MERLIN Properties SOCIMI, S.A. (OTCPK:MRPRF) Q1 2022 Earnings Conference Call May 13, 2022 9:00 AM ET
Company Participants
Ines Arellano – Investor Relations
Ismael Clemente – Chief Executive Officer
Miguel Ollero – Chief Operating Officer
Conference Call Participants
Florent Laroche-Joubert – ODDO BHF Corporate & Markets
Ben Richford – Societe Generale
Pedro Jorge Gouveia Alves – Caixa Economica Montepio Geral
Alvaro Soriano-De-Miguel – Exane BNP Paribas
Fernando Abril-Martorell – Alantra Equities
Jaap Kuin – Kempen & Co. N.V.
Operator
Good day and thank you for standing by. Welcome to the MERLIN’s First Quarter 2022 Results Presentation. [Operator Instructions] Also must advise that today’s conference is being recorded. [Operator Instructions]
I would now like to hand over the call to your first speaker today, Ms. Ines Arellano. Thank you. Please go ahead.
Ines Arellano
Thank you. Good afternoon, ladies and gentlemen, and thank you for joining MERLIN’s first quarter results conference call. As we always do in our first and second quarters, we remind you that there is no presentation. And our CEO, Ismael Clemente, will give a brief update on the main highlights in the quarter, and then we will open the floor for Q&A.
So with no further delay, I pass the floor to Ismael. Thank you.
Ismael Clemente
Thank you, Ines. Welcome to MERLIN’s first quarter results presentation to present ’22. The quarter went very well for the company. It’s being quite strong as anticipated in the financial year 2021 Analyst Call. We said at that time that we expected a strong year in terms of like-for-like metrics, given that we have all cylinders firing at the same time, for the first time in many years. I mean, we are posting net occupancy gains. There are increase in nominal rent as evidenced in strong release. And we are also posting positive indexation — very clearly positive indexation as compared to past years.
And that is on the top line. On the bottom line, the cash flow duration is also significantly enhanced, as a consequence of the reduction in incentives that will be very strong and will be very noticeable during the first and second quarters. A little less so in the third and fourth because last year we were also reducing significantly in the third and fourth quarters. So all in all, we posted a strong revenue growth of 8.6%. Basically, the four pillars were reversionary potential where we continue to capture significant risk spreads, net occupancy gains across the board, very positive indexation. And both in our portfolio of a number of with projects.
The gross rental income growth was 6.6%, which together with a reduction of incentives I was commenting before, drove net rents up by 24.9%. This had in turn an effect in the FFO. The FFO per share increased by 26% compared to the first quarter of 2021. And this is — this can be performed without BBVA. So without BBVA, it was €0.14, because you will notice in the first quarter results presentation that we have now reclassified BBVA into discontinued operations as a consequence of the recently signed SBA with the [indiscernible]. We didn’t revalue during the period, the NTA stands up 16.32 given basically cash accumulation.
In terms of business performance, offices saw an increased like-for-like of 4%, our logistics 9% and shopping centers [indiscernible]. The risk spreads were respectively 4.5, 7.3, 5.8, and the occupancy went up by 46 basis points to 94.9% portfolio overall, which performed without BBVA will be 94.4%. I think this is all in terms of making a quick summary of what happened during the quarter. And we are open, and at your disposal for Q&A.
Ines Arellano
Thank you, Ismael. So, operator, can you please open the line for Q&A. Thank you.
Question-and-Answer Session
[Operator Instructions] We will now take our first question. Please go ahead.
Q – Florent Laroche-Joubert
Hi, good afternoon. Can you hear me?
Ismael Clemente
Yes.
Florent Laroche-Joubert
Yes. So this is Florent Laroche-Joubert from ODDO BHF. So thank you for this short introduction. I would have maybe two questions. So would it be possible to have more [indiscernible] the outlook for the rest of the year? Maybe particularly on offices, where you expect I think an increase of the occupancy later. And also maybe on shopping centers, where we can see that tenant sales are at — now at minus 6% compared to Q1 2019. So, do you think that this trend can continue for shopping centers? And maybe my second question will be on the disposal of the BBVA branches. So, as of today, can we consider this disposal as a straightforward project now? And throughout the exceptional dividend to be paid just after [indiscernible]. So, what could — please maybe remind us the timeline of that? Thank you.
