Fibra Mty, S.A.P.I. de C.V. (FMTY14) Earnings Call Transcript & Summary

The following is a recording for Manuel Perez with IR [ staff ], on Thursday, February 20, 2020, at 12 p.m. Central Time. Good morning, and welcome to the Fourth Quarter 2019 Fibra Monterrey's Conference Call. With us this morning from Fibra Monterrey, we have Mr. Jorge Avalos, CEO; Javier Llaca, COO; and Jaime Martinez, CFO. They will discuss on the more important strategic financial operating aspects of the quarter. It is important to note that the presentation referred to this conference is available at www.fibramty.com, and recordings of the call will be available on the website of the company in the next 2 hours. Let me remind you that the information discussed in today's call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to rely unduly on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statements. I would now like to turn the call over to Mr. Jorge Avalos. Please go ahead, sir.

Thank you, Travis. Thank you, everyone, for attending to our fourth quarter conference call. I would like to start by thanking all our team members for their outstanding contribution on what we believe has been one of our best years ever. As a result of our commitment, alignment and transparency on delivering results that were promised, we were able to achieve a successful follow-on of MXN 3.9 billion in the local markets, being the sole equity public issuance for the past [ 15 ] months in the Mexican market. Furthermore, I want to highlight that for the first time since inception we had an important participation of more than 1,600 private investors, and we have proven to be an attractive income-producing asset that is profitable and predictable. In terms of the use of profits and according to our guidelines we made during our roadshow, we achieved our first acquisition of the Garibaldi portfolio 28 days after the follow-on. At the beginning of this month, we announced a binding commitment to acquire the Perla portfolio, which Javier will give you the details further on, and we estimate it will be concluded within the next 2 months. These 2 transactions represent approximately 80% of the proceeds in addition to the pipeline that we are under negotiation. We believe we can fully deploy the rest of the proceeds during the first semester. I'm also glad to announce that for 5 years in a row we have overachieved our annual guidance. In 2019, we distributed MXN 1.1150 pesos per U.S. dollar, which was [ 4.5% ] above our estimate, representing a dividend of 9.4% using the [indiscernible] at the beginning of the year. Furthermore, we have been able to increase 37% of our distribution per U.S. dollar since inception. During 2019, we initiated 2 important long-term strategical projects: digital transformation and ESG. In terms of digital transformation, we've seen how the evolution of the PropTech has exponentially evolved in most of the developed countries, making users' and tenants' daily experiences memorable and benefiting landlords with a better and more efficient service. I'm sure this endeavor will help us know our clients' needs and will strengthen a long and lasting relationship. In terms of ESG, sustainability has become a major topic in the global agenda. We are convinced that any company that's not going to address these issues could compromise their performance in the long run. We also believe that companies should not only pay attention to their financial information, but also to the positive impact they are creating in their own communities. For these reasons, we decided to hire a company with proven credentials in terms of ESG advisory called Social Value Institute, so that they could help us diagnose and elaborate a joint work plan to set sustainability as a long-term strategic goal. Further on, and on a continuous basis, we will present in our quarterly report the advances we will be implementing in terms of ESG, as this is a continuous compliance process. I will now turn the call to Javier Llaca, who is our COO, so he can walk us through the operations and acquisitions. Javier, please [ go by ].

