Earnings call transcript: Merlin Properties sees growth in Q1 2025 with data center expansion

Merlin Properties reported a positive start to 2025, with notable increases in gross rents and Funds From Operations (FFO). The company, a leader in the Iberian Peninsula’s data center market, is poised for further growth due to strategic acquisitions and high occupancy rates. According to InvestingPro data, the company maintains a "GOOD" overall financial health score of 2.76, and analysis suggests the stock is currently undervalued. The stock price rose by 3.26% following the announcement, contributing to an impressive 70.42% return over the past year and reflecting strong investor confidence in the company’s performance and future prospects.

Key Takeaways

• Gross rents increased by 2.7%, while FFO grew by 17%.
• Merlin acquired two data center sites in Madrid, boosting potential IT capacity.
• The company maintained a high occupancy rate of 96.7%.
• Stock price increased by 3.26% post-announcement.

Company Performance

Merlin Properties demonstrated strong performance in the first quarter of 2025, driven by strategic acquisitions and robust rent growth across its segments. InvestingPro data reveals impressive revenue growth of 33.74% in the last twelve months, while maintaining a healthy current ratio of 1.69, indicating strong liquidity. The company’s focus on expanding its data center capacity in key locations like Madrid and the Basque Country positions it well for future growth. Despite market challenges, Merlin maintained a high occupancy rate of 96.7%, underscoring its resilience and effective management.

Financial Highlights

• Gross rents: Increased by 2.7% year-over-year.
• FFO: Grew by 17%, although FFO per share decreased by 2.6% due to a capital increase.
• Occupancy rate: Maintained at 96.7%.
• Asset rotation: €37.4 million with a double-digit premium.
• Dividend: Final dividend recommended at €0.40, with €0.22 to be paid on May 26.

Outlook & Guidance

Looking ahead, Merlin expects to exceed its FFO guidance of €0.59. The company plans to continue its expansion in the data center sector, targeting €320 million in rents from phase two developments. With a total planned IT capacity of 210 megawatts, Merlin is well-positioned to capitalize on growing demand in the European data center market. Analysts maintain a bullish outlook, with consensus recommendations trending strongly positive. The dividend policy remains stable, with expectations to maintain payouts at 80% of adjusted FFO through 2025 and 2026. For deeper insights into Merlin’s growth potential and comprehensive financial analysis, access the detailed Pro Research Report available on InvestingPro, which covers over 1,400 top stocks with expert analysis and actionable intelligence.

Executive Commentary

CEO Ismacio Mendo highlighted the company’s strategic focus, stating, "We are starting to see some European artificial intelligence now playing around in the market." He emphasized the potential for significant growth in the data center sector, noting, "If the demand in Europe goes half similarly to what it has gone in The US, yes, there will be space for Jiga development."

Risks and Challenges

• Market dynamics: Potential fluctuations in rent growth and occupancy rates.
• Economic conditions: Macroeconomic pressures could impact consumer spending and commercial real estate demand.
• Competition: Increased competition in the data center market may affect pricing and market share.
• Regulatory environment: Changes in regulations could impact operations and expansion plans.

Merlin Properties’ strategic initiatives and robust performance in Q1 2025 highlight its strong market position and growth potential. The company’s focus on data center expansion and maintaining high occupancy rates bodes well for continued success in the coming quarters.

Full transcript - Merlin Properties SA (MRL) Q1 2025:

Ines, Conference Call Moderator, Merlin: 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, Ismacio Mendo, will briefly go through the main highlights of the quarter, and then we’ll open next line for Q and A. For those of you who want to ask questions, please press start followed by number five. With no further delay, I pass the floor to Ismail.

Thank you.

Ismacio Mendo, CEO, Merlin: 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 MTA, despite not having revalued in the quarter, we are running at minus 4.8%. Let’s see what happens in June, but when we continue probably shrinking, the dilution of the capital increase in terms of NPA by June 30. It’s been a very active quarter in terms of, data centers.