Ismael Clemente
Okay. Well, first on the outlook. We live in uncertain times, and it is very difficult to predict what will happen for the rest of the year. However, we try to monitor the performance of our portfolio and to some extent, our company is more predictable than many. So, we record of what is happening in offices in what we call the forward occupancy report. We do the same for logistics and shopping centers. And these keeps track of the ongoing open negotiations with different tenants et cetera to which we attach a probability. So, at the end, we calculate occupancy as of end of the year weighted by probability. This is an internal calculation and based on that, we provide guidance.
So, regarding the office guidance of 91.5% at present, we maintain it. We believe we are going to get there. It will be progressive during the year that could be blips. I mean, I don’t know whether in the second quarter it will be .1 better or .1 lower, but when measuring the whole year considering the different negotiations we have in hand, we believe this will be accomplished.
However, for example, in logistics, be prepared for what you will see as a decrease in occupancy as of year-end. But in reality, it will be simply a cutoff date effect because we expect a significant tenant to leave during the month of November — not to leave, in fact, we are simply relocating it to a new development of ours, that it will vacate the existing shed that will be very lightly refurbished and put back in the market and we expect during the next year to have full again. So you will see especially a drop in occupancy.
In shopping centers, the trend is positive. I mean, if your question is simply mathematical, the trend is positive. If your if your question is deeper, and what you want to understand is whether the tone in shopping centers in Spain is positive or negative, it is positive. As many times I say believe it or not, it is positive. I mean retailers are calling again. The big brands are basically expanding their shops and then there is a myriad of new entrants, which basically are concentrated in two, three segments, which is low priced fashion retails. A lot of sports and a lot of health and beauty, and a little bit also doing yourself and home improvement. This is what we are seeing in shopping centers.
Also F&B is coming back to life and they are starting to perform very, very well in recent times. Barcelona, which was clearly lagging behind Madrid is now a little by little catching up. I mean they have recovered now the cruise traffic and the city is back into vibrant activity. So, little by little, we are recovering the tone in all of our shopping centers. From fixed rents also a little bit of variable and mall income. Mall income is coming back, which as you know, was completely nullified during the COVID period because it was impossible from a legal standpoint to put obstacles in the middle of corridors, et cetera. But now we are going back to normal life in terms of mall income.
So we expect a reasonable 2022 across all of our asset categories. I don’t know what is your experience in other countries or wherever. So rest assured that if I see negative trends, I will be the first to tell you when negative trends are arising to the market. But as of today, things are going reasonably well.
Florent Laroche-Joubert
Okay, so that’s good news.
Ismael Clemente
On the BBVA branches, Miguel will commend the date.
Miguel Ollero
Yes, regarding BBVA, we already signed an SBA with a buyer with BBVA. Now, the only pending condition is the clearance from antitrust that has been launched as well. While inspecting that they will take no more than 2 months. That’s why we have the intention to get closing of this transaction at the end of June, early July. So that’s — those are the dates we are working on. And as soon as this is already executed, we will proceed with all the different Board of Directors decisions [ph] in order to formalize the dividend [ph] distribution that will be coming out after the closing of the transaction. So as we said already, 2 weeks ago, we’re expecting [indiscernible] transaction by the end of this quarter. And by that time, the distribution [indiscernible] transaction.
Florent Laroche-Joubert
Okay, okay. Thank you very much. That’s very helpful.
Ismael Clemente
You are welcome.
Operator
Thank you. Our next question is from the line of Ben Richford from Societe Generale. Thank you. Please go ahead.
Ben Richford
Hi, guys. You active in development in certain fields, including the big project in Madrid that’s yet to really get going. So how does the rising construction cost impact your potential returns? And you’re thinking about moving ahead with projects that are uncommitted? So that’s the first question. And then the second one, you’ve sold BBVA, a good premium to the book value returning capital to shareholders, it’s what many people may look for you to do, when the share price is trading where it is. Should you do more of that? Obviously, you’ve got the leverage down, but it’s the — a big opportunity here for you to do something either through further asset disposals or to sell the company to a different form of capital that’s going to pay a higher price than the share price is languishing at today.
