IBERIAN DAILY 04 APRIL (ANÁLISIS BANCO SABADELL)
NEWS SUMMARY: BBVA, MERLIN PROPERTIES.Positive week for Europe and the peripheral segment
The European stock markets ended the week with substantial gains in Spain (+2.1%) and Italy (+2.4%) with no news on the Russia-Ukraine negotiations. The decline in the crude oil price eased inflationary pressure following the poor Euro zone data, where inflation climbed to 7.5% YoY in March. Thus, almost all sectors within the Euro STOXX rose over the week, with Utilities and Insurance being the best relative performers vs. the drops in Retail and Travel&Leisure. On the macro side, in the Euro zone, March’s final manufacturing PMI was lowered to 14-month lows of 56.2. In the US, the unemployment rate fell in March more than expected to 3.6%, as did non-farm employment. March’s ISM manufacturing index fell more than expected, but still stands at levels consistent with expansion. From the Fed, S. Francisco Fed president (M. Daly does not vote) was in favour of a 50bps rise in May and of raising rates up to neutral levels in 2022 (around 2.5%) whereas Williams also endorses a neutral position but not necessarily in 2022.
What we expect for today
The European stock markets would open with slight gains awaiting new sanctions from the EU against Russia. Currently, S&P futures are flat (yesterday the S&P 500 ended unchanged vs. the European closing bell). Volatility in the US dropped (VIX 19.62). Asian markets are rising (China’s CSI 300 closed, and Japan’s Nikkei +0.1%).
Today the Euro group will hold its meeting. Also we will learn April’s Sentix Confidence index, in Spain the number of unemployed for March, in the US February’s factory orders and in Mexico March’s Consumer Confidence. In debt auctions: Germany (€ 6 Bn in 3M and 9M T-bills) and the Netherlands (€ 2 Bn in 3M and 9M T-bills).
COMPANY NEWS
MERLIN PROPERTIES, BBVA. BUY/SELL.
BBVA has bought back from MRL a portfolio of 659 offices and 3 singular buildings for € 1.987 Bn (+12% premium vs. appraisal value as of Dec’21). These assets are part of the ~990 branches sold by BBVA in 2010 to Tree (later acquired by MRL) in a sale and leaseback deal. At the beginning of February, Merlin activated the sale of the remaining 662 assets and BBVA decided to exercise preferential right. The deal is expected to be closed in the 2Q’22.
In the case of Merlin, the amount of the deal accounts for 14% of the market value of the assets as of De4c’21 for a portfolio that could have generated 17% of rents’22e.
For BBVA, this acquisition will have an impact of ~-7bps on CET1 (currently 12.75%) and it will register € -200 M of capital losses as it had accounted the right of use (IFRS16) at a lower value. BBVA plans to offset these effects with the savings expected from the deal where the ownership of the branches offers it greater resilience to reduce the network.
This is good news for MRL, as it would sell with a +12% premium on the appraisal value as of Dec’21 (BS(e)), although this was foreseeable given the recent inflation performance (this asset has a rental restatement of 1.5x the Euro zone’s inflation rate). With the release of its 4Q results in late February, MRL confirmed that the sale was imminent, as it has received several binding offers at acceptable prices. The priority use of the funds obtained will be debt reduction, dividend payments (which are mandatory under the REIT regime) and the recycling of capital towards the data centre and logistics business. In this sense, we expect the LTV ratio to go from 39% to ~32%, with the company paying out some € 275 M as an extraordinary dividend or € ~0.58/sh., meaning additional yield of ~5.5%. We forecast a positive impact on MRL’s NTA per share of +2.8%.
In the case of BBVA, this transaction would be negative due to both the high price involved and the acquisition of a branch network, which goes against the need to reduce physical structure. That said, in view of both the inflationary risk (which makes the contract substantially more expensive) and the risk of a change of ownership, we believe that exercising the call option was the bank’s only possible choice.
Banco Bilbao Vizcaya Argentaria is an international financial group, engaged primarily on providing banking services and consumer finance to private individuals and businesses in Spain and Portugal; providing real estate activity in Spain; providing services to international companies and investment banking, capital markets and treasury management services to clients; and providing the banking, insurance and pension businesses in Mexico and the U.S., as well as in South America.
Merlin Properties SOCIMI SA is a Spain-based company engaged in the operation of a real estate investment trust (REIT). The Company focuses on the acquisition, management and rental of commercial properties located in the Iberian Peninsula, primarily in Spain. The Company's activities are divided into the following segments: Office buildings, operating a portfolio of office space; High-street retail, engaged in leasing retail stores; Shopping centers, engaged in managing department stores; Logistics, operating logistics warehouses and distribution centers, and Others. The Company's other activities include property management services rendered to third parties.
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