We bought two sites in in Madrid with 15 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 in our Basque country development in Al Azur. And small, but super important for us, six 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 let are relatively scarce, at least in the Spanish market. As commented on many occasions, we believe that the possibility of doing pre let’s 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 two data centers in Barcelona and the Basque Country fully including the repowering. We will become, the leader in terms of IT, in operation in the Iberian Peninsula that will be further further strengthened by the leased up of Madrid, when the electricity arrives, next year. So it’s very, very interesting for us because at the time of the Capital Markets Day in 02/2022, we we laid, a road map, in front to of all of you. And, of course, we we try to abide by what we say, and it’s been you know, since God, we are we are delivering what we promised. This is 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, you know, 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 three months of 2024, as commented almost offsetting the dilution created by the capital increase. Very little asset rotations, 37,400,000.0 of non core sales, double digit premium.

This is a little bit of a bullshit. I mean, if you allow us to to do this because it’s been like 11% or 13% is low double digit. I mean, not that we have done a 50% premium, but it’s okay. And we have a further 15,600,000.0 signed, that will be executed in 02/2025 and some other things, in the oven that will end up, materializing during during the year. As commented, no valuation during the quarter.

The NTI per share is a reflection simply of the accumulation of cash flows of 14.47. We recommended to the Board of Directors and then to the General Shareholders’ Meeting and approved a final dividend of €0.4 given that we have paid €0.18 on account. Euros 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 in logistics, which is the only segment in which, we are lagging behind a little bit the others and shopping centers 2.8%. The release 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 till 02/1932, 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 lose occupancy. And 3% in shopping centers, which continue performing like a rocket. It’s very interesting. Many of you are asking whether we want to modify our guidance for the rest of

Frans Rigas, Unnamed Executive, Merlin: the year. We are in

Ismacio Mendo, CEO, Merlin: 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 point 15% per quarter.

That should point to around point 60 for the year, in full. And I think we said point 59. So, you know, it’s a it’s a we are running a little better, but anyway, it’s not it is not a big difference. And I believe it’s, you know, it’s a little bit childish to be so obsessed about, you know, the guidance or the not guidance. I mean, around 59, if we are lucky, it will be point 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 is always some churn despite having a renewal rate of around 82%. But this 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, you know, pro form a the the transaction that I just commented that will be with us this quarter in the half and in the year, so you we will be I mean, it will be weighing in our numbers for the next two the twelve months to come. So, you know, it’s clearly will it will worsen. It will make uglier our our numbers for the next twelve months.

But if you pro form a this single transaction, the risk spread has been four point one percent, 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 destruction of stock that that I commented, it’s just at the very beginning. We are in the first innings of the game. If the destruction of a stock continues over the next years, I believe this is going to have an effect in rent as it had in Portugal a number of years ago. I mean, we it is this is a situation that we have seen in the past.

So without further preambles, I think we move into Q and A. And my colleague, Frans Rigas, is here with me because I’m sure there will be a number of questions regarding data centers. And Inessa del Reyemo is also here in case there is something some specific questions about one number that I couldn’t know by heart. And that’s it. So let’s go and move into Q and A.

Ines, Conference Call Moderator, Merlin: Thank you, Ismail. So the first question comes from the line of Stephanie Dozman. Stephanie, whenever you want.

Stephanie Dozman, Analyst, Unknown: So hello, everyone. Thank you. I will have three or four questions, if I may, mainly in data centers. The first one regarding the new contract signed. How do they compare to the previous contract signed in fall twenty four in terms of level of rent, step up close, etcetera?

The second one relates to your the phasing of your CapEx in phase two. 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 expecting demand going forward with all the negative narratives in January on development cut from hyper scalar or 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 the view of the appraisal? Is it blurred with, again, the bad noise I was talking about?

Any change there? Thank you.