Ismael Clemente
Well, from my point of view, also, we will continue rotating assets, although we will be focusing on our, let’s say, ordinary set rotation plan, which is revolving mainly around core of which we don’t have plenty percent in the company. But yes, we are raising the bar a little bit because we are making room also for the upcoming DCM regional North development, which office buildings should be joining our books around end of 2000 — of the decade of the 20s. So 2027, ’28, ’29 et cetera. So we’ll continue rotating assets.
The theory says that when you sell assets repeatedly, people discovers that your pricing is right, that your GAV is correctly calculated, and your share price in principle [indiscernible]. Reality is proving that people overlook completely what we might do or not do because with BBVA we have sold like €6.5 billion assets since we started the company in 2014. I think it has helped relatively little the evolution of the share price. Although recently we are trading better. So that does mean that we should be actively looking for a buyer for the company that should pay you something closer to the MTA. It is not our duty. I mean we are the management of the company.
This is mainly the duty of the Board of Directors and the leading shareholders of the company. Of course, they will need our assistance and we will be very happy to provide it in terms of the of the crunching the numbers, et cetera. But in reality, it wouldn’t be very nice if we were actively looking for replacement buyers in the market. But certainly as you all know, that we are now in the middle of more significant activity in that respect. I mean, there’s more and more people looking at the company.
Then you commented on the hike on construction prices. What our reaction to that is relatively I would say predictable or understandable by you, I guess. What we have done is we are more or less holding all spec developments, because in aspect development, you crystallize increased costs in exchange for an asserting rent return. However, in those developments, which are either contextualized or morally committed to asserting long standing client of the company, we are going ahead because frankly speaking at the prices we bought, particularly logistic land, if a given client comes to us and says do a cold storage facility for me in Valencia, doing it at present will deliver instead of 7.8% will deliver a 6.9% yield sold it. I think be particularly this is unlevered, so we will more or less earn our cost of capital and we will more importantly please and serve our client, which is very important for the future in terms of gaining the loyalty for the future.
In offices, we are relatively inactive now. We are — yes, we think the development of [indiscernible] with Picasso in Madrid, because this is the end of our landmark program. But on that building itself, we were — we have relatively ample headroom in terms of yield on costs. So, we have the works more than 70% committed, only 30% remains, let’s say open for cost increases. And the yield on cost will oscillate within 0.1%, 0.2% max at a relatively high mark anyway. And, yes, the rising construction prices will also affect our data center program. But the interesting thing is that data centers are 30% as you know, civil construction and the other 70% is equipment in civil construction. Therefore, an increase in the civil construction costs will have a very relatively small effect on the cost of the data center overall.
And as for the cost of supplies, particularly equipment, we started buying the equipment on May last year. So, most of our critical equipments have already been bought, which also helps us a lot in terms of overcoming the current market bottlenecks that will significantly hampered [ph] a possibility of opening those data centers on time as agreed or as committed with our clients. So this is how we are coping with the increasing cost. Of course, I know from my colleagues in the market that for resi developers, it is a nightmare. I know that for some other people, it is starting to be a real problem. But for us, we are coping with it. I wouldn’t say comfortably, but at least it is not the end of the world for us.
Ben Richford
Understood. Thank you.
Operator
And now for our next question is from the line of Pedro Alves from Caixa Bank. Thank you. Please ask your question.
Pedro Jorge Gouveia Alves
Hello, guys. Good afternoon. Two questions, please. The first one on your perception on the upside or downside risks in terms of your FFO guidance for this year. So these €0.17 definitely a very good start to the year and in the coming quarters with the expectation of occupancy growing and indexation to inflation already still help. And It seems that you are in a comfortable position to reach €0.64 or €0.58, assuming the 6 months deconsolidation of BBVA. Obviously, we cannot simply analyze these figures of the first quarter, but I’ll just interested in getting your view that it is fair to assume that we see upside risks to your guidance in terms of OFFO.
