Fibra Mty, S.A.P.I. de C.V. (FMTY14) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to the 2025 Fourth Quarter Fibra Monterrey's Conference Call. All information presented in this conference is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. 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. Additionally, during this call, we may refer to certain non-accounting financial measures. Actual results may materially differ and the company advised us not to rely on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statements. With us this morning from Fibra Monterrey, we have Jorge Avalos, CEO; Jaime Martínez, CFO; Javier Llaca, COO and CIO; and Cesar Rubalcava, Investor Relations. They will discuss on the more important strategic financial and operating aspects of the quarter. I will now turn the call over to Mr. Jorge Avalos. Please go ahead.

Thank you, Kerry, and good morning, everyone. Thank you for joining us today. 2025 was a year defined by execution and delivery. Throughout the year, Fibra Monterrey continued to demonstrate the strength of its business model and the consistency of its long-term strategy. We reached the 2025 AFFO per CBFI guidance closing at MXN 1.02 per share. This result reinforces our commitment to transparency, financial discipline and delivering the objectives communicated to the market. We closed 2025 from a position of strength. We are steadily advancing towards a predominantly industrial portfolio, actively optimizing our asset base, maintaining investment-grade credit metrics and generate [Technical Difficulty] cash flows with long-term visibility. Before turning the call to Javier or Jaime, I would like to briefly address the broader market environment. We remain constructive on Mexico industrial real estate sector. Despite ongoing global uncertainty and continued discussions around the trade policy and the USMCA review, structural fundamentals remain supportive. Mexico continues to benefit from competitive labor costs, a strategic geographic position and an attractive industrial cost structure. At the same time, the reconfiguration of the North American supply chain continue to underpin demand for modern, well-located industrial facilities. We're also encouraged by the opportunity set ahead. We are seeing several large institutional quality portfolios coming to the market and only a limited number of platforms, including Fibra Monterrey have the scale, balance sheet, and execution capabilities required to participate meaningfully in these transactions. Consistent with our business model as we approach our 30% LTV and gained clear visibility on actionable acquisition opportunities, we are actively pursuing the corresponding regulatory approvals for a potential equity offering. Should market conditions allow and provided that the transaction is accretive and aligned with long-term value creation for our investors, we intend to access the market once again. Our [Technical Difficulty] for itself. Across our last 7 follow-on offerings, we have deployed capital as committed into high-quality assets at a disciplined pricing. As always, capital allocation will remain guided by prudence, discipline and a clear focus on risk-adjusted returns. With that, I'll turn the call over to Javier to discuss market conditions and portfolio performance.

