Earnings call transcript: Merlin Properties sees strong Q2 2025 growth

Merlin Properties reported robust Q2 2025 results, with revenues up 8.5% and FFO rising 12.8%, prompting an 8.32% stock surge and a raised 2025 FFO guidance to €0.56 per share. This strong performance is attributed to strategic investments in data centers and logistics, with the company actively expanding its digital infrastructure portfolio, including a bid for the EU AI Gigafactory initiative. While 2026 is projected to be flat, management anticipates significant growth from 2027-2029 as data center projects mature, reinforcing the company's long-term value creation strategy and strong financial position.

Analysis

Merlin Properties demonstrated robust operational and financial performance in Q2 2025, underscored by an 8.5% year-over-year revenue increase to €264.7 million and a 12.8% rise in Funds from Operations (FFO) to €166.6 million. This performance, driven by strong organic rental growth across its portfolio, prompted an 8.32% stock surge and an upward revision of its 2025 FFO guidance to €0.56 per share. The company's traditional assets remain resilient, with Madrid offices benefiting from supply reduction due to residential conversions, reaching a record 94.2% occupancy, and shopping centers posting a record-low 11% occupancy cost ratio. Financially, the company maintains a strong position with a Loan-to-Value (LTV) ratio of 28.6%, a net debt to EBITDA ratio under 9x, and €1.6 billion in liquidity, providing a solid foundation for its growth strategy. The core of Merlin's long-term strategy is its aggressive expansion into the data center sector. Phase 1 is substantially de-risked and expected to generate €92 million in stabilized Gross Rental Income (GRI) by 2027. Phase 2, the primary future value driver, is projected to deliver €379 million in GRI by 2029. Management has guided for a relatively flat 2026, positioning 2027-2029 as the key period for significant growth, contingent on the successful delivery and leasing of these large-scale projects. A major potential catalyst is the company's bid for the EU AI Gigafactory initiative, with a decision expected by year-end 2025, which could significantly accelerate and fund the development of its key data center campuses.

Key Decisions for Investors

• Investors should view Merlin Properties as a long-term strategic play on digital infrastructure, where the current strong cash flow from traditional real estate assets is funding a significant value-unlock from its data center pipeline, with a major inflection point in FFO growth expected from 2027 onwards.
• Monitor the company’s progress on pre-letting its data center capacity and the outcome of its bid for the EU AI Gigafactory initiative by December 2025, as this is a key catalyst that could significantly de-risk and accelerate its development timeline and funding.
• Note the revised 2025 FFO guidance of €0.56 per share and dividend of €0.42, but be prepared for a guided flat performance in 2026 as the company navigates a period of heavy capital expenditure before the data center projects begin to contribute meaningfully to earnings.
• Consider that the current valuation by appraisers is conservative, particularly for the data center assets under construction, suggesting potential for significant net tangible asset (NTA) uplift as projects are completed, leased, and re-rated at lower discount rates.