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Pickup in Spanish office market helps boost Merlin's results

The strengthening recovery in the Spanish office market helped Iberian landlord MERLIN Properties post an 11.6% year-over-year increase in funds from operations to €157.2 million during the first half of 2019, CEO Ismael Clemente said during an earnings call.

Merlin, which owns a diversified property portfolio that includes offices, retail and logistics assets, recorded year-over-year rental growth in its office assets of 7.5% in the second quarter, with renewals and re-lets seeing growth of 6.1%.

Offices make up around 40% of Merlin’s total portfolio value, which had a net asset value of €7 billion as of June 30. Merlin's office assets are in Madrid, Barcelona and Lisbon.

"The market remains very strong across all the sectors in which we operate," Clemente said. "Notably, we are starting to feel very interesting acceleration of the activity in offices, which, as many of you know, has been the laggard in the Spanish real estate recovery."

Spain was among the most impacted economies in Europe following the 2008 financial crisis and the European sovereign debt crisis that followed. The country suffered a deep recession in 2009 and again from 2011 to 2013.

Responding to an analyst's inquiry as to whether the company had any plans to begin buying back shares to counter the company's continued trading at a discount to NAV, Clemente said this was unlikely to happen soon. Merlin trades at a NAV discount of around 25%.

"We closely monitor our discount to NAV, and when we think it is starting to be a little bit structural, we buy back some shares," he said. "We don't want to make it a program to simply beef up the price of the shares and then [see] the hedge fund community taking contrarian positions to what we have announced to the market."

Clemente said Merlin is on track to beat guidance for funds from operations and adjusted funds from operations for the year, but that the company might use this headroom to accelerate its development program. "We want to keep that trump card in our sleeve because [if] we see we are running ahead in cash flow, we might elect to close one building slightly earlier [to start redevelopment work]," he said. "We are in the middle of very significant capex activity, so it's good to be safe."