FIBRA Macquarie México (FIBRAMQ12) Earnings Call Transcript & Summary

Good morning, and welcome to FIBRA Macquarie's Fourth Quarter 2024 Earnings Call and Webcast. My name is Paul, and I will be your operator for the call. [Operator Instructions] I would now like to turn the call over to Nikki Sacks. Please go ahead.

Thank you, and hello, everyone. Thank you for joining FIBRA Macquarie's Fourth Quarter 2024 Earnings Conference Call and Webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer; and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I'd like to remind everyone that this presentation is proprietary, and all rights are reserved. The presentation has been prepared solely for informational purposes and is not a solicitation or an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalents, unless otherwise specified. As usual, we prepared supplementary materials that we may reference during the call. If you've not already done so, I'd encourage you to visit our website at fibramacquarie.com and download these materials. A link to the materials can be found under the Investors, Events and Presentations tab. And with that, it's my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon?

Thank you, Nikki, and hello, everyone. Thank you for joining us for FIBRA Macquarie's Fourth Quarter and Full Year 2024 Earnings Call. I'm proud to share that FIBRAMQ delivered another quarter of solid results, contributing to a year of sustained earnings growth as we achieved record AFFO generation of $114 million. Before diving into our results, I'd like to emphasize that 2024 was a year that demonstrated the strength and resiliency of our business model. Our strategy has yielded solid results, with our focus being on 4 key priority execution areas: optimizing net operating income across our portfolio; disciplined growth through industrial development; maintaining a well-positioned balance sheet and prudent approach to capital management; and building a strong and positive organizational culture where our market-leading team believe in our continued success, integrating sustainability, safety and operational excellence as central pillars of our business. Our strong leasing performance in 2023, with industrial re-leasing spreads of 14.1%, provided solid earnings momentum into 2024, where we achieved a healthy 13.4% re-leasing spread, meeting our goal of double-digit increases. This strength in leasing helped drive a 5.8% increase in average rents and a 6.5% rise in same-store NOI, reinforcing the quality of our portfolio. We are cautiously optimistic that this momentum will continue into 2025, where based on existing market conditions, we expect to see sustained performance in AFFO and are introducing our full year distribution guidance that implies a 4% increase in U.S. dollar terms on a stable payout ratio. We have also made progress in our industrial development program. We successfully secured tenants for 2 new development properties and have 2 additional buildings that have been delivered or are nearing completion. The addition of land parcels in Guadalajara and Monterrey through the year provides us with ample capability to add to GLA over time. In our retail portfolio, the location and necessity-based format of our properties have proven to be a winning formula. We've continued to deliver occupancy gains, closing the year at 93.3%, which has resulted in above inflation NOI growth in this segment. These results drove sustained earnings momentum with revenue up 7% year-over-year in underlying dollar terms, contributing to an increase in consolidated NOI of 6.3% in dollars. With regards to our stabilized industrial portfolio, performance remains sound. For the fourth quarter, NOI was $48.2 million, a 4.3% increase over the prior corresponding quarter. Total leasing activity comprised 800,000 square feet of GLA, including 156,000 square feet of new leases and more than 630,000 square feet of renewals. This quarterly leasing activity contributed to an overall vibrant environment for the full year, where we executed 62 new and renewal leases, comprising 5.3 million square feet of GLA. Looking ahead to 2025, I want to emphasize a particularly important aspect of our portfolio. Our lease expiration schedule is notably lower than our historical average, with just 11% of the industrial portfolio scheduled to expire this year. This positions us favorably in the currently cautious environment providing enhanced stability and predictability in our income stream. In our retail portfolio, we delivered solid results with continued positive momentum. Occupancy increased sequentially throughout the year and our weighted average rental rates were up 5.5%. This resulted in a fourth quarter NOI increase of 4.3% over the prior corresponding period. The retail portfolio benefited from the strong retention of 83.4% over the last 12 months and quarterly cash collections increased 12.8% annually, which we consider a positive reflection on the improved performance that has been building over the year and one that we expect to be largely sustained through 2025. Looking ahead, we remain committed to advancing our development program while maintaining a prudent approach in response to evolving market conditions. Park infrastructure and earthworks are progressing across multiple sites ensuring a steady flow of opportunities in the years to come. While near-term challenges persist, especially with regards to the threat of tariffs, we are taking increased caution on construction starts in the immediate term. However, we remain confident in the long-term fundamentals of the industrial sector and our ability to create value through strategic execution. On this topic, I want to share our perspective on the broader market environment. Despite the current geopolitical uncertainties, we maintained a strong conviction in Mexico's role as a crucial player in global supply chains, remaining a competitive place to do business and ultimately consolidating its trading relationship and alliance with its North American partners. We remain encouraged by the Mexican government's policy initiatives and focus on maintaining mutually beneficial trading relationships. As an example, the recently announced nearshoring decree is expected to stimulate Mexico's export economy. Additionally, Plan Mexico is also expected to enhance Mexico's position within North American supply chains, reducing reliance on foreign imports and creating new opportunities to grow industrial production domestically. The government's commitment to infrastructure development, including highways and bridges, will further support efficiency and connectivity. Moreover, the national energy strategy focused on expanding the generation capacity, improving grid transmission and distribution, whilst recognizing the importance of renewable energy will provide much-needed critical support for the expansion of the industrial sector. With targeted programs to attract investment in strategic sectors, Mexico is well positioned for growth over the long term, and we believe that FIBRAMQ is well positioned to capitalize and benefit from these opportunities. We, of course, cannot ignore the current market backdrop and uncertainty. And so at the same time, we are assessing contingencies depending on how the current landscape evolves. Importantly, there are several elements of our business and portfolio that demonstrates our resiliency. We have a high-quality, diversified portfolio with a weighted average lease term remaining of 5 years across our largest industrial tenants, who represent 25% of our ABR and a WALT of more than 3 years in our broader industrial portfolio. Our resilient portfolio, combined with our prudent balance sheet management, gives us both the stability to weather market fluctuations and the flexibility to pursue value-creating opportunities as they arise. Before handing over to Andrew, I want to thank our team for their valued contributions and all of our stakeholders for your continued support of FIBRA Macquarie. Andrew?