Ismacio Mendo, CEO, Merlin: Okay. Okay. You’re welcome, Stephanie. 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 were ranging between 1012%, and they were reflective of the, let’s say, level of uncertainty pertaining to construction risks, commercialization risks, you know, a little bit of everything. So they were using relatively high discount rates. 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 of data centers. So I don’t know to what extent.

I don’t have a figure that I can give to you. We 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 the interest rate environment, etcetera, I believe that eventually most of the bleeding might be behind us. I mean, I will particularly like a little bit more correction in 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 appraisers may have a completely different view and stay at 4.9 or even or even shrink. I mean, even 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 notices is the c and d, shopping centers that I mean, there are also some, negotiations on on a and b class, shopping centers.

And so there’s there’s now clearly a reference. And in and in logistics, same thing. 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 know this is terrifying you, the negativity of the hyperscalers, but I will give you a very easy example, and you will understand why there is not such a negativity.

Ines, Conference Call Moderator, Merlin: Yes. So Stephanie, basically, on the rhythm of CapEx, bear in mind that we’re always talking about committed CapEx. This is not incurred CapEx. And with the changes that we’ve done in Phase two, 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 don’t be afraid of seeing a different amount of CapEx committed because, we think we’re gonna be on time to meet the to meet the business plan that we provided to you.

Ismacio Mendo, CEO, Merlin: Of course, the CapEx is alive. I mean, there will be variations during during the period. I mean, sometimes we incur a little bit more in the quarter. Sometimes we incur a little bit less that, in the early variations. But, 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, the CapEx that we commit, which, you know, the the the numbers we give to you is the CapEx committed, which includes the accounting plus, the commitment. So if 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 thirty and just a down payment for the jump in the queue on the remaining 30. So there will be variations.

Don’t I mean, you want to be very specific, you can come here and and and talk to our team that I I wouldn’t try to reconcile because I believe it it’s a it’s a waste of time. On the negativity of hyperscalers, there’s there’s been a lot of conversations regarding this. Look. For for the ones who, were here doing logistics in in in the past, I remember about, it was like two, three years ago, there was a 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 they they, built in Barajo and another one they built in I think it was Wesca or Leon.

Those ones, were finished, and they have never operated. So they have they have the the fulfillment center ready, but nobody has ever operated from there. So they have security, etcetera, 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 continued, I mean, we were not super high in Amazon risk, and we continued performing pretty, solidly with 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 offymatics. They enter through the search engines.

They enter always there’s always a way or they enter through, cloud applications. But there there is always a relatively easy way to establish a relationship for the hyperscaler with the 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 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 in doing inference, but the cost of which they build, the cost of which they buy, the cost of which they buy the busbars, the, you know, the equipment, the racks, and everything tends to be high. And they translate that inefficiency in 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 in in in the global 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 on many occasions.

So we know that Microsoft has, you know, been the protagonist of a number of, situations, particularly in The US in which they have pulled back from existing deals. They have relinquished capacity that they were entitled to, etcetera. Well, that is main it’s it’s Microsoft that we 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, you know, we believe that at present, at least, there is no reason to be worried. As as as very well said by David Guarino of Green Street in in a recent piece of, research, he doesn’t know what is the specific amount of new demand that Europe will require over the over the next five years, but he knows it’s 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 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 it’s also a very important piece of information. He further compared 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 two years.

So the capacity contracted in The U. S. In 2018 was very similar to the one in Europe in 2019 to 2021 and 2020 to 2022. But then in 2022, artificial in 2022 in The US, 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 doubled the previous year. So those two movements have never, happened, yet in Europe and will happen over the coming years. We are starting to see some, European artificial intelligence, now, playing around in the market. I mean, at least we know one that that is very active and has taken a lot of capacity.

And, you know, little by little, Europe will be catching up with The US. 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 indices versus past, you can comment on it. Yes.

Thank you, Matt. Very

Frans Rigas, Unnamed Executive, Merlin: similar. They are basically comfort of ten year, length, mandatory, with several extensions.

