, let's say, once those CPs are clean, we are buying a final [indiscernible] credit bill.

Power there is granted so it's not source, of course, because there is not building in operations right now, but so we will delay a little bit the time as compared to the one in [ Santa Fe ]. We expect that they will start construct organization in the second half of this year, probably in the beginning of the next as well, first half.

And again, we will try to do some sort of apparently approval for the construction projects so we can start construction as soon as the organization is completed. So we are not doing this in different timing and other that but overlapping the different approval processes to accelerate the deployment in these 2 plots of land.

[Inés Arellano, executive]

So the next question comes from the line of [ Alex Foster ] from Kempen. Alex, the floor is yours.

[Unknown Analyst]

Two long data center-related ones. The first one is on the logistics reletting and the Decathlon to Airbus. Could you comment on the reversing capital when on the releasing activity? And secondly, on the Madrid office, this with a negative reversion captured, do you expect all big leases to mature and capturing similar negative production spreads?

[Ismael Orrego, executive]

Okay. The logistics one, you will have to repeat it, but I will start with the Madrid lease. Well, the -- this lease the list that we have now renewed up in year 2032, we inherited it from office park that we bought from a venture capital fund. So the lease works a little bit, let's say, weird. It was a little bit on purpose. It was a little bit above market. Of course, we took it into account in the pricing of the transaction, but it was clearly above market. It had been injected some asteroids and was not reflective of the reality in the area. So what we have done now is simply what we have enjoyed the lease team it lasted. We renewed, but we renewed on a year-by-year basis. And now we have renewed seriously, we have renewed for the year 2032, and we have adapted to market.

It is not reflective of a market situation. I mean if your question -- I believe your question means, I mean, you have many other headquarters. Are all of them rented? No. In fact, I've commented on some other occasions, if I have to bet on the direction that the market is taking, Madrid is probably a different one. It's upwards. So we are now rebuilding the cushion between passing rents and market. We are rebuilding reversionary potential because the market rents are evolving now quicker than inflation.

Anyway, in the past years, the office team did a good job in extending most of the important leases, which pertain to headquarters of big multinationals. I mean we extended Endesa till year 2030. We extended Indra till year 2032. We extended price till year 2033. So I mean, we have -- the big headquarters over the past years have been significantly extended till beyond 2030 in most cases.

So don't be afraid. I mean, don't extrapolate that particular case with the rest of the portfolio because that will be a full rate across. What we are trying to do here is simply bring on board more backlog. We want to continue building on the strength of the A1 corridor, and we have buildability, which is used in the Adequa business park. So if we can employ that unused buildability and build a turnkey building pre-let to an existing tenant, which is enlarging significantly its presence and bringing everything they had in satellite locations to just one single headquarter location, it's a good opportunity for us because it's relatively easy to manage, and it will give us more cash flow and more backlog in the A1 corridor.

And we might also take the opportunity to finish all the remaining unused buildability in that part because it's not very significant and we might perfectly afford the little luxury of building part of its spec and finish it because we are trying to make sure that with the 1/4 of CapEx that we have in front of us for the coming years given the DC development, we want all the cylinders of our engine to be firing.

I mean, if we have a 20V, we want to have a 20V with 20 cylinders firing. We don't want to have a 20V with 18 cylinders firing and 2 idle because that is not efficient from a cash flow generation standpoint. And this lately, I mean, following the divestiture of the BBVA sale and leaseback, we don't have a problem of LTV. Let's say, our only problem between quotes, is recovering as quickly as possible from the dilution created by the capital increase through organic growth so that we wait comfortably on a very significant dividend while we wait for the new cash flow stemming out of the DC development, particularly of Phase 2, which is the one which is meaningful because Phase 1 is relatively humble with 90 million. So this is the intuition or this is the idea behind the contract you commented.

And in logistics, I couldn't hear your question very well. Can you please repeat it?

[Unknown Analyst]

Yes, sure. No worries. I was just wondering about the re-leasing spreads on the letting activity from Decathlon to Airbus.

[Ismael Orrego, executive]

In the Decathlon to Airbus transaction, we have lost rent, but it's not respread because it's not exactly the same perimeter. But yes, we have lost rent because Airbus is an industrial client and couldn't afford the same rent we had with Decathlon, which was an online commerce type of rent a little bit more elevated but this is a bill. So we have prioritized, of course, the backlog, again, the obtaining cash flow, and we have decided to relet as quickly as possible rather than wait for another client in the e-commerce space.

[Inés Arellano, executive]

Thank you, Alex. So the next question and final question comes from the line of Ana Escalante from Morgan Stanley.

[Ana Taborga, analyst]

I have 2 questions. The first one is regarding your dividend. Because correct me if I'm wrong, but I would assume that your dividend policy is still based on your AFFO pre any adjustments for capitalized interest. However, given you are delaying a bit the CapEx for Phase 2, could that open the door for paying a bit more of dividend or increasing the dividend either next -- this year or next year, even if AFFO as of -- the reported figure does not grow much?