Thank you, Simon. For the fourth quarter, we delivered an AFFO result of MXN 583.2 million, up 20% from the prior year, driven by a 17% increase in NOI. Contributing to this growth was higher same-store income and NOI from our new developments, partly offset by higher interest expense. We are also reporting a record NAV of MXN 54 per certificate, which is up 22% year-over-year. Our balance sheet remains well positioned with adequate leverage metrics and strong liquidity to support our strategy. As of December 31, our real estate net LTV was 32.6%, and our net debt-to-EBITDA multiple was 5.1x. We have no scheduled maturities until September 2026. And our weighted average cost of debt is 5.6%, of which 99% is fixed rate. We have available liquidity of approximately $435 million, which positions us well to fund our developments in process and selectively pursue investment opportunities and, of course, maintain stability should macro conditions deteriorate. As is customary for this time of the year, we are also introducing our outlook for 2025. We maintain a cautious outlook on operational performance and expected to deliver sustained returns through AFFO growth and cash distributions. Note that our guidance assumes that there is no material deterioration of the geopolitical landscape or trading relationships. Revenue and NOI growth driven by contractual increases and continued healthy low double-digit lease spreads are expected to be partly offset by the financing cost of near-term investments in FIBRA Macquarie's industrial growth CapEx program, which are expected to contribute to additional revenue and AFFO growth in future periods. With regards to AFFO, we are guiding to a range of MXN 2.95 to MXN 3.05 per certificate. This equates to an equivalent USD range of $115 million to $119 million, representing an increase of between 1% and 5%. We are also initiating guidance for cash distributions in FY '25 of MXN 2.45 per certificate expected to be paid in quarterly installments, representing a meaningful step-up of 17% in peso terms. This cash distribution guidance equates up to approximately $95 million, which represents an annual increase of 4.2% in USD. The guidance implies an expected FY '25 AFFO payout ratio of approximately 82%, reflecting a comfortable distribution coverage. As Simon discussed, while the current macro and political uncertainty persists, we remain confident in the longer-term positioning of Mexico as well as FIBRA Macquarie's attractive and well-located portfolio, supported by the strength of our balance sheet and liquidity position. Our FY '24 results and FY '25 guidance reflect our continued track record of delivering reliable earnings, disciplined capital allocation and attractive total returns. This, combined with our strong operational performance, strategic development execution and prudent financial management have positioned us to navigate market fluctuations while creating long-term value. I would like to take this opportunity to recognize the commitment and efforts of the entire FIBRA Macquarie team and thank our stakeholders for your ongoing support. And with that, I will ask the operator to open the phone lines for your questions.

