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

Good morning, and welcome to the 2020 Third Quarter Fibra Monterrey conference call with us this morning from Fibra Monterrey, we have Jorge Avalos, CEO; Jaime Martinez, CFO; Eduardo Elizondo, General Counsel; and Andre De Sousa, Head of Real Estate Operations. They will discuss on the more important strategic financial and operating aspects of the quarter. It is important to note that the presentation related 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. If you are connected using our webcast tool, you have the option to download the presentation in order to move the slides at your own pace. 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 materially differ and the company advises not to rely on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statements. I will now turn the call over to Mr. Jorge Avalos.

Thank you, Michelle, and thanks, everyone, for attending to our third quarter earnings conference call. I would like to start with a quote by Charles Darwin that says, "It is not the most intellectual of the species that survives, nor the strongest, but the one that is able to adapt and adjust to the changing environment in which it finds itself." It's been more than 30 weeks since the pandemic began, coupled with a worldwide financial and geopolitical crisis. It is important to analyze and understand how our business has changed and how we are adapting to this new reality. We're seeing 2 major shifts in industrial and office segments in which we have been adapting and searching for opportunities to distinguish from our competition. Regarding the new normal for the Office segment, we are convinced that we have to profoundly change the way we have been interacting especially with users and clients in our buildings, security, health information, connectivity, densification, open spaces, among others, are important matters we have to address as owners. The use of technologies and a digital transformation will accelerate what would have probably taking a couple of years to adapt in our industry without this pandemic or this crisis. For us, the use of property technology will help us transform with a focus in 4 main topics: first, the experience of users and customers throughout a digital platform; two, big data gathering and analysis to better understand our users and visitors; three, the use of Internet of Things so we can transform our buildings into smart ones; and: Four, sustainability, collection, integration and analysis of ESG data from our properties. On the other hand, in the industrial segment, the impact caused by the USMCA and the China-U.S. trade war have driven an important near-shoring activity of companies that we're supplying the productive chains from China to North America, where Mexico outperforms other countries, thanks to its trade agreement and provides, among other things, protection mechanisms for intellectual property, geographical proximity with the United States and adequate communication infrastructure and an accessible and specialized labor force. In this sense, we believe that the industrial real estate developers who already have high-quality, stabilized industrial facilities could recycle these assets to develop new products since spec development for light manufacturing and logistics centers will be quite active and currently are lacking of banking funding. This sets an opportunity for us to consolidate our industrial portfolio with revenue streams in U.S. dollars and longer maturities. And for this quarter results, I am pleased to see that our business model has proven to be highly resilient and defensive against this financial crisis, as you will see in our financial and operating results. This has been mainly supported by high-quality tenants, long-term leasing contracts, high-quality buildings, good locations, low development risks, no vacant or spec space in our buildings, low leverage, efficient use of our capital and especially transparency and alignment to our shareholders. Before I hand this call to André de Sousa, who is our Operations Director, and who will walk you through our portfolio performance. I would also like to let you know that as of this quarter, we will be presenting an ESG report on a biannual basis held by Eduardo Elizondo, who is our General Counsel, as we are very committed and convinced on sustainability as a topic of the utmost importance for any world-class company. André, please go ahead.

