Fibra Danhos (DANHOS13) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Fibra Danhos' First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the program over to Elias Mizrahi, Investor Relations Officer. Please go ahead.

Thank you, Brittany. Hello, everyone, and good morning. I am Elias and together with Rodrigo Martinez, we run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos' 2023 First Quarter Conference Call. We published our quarterly report yesterday. If you did not receive a copy, please do not hesitate to contact us and be aware that they are also available both on our website and on the Mexican Stock Exchange's website. Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do no account for future economic circumstances, industry conditions and company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included here were prepared in accordance to IFRS standards and are stated in nominal Mexican pesos, unless otherwise noted. Joining us today from Fibra Danhos is Mr. Salvador Daniel, CEO of Fibra Danhos; Mr. Jorge Serrano, CFO of Fibra Danhos; and Mr. Rodrigo Martinez, who runs Investor Relations along with me. I will turn the call over to Jorge Serrano for opening remarks and financial and operating indicators. Please go ahead, Jorge.

Thank you, Elias. Good morning, everyone. Thanks for joining us to our conference call for the first quarter 2023 results. We are glad to share that Parque Tepeyac ramp-up process is underway with great success and with positive trends on flow of visitors. Meanwhile, the development of its second phase, the entertainment and cultural center continues on time and budget and will be ready for the second half of this year. It's worth mentioning that while in the ramp-up process, Tepeyac has yet to improve its NOI margin as operating expenses are fully reflected with -- while revenues are affected by prepaid rents and current occupation levels. Tepeyac financial figures are fully consolidated on our quarterly results report, and noncontrolling interest line is shown on our income statement below net income. Consequently, AFFO calculation excludes these noncontrolling interest. Total revenues of MXN 1.4 billion were 11% higher against last year. Revenue figures reflect increases across the board that were partially offset by higher total expenses mainly related to the operation of Parque Tepeyac. NOI of MXN 1.1 billion during the quarter is up almost 8% year-over-year, posting a 78.2% margin. AFFO reached MXN 939 million and accounted for MXN 0.61 per CBFI with economic rights. Distribution was determined at MXN 0.60 per CBFI, 3.4% higher than that of last year with a payout ratio of 98%. Balance sheet remains strong. Leverage increased slightly to 9.3%, explained by a net debt increase of MXN 460 million compared to the last consecutive quarter to meet cash flow requirements during the quarter, such as property tax, insurance payments and debt service obligations. Our portfolio overall occupancy level remained stable at 85%, with retail occupancy reaching 90.4% and office portfolio posting a slight decline to 72.6%. With this, I finish my operating remarks, and we can move on to the question-and-answer session. Thank you.

[Operator Instructions] We'll take our first question from Vanessa Quiroga with Credit Suisse.

I would like to know what's your outlook for traffic flow to your malls. Do you think that now we should expect more stabilized growth in traffic, foot traffic for our -- for the malls. And then on office, if you can provide some views on what we should expect for occupancy and rents for the rest of the year?

I mean profit flow has been increasingly consistently during the past year. It's been growing. We had a little bit decline in our Parque Tezontle mall because Liverpool closes for [ refurbishment ] in last October, and that really hit us in traffic flow in Parque Tezontle specifically. But the rest of the mall, they're actually increasing day by day. And we feel during this year and probably first semester next year, the traffic flows will actually be larger than they were used to be. In terms of leasing activities, we basically in the retail part, there will be -- I mean, our Parque Tepeyac project is daily leasing every day. And the rest of the projects that they're actually almost full. So we believe this is going to be at least at 90% by the end of the year with Parque Tepeyac as an average. And the office space is a little bit more challenging. We had been working very hard on it. And we believe we're actually increasing that also during the year. We don't know what the numbers are going to be, but we see the activity increase in an important way in the past 3 months...

We will take our next question from Juan Ponce with Bradesco BBI.

Variable rent increased pretty significantly or has been increasing pretty significantly since prepandemic levels. Just wondering if you can talk a little bit about what are the drivers there? And are you seeing more types of rents that are -- have more weighting towards the variable income versus stakes? When do you see that reverting or normalizing? That would be my question.

