FIBRA Macquarie México (FIBRAMQ12) Earnings Call Transcript & Summary

Good morning, and welcome to FIBRA Macquarie's First Quarter 2025 Earnings Call and Webcast. My name is Sherry and I will be your operator for this call. [Operator Instructions] I would now like to turn the conference over to Nikki Sacks. Please go ahead.

Thank you, and hello, everyone. Thank you for joining FIBRA Macquarie's First Quarter 2025 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 equivalent amounts, unless otherwise specified. As usual, we've prepared supplementary materials that we may reference during the call. If you have not already done so, I would 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 FIBRAMQ's First Quarter 2025 Earnings Call. I'm pleased to report that we've started the year with positive momentum, demonstrating the resiliency and strategic positioning of our portfolio. Despite a volatile macro backdrop, FIBRAMQ continued to deliver robust financial and operating results. In the first quarter, notable achievements include; record NOI and AFFO in U.S. dollar terms, industrial re-leasing spreads of 17% and the completion of 1.6 million square feet of industrial leasing activity, which is, in fact, slightly above our 3-year rolling average. We were particularly excited to have brought forward over 600,000 square feet of accelerated renewals across 3 leases into the first quarter. This leasing activity defensively positions our industrial portfolio with what we consider to be a very manageable 7.4% of scheduled expirations remaining for the balance of the year. We're also pursuing additional opportunistic, accelerated renewals with attractive leasing terms to proactively address our expirations beyond 2025. And with respect to our outlook on renewals, we're maintaining our guidance for leasing spreads to be in excess of 10% with healthy levels of retention for the full year. Our disciplined approach to capital allocation continues to serve us well in a heightened risk environment. We continue to make progress on our development initiatives, and in recent weeks, we delivered the first building in our Tijuana industrial park, and we're actively marketing this property for lease and engaging with potential customers. We remain well placed to accelerate new development opportunities through our strategic land bank that positions us for further growth when market conditions align with our criteria to commence speculative construction. With regards to our stabilized industrial portfolio, performance remains robust with average rental rates growing annually by 5.7%. And whilst new leasing activity is understandably being impacted by the broader market uncertainty regarding tariff policy, we nevertheless closed the quarter with a healthy same-store occupancy of 95.8%. We continue to leverage the privileged access across our internal property management platform, which provides us direct engagement with our customers. And as I like to do throughout the year, I personally took the opportunity to accompany our teams in meeting and speaking with our diverse range of customers in important industrial markets such as Tijuana, Juarez, Chihuahua City, Guadalajara, Hermosillo and Puebla. I continue to be encouraged by the positive sentiment surrounding those conversations. And furthermore, it was also quite positive to see the generally high utilization rates in our buildings. Besides from, once again, being impressed and incredibly proud of the sophistication and excellence of the broader Mexican manufacturing sector, the time spent with our customers reinforce my confidence in the resiliency and continued performance of our portfolio. In our retail portfolio, the location and necessity-based format of our properties have continued to be a reliable source of cash generation. We delivered relevant year-over-year occupancy gains, closing the quarter at 93% with average monthly rental rates up 5.2%, contributing to a healthy 8% annual increase in NOI. As we look to the remainder of the year, we have a stable outlook with respect to key operating indicators and expect to see that translate into ongoing NOI growth. We believe the macroeconomic landscape presents both challenges and opportunities as we navigate through 2025. Recent changes in tariff policies have introduced additional complexity to the trade and investment environment. Notwithstanding this, we believe Mexico continues to be well positioned to maintain its important and highly integrated role with respect to North American supply chains. We also note that the Mexican government remains committed to supporting the manufacturing sector through constructive policy implementation and maintaining an effective dialogue with Washington. This, along with our broader exposure to the logistics and retail sectors, allows us to not only withstand near-term headwinds, but to also capitalize on opportunities that may emerge in a changing market landscape, especially with regards to opportunistic investments that will deliver accretive total returns. With that, I'll now turn the call over to Andrew to provide more details on our results. Andrew?