Ismacio Mendo, CEO, Merlin: Normally, this

Frans Rigas, Unnamed Executive, Merlin: is linked to the, you know, average life of the different equipment that they are implementing and and, you know, deploying in the in the in the building. And this from the length,

Ismacio Mendo, CEO, Merlin: from maturity point of view and from

Frans Rigas, Unnamed Executive, Merlin: the rent point of view, as well pretty pretty in line. We are beating what we, you know, share for phase one and even for phase two, at the time of the capital increase. If you remember, basically, phase one, we were targeting, when we did the the math at the time, like, ’11 January kilowatt month, you know, for these first three assets. And, for phase two, we, were seeing basically an increase up to the €118.5 kilowatt month. Now if you made a calculation of what we have disclosed, we are above hundred and 20.

So that’s basically the levels are being maintained, you know, with with this specific client and with the guys we are talking to.

Stephanie Dozman, Analyst, Unknown: Alright. Thank you. Maybe just a follow-up one, if I may, on logistics. You, should we expect a departure similar to the the one of Decathlon? How is the the demand behaving?

Ismacio Mendo, CEO, Merlin: Well, the the departure of Decathlon, as you know, Decathlon is now reducing capacity, including, in France. And, you know, we we lost them in in Seville, and we’re able to, replace, most of the space by 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 centers. We always conceived logistics as a natural hedging to our physical commerce, 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 it might in the future, might happen the other way around.

I mean, might suffer a little bit, because online is clearly no longer what it was. And physically, however, is is doing fantastically well. And the two activities combined, you might remember that in in in in Berlin, both activities are coordinated by the same professional. So we would have a colleague of ours called Luis Lazar 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, well, poor distribution, but it’s commerce related.

We sold most of our light industrial. And as such, I believe that we are talking about the two sides of the same coin. We are going to have a significant exit in the second quarter that we know already, which is in Cavanilla’s Part 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 shared. 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 prelates that we have been achieving in our existing development. So, you know, I wouldn’t we I I wouldn’t be too worried about about it for the moment.

And then, you know, if there if there are news regarding that, I will disclose in in future conference calls, but not not for the moment.

Ines, Conference Call Moderator, Merlin: Fair enough. Thank you so much.

Ismacio Mendo, CEO, Merlin: It’s a pleasure.

Ines, Conference Call Moderator, Merlin: Thank you, Stephanie. The next question comes from the line of Mario Castro from Bernstein. Mario, the floor is yours.

Mario Castro, Analyst, Bernstein: Great. Thanks very much. Good afternoon. Thank you for taking my questions. I’ve got three questions from my side.

I’ll ask them all at once. One firstly, it’s a bit of a follow-up on the Phase two 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, that refers to the volume of rents you’re expecting from 2027 and through to stabilization? So the CapEx isn’t changing things or pushing this out.

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

Ismacio Mendo, CEO, Merlin: Okay. Well, the Phase two, in principle, everything is on track. We are forecasting rents of around €320,000,000 for the whole of Phase two. Costs are more or less kept at bay. 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 $326,000,000, with total IT capacity installed of two ten. 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, the former Biden administration you know, put in place a US artificial intelligence diffusion, rule, and they classified the countries in the world in three categories, tier one, tier two, tier three. The close allies, including most European and European countries, were, classified in tier one.

So they are entitled to import to their territories the latest, gear they want from from The US. But for reasons unknown to us, Portugal was placed on tier two, 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 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 h 100, the hopper 100 of NVIDIA. Of course, the more sophisticated the GPU becomes, the more reduced the number becomes. So if instead of, Hopper one hundred is, Blackwell two hundred, the number of GPUs is lower. And for future series of, NVIDIA, like Vera ruling at the end of twenty six, etcetera, the number will keep reducing because what they are trying to do is limit computing capacity that can fall in undesirable hands. We in 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, has really paid attention to this Tier one, Tier three categorization of the world. But the latest news that we got yesterday, I mean, from an American client in in Barcelona is that, the latest, they know is that the Trump administration is thinking about scrapping the whole US, 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’ll go from ’36 to ’72 and increase a little bit our Phase two 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 two 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. I mean, we’re doing the organization works. So nothing is really serious. And once we get the hold and once we get the delivery of those two pieces of land, we will start construction.