Thank you, Jorge. Page 3 of the material presents a side-by-side comparison of CBRE's key indicators across the 13 primary markets in Mexico and our portfolio as of the end of the fourth quarter. According to CBRE data, vacancy across these markets stood at 5.3% and total net absorption during 2025 exceeded 35 million square feet, remaining above 2018 and 2020 levels. We are beginning to see demand gradually reaccelerate, particularly from companies already operating in Mexico. While uncertainty persists, strategic decisions cannot be postponed indefinitely, and tenants are increasingly resuming expansion plans. Additionally, space under construction has normalized and currently represents roughly 2 years of absorption, which we view as manageable in the context of sustained structural demand. Our portfolio outperforms the broader market in occupancy. When comparing our in-place rents to current asking rent, we maintain meaningful embedded mark-to-market potential. Our weighted average lease term of 5.2 years provides strong cash flow visibility and short-term defensiveness, particularly during periods of uncertainty. As mentioned in previous calls, while we do not have material exposure to Tijuana and although short-term fundamentals may present challenges, the market could offer attractive opportunities in stabilized assets, given its long-term structural advantages. The same applies to Ciudad Juárez, where we currently have no owned properties. Consistent with latest calls, a more detailed analysis of the CBRE data is presented on Slide 4, so you can review at your own pace. Slide 5 provides an update of the commitments made during our last follow-on offering. Capital deployed today already exceeds the amount raised in the previous issuance, having been allocated to high-quality stabilized industrial assets and expansions at an expected blended return of approximately 8%. Importantly, this return considers property expansions with 9.5% yield on cost. We continue to review these opportunities and attractive given asset quality, tenant profile, location and lease duration. Historically, capital raised by Fibra Monterrey has been deployed within an average time frame of approximately 7 months, demonstrating consistent execution across different market cycles. Should the acquisitions currently under advanced negotiations close without raising external capital, our LTV would reach approximately 30%. If we were to extend leverage towards our 35% internal cap, we will unlock additional investment capacity of roughly $230 million. However, our preference remains to operate at or below 30%, even if that temporary limits acquisition capacity. Additionally, asset disposals currently in process could provide incremental firepower. That said, this transaction remains subject to regulatory approvals and customary closing conditions. And therefore, monetization timing remains beyond our direct control. On the divestment side, only 1 property remains within our underperforming office portfolio, which continues to be our primary sales focus. As shown on Slide 7, based on market value -- on fair market value as of the first quarter of '24 prior to initiating our optimization strategy, we have sold approximately $40 million and agreed to sell an additional $120 million. In aggregate, this represents roughly 33% of the initial office portfolio and 95% of the retail portfolio. Including properties currently under negotiation, representing approximately $110 million in fair market value and isolating the Filios office assets within the Whirlpool campus, the remaining nonindustrial exposure would stand at approximately $120 million across two of its properties, including La Perla facility located in Jalisco. As shown on Slide 8, our KPIs remained broadly stable compared to the third quarter. Industrial assets now account for approximately 80% of total revenues with a strong presence in core markets. Our tenant base is well diversified, predominantly U.S. dollar-denominated and supported by long-term lease agreements with inflation-linked escalations, providing resilience and cash flow visibility. As mentioned earlier in the call, our weighted average lease term remains around 5 years with a staggered lease maturity profile. On a same property basis, NOI increased year-over-year despite temporary vacancy impacts. Inflation-linked escalations, new leases and expansion-related revenues offset that pressure. Excluding FX fluctuation, same-store NOI grew close to 10% year-over-year. Acquisitions completed over the past 12 months further supported NOI growth, while margins expanded to 92.4%. Before FX fluctuations, property valuation increased by approximately MXN 1.4 billion. Acquisitions added MXN 3.8 billion net of MXN 1.9 billion reclassifications to assets held for sale, resulting in an investment property balance of MXN 41.4 billion, approximately a 9% increase. After accounting for FX effects, the final balance stood at MXN 36.8 billion. The current implied cap rate for the industrial portfolio stands at 7.6%, while the combined portfolio remains near 8%. The valuation from our independent appraiser could be subject to adjustments as interest rates environment continues to unfold. I'll turn it over to Jaime to discuss financial performance before talking about the pipeline. Jaime?