Thank you, Simon. For the first quarter, we delivered a record AFFO per certificate of MXN 0.7556, driven by a 20% increase in NOI. Contributing to this growth was higher same-store income and NOI from our new developments as well as an FX benefit, partly offset by the higher interest expense. Our balance sheet remains well positioned with prudent leverage metrics and strong liquidity. As of March 31, our real estate net LTV was 33%, and our net debt-to-EBITDA multiple was 5.2x. In order to increase cash liquidity and financial flexibility amidst an uncertain macro environment, in February, we drew down USD 225 million on our revolving credit facilities. Importantly, we have no scheduled debt maturities until September 2026, our average weighted cost of debt is 5.7% with 82% being fixed rate. We have available liquidity in the order of $420 million, which positions us well to fund our developments in process and selectively pursue investment opportunities whilst positioning our business defensively amidst the ongoing uncertain policy environment. Turning to our guidance. We are pleased to be maintaining our outlook for 2025. Note that our guidance assumes that there is no material deterioration of the geopolitical landscape or trading relationships, including the implementation of tariffs. With regard to AFFO, for the full year 2025, we continue to anticipate annual growth in the range of 1% and 5% in underlying U.S. dollar terms. Should the recent appreciation of the peso relative to the U.S. dollar persist, FIBRA Macquarie will provide an update to the market regarding its FY '25 AFFO per certificate guidance in line with the second quarter reporting cycle. It is important to note that the FY '25 AFFO guidance in U.S. dollars ranging from $115 million to $119 million is not adversely impacted by an appreciation of the peso, and this simply reflects an FX translation for reporting purposes, given the underlying U.S. dollar nature of our business. We are also taking this opportunity to reaffirm our guidance for cash distributions in FY '25 of MXN 0.0245 per certificate, expected to be paid in quarterly installments. The guidance implies an expected FY '25 AFFO payout ratio of approximately 82% based on the AFFO guidance midpoint, representing one of the most well-covered distributions in the sector. As Simon discussed, while the current macro and political climate reflects some uncertainty, we remain confident in Mexico's important role in the global supply chain and FIBRA Macquarie's position as a leader in the Mexican real estate market. As we consider our outlook for the remainder of the year consistent with our track record, we continue to prioritize growth on a per certificate basis, a strong balance sheet and a robust liquidity position. In closing, I would like to take the opportunity to recognize the commitment and efforts of the entire FIBRAMQ team, a group of approximately 100 leading professionals located in 10 markets across Mexico. And with that, I will ask the operator to open the phone line for your questions.

[Operator Instructions] Our first question is from Gordon Lee with BTG Pactual.

Simon, you went through -- sort of a walk-through you did for some of the properties in some of the key markets and described more or less how some of your clients' stabilized properties are doing. But I was wondering if you could maybe provide some color as well in terms of how the lease-up, both at the pre-leasing level and also after delivery of the new properties is going? Just sort of maybe provide some qualitative context around that. And as part of that answer, has any way changed sort of your preferences for capital allocation away from development and maybe more towards either share buybacks or stabilized properties?

Yes. No, thanks, Gordon. And yes, it was great to get out and speak to our tenants and, as I said, we're -- generally speaking, things are going particularly well, I would say, despite that backdrop. But with respect to the question that you had on the, I guess, the more recent deliveries, I would say, yes, look, it's also relevant where those properties are being delivered into. So, particularly Juarez and Reynosa, couple of more recent deliveries in the back-end of last year. They continue to be some of the softer markets around the country, I would say, from a demand/supply dynamic. We're seeing occupancy drop off in both those markets. So, I would say it's certainly on the challenging side in the near term/ It doesn't really matter how good your building is, how well the utilities are, et cetera, we're still navigating that basic occupancy challenge. So, no doubt that those buildings will get leased up at some point. They're going to be fantastic developments, both of those properties, given the quality that we're delivering into the market. But I do think that the short-term lease prospects, to be frank, are limited just because of that market backdrop. So, what does that mean, as you say, with regards to capital allocation? Well, yes, certainly, we -- you would have seen that we haven't done construction starts through the quarter. So we are cautious in that respect and continue to be so. I would say that we still move forward, though, with regards to the existing land banks that we have to basically repair those to-go vertical. So we are still deploying some CapEx to do basic utility work, platform work, et cetera. That's moving ahead. That makes sense so that we're ready to basically go vertical when the market conditions are there. And so we're doing that. We are remaining opportunistic, as I said, with regards to investment opportunities, particularly, I think it makes sense in the short-term to be looking at land opportunities, particularly with great energy strategies. We're having a look there to see if we can actually execute on a pretty promising pipeline. So that makes sense. And then also, I would say the other category is more sort of the single asset purchases where we're seeing attractive pricing, attractive total return opportunities, for example, Mexico City, last mile logistics, any single asset properties there, for example, would be great if the returns are there. So that's where we're looking. Buyback, it certainly is interesting, as you say, at these levels, we get the financial proposition and the per certificate returns. I think it's just a trade-off and just balancing that also with what that means in terms of trading liquidity or even balance sheet and using leverage for that. So that's a dynamic analysis that we'll continue to monitor.