And 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 two ports to replace like for like the 72, megawatts, let’s say, lost in, in Lisbon. On phase one, I believe I don’t remember the exact question. Probably you are

Ines, Conference Call Moderator, Merlin: It’s a phasing in Madrid.

Ismacio Mendo, CEO, Merlin: Extrapolating? Listing in Madrid. The leasing in Madrid. Yeah. The leasing in Madrid, the problem that we have is that we only have a commercializable block of around five megawatts because the utility has given us only eight megawatts of, electricity.

And as such, that block of five megawatts is a little bit insufficient for IT, so for IA. So very probably, will commercialize it together with the remaining 14 megawatts that we will receive next year upon delivery of the electricity by the utility company through, two aerial lines that we that we are bringing, that we are building and bringing to the, to the plot. And once we equip the 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, Getafee. Regarding commercialization, once we receive the electricity, I wouldn’t be too worried. I mean, Getafee Madrid has a lot of demand. And I I mean, we are negotiating with multiple parties, and I wouldn’t be I wouldn’t wouldn’t be too worried about it.

I believe during 02/1926, God willing, we should be able to have it fully let and leave the Phase one completely delivered and full and cash flowing, which at the end is our objective in order to have full rents during 2027 as committed vis a vis the market vis a vis all of you. So this is what we want to do with with head of and regarding guidance, well, the the guidance that we gave was, point 54, maybe point 55, point 59 pro form a of the capitalization of interest, which is something that as commented, we don’t want to do. I mean, we will give you the raw number and then the number with capitalized interest will be simply a pro form a 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, the second quarter, after the departure of GxO, etcetera, 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 it’s too early to to do it. We believe we are going to beat our guidance, but, but we shouldn’t be too carried away because the year is very long and many things can still happen in the coming months.

Ines, Conference Call Moderator, Merlin: Do you have more questions, Mario?

Mario Castro, Analyst, Bernstein: 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 and yes, why we’re really just hearing about this now in terms of the changes being made to this Phase two pipeline.

Ismacio Mendo, CEO, Merlin: Sorry, what is the I couldn’t

Ines, Conference Call Moderator, Merlin: Why the changes in the pipeline?

Ismacio Mendo, CEO, Merlin: Why the change in the pipeline? Because of The U. S. Artificial intelligence diffusion act. I mean, the reason why you change 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 US, which is the obtaining of a validated end user certificate. So the loophole to the to the EU to the Europe 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 US, you can import, the latest technology, with a special permission from the US 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, you know, between asking permission and not asking permission, people is like, be water, my friend.

I mean, they they will they will go through the easiest route. So this is why we have reduced a little bit in 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 one data hole. Yes. Not 18 as we have initially, you know, designed. It’s going to be 36. That is going to be just one data hole.

Of course, if you do three data holes, 108, you will you will have a significantly bigger capacity of dilution of all the common infrastructure of the park that, you know, life is long, and we will continue leasing in Portugal and, you know, you know, quicker or slower that we will continue leasing there and do the second building and the third building and the fourth building and the fifth building. 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 the elections are now in May, I believe, and we will only know the the new government depending on the agreements that they need the different forces need to do by June, July, May might be September. So if if that is the case, you know, clearly, this is holding back a number of decisions, including one which is important for us, which is the the CapEx that the government of the state of Portugal needs to do in in a in a a gas metering station that is right next to our plot from which we are getting the gas that fuels our gas generators.

Given the fact that this is this being a Riverside location, we haven’t used, fuel in this, location. We are using natural gas for the backup generators. So this is why we changed, Portugal for Spain. It’s it’s not the end of the world. We mean if if if if if finally the US 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 bet in Portugal, and recover part of the capacity that we decided to postpone.