[Operator Instructions] We are having some technical difficulty. Please stand by. [Technical Difficulty] [Operator Instructions] Our first question is from Alejandra Obregon with Morgan Stanley.

We're just having some technical difficulty. We're not getting any audio feed on our line. Just hold for one moment, please. [Technical Difficulty]

Our next question is from Rodolfo Ramos with Bradesco BBI.

We'll go back to Alejandra's question, but thank you -- [Technical Difficulty]

Our next question is from Alan Macias with Bank of America.

Regarding [indiscernible] -- [Technical Difficulty].

Please stand by while we address some technical issues. [Operator Instructions] Our next question is from Jorel Guilloty with Goldman Sachs.

I have 2 quick questions. One is around the markets where you're seeing maturities for 2025. You mentioned that it's a low amount of markets that are rolling over. It's coming at 10% spread, but I just wanted to get a sense of where exactly is it more focused on Tijuana, Monterrey, what have you? And then the second question is around if the deceleration, the material deceleration that we've seen in border markets, due to uncertainty around the near shoring or USMCA or what have you, I wanted to get a sense, is there a risk that we could see this spreading into other markets? Or do you see this as limited to border markets as we've been seeing so far?

[Technical Difficulty] scheduled expirations in our markets. And so Monterrey, we have a bit of an exploration. Tijuana, Juarez, et cetera. Okay. I'm just being asked to start again. So I'll do that, and thanks for bearing with us as we go through these technical issues. So Jorel, just picking up the question again regarding where we're seeing scheduled expirations for the year. As I was saying, we're really seeing it across our entire rent roll sort of fairly mixed bag. Nothing concentrated. A little bit in Monterrey, Tijuana, where we have our inventory basically. So nothing really which is particularly concentrated in one market. And when we think about how we're seeing explorations roll over, et cetera, again, I would say, we're not really seeing any particular pressure or roll off and move-out trends in any particular market. It's a fairly good rollover outlook. And I would say, putting that all together, it's a fairly stable outlook when we think about occupancy going forward into FY '25. The second question was around, I guess, potential ripple effects, et cetera, through other markets of the Northern markets. Look, I think as you know, Jorel, we have a very integrated supply chain. So to the extent that we're thinking about anything which is systemic or impacting the export economy. Obviously, yes, the border markets have the highest exposure. But realistically, when you think about the overall export economy, it does also filter down quite meaningfully, whether it's Bajio, Guadalajara, Queretaro, et cetera. So I would say you should be seeing any type of trend if you're thinking about sort of a bear case with tariffs, et cetera, that should really sort of have a ripple effect, yes, through the entire industrial market because of the integrated supply chains. But certainly, amplified in the North is a fair assumption.

[Operator Instructions] Our next question is from Felipe Barragan with BTG Pactual.

Mine is on part of the guidance that you guys gave on having the revenue and NOI growth offset by the financing costs. Is the financing cost just assuming your current debt? Or are we potentially seeing an increase in the debt? And if yes, what sort of LTV levels are you guys looking at?

Thanks for the question. It's Andrew here. So absolutely. So the guidance does actually assume that $50 million to $100 million range of incremental growth CapEx expenditure that we are looking to deploy throughout the year. The guidance range takes into account, I think, a range of scenarios ultimately, whereby deployment may be impacted by the broader economic and macro outlook. But certainly, sort of as a base case at the lower end is completing all of those projects that we have in process and delivering those now. And so you'll see LTV not stepping up meaningfully, but you will see some drawn debt as we work through those projects. And ultimately, we've got a healthy pipeline there of new opportunities. And so should we see some more stability or opportunistic projects appear. There's also the fact that the balance sheet is well positioned from a liquidity standpoint to be able to opportunistically execute on those types of opportunities as well with around $400 million in available liquidity.

Okay. Great. And just a follow-up real quick. What's sort of like your internal limit for LTV?

Yes. So I think our guidance has consistently been that we'll be in the order of 30% to 35% in terms of LTV. What we have indicated in the past, the willingness to step up slightly above that sort of 35% with conscious that we'll see a revaluation uplift on the stabilization of those development properties as they come into the stabilized portfolio. And so that will naturally have a correcting effect. But in terms of what we're talking about deployment here and given the fact that we're around 32% today in terms of our real estate LTV, we're expecting to stay well within that range.

Our next question is from Andres Aguirre with GBM.

Congrats on the result. I have one quick question. Could you provide some detail on the property you're developing in Tijuana? We saw the delivery was first planned for this quarter, but you -- but now it's expected for the first half of the year. Can you share some more on the timeline and what's behind the change, please?