Yes. And I think just to complement Simon there as well, we have bought back north of 6% of outstanding shares over time. And so, it's a tool that we had renewed by shareholders in our AGM last month or early this month, I should say. And so something that sort of we continue to actively pursue. But as Simon mentioned, the universe of investment opportunities out there remains interesting and attractive at this point in time, particularly in the development space.

Our next question is from Rodolfo Ramos with Bradesco BBI.

My question is -- I have a couple, if I may. When we look at your occupancy, it continues dipping quarter-over-quarter. Can you give us your thoughts on when we could see this stabilizing? I mean we've seen some peers reporting stable occupancy, still expecting potential weakening. But when do you think, you could start seeing this stabilizing? So this is my first question. And then second, you don't have any meaningful lease expirations coming up this year, but next year is a little bit different. I don't know where we will be. I mean, we might be still in the same limbo that we are today. But maybe you can share whether you've been reaching out to any of your tenants, perhaps in hopes of renewing earlier or just trying to see a little bit ahead of how might those negotiations go down?

No. Thanks Rodolfo. I'll pick that up. And Andrew, feel free to add. Look, I think we actually feel pretty comfortable about the current occupancy trend. Yes, sure, we had a little bit of a decline this quarter, but nothing that's particularly concerning. I would say that the move-outs that we had were nothing as a particular theme to that. Actually a couple of tenants just looking for bigger spaces. And so that was some of the move-outs. But with some of those that have moved out, we already have, we think, good backfill prospects as well to come through in the balance of the year. So let's see how we go there. And look, I'd like to think, as you say, with that low expiration profile, through the course of the year, we'd like to think there's a good chance of holding at current leased GLA levels. I would note that same-store occupancy is at 95.8%. So I think it's important to look at that as a metric as well. That's quite healthy. We did actually have a good chunk of our leasing activity in Q1 was accelerated renewals. So, we have been proactively doing that. So we had 1.6 million square feet of total [indiscernible] for the quarter, which actually is above our 3-year rolling average, as I said earlier. So it's actually a pretty healthy number. But within that, there's over 600,000 square feet that we brought forward from scheduled expirations after Q1. We also think there's a good chance that through the balance of the year, we can bring forward other renewals, particularly bring them forward from 2026 scheduled into 2025. So, I think we're proactively pursuing that. And we think there's an opportunity not just to do that, but also at a good spread as well. So, hopefully, we can report some of that as we go through the balance of the year.

Our next question is from Jorel Guilloty with Goldman Sachs.

I have 2. One is around the sort of conversations you're having on new leases. And I'm just trying to understand, on those conversations, are tenants looking to perhaps change lease terms from what they normally would be? So perhaps trying to do a shorter duration or getting more TIs or getting something along those lines? And then the second question is, how are those conversations going for potential new tenants? Is there a certain industry or vertical where you're seeing incremental demand, perhaps because they have a view of less uncertainty going forward or they feel comfortable with the way that policy is shifting? Just wanted to get a sense of the general tenor and color of those conversations. And within those conversations, what are the sort of terms that the potential tenants are looking for?

Great. Thanks, Jorel. Look, I think, firstly, with regards to new leasing conversations, nothing really fundamental that we're seeing in terms of the shift in terms of tenor, et cetera. So, I think maybe that will change as time goes on. But for now, we're seeing a pretty consistent dynamic there in terms of those discussions as new opportunities arise. It was a soft quarter this year with regard -- soft quarter, I should say, with regards to new leasing for the first quarter. But I do think when we look at the pipeline in front of us, whilst it continues, I would say, to be a subdued leasing environment, we are seeing some opportunities out there that we think are quite prospective, including for the second quarter. And you'd be surprised, some of those are actually auto parts tenants, for example. So I think we've got an ability to do a few different auto parts tenants in different markets. And otherwise, it's a good bunch, I would say, of different sectors again. So I would say there's nothing particularly from a vertical perspective where something is underweight or overweight. I think it's a fairly consistent trend in terms of what we're seeing as opportunities. I would just say that's, generally speaking, just a lower level of opportunity than it has been compared to prior years and that's totally understandable given the current market dynamic.