Very clear.

Mario Castro, Analyst, Bernstein: Thank you very much for the answers. Appreciate it.

Ismacio Mendo, CEO, Merlin: Yeah. You’re welcome.

Ines, Conference Call Moderator, Merlin: Thank you, Mario. The next question comes from the line of Fernando Abir from Avantra. Fernando, the floor is yours.

Fernando Abir, Analyst, Avantra: Hello, Ismail and team. Thank you very much for taking my questions. I have three. First, regarding the CoreWhip partnership. So they’ve now pre let the Barcelona repowering almost a year in advance, as you said.

No? And and CorWheath is is a big player and actively seeking to expand capacity in in in Europe. So do you see a real possibility that CorWheath could act as an anchor tenant in future larger developments such as the Bilbao extension or Extremadura? Then a couple of follow ups. First, on data center rents.

So you mentioned €66,000,000 in passing rents for the signed capacity. Relative to your €88,000,000 target for Phase one, this implies an average of around €100,000 per megawatt month, no? So for the remaining 19 megawatts in Madrid, which, by the way, I think is is normally normally has higher rents. No? So I 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 one and maybe to your Phase two assumptions as well? And then third, regarding the Madrid assets brought forward to Phase two. 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? Thank you.

Ismacio Mendo, CEO, Merlin: Thanks, Alfonso. The the one on on the Madrid side will be taken by by Frank. Regarding the relationship with CorWheath, well, yes, it’s it’s it’s very important for us that they that that they have committed to a pre let. I must say that it’s a relatively natural pre let because they they they have a significant capacity already in that same data center. They have, 20 people, you know, software engineers working in there, and power engineers.

So it’s it was relatively natural that they will take, the expansion. Might have not happened, but, you know, it doesn’t mean that they are going to continue doing pre let across the board. But, yes, I think it’s it’s a very positive, development. We are looking at other things with them. But, you know, whether they can anchor one of the Jiga developments or not will depend a lot on the evolution of demand in Europe.

If the demand in Europe goes, half similarly to what it has gone in The US, yes, there will be space for Jiga development, And yes, there will be space for, doing something, together and, you know, using, the relationship as an anchor to one of existing, for existing big developments in Exceme Aurora or elsewhere. But, but for the moment, don’t assume that we are going to be doing everything with, CorWiF because it’s a two way relationship. First, we need to be mindful of a certain a certain dispersion or diversification of rents on our side. On their side, they are also mindful of their own diversification. And, you know, they also need to be matching constantly the long term commitments they, adopt as a consequence of leases with the demand they are finding on on 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 positively 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 is 66, or the first forty five point two is 66, That means we have been letting at an average of slightly above 120. And as you might remember, for phase one, our magic number was one twelve. So we are we are beating our expectations in terms of rent in phase one. For the reminder, once we get to 64, yes, it is relatively easy to extrapolate the fact that, you know, the 88 is probably short of what the reality should be.

So normally, rents should be above 90. But, you know, again, I mean, we will we will see. I mean, we we wait till we fill up, Madrid. If for some reason, you know, there could be many things 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,

Frans Rigas, Unnamed Executive, Merlin: they are they will not

Ismacio Mendo, CEO, Merlin: 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 rent will probably exceed €90,000,000 or even something in the range of 92,000,000 something like that.

And Madrid construction and equipment, well, equipment, but in Chile and construction. Yeah. So regarding Madrid on the new two plots,

Frans Rigas, Unnamed Executive, Merlin: we have two different situations there. The first one, basically, is the one which is we call the second building in Gitafe.