And the second question, it’s basically to understand how do you see the valuations in the private market evolving over the past weeks? And are you seeing any change in tone from potential bidders regarding the scenario of higher interest rates, or on the other hand, if things continue to remain quite positive for the private market? And related to these, you mentioned that shopping centers tone is definitely positive in Spain, and clearly different from one year ago? Do you see any window of opportunity to eventually sell at least part of this portfolio in the future? Thank you.
Ismael Clemente
Okay. Well, on the FFO guidance, Pedro, the one we provided to the market, which is €0.58. If we continue producing cash flows at the pace we have produced during the first quarter, there is upside risk to that guidance. I mean, we should be there or slightly exceeded. However, I don’t think it makes sense to restate the guidance every quarter. So, during the year, it will see that the difference is going to be meaningful significant. We will restate the guidance for the moment simply take it as a guidance provided to the market with no little prudency. And you can make your own calculation because depending on which moment we get the antitrust clearance, you can assume that the generation of cashflow during the second quarter will be similar to the first and then third and fourth should be, let’s say, standard quarters without BBVA. So you can make your own addition of those figures in order to calculate your own guidance, provided we can keep the same cash flow production page that we have had till now, which in principle should be the case. But tomorrow there is a problem with putting on Finland, and all what I said will be [indiscernible].
Regarding valuations, at present, the market continues relatively robust. The level of leverage of bidders participating in the market normal transactions is low. So, in offices, the people who is now bidding for small ticket offices in Madrid is increasing. I mean, there is more interest in offices in small tickets than probably ever because the Spanish family offices and some international family offices alike are now trying to protect the worst against inflation. In some cases, they’re using offices as a natural hedge.
For big ticket, probably it’s different, because you know although there are some insurance companies, some pension funds out there, the market is no — not so vigilant [ph] at present. However, in our case, as you know, we have done our work. So, what we need to do from now on is basically rotation of some non-core to the tune of around €150 million per year for the next three is not very significant. In fact, if we don’t do it, I mean the company will not implode. So, there is no problem and we can adapt easily to the market, having done already our homework in that respect.
Regarding shopping centers, yes, we are seeing back activity in the market. There could be opportunities out there. And if there are opportunities out there eventually, as you all know, our intention will be to end up rotating the two, three shopping centers as we consider the remainder of our non-core. I mean, we wish all the majority of our non-core representing around 2% of our GAAP and now we only have around 0.8%, 0.9% of our GAAP in what we consider non-core shopping centers. We see the opportunity, we will dispose of them and add them to our ordinary non-core disposal program.
So, that is basically what — in logistics, what can I say. I mean, people [indiscernible] that sector of activity continues to love it. As you know, we are a little bit more prudent as to the future evolution of rent and take up, but the market continues to be absolutely bullish. And so far, the market is right, we are wrong. The market is right because the release spreads is accelerating. So, whether it is simply the cartel effect, or is whatever, but certainly rents are accelerating. And we have to admit that we were wrong because we considered that the margins of our tenants were so narrow that it was impossible to pay up higher for their facilities. However, rents keep going on — going up in Madrid — in both Madrid and Barcelona. So let’s see what the future holds.
Pedro Jorge Gouveia Alves
Very helpful feedback. Thank you very much, Ismael
Ismael Clemente
You’re welcome.
Operator
Thank you. Our next question is from the line of Alvaro Soriano from BNP Paribas. Thank you. Please ask your question.
Alvaro Soriano-De-Miguel
Yes. Thank you, guys. Just a quick one. How do you see the credit market for real estate issuers, specifically for MERLIN in the coming quarters?
Ismael Clemente
We have had a very significant stiffening of our credit spreads. But which now is easing significantly [indiscernible]. So eventually, have you made the question 2 weeks ago, I will have said very, very hard. Now it’s only hard. Let’s see what happens in the future. However, as you know, our aim will be to try and obtain one notch increase in our rating in order to compensate the increase in credit spread across the market with a little bit of tightening as a consequence of the improved rating. That will be our idea. We are working towards that objective.
