Merlin Properties (OTC) ((ES:MRL)) has held its Q4 earnings call. Read on for the main highlights of the call.
MERLIN Properties’ recent earnings call painted a picture of a company experiencing robust operational growth, yet facing some financial hurdles. The sentiment during the call was generally positive, with notable achievements in rental income and occupancy rates. However, challenges such as increased financing costs and dilution from a capital increase were acknowledged, alongside strategic expansions and credit rating upgrades that signal potential for future growth. The decision to reduce dividends, however, may have left investors with mixed feelings.
Strong Financial Performance
MERLIN Properties reported a strong operational year in 2024, highlighted by impressive rental growth and record occupancy rates. The company achieved a 96.7% occupancy rate, marking an increase of approximately 60 basis points from the previous year. This growth underscores the company’s successful management and strategic positioning within the real estate market.
Office and Logistics Segment Success
The office and logistics segments were standout performers, with the office segment achieving a like-for-like rental growth of 3.9% and a release spread of 2.3%. Despite some challenges in Barcelona, the logistics segment reached full occupancy at 99.4%, demonstrating strong organic growth of 2.8% like-for-like.
Shopping Centers Performance
Shopping centers also had a remarkable year, with a like-for-like rental growth of 2.7% and a historically low occupancy cost ratio of 11.2%. The strong tenant sales and footfall are indicative of favorable market conditions and the company’s effective management strategies.
Data Center Expansion
MERLIN Properties made significant strides in its data center segment, signing an agreement for a 5 megawatt IT block in Barcelona and engaging in advanced negotiations for an 18-megawatt block in Arasur. This expansion reflects the company’s commitment to diversifying its portfolio and capitalizing on growth opportunities in the tech sector.
Stable Financial Structure
The company’s financial structure remains robust, with a Loan-to-Value (LTV) ratio of 28% and no major debt maturities until November 2026. This stability is supported by a successful capital increase, which has fortified MERLIN’s balance sheet.
Credit Rating Upgrades
Both Moody’s and S&P have upgraded MERLIN’s credit rating, a testament to the company’s improved financial standing and growth potential, particularly in the data center segment. These upgrades reflect confidence in MERLIN’s strategic direction and financial health.
Increased Financing Costs
Despite the positive developments, MERLIN faces increased financing costs, which are expected to continue rising through 2025 and 2026. The anticipated cost of finance is projected to reach 2.9% by 2026, impacting the company’s cash flow.
Missed Divestment Target
MERLIN fell short of its 2024 divestment target of €100 million, managing to sell €73 million of non-core assets. However, an additional €53 million is signed for future sale, indicating ongoing efforts to streamline its portfolio.
Dilution from Capital Increase
The capital increase resulted in a 16.7% dilution impact on earnings per share, affecting the company’s funds from operations (FFO) per share. This dilution is a critical factor for investors to consider when evaluating MERLIN’s financial performance.
Challenges in the Office Segment
The office market in Barcelona presented challenges, with a slight weakness resulting in a loss of over 1 percentage point in occupancy. This highlights the need for strategic adjustments to address market-specific issues.
Dividend Reduction
MERLIN announced a reduction in its dividend payout, a move that might send a negative signal to investors despite its strategic rationale for retaining capital. This decision underscores the company’s focus on long-term growth and financial stability.
Forward-Looking Guidance
Looking ahead, MERLIN Properties anticipates a flat cash flow for 2025 due to rising financial expenses and a commitment to not capitalizing interest. The company projects an FFO of €0.54 per share, with continued strong rental growth and a stable financial position. The upgrades in credit ratings and strategic expansions in the data center segment are expected to support future growth.
In summary, MERLIN Properties’ earnings call highlighted a year of strong operational performance, with significant achievements in rental growth and occupancy rates. While the company faces challenges such as increased financing costs and dilution from a capital increase, strategic expansions and credit rating upgrades provide a positive outlook. The decision to reduce dividends may have been a point of contention, but it aligns with MERLIN’s focus on long-term growth and stability.