Our next question is from Mario Tripicchio with Morgan Stanley.

I just have a -- I wanted to double-click on the retail portfolio. So, we are seeing that foot traffic decreasing this quarter. And so I just wanted to see how trends are shaping up on the second quarter? And also what is the outlook for the space overall?

Great. Thanks for that, Mario. Look, I think foot traffic for us, it's probably not as relevant an indicator in terms of overall tenant performance. A lot of that's to do with cinemas. I would say Q1, we had a soft quarter in terms of cinema releases or movie releases. So I think you may see a little pickup in Q2 with Semana Santa, et cetera. So I would say, look, there's nothing there from a foot traffic point of view, which is, we've seen as having a correlation with regards to overall tenant performance. We actually feel we got a pretty good -- actually when it comes to [ renegotiated ] renewal spreads at 5% occupancy holding steady at that 93% mark. So, I think we set ourselves up well for the balance of the year. The NOI generation itself, which is ultimately what matters, is at effectively record levels on a normalized basis. So, in a good position to continue to grow that NOI incrementally over the balance of the year. So I'd say it's a stable outlook. I think you're going to see foot traffic bubble around. But ultimately, it's not really going to be the leading indicator of where tenant performance is. I think we should be doing well when it comes to new leasing renewals. And I think we've got a good chance of, as I say, increasing that NOI and keeping that occupancy at current levels with a bit of luck, actually, building that as well.

Our next question is from Andre Mazini with Citigroup.

Two questions. First one, if you can remind us if the vacancy increase was concentrated on the border markets, which are more oversupplied at the moment. We've seen the numbers for like Tijuana, you went from like 1% vacancy rates to maybe a 9% now. So, in Tijuana and other border markets, if that's where your vacancy is located or if it's more spread around the whole portfolio? And the other one -- the other question is around the auto tenants. You talked a little bit about them already, but they are the ones who are facing big tariffs differently than the other USMCA compliant tenants. The OEMs are already seeing the tariffs and the auto part ones, I think, are due to have tariffs on May 3. So, if there is any different behavior or want of leasing additional space from these tenants at this time or they're kind of shrugging it off and thinking that this is temporary and they're reacting as all the other tenants are as well.

Thanks, Andre. Picking up those questions. Look, firstly, where we saw the, I guess the move-outs in the first quarter, they were really concentrated in Monterrey. We had a move-out as well in Reynosa. So I'd say both in line with where the market occupancies were going as well, we're seeing those move-outs. And just adding some color there, like the move-outs that we saw in Monterrey, there were a couple of consumer good related tenants there. As I say, they effectively moved out to actually expand operations in other parts of town. And we also had some tenants mostly in electronics, auto parts sector who are using spaces for warehousing rather than manufacturing processes. And so, consolidating into other facilities. Again, that happens from time to time. So, nothing particularly concerning there with regards to the theme or the reasons for the move-outs. And I would say, particularly for those who are actually using premises for manufacturing or process-related operations, these are move-outs that were planned from way back in 2024. So, with regards to looking to relocate to bigger spaces. So, again, nothing to do with -- well, nothing that you can connect to the current theme. When you are -- and that goes to the second half of your questions on auto parts and how tenants are currently looking at that. As you say, that's probably the more challenging part of the overall tariff equation given the special tariffs there on auto sector. I would say, though, in general, we haven't really seen any noticeable shift with regards to tenant operations and behavior in the sense that operations are, generally speaking, tracking along as they usually are. We're seeing, in general, auto sector behaving in a fairly normal functional capacity. There are some -- obviously some cars there in some markets, particularly to do with the non-USMCA compliant exports, but they're very concentrated and limited. The overall sector as a whole seems to be behaving, as I say, quite well given the considerations. So, when it comes to what auto parts tenants are doing and how they're considering the current situation, I would say it's effectively a wait-and-see mode. It's just not enough information with regards to long-term policy outlook to really make any informed decision. And so, we do think that the general dynamic is wait and see. No one is really changing. Obviously, we're not seeing any new investment coming in, in any meaningful way, but we're also, on the flip side, not seeing any tenants making decisions to pause, et cetera. It's just not the way things work. So, I think we just need to see how things move along from a policy perspective. As we said at the top of the call, we actually believe long term that actually Mexico will be better off when this is all said and done. We really need to see USMCA come through on a renegotiated basis. And I think that will be the ultimate definition of what long-term policy looks like for the sector to adjust to.