Thank you, Jorge. Good morning to everyone. I hope you all are safe in staying at home. I will start with the same-property performance analysis of the portfolio for the third quarter that we present on Page 3 of this webcast material. The portion of the portfolio for the same property purposes is comprised by 55 out of the 59 properties that we owned by the end of the third quarter of 2020. Occupancy rates have dropped 120 basis points. This is mainly due to a partial vacancy on one of our industrial properties, which at this moment continues under negotiation for a new lease. In terms of gross revenues, this grew from MXN 302.5 million to more than MXN 326.6 million, a growth of 8% and this driven mainly by the devaluation of the Mexican peso during most part of this year. Operating expenses dropped 6.5%, mainly due to the under occupancy on our office buildings that has reduced the utilities consumption and the frequency of minor maintenance repairs. This has resulted in an increase on our net operating income of approximately MXN 26 million, a 9.6% growth. It is important to point out that the same property NOI margin has increased by 140 basis points from 89.9% to 91.2%. Once we incorporated additional acquisitions and construction, which are all triple net leases we are able to increase our net operating income and 15.6% year-to-year, and our NOI margin increased 170 basis points from 89.8% to 91.5%. Again, we believe that these margin levels are a typical and consequence of the recent volatility in the financial markets. We should expect an adjustment in the few months to margin levels slightly under 90%. On Page 4 of the presentation, you have the key performance indicators of the portfolio as well as the exploration profile of our lease contracts, all as percentage of our income. The combination of asset classes of our portfolio continues to be around half and half between our office and industrial properties. Our currency composition remains at close to 75% of dollar-denominated leases, in line with our capital structure that Jaime will address later during this call. The weighted average remaining term of our leases continues to be around about 5 years with more than 58% of our total income scheduled to start expiring after 2024. It is worth mentioning that during this quarter, we achieved the renewal of two 10-year leases on office properties in Mexico City and Monterrey, with no material changes in terms of rent or currency. On the other hand, in the industrial segment, multiple lease renewals were completed with terms between 1 and 10 years. In the same fashion of what we did in the last quarter report and on Page 6 (sic) [ Page 5 ] we present the comparison chart of the levels of rent collection before and during the sanitary contingency induced by the actual COVID-19 pandemic. As you can see, our levels of brand collections from May up to date, we have steadily maintained a collection level between 94% and 95%. We are, at this point, confident that we will most likely be able to catch up with pre-COVID collection levels during the next few months. Finally, and regarding our tenant relief program, it is worth mentioning that during the third quarter, we did not receive any additional request from any of our tenants in addition to what we have reported on the previous quarter. It will be more than -- I will be more than happy to address in more detail any of the operations and acquisitions aspects during the Q&A. With that, I'm going to ask to our CFO, Jaime Martinez to talk about the key financial aspects of Fibra Monterrey. Go ahead, Jaime.

Thank you, André, and good morning to everyone. I hope that you and your families are healthy and safe. As Andre mentioned, our properties shown a resilient performance during the third quarter. That stability has allowed us to maintain our monthly dividend in a competitive level when compared with other investment alternatives, even at prices observed previous COVID-19. Notwithstanding uncertainty prevails in the markets and for that reason, we decided to maintain our financial flexibility. We expect that such decision will have significant upside in the near future. As shown on Slide 6, our net loan-to-value remains at 15%, one of the lowest in the Fibra market mainly because our cash as a percentage of assets has stayed around 18%. Furthermore, our committed lines of credit provide Fibra Monterrey to drive [ power ] to take advantage of market opportunities if and when presented. As you may know, Banxico's monetary easing has increased the opportunity cost of cash investment, which has resulted in lower financial income. To cushion this effect, earlier in 2020, we took some term investments, reducing the negative carry between the money market and the income produced by investment properties. Some weeks ago, we made public to the market our intention to issue USD 100 million bond at the end of this month. The proceeds will be mainly used to substitute a syndicated loan due in 2022 and 2023. We consider such operation will bring quantitative and qualitative advantages for Fibra Monterrey. For starters, using a new alternative to Fibra Monterrey by accessing the public markets will complement and provide optionality to our current capital structure. This transaction would be the first U.S. dollar-denominated bonds to be issued by Fibra in the Mexican market. We expect this to provide further opportunities for our industry, resulting in additional growth of the real estate market in Mexico. Continuing with the upside, as shown in Slide 7, the bond would mature in 7 years, extending the current loans by 4.6 years, while increasing our overall debt maturity profile from 3 to 5 years while maintaining similar funding costs and leverage levels. In addition, as the bond is intended to be unsecured, Fibra Monterrey would be releasing a substantial portion of its investment properties currently held as collateral in the syndicated loan, allowing for better flexibility at the lien structure. According to the chart that will take our unsecured debt to 38%. Finally, I would like to talk about our quarterly distribution of around $0.27 per CBFI, resulting in a dividend yield of 11% at yesterday's closing price, which is substantially higher when compared to current fixed income yields and inflation rate. I would like to turn over the call to Eduardo Elizondo, who will talk about our ESG strategy. Go ahead, Eduardo.