Thank you, Javier, and good morning to everyone. I would like to start by mentioning that we achieved sequential margin expansion, reaching 92.4% NOI margin and 84.9% EBITDA margin despite FX headwinds from a stronger peso. In terms of key financial metrics, normalizing last year's typical financial income and isolating FX impact, we recorded growth across all of them and delivered a 5% year-over-year increase in distributions. Additionally, as part of Fibra Monterrey's preparation for the adoption of IFRS 18, presentation and disclosure in financial statements, the company implemented a presentational regrouping in fourth quarter '25 for FFFO fully aligned with income statement line items. This change was presentation only and did not affect AFFO or distributions. For reference, fourth quarter '25, FFFO under the prior methodology would have been MXN 637.1 million equivalent to $34.8 million, implying that year-on-year variation would have been 2% increase. Also, I'd like to recall the typically high cash investment yields during fourth quarter '24, which led us to allocate approximately MXN 40 million of our AFFO to our buyback program. Given that the trading price did not reflect Fibra Monterrey's intrinsic value and cash generation capacity. For this reason, we believe performance is better assessed through distributions per CBFI than traditional AFFO. Moving to the next slide. We achieved important milestones this quarter that further strengthen our financial flexibility. As of quarter end, LTV stood at approximately 26%, net debt to adjusted EBITDA below 3x, no material maturities until 2027, fully unsecured debt structure. In December, we amended a credit facility extending maturity from 2029 to 2031 and reduced the spread by 10 basis points while also optimizing the hedge as a result our weighted average interest rate accrues at 4.8%, which compares favorably with listed peers in the U.S. After quarter end, we executed a nonsecurity indicated facility of up to $215 million. This facility carries the lowest spread achieved in Fibra Monterrey's history for comparable characteristics, reflecting strong banking support and confidence in our credit profile. In parallel, Standard & Poor assigned Fibra Monterrey, a BBB- global corporate credit rating with stable outlook, reinforcing our investment grade positioning and competitive cost of capital. Turning briefly to capital markets performance. I'm pleased to highlight that our valuation continues to be supported by both local and international investors. Our trading price has remained resilient demonstrating defensive characteristics amid broader market volatility. This underscores continued investor appetite for vehicles that offer a stable inflation-linked U.S. dollar-denominated cash flows with long-term visibility. Average daily trading volume during the fourth quarter reached approximately $2.5 million, reflecting broader investor participation and a structurally improved liquidity profile. Since our most recent follow-on offering, liquidity has expanded meaningfully, supported by increased international engagement and enhanced index representation. Following quarter end, and as anticipated during our last earnings call, we were informed that MSCI will include Fibra Monterrey in the MSCI Global Small Cap Indexes as part of its February 2026 index review. This inclusion will become effective later this month and could support incremental trading activity as institutional and index-linked investors adjust their portfolios. Moving to Slide 15. Since our most recent equity offering, we have generated a total return in excess of 50% outperforming both the Mexican equity market and our listed peers. We believe this reflects the result of this in capital allocation, a prudent balance sheet and a clear commitment to deliver on what we communicated to investors. At current levels, we trade at approximately 14x AFFO implying a yield near 7% in U.S. dollars and evaluation, we consider reasonable given our growth profile and balance sheet strength. In summary, Fibra Monterrey closed 2025 with disciplined execution on both organic and inorganic initiatives, strong margins in all major financial metrics, investment-grade credit ratings and meaningful strategic capacity to pursue growth opportunities, including those that may materialize through potential follow-on transactions. I'd like to return the call to Javier to elaborate on investment pipeline.

Thank you, Jaime. Let me address our acquisitions pipeline and capital deployment strategy, emphasizing that our objective remains unchanged to invest in stabilized assets offering attractive risk-adjusted returns while maintaining leverage within our targeted parameters. We have seen tenants resuming their expansion needs. Total expansion investments now stand at approximately $173.8 million, with yields approaching 10%. A significant portion of this capital is already secured through signed agreements with projects either delivered or under construction and nearly $90 million currently under negotiation. These expansions deepen tenant relationships, extend lease maturities, generate double-digit returns without speculative risk and support NOI growth independently of lease spread dynamics. Moving to Slide 20 of the webcast material. As of year end, our acquisition pipeline totals approximately $700 million across 38 industrial properties, representing roughly 8.1 million square feet of GLA. These opportunities are in core markets such as Monterrey, Central Mexico and the Bajio region. The pipeline includes assets at different stages of negotiation and evaluation. Due to confidentiality and NDA agreements, we cannot provide additional details beyond disclosed materials. As always, we will keep the market informed as transaction progress. Notably, the current pipeline represents approximately 1.2x our installed firepower even after asset recycling and reaching our 35% LTV ceiling. This dynamic underscore why a potential follow-on offering may become strategically relevant. Proceeds would primarily support stabilized acquisitions build-to-suit projects and same expansions, fully aligned with our underwriting standards modern assets located in core markets, high-quality tenants, long-term contracts, U.S. dollar-denominated rents and inflation-linked escalations. Thanks again for joining the call, and Kerry, please open the line for Q&A.

[Operator Instructions] And our first question will come from Jorel Guilloty with Goldman Sachs.

So I actually wanted to focus a little bit more on fundamentals. We saw that there was a material increase in leasing spreads in 4Q '25. It was a nominal 16% and around 13% when you look at it in real terms. And I was just wondering how should we think about that acceleration in lease spread? And what could this mean for your portfolio going forward? Is this something that we should continue to expect maybe at these levels? And then the other questions that I have were around the announced divestments. I just want to understand like how we should think about timing, I know you announced these late last year, but just wondering if it's just a matter of bureaucracy and what is driving the pause before it gets completed? And connected to that, just wanted to see like how the what -- how the talks are going for the rest of your portfolio? I know you mentioned a little bit, but I just want to get a sense of color of where we are in terms of the tax for divestment for the rest of your non-core industrial portfolio?