Yes. Thank you, Jorge, and good afternoon, everyone. I will start with the same-property performance analysis of the portfolio for the second quarter that we present on Page 3 of the webcast material. The portion of the portfolio for same-property purposes is comprised by 42 out of the 58 properties that we owned by the end of the fourth quarter of 2019. It is important to point out that we are excluding the old Cuprum facility given the fact that the property was vacated last July and is currently under development, and it does include an additional 91 square meters of GLA after our BOMA adjustment in one of our most recent renewals at Oficinas en el Parque. Occupancy dropped 110 basis points mainly due to expiration and partial vacancy on one of our industrial properties in San Luis Potosi which is currently under negotiation for new leases. In terms of gross revenue, this grew from MXN 236.1 million to MXN 243.2 million. This is a growth of 3%, driven by the combination of lease collections and nonrecurrent income from conventional penalty on an early termination in one of our office buildings. Operating expenses only grew by 0.2%, thanks to strong expense control from our asset and property management teams despite the fact of constant increases above inflation on expenses such as electricity and power. In this regard, I would like to point out that we're currently working on specific initiatives for the optimization and utilization of green power to reduce our carbon footprint. This will focus in an increase of our net operating income of approximately MXN 7 million or 3.4% growth, which is higher in more than 2x our weighted peso/dollar inflation rate or variation of exchange rate. It is important to point out that the same-property NOI margin increased by 30 basis points, from 87.9% in the fourth quarter of 2018 to 88.2% during the last quarter of 2019. Once we incorporated additional acquisitions and construction from the [ Patria ] [indiscernible] and Cuprum properties, which are mostly triple net leases, we were able to increase our net operating income in more than 26% year-to-year and our NOI margin increased up 180 basis points from 88.4% to 90.2%. On page 4 of the presentation, you have a new simplified geographic snapshot of our portfolio, with slight differences from the previous quarter. After incorporating the first tranche of the Garibaldi portfolio announced last November, we have reached a total of 58 properties with a total GLA of nearly [ 700,000 ] square meters across 13 markets in 9 states. On page 5 of the presentation, you have the key performance indicators of the portfolio as well as the expiration profile of our lease contracts, all as percentages of our income. The combination of asset classes of our portfolio is practically half and half between our office and industrial properties, in line with our 2020 growth program. This proposition will shift towards higher office component once we conclude the Perla transaction recently announced. It is important to point out that our currency composition has reached 70% of dollar-denominated leases, which allow us to strengthen our capital structure that Jaime will address later during the call. This composition will increase after the last tranche of Garibaldi and La Perla are fully integrated into our portfolio. The weighted average remaining term continues in the neighborhood of 5.3 years. I will later address the progress of the renewal of the leases that will expire in 2020 and 2021, which we expect to have a positive impact on stretching our weighted average remaining term shortly. Also, the Perla transaction will provide additional positive stretch of the weighted average remaining term of the aggregated portfolio. Now let me go through some of the highlights of our progress on renewing leases that are scheduled to expire during 2020 and 2021, shown on Page 6 of the presentation. These are all percentages of gross rent income. Of the 14.1% of gross income in leases scheduled to expire in 2020, we have secured renewals for [ 33% ] and are currently either into negotiations or about to enter into negotiation for another 48%. We're also working on leasing up the space that won't renew and will vacate sometime this year, which accounts for 19% of scheduled expirations. For leases expiring in 2020 -- during 2021 that account for 16.4% of gross income, we have already secured renewals for 21% of these leases, while 54% are already under negotiation. We have not received any confirmation on any definitive termination for 2021 so far. As Jorge mentioned before, we have executed a bank commitment, sorry, for the acquisition of 100% interest on the office component at [ District La Perla ] [indiscernible]. The highlights of the transaction are outlined on Page 7 of the presentation. This acquisition is a progressive purchase of a class A, multi-tenant office complex of more than 43,000 square meters of gross rentable area. The buildings were completed in 2018. Once full [ capitalization ] is achieved, the total purchase price will be up to $100.48 million with an expected net operating income of $8.44 million during the first year after capitalization. The weighted average lease term is approximately 6.4 years and 87% of lease agreements are dollar denominated, all single net. Finally, and as Jorge mentioned earlier, we have reached acquisitions and binding commitments for 80% of total proceeds from our last acquisition, and we continue to make progress on 4 more transactions that would allow us to fully deploy all MXN 3.9 billion [indiscernible] last October. We expect this to happen during the first semester of 2020. We continue to be in line with our 2020 growth program, and we are working on additional transactions that will drive our program to completion by the end of this year. With that, I'm going to ask our CFO, Jaime Martinez, to talk about the key financial aspects of Fibra Monterrey. Go ahead, Jaime.

Thank you, Javier, and good morning to everyone. I would like to focus my speech in the results and expected effects of our foreign equity rights that took place during fourth quarter '19. We have already seen some benefits after the follow-on, first in terms of economies of scale. As we mentioned on our last speech, corporate expenses as a percentage of the company's assets would decrease around 10 basis points from low 80s to low 70s, which is an advantage of our internally managed structure. The second positive outlook is regarding Fibra Monterrey's [indiscernible] liquidity. Average daily trade volume [indiscernible]. We also have observed more institutions operating Fibra Monterrey synergies. The fact that our follow-on was the only issuance in Mexico for the past 18 months has provided the company with more visibility for potential investors, and 4 new analysts have begun [ coverage ] reports for Fibra Monterrey. In this regard, we increased market cap by around 50% and doubled the amount of flows in the retail market. 1,600 individual investors bought shares at the follow-on. As a result, we continue to [ higher ] places in the medium level of liquidity index of the [indiscernible]. The third element is a reduction of leverage from 36% to 28% even though a lower ratio reduces the positive carry obtained by the spread between the cash and cash produced by our U.S. dollar-denominated rent and the interest rate of our debt, it's more important to maintain the loan to value of around 30%, as we have mentioned several times. A 30% represents a healthy level and gives us firepower for strategic acquisitions like [ Filios ] portfolio at the end of 2018. The guidance for 2020 has been significantly influenced by the dilution effect to reach the distribution [ per CBFI ] is necessary to execute the acquisition and take the leverage to a slightly higher level. Given the time required to accomplish such goals, the guidance for 2020 at an exchange rate between MXN 19 and MXN 20 per U.S. dollar is a distribution in the range of MXN 1.06 and MXN 1.10. I'd like to point out that even with a dilution of around 60%, the number is 1% above last year's guidance. In 2020, have some challenges that we've announced to accomplish our guidance. To mention some of the most important issues, renewals around 14% of the portfolio expired on 2020 [indiscernible] already went through. To invest the follow-on resources in accretive acquisitions and to take additional debt at competitive conditions. There are also several variables that may affect our performance, such as interest rate and exchange rate between Mexican peso and U.S. dollar. I would like to finish my speech by mentioning that our consistent performance has been based on a strict discipline in all aspects related to Fibra Monterrey's performance. 2020 will not be the exception. We will be close to you, offering information of the evolution of our business plan. That would be all. Travis, please proceed with the questions.