Thank you, Jaime. Good morning, everyone. If you'd like, please go to Page 9 of the presentation. As mentioned before, at Fibra Monterrey, we firmly believe in sustainability as an integral part of our business. Notwithstanding that since our formation, we have pursued a solid corporate governance and other good corporate practices. We formally started with the implementation of our ESG strategy recently in 2019, observing demanding standards and international frameworks. It is clear to us that this is not only a long-term strategy, but also a permanent commitment. These days, it is hard to attend to a business meeting, webinar or presentation without discussing ESG matters, and that is because ESG is no longer a nice-to-have subject. Rather, it has become an essential area not only for all types of companies, but also for stakeholders, such as employees, investors, government, regulators, tenants and suppliers to mention some of them. Clearly, the pandemic has emphasized the importance of ESG and the different stakeholders deserve to know what is it that companies are doing about it. During our 2019-2020 cycle and as of today, we have mainly focused our efforts on the foundation of our strategy, mainly by confirming our intention and commitment and by communicating our progress. As part of this initial effort, we conducted an internal analysis regarding ESG matters and a systemic understanding of the company, which resulted in a road map for the general strategy. That was followed by our first materiality assessment which help us to identify the issues that are more important for our stakeholders and will help us to create long-term value for our business. We concluded this 2019-2020 cycle. By posting in our web page and ESG microsite to communicate ESG information and progress by releasing our first ESG 2019 progress report and finally, by participating for the first time in the SAM/S&P Corporate Sustainability Assessment in July 2020. As for the years to come on the next cycle, we will focus mainly on integrating sustainability into the business through the establishment of goals and the implementation of processes as part of this effort, we will design and work on certain specific ESG initiatives such as monitoring property consumption and use of waste, including ESG factors as part of the acquisition process and the social screening of our profits. Other goals and activities will include enhancing the involvement of our technical committee in ESG matters and formalizing the appointment of an ESG committee, aligning our reporting to certain frameworks that are relevant for our sector, and adhering to the United Nations Global Compact for which we have recently submitted our application. With this, I conclude this part of the presentation and return the microphone to the operator for the Q&A section. Thank you. Operator?

[Operator Instructions] Our first question comes from the line of Francisco Chavez with BBVA.

My question is regarding the leasing activity in your office portfolio. Can you give us an idea on what percentage of your rents in the office segment will expire in fourth quarter of this year and the next year? And regarding the 2 renewals that you mentioned in the press release, what are the main elements of this of these renewals are your tenants reducing the demand for office space and our rents are increasing or decreasing? And any color will be useful.

Okay. So regarding the lease maturities, we are starting for next year -- right now, we have around 20% of lease expires for the next year from which 10.4% are industrial and 9.6% are on the office segment. At the moment, we have a very positive perspective. Once we are at very advanced stages of the renewal of half of these industrial properties, which would mean 5.3% of the income and 35% of the office properties, 3.36% of the income. This would mean that we were starting next year with 11.6% income on expiring leases, a much better positioned than the 1 that we have at the moment. Regarding the pressure on the office side of the business on the leases, and the leases that we have renewed, the truth is that it is certain that we have a certain pressure on the leases price. But on the other side, we also have companies that are not in a position right now to decide or to make big investments to move offices. And that has made the market to have some equilibrium between the asking prices and the prices that we are able to close with the tenants. If you have any more...

So if I understood it correctly, those renewals were carried out at lower rents?

The renewals were mostly at the same price.

The things that we're saying this call is that those tenants, they have an option regarding moving their facilities to other buildings which would take them certain TI or certain CapEx investments that they are not in a good position right now to do that. So what they're doing is they're renewing their leases for a shorter period periods that go between 1 and 2 years, within the same rent and inflation. And you can see that on the report on what page is it? It's on Page 10 of the press release.

Just to be clear about the 2 leases that we talked about, the 10-year leases that we renewed, there were no material changes on the rent levels that were achieved on the negotiations.

Our next question comes from the line of Gordon Lee with BTG.