Thanks, Andres. It's Simon here. Look, I think that development has moved along very nicely. It's a closed box now with 4 walls and a roof and utilities, and we're actively marketing it. So there's a little bit of a technical definition in terms of when we formally say it's delivered. But for all intents and purposes, it's done. We are making some finishing touches. So that will be formally closed out in this first half. But as I say, we're basically marketing that and the characteristics of the property, we think will serve the market well. We think, ultimately, the lease-up that we're expecting on this will be in line with the original underwriting anyway, just given what we're seeing as a market backdrop where we are seeing some good interest there. And importantly, that's a building that we're doing with the high standards of lead, and some of the high-quality names that are looking at the property, they actually need lead. So we are seeing that trend in the marketplaces like Tijuana, where building high-quality product like we're doing with Tijuana 31, it's going to be a differentiator and put us in that bracket where the best type of tenants who need lead, we're giving that product to them. So as I say, I think we're basically in a position where we can still meet our underwriting timeline when it comes to the lease-up of that property. Obviously, if tariffs come about, that could change. But as we're seeing at the moment, it's a pretty good backdrop.

[Operator Instructions] Our next question is from Rodolfo Ramos with Bradesco BBI.

I have here just one question remaining, and it's about your future development and CapEx. Is there any particular market that you're looking at that could push you to either the lower side or the higher end of your CapEx guidance? I'm not sure if the weakness in Ciudad Juarez could do that? And if you can comment also on any risk that you see there, given the great potential that you have there to develop more GLA based on what -- your reserves and on your plan?

Yes. Thanks, Rodolfo. Look, I think where we're seeing the opportunity, we just spoke about Tijuana 31. If that has a sort of a shorter-term lease-up than the ability in that park that we have there to get on deploying or constructing a new building, that opens up the window in Tijuana. So we're seeing generally some good opportunities in Tijuana generally from a pipeline, but also a lease-up perspective, that's probably one of the better favored markets. Guadalajara, obviously, we like as well, low occupancy -- sorry, low vacancy, I should say. And obviously, with the land parcel that we acquired last year, where we're moving forward the early works there to be able to go vertical on that in the second half of the year. So I think that's also got the ability to keep moving forward. And again, we're seeing some nice pipeline opportunities as well when we think about land sites in Guadalajara. And in Monterrey, I'd say it's always a vibrant market. And again, we have some land sites there. We have some lease-up to do, but we also have some good opportunities as well to think about going vertical on the land sites we're seeing there. So those are, I guess, the sort of the more favored markets when we think about where we have land banking opportunities to move forward.

I think fair to say, and to complement, Simon, in terms of the land bank that we have in places like Juarez and Reynosa, we'll wait to see lease-up on the existing stock and continue to monitor those markets before considering to put new product into those particular projects.

Our next question is from Jorge Vargas with GBM.

Congratulations on the results. Just 2 quick questions from my side, please. Rental escalations remained strong, particularly in the industrial segment, with a 32% lease spread. Do you see this level of pricing power continuing in 2025? Or do you anticipate some normalization in these negotiations? And my second question is, the NOI margin contracted slightly due to higher property-related expenses, should we expect similar cost pressures in 2025? And what specific costs contributed to the margin contraction?

I'll take up the first part of those questions. And when it comes to our re-leasing spreads, yes, absolutely. We were very happy to see the -- to finish on a high at 22%, a record high last 12 months at 13%. What I reflect on that performance, I think it was around this time last year when we were sort of thinking or we're getting asked, what do you think we'll do in FY '24? We thought we'd said it would be disappointed if we didn't get to double digits. So I think in the end, we were probably a little bit higher than expectations getting to 13%. Here we are again, thinking about the year ahead. Slightly different market backdrop, yes, but with the visibility that we have and under the current market conditions, again, we think we'd be happy getting to that 10% area. Let's see how we go. I think the pretty strong visibility on how we think those renewals will work out. We'd like to think there's a good chance of getting to that 10%. Always, those things could change, as you say, with what's going on, but we feel pretty comfortable at the moment that we'll be able to get that. So again, I think we'll look to maintain that momentum. And importantly, to the 13% last year, in particularly the 22% we saw in the fourth quarter, most of that impact will actually start feeding into the FY '25 results when you think about contribution to income. So really good momentum heading into FY '25 where we really have the opportunity to continue in terms of that same-store performance. We're particularly proud of the fact that we're able to hit a 7% increase in industrial same-store performance in dollar terms for FY '24, retail at 5.3% in pesos. So those are really strong numbers to be proud of. And I'd like to think that, again, our same-store performance, particularly with the low rollover, it's going to be a good year going forward with the momentum that we've got from the back end of this year.

