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Merlin Properties, Spain’s largest REIT, boasts a robust, diversified, commercial real estate portfolio of high-quality assets.
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At €12/share, the stock trades at an 11% discount to NAV and a 4.8% AFFO yield, offering relatively good value.
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The stock offers investors the opportunity to diversify into REITs, which are less vulnerable to broader market swings, and into a growing European market.
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We forecast at least 7% in annual returns, with further upside potential, absent any major macroeconomic setbacks.
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Our return estimate assumes dividend yield of 3.8%; rent increases of 2%; and AFFO growth of 1.2% from reinvestment.
Today, we present our analysis of Merlin Properties (MRPRF) (MRL.MC) – Spain’s largest REIT by net asset value and market capitalization, at about €6 billion.
This first freely-available comprehensive research piece on Merlin Properties is part of our Stocks on the radar series, wherein we explore potential additions to the market-beating IW Portfolio. It follows recent research on Chinese Baozun (BZUN) and Brazilian Ambev (ABEV).
We believe Spain’s Merlin Properties provides investors an opportunity to tap into a REIT that is poised to benefit from strength in its domestic economy and investments in assets that offer long-term growth potential.
The Madrid-based company engages in the acquisition and management of offices, industrial buildings, logistic centres, local premises and shopping centres, mainly in Spain and to a lesser extent in Portugal.
Founded in 2014, Merlin Properties has since grown through acquisitions to emerge as Spain’s #1 REIT in office, high street retail and logistics assets, and the #2 REIT in shopping centres. The company’s commercial focus gives it exposure to the Spanish economy (in growth mode since 2014), while providing substantial immunity to regulatory changes (in contrast to Spanish residential REITs).
While most investors know us from our investments in high-growth tech names such as Nvidia (NVDA), The Trade Desk (TTD), and PayPal (PYPL), we believe Merlin Properties may warrant an exception to our typical 15%+ annual return hurdle for equity investments.
This is because we believe an investment in Merlin Properties provides a two-fold risk diversification: first into a REIT, which is less correlated to the broad equity market, and second into a trust operating outside the US, in one of Europe’s largest economies.
Merlin Properties trades in Madrid under ticker MRL and is part of the IBEX 35 index. US-denominated shares can also be acquired in the gray market under ticker MRPRF.
In this analysis piece, we assume a share price of €12 per MRL share, or $14 per MRPRF share, and an exchange rate of $1.17 to €1.
The business
Brief history and management team
Merlin Properties was co-founded in March 2014 by Ismael Clemente and Miguel Ollero. Since then, the company has witnessed significant growth through acquisitions. A major part of its current commercial real estate portfolio, in particular, comes from its acquisitions of Testa, from Sacyr (SYRVF, SYRVY) in 2015; and Metrovacesa, from Banco Santander (SAN, SC, BSBR) and BBVA (BBVA), in 2016.
Today, Mr. Clemente is the Vice Chairman and CEO of the company and Mr. Ollero, Corporate Managing Director and COO. The duo have a combined experience of 33 years as real estate professionals and have participated in multi-billion aggregate volumes across all property sectors.
Before founding Merlin Properties, the two partners managed Magic Real Estate, an investment firm that managed Spanish real estate assets for foreign investors with €2,800 million in assets under management as of end 2013. They later launched the REIT after the SOCIMI regulation was approved.