And it is also true that our bonds have been among the best in terms of performance in the market. I mean, our bond yields have widened much less than the ones of our comparable rivals in the market. And we keep track of that on almost a weekly basis to see what our chances of balance sheet management are. For the time being, we are comfortable. Our first maturity issuing in 2023. We will — during the second half of the year, we will start working on a dual track to tackle that maturity bond and bank routes. And if necessary, we could almost tackle that maturity also with available cash. So let’s wait to see what the market does, that I think we are in a very good position in terms of debt management for the coming future.
Alvaro Soriano-De-Miguel
And a quick one on logistics, if I may. Rents continue to be strong How likely is seen MERLIN buying minorities of Belport [ph] in the coming quarters. It’s something that it has been discussed even at your Capital Market Day. Yes, it’s likely a scenario in the coming quarter. So we will have to wait a little bit more until that deal comes through.
Ismael Clemente
Well, in Belport [ph] we are not at the helm. Basically we are reactive not proactive. So we have to wait to see what the Port Authority and the government of Spain want to do. If at some point, they want us to increase our stake and eventually become majority in that investment, of course, we are prepared. I mean, we have been from a factual standpoint, we have been managing that venture for long. So we are of course prepared to take up a more protagonist role on it, if we are requested to do so.
Alvaro Soriano-De-Miguel
Okay, thank you.
Ismael Clemente
Okay. You’re welcome.
Operator
Thank you. And our next question is from the line of Fernando Abril from Alantra Equities. Thank you. Please ask your question.
Fernando Abril-Martorell
Hello, and thank you for taking my questions. I have three, please. Firstly, on shopping centers. So I’ve seen that OCR is at — right now at 12.6%. In 2019, it was above 13%. And right now, your tenants are still below pre-COVID level. So how did you manage to get that and what do you expect OCR to evolve during this year? Then second question is with regards offices. So if right now inflation is helping you to accelerating the capturing of the reversionary potential you have now. But at the same time you are posting mid-single-digit releases spread. So I don’t know how long it can release the spreads grow at this level? Or putting in other words, how much reversionary potential is stealing on your office portfolio? Do you estimate that it’s still there? And third, more a high-level question. Is [indiscernible] how do you see the things are changing faster? Inflation, pricing, the interest rates as well. So I don’t know, how do you see the real estate cycle? And how do you see yourselves — yourself after the three disposal?
Ismael Clemente
Okay.
Fernando Abril-Martorell
Thank you.
Ismael Clemente
Okay. You’re welcome, Fernando. Look in shopping centers, we keep track constantly of the OCR of our clients. The reason why we have been able to keep OCR is pretty much under control during the pandemic. It’s been through incentives, of course, but that has helped also asked to keep occupancy at bay. So, overall, I believe it was the right decision to do for the future. We will continue monitoring OCR, if we see OCR going beyond — I don’t know the 16% mark clearly. We will ring an alarm internally and we will take decisions. But for the moment, OCRs are relatively comfortable for tenants as evidenced for example, by the, I would say easier than expected rotation of red flags of the zombie clients.
I mean, we have been positively surprised by the pace at which — pace and the rate at which we have been able to rotate the zombie clients. And we have obtained not only a very slight [indiscernible] gain, but also a very slight positive release spread in those trades quarter-on-quarter once the evicted client was out the new entrant, if it was during the same quarter during the same year as you know we count them to work really spread. We will keep our eyes in to the evolution of the OCR.
In principle inflation should help us with the OCR because so far this cannot be taken for granted, but so far we have seen that our tenants are being able to transfer inflation to final prices. So, if you are operating under 12% OCR and you have total sales of 100, of which 12 is rental payment, an inflation of five results in five additional units on the top line. 105 and 26 on the bottom line, that means, 4.4, let’s say, additional units in hands of the retailer and this is — they know that. So, so far, they are not protesting too much rental increases.
Can this last forever? No. I mean, inflation is bad for economy, particularly inflation with the world I mean, stagflation is very bad for the economy. So, if we have low growth, high inflation for long, of course, the economy will be damaged. If the economy is damaged, we are damaged because through retail in shopping centers, through our clients in the office segment, through logistics. Of course, we are a tertiary sector player. So, we are simply the assistance of the primary and secondary sector providing them with space, good quality space, [indiscernible] price. If they are damaged, we of course are damaged.