Jorge, picking up on the second part of your question regarding the NOI margin. In the fourth quarter, we did have some seasonality in expenses that come through. And so typically, we do see a bit of an uptick in things like repairs and maintenance in that final quarter of the year. On the retail side as well, we had some one-off expenses, particularly related to some historical utility, water and electricity-type related expenses that came through there during the fourth quarter as well. And so I would say indicatively, referring to where we were on a full year basis for FY '24, you'll see a marginal increase of a few basis points, we would think as we expect to go into FY '25, but largely stable after taking into account or removing -- backing out those one-off expenses.

Our next question is from Pablo Monsivais with Barclays.

Apologies if you already answered this question, but I wasn't able to hear properly. Just wondering about Monterrey. We have seen that, I don't know, like 2 years ago, demand was very strong. And then, of course, real estate players start to develop a lot of properties there. Now I think that net absorption has decreased a little bit of what we saw 2 years ago. What are you seeing right now in terms of the supply-demand balance in Monterrey?

Yes, it's a good question, Pablo. I think Monterrey is a big market, over 100 million square feet of GLA. So it's a very deep market, and there's always a lot of activity going on. And there's a fair amount of land out there for construction to keep coming in. So I would say the year that we're seeing and the way we're seeing Monterrey finish, it's fair to say it's probably softened a little bit, but again, nothing that concerns us. We're sort of in that 4%, 5% vacancy area, which is a normal level, and it's a nice healthy demand-supply balance that we have from Monterrey and indeed, you probably say that's for the broader market. So I think it's also just a little bit of a coming back to normal type feeling where we had really strong markets, 100% sort of unprecedented-type demand-supply dynamics for 1 or 2 years there. But particularly in the second half of '24, we're seeing those markets and Monterrey is a classic example where, yes, we're sort of coming back to that 4%, 5% vacancy. So not particularly worrying from our point of view and what we see ahead of us. Again, we think that Monterrey is going to have a fairly solid performance for FY '25 as far as our own portfolio is concerned. And in some places like Apodaca, I think, are going to go from strength to strength. Other markets are a little bit more patchy. But overall, I think it's fair to say it will be a fairly steady year next year with a bit of supply coming on, but good, healthy demand dynamics and that 5% vacancy is probably going to be around there all year next year.

If I may add a follow-up on my question. Perhaps what we saw of increasing demand in Monterrey in particular, has been more to manufacturing for exports. But we have seen also logistics and consumer-driven tenants to expand significantly in Mexico. How would you describe the dynamics of I don't know, like 2 years ago being, okay, let's build this or have these tenants for light manufacturing. And right now, I think that consumption has performed pretty well. Should you like pivot to focus more on that consumer-driven tenants? Or will light manufacturing still be the growth driver going forward?

Yes. Look, I think we still see the light manufacturing as being a really good growth driver. When you think about the lease-ups that we did in 4Q in Monterrey, we had an electronics manufacturer coming there. And we're still seeing, particularly where you have buildings with power, light manufacturing demand is definitely out there. We have seen some interesting activity around the consumer side. But again, I don't think we've fundamentally shifted our strategy or where we're seeing the leasing demand come up.

Yes, I think that's right. And I think from where we stand today, Monterrey is a market where logistics does play a larger role in the overall customer base as a function of the large population that's there to serve. And so I think what's important is that the product that we're developing and building as well is highly flexible. And so building to 36-foot clear, efficient buildings with a great deal of flexibility in terms of number of docks, access, truck circulation, et cetera. And so we think we're well positioned with this type of flexible product to be able to capture both markets there and be able to sort of ultimately outperform, I think some of the stock that's out there in the market that's perhaps of a less institutional quality.

There are no further questions at this time. I would like to hand the floor back over to Simon Hanna for any closing comments.

Thanks very much, Paul. Thanks, everyone, for participating in today's call. Despite the technical difficulties, we appreciate the patience, and we look forward to speaking with many of you over the coming days and weeks, as well as updating you again soon at the end of the first quarter. Thanks very much. Bye.

This concludes today's conference, you may disconnect your lines at this time. Thank you for your participation.