Thank you for the question, Jorel, nice talking to you. Regarding the first question, you should expect lease spreads to remain stable. As rent growth is decelerating a little bit in comparison to 2023 and '24, '25, we saw almost, I would say, a flat line on rent growth. But we believe that our upside remains at about 10% to 15% moving forward. In regards to your second question on the timing for the divestment of the nonindustrial portfolio, this is -- this has been taking some time given a different number of issues. One being antitrust approval, due diligence from the buyers have been taken a little bit along with the -- with agreed terms on a purchase and sale agreement. We continue to make progress. I would say that probably the buyers are not as efficient as we are when we buy properties. But it continues to make progress, and we expect to have news on that regard on actual closings within the next couple of quarters.

And our next question comes from André Mazini with Citi Group.

So 2 questions or maybe 3. On the acquisition pipeline, should we expect more sales and leasebacks transactions as historically you've done or other types of stabilized acquisitions? I know you guys stress it's going to be stabilized. So still and leaseback or other types of acquisitions. And on pricing in the private markets, of course, the FIBRAs have had a run. Your stock is up 40% in the last 12 months. Has that taken place as well for private market transactions and private access or another way of saying is the acquisition cap rate have they decreased because price in private markets have gone up or not necessarily they're kind of the same as they were a year back, given all the volatility and whatnot.

Thank you for the question, André. Yes, you should expect a mix of different type of transactions, including, of course, sale and leaseback. I can disclose a lot on that. But yes, we are working on several sale and leaseback transactions as well as acquisitions from private developers mainly in our core markets. Again, sorry, not being able to disclose any more than that. In terms of pricing, we've seen cap rates stable. Probably, we're going to start seeing slight compression in some markets like -- some markets in Bajio, they are picking up on demand and activity. But the reason of that is that the Bajio area was kind of behind on cap rates, if you compare that to Central Mexico and some border markets. You could expect probably a slight expansion on cap rates, on some, I would say, distressed markets like Tijuana and Juarez. But other than that, the big picture that we see on cap rates moving forward is for them to stay stable.

We'll take our next question from Carlos Peyrelongue with Bank of America.

The question is related to the pipeline that you see for future acquisitions. Could you provide some color? I apologize if you already answered this one. Just some more color on what are the potential targets that you see are there coming from [indiscernible] or other sources? Any color would be appreciated.

Of course, Carlos. Thank you for the question. Regarding the $700 million pipeline that we mentioned during the call, most of it are either sale and leasebacks or private developers. The color that I can give you is that their long-term WALT 100% or close to 100% U.S. denominated, about 8 million square feet on GLA, mainly located in the markets that we currently have a footprint on, particularly Northeast markets, Bajio, we are looking at some properties in the central part of Mexico. Other than that, I'm afraid we cannot provide any more color given all the NDAs and the confidentiality that we have agreed with the potential sellers.

And our next question comes from Felipe Barragan with JPMorgan.

Just a little bit more details on the Catacha asset sale. So I understand that's in Santa Catarina, which is a region that you have plenty of other assets, notably from the Zeus portfolio acquisition. I just want to understand more of the philosophy of what sort of industrial properties you might be targeting, maybe age or sort of type of tenant you guys might be looking to remove from the portfolio?

Thank you, Felipe, for the question. Talking specifically about the transaction in Santa Catarina, that was kind of an atypical case because it was an option to purchase or an option from the tenant to buy the property from us. Given the size of the property, we decided to just to go ahead and sell that at a fair market value -- so -- and it was also peso-denominated, which is, as you know, not ideal for us. In regards to the guidelines or the criteria for the disposition of additional industrial assets other than the ongoing divestment on nonindustrial assets. There's a number of different criteria. One could be locations on secondary markets as a result of the purchase of a larger portfolio. Another one could be the age of the building and another one could be the underlying asset behind the tenant. So we are working on the recycling program. We are focused now on the nonstrategic portfolio being in those office and retail, I'm sorry. But we -- you could expect for this recycling of assets program to continue moving forward with industrial assets, probably sometime next year.

[Operator Instructions] And with no questions in queue, I'd like to turn the conference over to management for closing comments.

Thank you, everyone. Thank you, Kerry, for the call, and we'll talk to you next quarter. Thank you, and have a great day. Bye-bye.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.