Ismacio Mendo, CEO, Merlin: On that one, basically,

Frans Rigas, Unnamed Executive, Merlin: the the land we, acquired is, is Urban Land. So there is already construction. There’s an industrial facility already, you know, active there that they are they would be demolished in the next months. And, in terms of, you know, the project that we need to approve in order to start construction, we are dealing with the same tackle, you know, and the same area that we, you know, already built, an asset there. So, we are foreseeing basically a more smoothly approval process considering basically that we are almost doubling the or more than doubling basic capacity, but in terms of how it does work and the structure of the building, etcetera, it’s 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. You know, best best timing we have right now is first quarter twenty twenty six to start construction if, as I said, basically, demolition and and permitting are going, you know, in in in due time. Interesting thing of this plot, as said, is that because it was active, the power is supplied, which means that we are paying the, you know, the power availability, what we call in Spain, and we’re paying this on a monthly basis already. So once construction is finished, the power is is already there, you know, waiting for us.

Ismacio Mendo, CEO, Merlin: Second plot, which is Trescantos,

Frans Rigas, Unnamed Executive, Merlin: North 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 organized. Second one is pending, you know, the organization which can adapt to the type of assets we need to deploy there. The seller is doing the renovation for us, so we will buy let’s say, once those, you know, CPs are are are are clean, we are buying, you know, final urban land ready to build. Power there is granted.

So it’s not source, of course, because there’s no no no building, you know, in operations right now. But, so we will delay a little bit the time as compared to the one in Hetafee. We expect that they will start construct by urbanization in the second half of this year, probably, you know, beginning of the next as well, first half. And and again, we will try to, you know, do some sort of internally approval, for the construction project so we can, start construction as soon as the organization is is completed. So we are not doing this in different timing and overlap, but overlapping the different approval processes to accelerate the deployment in these two plots of land.

Ines, Conference Call Moderator, Merlin: Okay, Fernando?

Fernando Abir, Analyst, Avantra: Okay. Yes, thank you very much.

Ines, Conference Call Moderator, Merlin: Thank you. So the next question comes from the line of Alex Kosteren from Kempen. Alex, your line the floor is yours.

Alex Kosteren, Analyst, Kempen: Yes. Good afternoon. Thank you for taking my questions. Two long data center related ones. The first one is on the logistics reletting that they come into Airbus.

Could you comment on the reverse, reversion capital on the releasing activity? And secondly, on the Madrid office lease renewal with a negative reversion captured, do you expect all the big leases to mature and capturing similar negative reloading spreads? Thank you.

Ismacio Mendo, CEO, Merlin: Okay. The logistics one, you will have to repeat it, but I start with the Madrid lease. Well, this lease, the the lease, that we have now renewed up till year 02/1932, we inherited it from an office park that we bought from Venture Capital Fund. So the lease was 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 the pricing of the transaction, but it was clearly above market. It had been injected some steroids and was not reflective of the reality in the area. So what we have done now is simply what we have enjoyed the lease till it lasted. We renewed, but we renewed on a year by year basis.

And now we have renewed seriously. We have renewed in year 2022, and we have adapted to market. It is not reflective of a market situation. I mean, your question I believe your question means, I mean, you have many other headquarters. Are all of them over rented?

No. In fact, as commented on some other occasions, if I have to bet on the direction that the market is taking, Madrid, it’s probably a different one. It’s upwards. So, we are 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, 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, extended Endesa till year 02/1930. We extended Indra till year 02/1932. We extended PRICE till year 02/1933. So I mean, we have the big headquarters over the past years have been significantly extended till beyond 02/1930 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 a false, rate across. What we are trying to do here is simply, bring onboard more backlog. We we want to continue building on the strength of the a one corridor, and we have buildability, which is unused 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 have 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 and finish it because we are trying to make sure that with the effort 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 20 v, we want to have a 20 v with 20 cylinders firing. We don’t want to have a 20 v with 18 cylinders firing and too 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 two,

Frans Rigas, Unnamed Executive, Merlin: which is the one which

Ismacio Mendo, CEO, Merlin: is meaningful because Phase one is relatively humble, euros 90,000,000. 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?

Alex Kosteren, Analyst, Kempen: Yes, sure. No worries. I was just wondering about the releasing spreads on the letting activity from Decathlon to Airbus.