And then the second question is regarding some press articles on some potential interest from a sovereign wealth fund in Castellana Norte, in Madrid Nuevo Norte in case BBVA would consider selling some of the stake or the totality of the stake? How could you look at that? Would you be interested in getting a bit of that? Or maybe now that we are focusing on data centers, that could also be an opportunity to cash out from that project and maybe redeploy that capital into data centers rather than using other sources of financing?

[Ismael Orrego, executive]

Well, first, regarding the dividend, our policy remains to be 80% of adjusted FFO and this adjusted FFO, cash calculated, so real money at the bank, it's not based on the pro forma in case we were to capitalize our interest and will remain like that. I mean the fact that this year or next we could be missing 0.02 on the dividend payout is not that relevant because at the end, we will not hamper our capacity to pay dividends in the future. So because the other thing -- the only thing that it does is flattens a little bit the predictability of the dividend, but it doesn't follow the cash principle. And as such, you could be paying more cash than the one you have available. So we will continue with the same policy.

Hopefully, particularly with the buildup of our data center activity, we will enjoy more cash flow available and with more cash flow available, we will pay increased dividends that's better, not play or not mix accounting, I would say, options or tricks with real cash. I mean it's better to pay the cash you have or 80% of the cash you have.

And regarding Castellana Norte, sometimes we read on the headlines of the Spanish press news about it. We haven't seen any movements in reality regarding BBVA. I'm not sure. I mean, maybe they keep exploring the market. I know they had an investment bank hired some time ago, and they have been sounding a little bit the market, but we don't see them very active in that regard. I mean they are now -- they are focused on agreeing among us, what should be the next step, what we should be doing, how we should be developing the different areas, et cetera.

Of course, we cannot discard that they maintain a part of the negotiation and they sell it or whatever. If they sell, we will stay cool. I mean, basically, happy with the new partner and whether it is a partial partner or a total partner that replaces BBVA in full or replaces to BBVA in half. We will continue working with all of them peacefully and happily.

Regarding using the opportunity to cash out, no, it is not our intention because we like what we see. I mean we are realistic, we are not apex partners. So we like the quality of the offices that will eventually be constructed in that area of Madrid. We don't see as many risks as nonprofessional real estate people see in there because I know building is always a big tally for many people. Oh, no, you have billion risk, no, you have commercialization risk. This is exactly our life, this is what we do for a living.

So we are not really afraid of it, and we like the location. We like it -- particularly, we like the infrastructure, which is second to not only in Europe, in the world because contrary to what many people believe, this is not like the funds. This is right in the middle of Madrid, it's not going to work. This is right in the middle of Madrid and you have a transportation hub in which you connect aerial train with metro, with subway, with green buses, with blue buses, with the airport, with high-speed train, and with taxi. So very few places in the world you can do that. It's very easy to get there and out and we believe it's going to be a success if properly executed. We wish we will have a little bit more protagonism in the execution, but our participation is what it is.

I mean we don't have the intention of buying extra participation, at least with the money that we have earmarked for data center development we might rotate 1 or 2 secondary office buildings and employ the money to buy a slightly higher percentage if the BBVA is amenable to sell to us but we are not going to do any big movement. And you can rest assured, we are not going to be recycling the money obtained in our capital increase to do data center into this transaction, okay?

So in that respect, you can be absolutely reaffirmed that this is not our intention. But we like it. So it's going to reshape, Madrid over the coming 20, 30 years and we want to be at the driving seat in this redevelopment because I believe there is nothing of that quality, not only in Spain but also in Europe at present.

[Inés Arellano, executive]

And I just want to clear up something on the dividend, be mindful of the fact that retailer dividend based on AFFO and the CapEx that is deducted from FFO is the maintenance CapEx. Therefore, for '25 and '26, because only Phase 1 cash flow is coming, not Phase 2, remember the work from Phase 2 of data centers are coming in '27. The fact that there is a little bit of a shift in that CapEx deployment does not impact at all '25, '26 figures. So the dividend, as we said on our year-end results, the dividend that we got in '24, which was EUR 0.40, what we said with the guidance is that it's likely to remain very, very similar in '25 and '26.

Thereafter, in '27, '28 and '29, '27 is when we reach stabilization for Phase 1 and we start receiving some rent for Phase 2, and then '29 stabilization and everything, we have never provided with the specifics on cash flow. So we will make sure that we get as much cash flow as we can as soon as possible, but we have not provided with any sort of guidance. So let's say, for short term, for '25 and '26, any deferral in CapEx does not impact our dividend policy.

So there are no more questions. It's been slightly more than an hour. As always, we thank you for joining today's call, and we remain at your disposal for any further questions that you may have. Have a nice evening. Thank you very much.