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Annual Report 2015
The policies of financial risk management within
the commercial real estate sector deal mainly
with the analysis of investment projects, the
management of the building’s occupation and
the situation of the financial markets:
• Credit risk: credit risk relating to the
Company’s ordinary business is not significant
because the contracts signed with the tenants
require payment in advance of most sums.
These contracts also require the tenant
to provide legal and additional financial
guarantees or deposits to cover possible non-
payment of the rent.
• Liquidity risk: The Company, in order to
manage liquidity risk and to meet the
needs of funds, uses an annual budget and
monthly forecast of the liquid assets. This
monthly forecast is detailed and updated
on a daily basis. The main liquidity risk is
due to the potential for negative working
capital resulting from short term debt from
tenants. The factors mitigating liquidity risk
include the following: (i) cash generated in
the ordinary course of business is very stable;
and (ii) the company’s liabilities are largely
long-dated and the high quality of the assets
provides ample ability to obtain new sources
of funding.
When formulating consolidated annual
accounts, the Company had already covered all
of its funding requirements, enabling it to meet
its commitments with providers, employees
and the Public Sector, according to the cash
flow for FY2015.
Furthermore, given the type of industry in
which the Company operates, the investments,
the financing for such investments, the stable
EBITDA generated and the high occupancy
rate of properties is more likely to produce
surplus cash. The company’s policy is to invest
this cash in Short-term investments and liquid
deposits with highly rated institutions. The
acquisition of options or futures on stocks, or
any other high-risk activities as a means of
investing its cash surplus are not considered by
the Company.
• Interest rate risk: in order to minimize the
Company’s exposure to this risk, financial
hedges, such as interest rate swaps, have
been executed. Total interest rate hedged
amount to 61% of total debt.
• Exchange rate risk: the Company only
invests in assets in Spain and Portugal with
all contracts denominated in euro and the
Company’s policy is to contract debt only in
the same currency as that of the cash flows
of each business. Therefore, the Company is
currently not exposed to exchange rate risk.
• Market risk: MERLIN Properties is exposed
to market risk from potential downward
movement in rental rates when current
contracts terminate. This risk could negatively
affect the cash flow and valuation of the
assets of the Company. However, the market
risk is mitigated by policies of attracting
and selecting new high quality clients and
negotiating compulsory lease terms that
maximize the length of the lease term. For this
reason, on 31 December 2015, the occupancy
rate of the Company’s assets is 94.6%, with a
weighted average unexpired lease term of 9.4
years (weighted by gross rents).