Ismacio Mendo, CEO, Merlin: The the in in the Decathlon to Airbus transaction, we have lost rent, but it’s not really spread because it’s not exactly the same perimeter. But, yes, we have lost rent because Elvus is a 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 deal. So we have prioritized, of course, the backlog, again, the obtaining cash flow, and we have decided to relate as quickly as possible rather than wait for another client in the e commerce space.

Alex Kosteren, Analyst, Kempen: Okay. Perfect. Thanks for the explanation.

Ines, Conference Call Moderator, Merlin: Thank you, Alex. So the next question and final question comes from the line of Ana Escalante from Morgan Stanley. Ana, the floor is yours.

Ana Escalante, Analyst, Morgan Stanley: Hello, good afternoon. I have two questions. The first one is regarding your dividend because correct me if I’m wrong, but I could 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 two, would that open the door for paying a bit more dividend or increasing the dividend in either next this year or next year even if AFFO as of as 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 Novo Norde.

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 you 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?

Ismacio Mendo, CEO, Merlin: Okay. Well, first, regarding the dividend, our policy is remains to be 80% of adjusted FFO. And is adjusted FFO cash calculated. So real money at the bank. It’s not based on the pro form a 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 €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 that 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, with the buildup of our data center activity, we will enjoy more cash flow available.

And with more cash flow available, we will pay an increased dividend that 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 you have. And regarding Castellana Norte, no. We we sometimes, we read on the on the headlines of of the Spanish press news about it. We haven’t seen any movements in reality regarding BVA.

I’m not sure. I mean, maybe they they keep exploring the market. I know they had an investment bank hard some time ago, and they have been, sounding a little bit the market, but we don’t see them very active in 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, etcetera. Of course, we cannot, discard that they, you know, maintain a parallel negotiation and they sell it or whatever.

If they sell, we will stay cool. I mean, basically, happy with a new partner and whether it is a partial partner or a total partner that replaces in full or replaces BBVA in part. 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 I mean, we are real stickers. We are not APAC’s partners. So, you know, we 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 building risk. Oh, 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 and we like the location. We liked it particularly. Particularly. We like the infrastructure, which is second to none, not only in Europe, in the world because contrary to what many people believes, this is not like the funds. This is right in the middle of Madrid.

It is not kind of work. This is right in the middle of Madrid. And, you know, you have a 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, one or two secondary office buildings and employ the money to buy a, you know, slightly higher percentage if BVA is amenable to sell to us, that 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 the data centers 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 twenty, thirty 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.

Ines, Conference Call Moderator, Merlin: And just to clear up something on the dividend, be mindful of the fact that we pay our dividend based on AFFO, and the CapEx that is deducted from FFO is the maintenance CapEx. Therefore, for ’25 and ’26, because only phase one cash flow is coming, not phase two, remember the first ones from from phase two of data centers are coming in ’27, the fact that there’s a little bit of a shift in the CapEx deployment does not impact at all 2025 and 2026 figures. So the dividend, as we said on a year end result, the dividend that we got in 2024, which was EUR $0.04 0, what we said with the guidance is that it’s likely to remain very, very similar in 2025 and 2026. Thereafter, in ’27, ’20 ’20 ’8 and 2029, ’20 ’20 ’7 is when we reach stabilization for Phase one, and we start receiving some rents for Phase two and then ’29 stabilization and everything, we have never provided with specifics on cash flow. So we will make sure that we get as much cash flow as we can as soon as possible, where we have not provided with any sort of guidance.

So for let’s say, for short term, so 25,000,000 and 26,000,000 any deferral in CapEx does not impact our dividend policy.

Ana Escalante, Analyst, Morgan Stanley: Very clear. Thank you very much.

Ismacio Mendo, CEO, Merlin: Welcome, Ana.

Ines, Conference Call Moderator, Merlin: Thank you, Ana. 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.

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