Two questions. The first is on offices. And when we speak to peers of yours that are in the retail space, it seems like mobility outside of Mexico City is higher than in Mexico City and perhaps it's because Mexico City has a greater share of, say, the labor force that can work from home. And so therefore, if you look at mobility numbers, if you look, for instance, at foot traffic in malls, it seems like secondary studies are doing better than Mexico City. You have a unique office footprint that gives you sort of a glimpse into both. So I was wondering if you're seeing something similar in terms of tenants that are coming back into offices physically in your locations? That's the first question. And the second question is you completed your last equity raise about a year ago. And I think, obviously, if you look at how things played out as far as COVID pandemic is probably better than you feared. And so I was wondering whether you feel now that you're at a point where you might be able to deploy capital more quickly if there are more concrete, say, advances in terms of negotiations that would allow some of that cash on your balance sheet to be put to work?

Okay. In regard to your second question, Gordon, I would say that definitely, I mean I think it was a wise decision. We're very, very cautious I would say that the Industrial segment is more strategic right now to Fibra Monterrey because of the denomination of -- it's more defensive, which is in dollar terms. We have longer maturities. As I mentioned before, light manufacturing is something that we like a lot. Logistics is about to happen, especially in the Northern regions in Mexico. We see a lot of activity in that, particularly in Nuevo Leon, Tamaulipas and Tijuana. In the office segment, we've had a lot of pipeline. The thing there is that there's a lot of available space out there in the market. And if you don't see a building that has especially a multi-tenant building that has big [ walls ] durations then we would enter in a risk segment, probably within the next 2 or 3 years. So we're very, very cautious on that. We're also -- in terms of pricing because of the implicit cap that we have at this price in order to be accretive -- our discounted rates are high and probably the sellers are more convinced or they think that they could be doing transactions at a pre-COVID level pricing. We don't think that's the right price. So we will be very cautious. There is a lot of pipeline, particularly there in the office segment. But we also see a lot of activity in the industrial segment. And as I also mentioned, we believe that the industrial developers that are doing spec buildings that hadn't been doing spec buildings for the past probably 4 to 5 years are beginning to do some spec development, and that's good for us because they would have to recycle some of their stabilized assets in order to gain some cash. Remember that nowadays, the banking system is not effective and as aggressive as it was before, especially for speculative development. And so we see an opportunity there. But the same thing happens as in office segment. Pricing still is on a pre-COVID basis, and we're not willing to do a transaction that is expensive for us. So liquidity is keen, and we'll be very cautious in how and where we invest that liquidity.

And we expect in the coming months, the sellers are going to be more interested in selling such buildings as they don't have offers as they expect that requite prices, as Jorge mentioned. So I think it's wise movement to wait a little bit longer as long as we have been for 3 months doing or 6 months doing that.

Yes. And I'm going to let Andre walk you through the first question, Gordon. But as you mentioned in other calls, I listened to the one in FibraShop, definitely, it's not happening the same in the office segment, what is traffic not in Mexico, but in other cities or primary cities like Guadalajara, Monterrey, where we're investing. Mobility depends on the traffic light that we have with authorities. We're now in Monterrey on a yellow traffic light as well as in Guadalajara. And you have to be very careful in terms of Secretaría de Salud, I would say that the whole traffic you can tell us more about that but it is between something around 15% to 20% of the whole building.

Yes. The traffic on the building has been steadily increasing from levels that were around 6% and on the last quarter to levels that now are about 15% to 20% on most of our buildings.

That's very clear. Just one question. I wanted just to follow up on the first question on the or in the first answer, which was on M&A. So you think that given the outlook that we've seen for logistics globally and what we're seeing in Mexico, pre-COVID levels of pricing is not realistic, you think that's too tight? You would not be willing to pay pre-COVID cap rates?

Depending on how you answer that question, in terms of development, the cap is exactly the same. Because the land prices are still the same, and construction costs are still the same. But what I mean is about a secondary transaction of a stabilized asset, which is our case because we do not develop. We believe that the sellers that are willing to do a transaction, still believe that the prices are pre-COVID prices. And that definitely for us, it's -- that won't happen. I mean probably they will do a transaction with someone else. We don't see too many buyers. So we believe that the capped, especially logistics in dollar terms or light manufacturing dollar terms will be capped somewhere between [ USD 8 ] and [ USD 8.5 ].