I mean, during pandemic, we did some rent, with a minimum rent a little bit lower and giving us the opportunity to increase in variable rent which that was finished basically 2 trimesters ago. And what you've seen now with the usual variable rent that we always receive basically in the best trimester during the tails, which is the last one. So you're basically seeing the variable rents that October, November, December gave us in the good season. So that's basically what we've been seeing. There's not a change in our contracts. We basically -- what we did is after the past 2 trimesters, we came back with our fixed rent with our tenant, and now we're seeing only the upside of it.

[Operator Instructions] We'll take our next question from Jorel Guilloty with Goldman Sachs.

I want to talk a little bit about the dynamic in occupancy costs and lease spreads. So looking at your occupancy costs, it's actually gone down 150 basis points over the last 2 years. And then this quarter, we saw lease spreads accelerate for the retail portfolio, so it was about 7%. And then I'm looking at your maturity schedule here, and then you expect about -- it's 5 years on average, your weighted average maturity, but you do have more commercial maturities coming in '23 versus the other years. So all of this is to say is how are you thinking about your pricing power in 2023? As we go post COVID, as we see occupancy costs going down, do you see then the potential for a spike, if you will, in leasing spreads for you? And would this apply mostly for these '23 expiries, '24? How are you thinking about it?

Yes, I mean, we feel very comfortable in the retail part that we're going to be able to actually increase above inflation. We believe we have strong malls. They're doing great. Tenants are very happy with it. Actually, Parque Tepeyac, it has also been increasing the traffic consistently. We're on a very short opening of our aquarium in the next, I don't know, 60 days. And our structure is the same. Basically, we have almost always a 5-year leasing time. And we expect to have the same or actually pushing it towards a little bit lower, no longer than that. So we feel that we're in a good position to work with our tenants and increase the rent in a good way.

And then a follow-up, if I may, just sticking to retail. When you look at the performance in your malls, are there some certain type of tenants that you feel are doing better than expected; is it more on entertainment? Is it more on, I don't know, electronics? Is it more -- is there one sector that is doing better than you would expect?

It's basically all around, but people are eager to go out to all the restaurants and the entertainment they're back. On review, we're able to see a note that we now, again, are the #4 the country on the selling tickets, the movie tickets in the world. So people are eager to go out and they're happy to be in the mall because they feel secure there.

[Operator Instructions] We will take our next question from Alan Macias from Bank of America.

Just one quick question. If you can provide an update on possible pipeline of new developments that you might be looking at?

I mean we are basically on a verge of announcing a couple of new projects. We'll finish final details and probably in the next trimester we will announce a couple of new projects. We've been working very hard on them. We're just putting the last touch of them. I cannot give you any more insight, but I think there are going to be important project that our tenant will -- our investors will love.

[Operator Instructions] And we will take a follow-up question from Vanessa Quiroga with Credit Suisse.

Yes. Well, just taking advantage of the opportunity to ask you about these projects, potential growth projects, if you expect to have the balance sheet to fund them or any other details that you would provide at this point regarding the structure for the funding for growth projects?

We know we have the balance sheet to attend them. So right now, the best way to do it is throughout our balance sheet, and we will see in the future how we can [indiscernible] it, but I think we have the balance sheet to take care of these projects.

Okay. Okay. Yes, because right now, cost of debt is higher, right? So I imagine that Danhos has this very strong balance sheet, but on the other side, it's kind of costly at this point to increase debt. So yes, we'll be looking forward to knowing more details about the strategy for the funding, Salvador.

You're right, but the price of the stock is extremely cheap. So of course, the way to do it is not throughout doing the follow-on. And I think that we've been keeping a good structure and a good balance sheet. We have to take advantage and win the opportunities. As you know, we don't take the only opportunity we see. We really make -- and we're very picky with the new projects. And we've been working very hard on them for the past year. And I think this project will be able to pay the high debt, which is today, which is going to be forever. So we will structure first the balance sheet at the beginning, and then we'll see where the market will take us.

Makes sense. Thank you very much.

It appears we have no further questions on the line at this time. I'll turn the program back over to our presenters for any additional or closing remarks.

Thank you, everyone, for being with us today. Please do not hesitate to contact us, me or Mr. Rodrigo Chavez for any further questions. We're always available, and we'll see you in our next conference call. Thank you very much and take care.