MERLIN Properties, the Spanish real estate giant, is at a crossroads. While their traditional office, logistics, and shopping center businesses remain robust, a quiet revolution is brewing in their data center division. CEO Ismael Clemente's ambitious "Mega Plan" envisions a future where data centers become the company's primary source of revenue, transforming them from a real estate company into a data center powerhouse.

Clemente's vision is bold, aiming to develop 200 megawatts of IT capacity across Spain and Portugal, requiring an estimated €2 billion in capital expenditure. To achieve this, MERLIN is preparing for a substantial capital increase, a move that has sparked intense debate among analysts and investors.

However, a closer look at the Q1 2024 earnings call transcript reveals a potential hidden gem that seems to have slipped past the radar of most analysts. While the focus has been on the capital increase and its potential dilution, a seemingly innocuous detail hints at a substantial revaluation gain that could significantly bolster MERLIN's balance sheet.

Clemente, in response to a question about the impact of the capital increase on their loan-to-value (LTV) ratio, casually mentions an anticipated €1 billion revaluation gain "upon opening of the data centers." This statement, tucked away amidst discussions of power supplies and commercialization strategies, carries immense weight.

"**Key Insight:** MERLIN Properties CEO, Ismael Clemente, anticipates a €1 billion revaluation gain upon the opening of new data centers, potentially offsetting the impact of increased debt. See Q1 2024 Transcript"

If realized, this €1 billion gain would significantly offset the impact of the proposed €1 billion debt component of the Mega Plan funding. Instead of the anticipated 50% LTV resulting from adding €1 billion debt to their current €4 billion net debt, the gain would bring the LTV down to a remarkably healthy 33.3%. This calculation assumes a total asset value of €12 billion, taking into account the €1 billion revaluation gain added to their current €11 billion asset base.

This potential revaluation gain stems from the unique nature of MERLIN's data center development strategy. Unlike many competitors who acquire existing data centers, MERLIN strategically focuses on building new facilities from the ground up, leveraging their existing land bank and securing their own power supplies.

"**Investment Strategy:** MERLIN Properties differentiates itself by constructing new data centers instead of acquiring existing ones, potentially leading to higher development yields and embedded value."

This scenario is already playing out. In the Q4 2023 earnings call, MERLIN reported a 50% revaluation gain on their existing data center capacity, despite valuing the Lisbon site and the Basque Country extension at zero. This demonstrates the significant potential for further gains as these sites progress towards completion.

The question now is, will the appraisers recognize this substantial embedded value in their upcoming valuations? If they do, MERLIN's LTV ratio will remain comfortably below their 35% target, even with the significant debt incurred for the Mega Plan. This would be a game-changer, alleviating concerns about potential dilution and strengthening the company's financial position.

The possibility of a billion-euro revaluation gain lurking within MERLIN's data center division is a compelling narrative. While it remains a hypothesis, the clues are scattered throughout the earnings call transcripts, waiting to be pieced together. If realized, this gain could catapult MERLIN into a new era, solidifying their position as a data center leader and rewarding investors who believe in Clemente's bold vision.

"**Fun Fact:** Did you know that MERLIN Properties owns Torre Glòries, the iconic, spiraling skyscraper in Barcelona? It's a landmark building that houses the regional headquarters of tech giants like Meta, Oracle, and Microsoft, a testament to MERLIN's commitment to attracting high-quality tenants."

The chart below illustrates the potential correlation between data center capacity (in megawatts) and revaluation gains (in € billions) based on MERLIN's strategy and historical data.