Merlin Properties Bets Big on Data Center Growth

Merlin Properties (OTC) ((ES:MRL)) has held its Q4 earnings call. Read on for the main highlights of the call.

Merlin Properties’ latest earnings call struck a confident tone, with management highlighting a strong year of execution and cash generation despite mounting financing and execution risks. Solid growth in recurring income, robust valuations driven by data centers, and high occupancy across most segments underpinned a positive message, even as rising leverage and flat 2026 earnings guidance tempered investor euphoria.

FFO Expansion and Rental Growth Support Cash Generation

Merlin reported funds from operations of €326.7 million, up 5.1% year on year, signaling healthy recurring cash flow. Gross rental income reached €541.9 million, with like‑for‑like growth of 3.5%, showing that the existing portfolio is delivering rent increases rather than relying solely on new assets.

Data Centers Drive Revaluation and Profitability

Data centers remained the star of the show, with Phase 1’s 64 MW fully contracted and Phase 2 capacity lifted to 254 MW. These assets contributed about €360 million to portfolio revaluation, while Phase 1’s gross yield on cost improved to 15.8% and stabilized GRI rose to €97 million from €88 million, underscoring powerful economics.

Occupancy Levels Remain High Across Core Assets

Operationally, the portfolio is firing on nearly all cylinders, with Phase 1 data centers at 100% occupancy and offices at a record 94.2%. Logistics ended the year at a still‑solid 96.4% and shopping centers also posted strong occupancy, supporting resilience of cash flows despite isolated market weaknesses.

Portfolio Value Growth and Double‑Digit Shareholder Return

Merlin’s gross asset value increased 4.7% on a like‑for‑like basis, reflecting both revaluation in data centers and steady performance in traditional assets. Total shareholder return reached 10.2% for the year, signaling that equity markets are recognizing the operational momentum and embedded value creation.

Record Data Center CapEx Underpins Future Growth

The company is committing aggressively to its data center rollout, with Phase 2 CapEx now at €987 million versus €836 million previously. Management expects Phase 2 to deliver around €397 million of stabilized GRI, targeting a compelling 14.4% gross yield on cost, anchoring Merlin’s medium‑term growth story in digital infrastructure.

Balance Sheet Still Conservative Despite Higher Leverage

Merlin emphasized a low loan‑to‑value ratio of 28.9%, with all debt at fixed rates and net tangible assets at €15.36 per share, supporting its investment‑grade ratings. Non‑core asset disposals of €129 million completed, plus roughly €130 million signed for 2026–2027, further enhance financial flexibility as the group recycles capital.

Retail and Shopping Centers Deliver Outperformance

Shopping centers delivered GRI of €133 million, with like‑for‑like growth of 4.7% and an implied gross yield around 6.4%, alongside a 5.7% net initial yield. Tenants remain healthy, with an occupancy cost ratio near 11%, while the 26,000 square meter Marineda extension is successfully pre‑let, adding to future income.

Dividend and Earnings Beat Reward Shareholders

Merlin proposed a dividend of €0.44 per share and reported earnings per share of €0.58, notably ahead of previous guidance. Management framed this as evidence that it can continue to return cash to shareholders while funding a heavy investment program in data centers and other growth projects.

Flat 2026 EPS and DPS as Financing Costs Rise

Guidance pointed to relatively flat earnings per share and dividend per share in 2026, as additional financing costs absorb roughly €40 million of expected top‑line upside. The decision not to capitalize interest on large data center CapEx keeps reported earnings subdued in the near term, even though long‑term value creation is expected to be significant.

Rising Net Debt‑to‑EBITDA Highlights Funding Risk

Net debt‑to‑EBITDA has climbed to 9.0 times, reflecting the capital‑intensive build‑out of the data center platform and increasing financial risk. While management stresses that low LTV and fixed‑rate funding provide a buffer, investors will watch closely how leverage evolves as new projects ramp up but are not yet fully income‑producing.

Barcelona Offices Face Oversupply and Leasing Headwinds

The office segment is robust overall, but Barcelona is a weak spot, with vacancy rising after the loss of about 11,000 square meters from Meta and an estimated 320,000 square meters of excess supply to digest. Management expects an 18–24 month absorption period, suggesting near‑term leasing could be challenging in that market.

Logistics Occupancy Dip Exposes Asset Concentration

Logistics occupancy slipped from 99% to 96.4%, making like‑for‑like rental growth appear softer even though underlying demand remains healthy. Future improvement is heavily dependent on leasing a single large warehouse in the Henares corridor, creating a binary outcome that adds concentration risk to the segment’s performance.

Uncertainty Around EU‑Linked Commercialization in Lisbon

The delayed decision on an EU‑backed gigafactory until the end of 2026, and Spain’s preference for another project, has freed capacity that Merlin had earmarked for that tenant. This injects timing and conditionality risk into some commercialization plans in Lisbon, particularly where negotiations were advanced but linked to the EU program.

Complex Hyperscaler Negotiations Add Execution Risk

Management reported ongoing discussions with hyperscalers and emerging cloud players, but cautioned that such contracts are complex and take time to finalize on attractive terms. With only about 112 MW currently let and tenant diversification still limited, closing additional large‑scale deals is critical to de‑risk the ambitious data center rollout.

Guidance Frames a Year of Investment Over Earnings

Looking ahead to 2026, Merlin expects a year where operational metrics continue to improve but reported EPS and DPS remain broadly flat. High CapEx of €987 million, planned debt market taps in the second half of 2026, and metrics like 94.2% office occupancy, 96.4% logistics occupancy, and 100% occupied Phase 1 data centers underpin confidence in long‑term value, even if near‑term profit growth pauses.

Merlin’s earnings call painted a picture of a company successfully pivoting toward high‑yielding data centers while maintaining strong performance in more traditional real estate segments. Investors are being asked to accept flat earnings and rising leverage in the short run in exchange for substantial embedded growth, making execution on leasing, funding and development milestones the key watchpoints going forward.