For the moment, we are in my opinion, far from seeing that. I mean, we don’t see the market extremely tense in that regard. Of course, people is not happy with mainly energy prices. But other than that on the underlying inflation, things are relatively athlete yet relatively under control, down here. In offices, our reversionary potential has been declining. We started at 13% on the first year of pandemic that moved to 12% on the second year of pandemic and this is for year 2021. If you compare the estimated rental value of our appraisers, to our passing brands, we are now running at an 8% reversionary potential. This is what we have.
We will continue enjoying statistically more probable positive risk spreads than negative for a little while, till the moment in which the situation reverses. But let’s see when the situation reverses, because, of course, rents are also affected by inflation. And the interesting thing is that in Spain, psychologically, given that the current passing rents in the market are still very, very far from the peak of 2008, that point of, let’s say, psychological resistance, which is when rents are at all times historical highs is very far from happening. So, people remember perfectly that well located buildings in Madrid traded for €46, €48 per square meter per month. At present, we are at €36.
So, we have a long run, in terms of inflation till we reach that moment in which people will start to really protest rental hikes. Also in our portfolio, what we are seeing is that, for the moment, at least, the tenants have good memories. So, averaging 5 years for the people who has been with us for more than 5 years, in the last 5 years, the net increase in rents for our average client has been between 1.6% and 1.8%. So people know that.
People know that although this year we have increased the rent by whatever 5.3% or 5.4%. We apply negative indexation over most of the past 4years, some years, very small minus 0.1, minus 0.3. But some of the years it was minus 1.8, minus 1.6. So people perfectly remind that and as such, the level of discomfort of our tenant base at present because of the rental hike is low, or what I’m saying is at present. If again, if we continue suffering across Europe, Argentinian inflations for the next 20 years, or what I’m saying can be completely nullified. But this is what we are seeing.
In terms of real estate real estate cycle, the increase in bond rates in normal economy in at least in what I consider normal sooner or later result in widening valuation yields. However, that this will affect the on-paper value of the assets of real estate companies. However, the cash flow of the company wouldn’t be necessarily affected, because inflation will be blowing in favor of increased cash flows. And at the end, it will be a mix of the two. Let’s see what is — let’s say faster inflation or yield widening in order to determine what is the true value of assets.
In our case, we will simply abide by the rules. So, the appraisers will appraise our portfolio on a yearly basis, and we will reflect that valuation in our books. And that’s all. I mean, what we can do is basically try to accelerate the income of the company through inflation or through nominal increase of rents or through refurbishment initiatives, whatever we can do, in order to continue sharpening the pencil in terms of income, rest assured, we will do. But in terms of asset valuation, we are a little bit at the mercy of the market.
Although we are happy that we have done a very, very reasonable job in the recent past, in the past 5 years in terms of refinement of the portfolio. Very few people probably has observed that, that if you look at our part, we have done the calculations recently. If you look at our portfolio only 3, 4 years ago and what it is now for example, you will see that average rent in our office portfolio has moved from around €17 to more than €19.
And this is a consequence mainly of the fact that we have gotten rid of those assets which were less centrally located and we’ve been keeping those assets which were commercially more attractive. And same thing we have been doing with shopping centers. And in fact also with logistics, because many people have not noticed that we have been seen for example, having selling — sorry, industry related logistics and keeping the ones which are more like CPL and e-commerce related in the portfolio, which are the ones that are commanding better and more stable rents in the market.
Fernando Abril-Martorell
Okay, thanks. Thank you very much, Ismael.
Ismael Clemente
You are welcome.
Operator
[Operator Instructions] And for our next question, it’s from the line of Jaap Kuin from Kempen. Thank you. Please ask your question.
Jaap Kuin
Hi, good afternoon. From my side, just, I think a small one on the offices like-for-like. So I just — maybe you could just help me do the math or square ends on how to understand the 4%, which seems below inflation, but I guess you also didn’t index the entire rent roll. So — and also, because you were still pretty positive releasing spreads, can you maybe just help us to interpret the kind of number of that 4%?