[Operator Instructions] Currently holding for the questions. Our first question comes from Gordon Lee, BTG.

Two quick questions, related questions really. First, on the deployment of the pending 20% still to be deployed from the offering that you expect to be deployed by the first half, would we be looking at similar types of properties or a similar split between industrial and office? And then the second question is, and you might have mentioned this, Jaime, but it wasn't very clear. The guidance, is -- does that assume the portfolio as it is today, or does it assume that that 20% is also deployed?

Gordon, nice to hear you. This is Javier Llaca. The first question regarding the remaining 20% of the proceeds. We have 4 transactions at different levels of negotiations, all of them, if you have ask me, at least 3 of them look pretty good in the short term. Without giving any -- giving away any details, but I can tell you that it would be around 75% of the component will be office. Are smaller transactions, obviously, than the ones that we already announced and are executing. But we believe that these 4 transactions would cover for a little bit more than the 20% remaining, we would need to use a little bit of that to cover for those, and we expect to complete those transactions before the end of the first semester of this year.

In terms of the deployment, we -- in our models, we consider the acquisitions to Perla in May around 80% of the whole use of provision because that project at this time vacant, and we are not going to pay, as you know, as it's completely full and occupied and paying rent. This is one part. The other thing that we have to consider is the VAT. As you know, it may take around 2 or 3 months to have their refund. The last acquisition, which was Filios, took us around 2 months. So we think it's going to be around the same period. For the guidance calculations, we didn't include additional acquisitions as we don't have enough visibility, even though it is possible that Javier has some more additional properties to acquire for the end of the year, I think around [indiscernible].

Yes. In other words, the guidance takes into consideration 80% deployment of the proceeds and the rest of the proceeds will be providing financial income on treasury.

Our next question comes from Amanda Rodriguez, Signum Research.

Congratulations on the results. I have two questions. The first one relates to the balance sheet. My question to you is your -- we should expect some debt changes considering this La Perla acquisition? And my second question is about the guidance. What is the occupancy level particularly of La Perla that you are considering in this forecast? That's my only two questions.

In terms of the balance sheet, we are always working with our banks trying to find more efficient ways to finance our acquisitions and so on. At this time, we are working with our banks in order to have additional leverage, which I think we can acquire once we acquire La Perla in order to have the adequate proportion between the properties and that we are not sure about the size of this leverage. We are just working with the banks. And once we have a clear picture, we will share with you at that point.

And in regards to the second part of the question, Armando, as we announced, this is a progressive acquisition. Right now, 77% of the building is occupied and producing rent, 77% of GLA. We estimate that represents 78% of our total potential revenue, and that's the first tranche that we are going to liquidate. But marketing and leasing of the building is moving really good. We are positive and we are confident that full stabilization might be achieved before the end of the year. There are some wait period from those new leases that we have to be very careful about. But if you ask me, I wouldn't be surprised that we paid for the full [ satellite ] building by the end of the year.

And remember -- this is Jorge -- just to point out what Jaime just explained about the leverage. It's very important to mention that, as Jaime told you during this speech, our objective is to maintain a 30% LTV in our balance sheet. The way that we can access more leverage in terms -- like we did past December when we bought the Filios transaction, that gives us leverage by opportunity assets. It is -- we know that it is more accretive to be -- to have a bigger leverage, but we want to be very conservative in terms of how we are managing our balance sheet. So what we have always told our stockholders and you guys is that we're comfortable on a range between 25% and 30% LTV. Both our technical committee has authorized us to go up to 35% LTV in case that we see an opportunity in the market.

Perfect. Thank you all for your comments.

All right.