Buying Metrovacesa's commercial investment property division
What's new? Merlin announced that it is buying the commercial property portfolio from Metrovacesa for €3.2 billion, which reflects around a 4.8% gross initial yield. The portfolio comprises mainly offices in Madrid and shopping
centres located across Spain. Merlin is funding this acquisition by issuing shares to Metrovacesa's shareholders (mainly Santander, BBVA and Popular) at €11.4 per share. In addition, Merlin and Metrovacesa are creating a residential property JV to which Merlin will be contributing its residential portfolio valued at €288 million, as a result of which Merlin will be deconsolidating its residential assets.
What is Merlin buying? The portfolio is the commercial investment property part of Metrovacesa and mainly comprises offices in Madrid and shopping centres spread across Spain; it does not include Metrovacesa's commercial
property landbank or its residential assets.
(1) Offices. Merlin is buying 37 office assets with a combined valuation of €1.8 billion (on average €3,192 per sq m) making up 58% of this portfolio by value. As much as 89% of the offices it is buying by value is located in Madrid
with the remainder in Barcelona. The portfolio is valued off a 4.1% gross yield and a 5.9% estimated rental value yield; this difference is owing to 22% vacancy in addition to reversionary potential. The portfolio is on a weighted
average unexpired lease term of 1.8 years.
(2) Shopping centres. Merlin is also buying 14 shopping centres for €1.0 billion (on average €2,735 per sq m) for €1.0 billion, making up 32% of the acquisition gross asset value. The portfolio is valued off a 5.8% gross yield and
a 6.8% estimated rental value yield (16% vacancy). The portfolio is leased on a weighted average unexpired term of 2.9 years.
(3) Hotels. The remaining €0.4 billion mainly comprises hotels, taking the group's portfolio from 12 to 24 hotels and from 2,263 rooms to 4,495 rooms. The hotel assets it is acquiring are valued off a 5.8% gross yield and a 6.1%
estimated rental value yield; they are fully leased with a 3.8 year weighted average unexpired lease term.
Financial impact. Merlin estimates this deal is 3% accretive to recurring EPS, despite buying assets with significant vacancy as mentioned above. Merlin also commented that this deal enhances NAV per share by just under 6% from
€9.85 to €10.41 all else equal (note this is based on NAV including goodwill), when this deal closes, expected by end 2016. We make additional comments about this transaction further in this report.