Ines Arellano
Yes. [Indiscernible]. So out of the 4% like-for-like, half of it comes from inflation. The 2% is CPI and then the remainder comes 1.4% from rents and 0.6% from occupancy.
Jaap Kuin
Yes, and so the 2% so that the — so why is that so much below the actual indexation grip [ph], because of the not the entire rentals indexed?
Ines Arellano
As of March, in terms of offices, only one state of the portfolio has reviewed the CPI, okay? I think the inflation coming and it’s been done at a 5%. This is only one quarter — sorry, one-third of the portfolio. So still you’re not looking at the whole amount of square meters. So on a yearly basis you should see the full impact of inflation. But in the first quarter it’s just one-third of portfolio.
Jaap Kuin
Yes, clear. That’s really great. Thank you very much
Ismael Clemente
You are welcome.
Operator
Okay. Our next question is from the line of Jose Luis Lopez. Thank you. Please ask your question.
Unidentified Analyst
Good afternoon, everybody. Good afternoon, Ismael. Jose Luis Lopez [indiscernible]. I wanted to ask a few questions about data centers. What kind of percentage of the total assets of the company do you plan to have in data centers in the next 2, 3, 4 years? How is the size of the market like? Is there a lot of room for growth in this kind of asset? And then also noticing that this is only 30% civil construction towards the land, but 70% equipments in this kind of assets. What kinds of yields do you expect from those assets and how is the depreciation of these equipments taken into account?
Ismael Clemente
Okay, perfect. Look, regarding the evolution over the next 2, 3, 4 years, our 5-year business plan the one at the end of 2026. Although in reality in the model, it spans to first half of 2027. It drives us to total deployment of around 70 megawatts, that represent around 75 million of rents. Of course, these will be highly dependent on the pace of the niche market develops in Spain. That pace today is unknown to the human being. I mean, if you take example, if you take U.S examples, you take Phoenix or even easier if you take North Virginia, the pace at which the market develops is 2,200. So it goes very, very fast. However, we don’t know.
So since we don’t know, we have tried to be relatively prudent in our take up assumptions and have significantly relied on the estimates made by our tech — technology partner with more acquainted with the pace of development of tough market depending of course on availability zones in the U.S. So we have used their assumptions. Regarding what size potentially the market could reach, today depending on the sources you use, the number of, let’s say, recorded data center facilities in Spain, depending also what you call data center oscillate between 86 and 107 megawatts. So, the market is clearly in its infancy.
There is no clear dominator of the market. The two biggest are of course [indiscernible] and Nabiax, which is Telefonica, let’s say related company. Nobody knows. According to the U.S engineers that we are talking to, the evolution of the market should move Spain from the current say 100 to no less than 600 by the end of 2026. However, if you take some of the most optimistic estimates by mainly generalist consultancy firms, like McKinsey et cetera, many people is going as high as 2,500 megawatts by end of 2030, which is the case they will be like one of the big availability zones in the U.S. I understand not Virginia, it’s like 2,800 at present. So, it will follow the evolution of those availability zones in the U.S.
So, we don’t know. We tried to be prudent. Yields on costs are sufficiently generous. Although, of course, the gross to net in data centers is completely different from other asset classes. The gross to net is, let’s say wider, let’s say and not we believe that from a return perspective, we are more than okay. We will be more than earning our cost of capital. And by the way, the first lease we have signed, justifies our calculation so far. In fact, it is above our calculation so far in terms of cash flow. So it is too early really to provide a lot of color on these. We need to bear with us a little bit. At the end of this year, we should have a little bit more visibility and even more visibility towards the end of next year. But this is what we can disclose as of today.
Unidentified Analyst
Thank you very much, Ismael.
Ismael Clemente
My pleasure.
Ines Arellano
Okay. So I understand there are no further questions. We will leave it here for today. But please remember that we are always at your disposal. You can contact us back [indiscernible] email or through phone, and we just need to wind this call. Thank you for joining us. Have a great weekend. Thank you.
Operator
That does conclude our conference for today. Thank you all for participating. You may all disconnect.