And as you may know, there are some portfolios that has been in the market for a while, and the sellers want -- I mean, are looking for lower cap rates, and they couldn't reach any an offer at this price. So...

And that's Gordon, I would say that it is basically because of the structure of their capital needs and their leverage we don't see too many leverage on the industrial developers, not what we've been seeing in the office segment. So they are not very motivated to do a transaction and probably that's going to take longer for us to do a high-quality, good tenant, good wealth on a region that it's under our strategy. But we want to be and we will be patient.

Yes. Basically, we think that the asking price on the market and the price that people are willing to pay right now are still too distant and they have to adjust on both sides to have the new equilibrium on the market.

[Operator Instructions] Our next question comes from the line of Edson Murguia with Summa Capital.

I have a couple of them. The first one is regarding to FFO. In the earnings release, you show us this AMEFIBRA FFO. So I was wondering if you can give us more color about if you are going to do it consequently for the rest of the year and into '21? Or even if you are planning to make a reconciliation for the past quarters? That's the first one. The second one is regarding to this LIBOR-SOFR transition. And the question is, if you have been in talks with your banks, if that so if you can give us more color about how it's going to be or there is going to be any impact on the [ manuals ] of the of notionals of your credit lines and last but not least, this S&P collaboration that you already have on July, it's regarding that you want to be certified by then?

Okay. In terms of the FFO, the AMEFIBRA FFO has some -- it's more focused on the operational side of the properties. And what we use or are focusing in our FFO, it's more about the cash flow because it's where you take the amount that you are going to distribute to your investors. So there are a few small different part. And let me talk about the most important 1 at this time. If you have dollars -- a U.S. dollar in your check account and you bought these dollars at MXN 19, for example. And now you buy whatever building or so [indiscernible] you use [ USD 30 ] and you use exactly the same amount in dollars that you have got. Now the exchange rate is at 22% or 20%, whatever, then I mean you have an exchange rate income, but it's not real because you just have the U.S. dollars and you use the full amount that you have in your check account. So in the accounting, you will -- it will appear that you have an additional income, but it's not real.

It's not cash.

It's not cash, exactly. So in the AMEFIBRA FFO, that you should consider this as income, but we can't distribute that. So that's the reason that we subtract. Regarding to the other part of that question, we are not going to consolidate from the particular place because we don't think that it's -- it will take a very important information for our investors. I mean -- but I mean, if we have an important demand for that, we can do it, but we don't see that there is going to be a material information for you guys. The question about the banks, I'm not sure that I don't understand the first part. Can you please repeat it?

Yes. Like 2 years ago around the world deciding to change or to migrate LIBOR for new type of rates. One of these new type of rates for not only credit lines, but for derivatives, even though for other types of asset classes and so forth. And for our understood or what have been talks between [ government ] is there's going to change everything and LIBOR is going to disappear by the end of 2021. So the probably our concern is what will happen, those utilizes that are related to LIBOR and if those brands have already put on the table, I mean you plan or a new way to transform these rates?

Sure. This is Cesar Rubalcava from Investor Relations and Corporate Finance funding. And yes, sure, we've been pretty close with our banks regarding the transition from LIBOR to SOFR. And we're happy to mention that our contracts regarding the derivatives and the bank loans do have a clause talking about the smooth transition to if and when it happens, a substitution of the LIBOR. So we've been very close with our banks, especially with HSBC, Citibank and BBVA, Scotiabank talking about this transition in order to have a smooth way to substitute our rate to SOFR. And also, we've been talking with our auditors and fiscal authorities in order to know how this will impact our results.

Okay. But a follow-up on that. But do you consider there's going to be an impact on notionals or even though the total amount that you already have with them? Or it's too early to know that?

No, we do not expect any impact on the notionals because this would be a change in the interest rate, not regarding the bank loan itself themselves. So we do not expect any change on the debt balance.

On your last question regarding the SAM/S&P participation, the CSA that we did last July, we are not looking for a certification. ESG is a continuing effort, and some S&P will provide us with a score, and that will help us to improve and see how we're doing considering our peers and other participants. We are not looking for a certain score. But certainly, we are looking to improve our ESG approach according to international standards. I hope I answered your question.