Our next question is from Jorge Vargas with GBM.

Could you elaborate on the drivers behind the sharp drop in industrial occupancy this quarter? Was it concentrated in specific markets or tenant types? And when do you expect the recovery for this occupancy drop?

Yes. Thanks. Look, as I said earlier, the occupancy drop in industrial, we saw that really coming out from a mixed bag of tenants, concentrated in Monterrey, to be fair, but nothing there from a thematic perspective. We had 2 tenants in manufacturing-related processes to do with consumer goods. They effectively exited only for the purpose of relocating to a bigger space in Monterrey. And as I say, they were long-term planned move-outs that really were in the making from 2024 that came about only in Q1. We had a couple of other tenants in electronics, auto parts, who are using these lease spaces that we had for warehousing purposes only. And again, they were basically just reconfiguring and consolidating space requirements into other facilities. Their actual operations and their presence in Mexico and in the relevant cities remain intact. So again, that happens from time to time. Sometimes we're on the losing end of that; sometimes we're on the winning end of a warehousing reshuffle. So, nothing there that we're particularly fussed about. And as I said, actually, there's a couple of prospects for those spaces that vacated to have a backfill lease-up in the balance of the year. So, too early to call any trend or noticeable shift when it comes to verticals. I think the only sort of meaningful call that we can definitively say for now is that there's just been a meaningful drop-off in new leasing activity across the board, whilst there is this period of uncertainty.

Our next question is from Felipe Barragan with JPMorgan.

Mine might have been related to the last 2. So, looking at your retention rate, it's been trickling down in the last few quarters from 89% to 79%. So just wanted to pick your brain on, if it's more of you guys looking for better tenants and improving the tenant profile of your portfolio or if that has to do with tenants maybe looking for other assets, perhaps -- you just talked about, perhaps getting a bit more space for their operations.

Thanks for that Felipe. Look, I'd say -- look, retention rate was -- yes, it trickled down a bit, but we're at an 80% area, which is not anything that is on the particularly low side. I think it's fairly in line with longer-term trends. So, certainly, it has come off a little bit, but nothing as a major drop. And I would say there, again, it's nothing that comes to mind as a particular thematic or anything that we're doing different. I think it's more just how the dice is rolled.

And I think, as Simon mentioned a little earlier, a lot of those move-outs as well were related to expansions or sort of structural shifts in the need for the tenant's operations. What we aren't seeing is that those customers are leaving our property and leaving Mexico. And so, ultimately, I think that dynamic is important to recognize because it doesn't sort of reflect perhaps some of the uncertainty around the broader macro and political backdrop. It's really unique challenges or specific objectives that those businesses are trying to achieve, whether it'd be space expansions, adjustments, moving into their own facilities, et cetera, is the type of behavior that we saw during the quarter that drove tenant move-outs.

That's right. And we saw that same dynamic in the back half of last year in Chihuahua City. We had a move-out where, again, it was basically relocating to a much bigger investment that they've made in the same city. So that's -- if there's ever such a thing as a good move out, I think that's what we'd say is a good move out.

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

Just a question on your share buyback program. What size is it, if you could remind us? And what would be the catalyst for you to do some repurchases? Would it be a deeper slowdown in expansion activity or the level of the share price?

Thanks, Alan. So, in April -- earlier in April, we had our share buyback program authorized for an annual extension through June 2026, which has a total availability of MXN 1 billion. So that remains available for execution through to mid-next year. As we sort of mentioned earlier, there are some interesting opportunities from a capital allocation perspective that we're seeing across the market, potentially some opportunistic land buying with respect to our development program. We also want to maintain a level of dry powder to be well positioned to accelerate on going vertical when we see the market improvement over time. And so, we're just being conscious with the available sources of capital that we have in terms of when we might pull the trigger and execute on some buyback. But it's certainly something that we have front of mind. As I mentioned earlier, we've done 6% historically. It's a tool that we think is important and one that we're not afraid to use at the right moment, just balancing those capital allocation priorities.

There are no further questions at this time. I would like to turn the conference back over to Simon Hanna for closing remarks.

Thank you, Sherry, and thanks, everyone, for participating in today's call. We do 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 second quarter. Have a great day, everyone.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.