Our next question comes from the line of Armando Rodriguez with Signum Research.

Congratulations on the results. I have two questions. First one, I know it's too early to talk about these spreads, particularly in the office segment. But I would appreciate your comments on this side, particularly in the industrial segment? And my second question is about your views on the tax result and maybe some changes on the payout ratio in the further quarters. Should we consider this? That's my only 2 questions.

Regarding the lease spreads on industrial side of the business, the lease spreads are generally positive. On the office side of the business, we had no material changes until now. As I said before, yes, we have felt some pressure to lower lease prices. But until up to date, we have to do it. So I couldn't tell you right now what we hope for lease spreads in our office portfolio.

Regarding the taxes, well, it depends on the level of the exchange rate. This distribution is going to be no fiscal -- I mean, tax-free. And maybe if the things are a little bit like of now, it might be the same in the fourth quarter. What we used to do is we maintain the higher margin in order to avoid a case in which we should distribute more than the cash flow that we had or on the other hand, that we are not able to take the opportunity of the whole tax-free distribution. So as I mentioned, this distribution is going to be tax-free, and it might be the same in the fourth quarter, but it depends on the exchange rate, that's it.

Okay. Perfect. And my third question, if I may. Have you seen some significant changes, particularly in the peso-denominated contracts in the office and industrial segment versus the dollar-denominated contracts? Particularly during these FX appreciation, for example, and that's my last question.

Thank you, Armando. We haven't seen, to date, any changes on currency. We had some requests, but at the end, the contract phase as they were, both on the office side and on the industrial side. On the industrial side, there's really haven't been much changed and the office side was, as I mentioned before. So the contracts that we renewed in -- that were U.S. dollars-denominated were renewed in U.S. dollar denomination and the contracts in pesos, were also renewed in Mexican pesos.

Thank you. And now I'll turn the call over to [ Antonio Lavera ], Fibra Monterrey to address the questions that came through the platform.

Our third question comes from Martin Lara for Miranda Research, "Where do you see the margins in the fourth quarter? Do you think that they can improve?"

Well, the answer to this question, as I said before during the reporting, we are expecting from the next few months from to the margin levels to be slightly under 90%. It depends and also it will depend on the exchange rate. But we don't think that margins can improve much more than what we have right now.

The second question from webcast from Roberto Lao, "Are you planning to rebalance your asset class, lowering your office and incrementing your industrial?"

Thank you. As I told, Gordon Lee, yes, if we see an opportunity, it depends on the price, if we have more visibility in terms of industrial, more willingness in terms of industrial portfolios. But as long as we see an opportunity in price for the office segment, we will take a look at it very seriously. So it's -- we believe that at the end, our balance will -- at the long run, will be 50% industrial and 50% office.

Our next question is coming from Stefano, "What is the expected rate collection from the coming months and quarters and which area sector is the most impacted by the pandemic?"

Well, answering the first question, we are actually hoping that from -- to until the end of the year, the collection percentage of the rents will be at levels near pre-COVID. And answering the second question, the most impact that we had on our rent collection is actually the entire impact that we have right now on our rent collection is on commercial customers that are mainly on amenities of our office buildings. So until today, they haven't been material.

We have one last question from Roberto Lao, "You mentioned the Internet of Things. What is the advance of that? And how are you planning to implement it?"

Okay? As of today, we are already implementing certain investments in the IoT, particularly with a platform that I was just mentioning, the digital platform. We're doing an app. It's an application for customers. That will bring two benefits. One, is data gathering to understand who and why and when is doing in our buildings. With that data gather, we can do a data mining or data analysis so we can give a better service to our customers. And in the other hand, we also will use that platform to have a better experience and better satisfaction from our users and customers in the use of our buildings. Those IoT technologies are also -- will also be used for energy efficiency for surveillance and so many other things that we've been using this probably 30 to 35 weeks through the pandemic, we don't have too many population in our buildings. We're doing currently those investments, and I believe that we'll transform our buildings from dumb to smart buildings.

With no more questions on your webcast too, I would like to turn the call to the administration.

Thank you, guys. Thank you, Michelle, and thank you, everyone, for attending the call, and we'll see you in the next quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.