FIBRA Prologis (FBBPF) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the FIBRA Prologis Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Alexandra Violante Head of Investor Relations. You may begin.

Thank you, Christa, and good morning, everyone. Welcome to our second quarter 2025 earnings conference call. Before we begin our prepared remarks, please note that all information disclosed during this call is proprietary and all rights are reserved. This material is provided for informational purposes only is not a solicitation of an offer to buy or sell any securities. Forward-looking statements made during this call are based on information available as of today. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements. Additionally, during this call, we may refer to certain non-accounting financial measures. The company does not assume any obligation to update or revise any of these forward-looking statements in the future whether as a result of new information, future events or otherwise, except as required by law. As is our practice, we have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologis.com and download this material. On today's call, we will hear from Hector Ibarzábal, our CEO, who will discuss our strategy and market conditions; and from Jorge Girault, our CFO, who will review results and guidance. Also joining us today is Federico Cantú, our Head of Operations. With that, it is my pleasure to hand the call over to Hector.

Thank you, Ale, and good morning, everyone. Let me begin by addressing the macroeconomic environment we are operating in. Trade uncertainty has increased from already elevated levels last quarter. Formal trade agreements between the U.S. and other countries remains unclear and 30% tariff on all Mexican imports not compliant with the USMCA has been announced to take effect in August. This environment has led many export-oriented manufacturing customers particularly those near the border to put their new plans on hold. However, our manufacturing portfolio continues to outperform the market in terms of occupancy, a clear reflection of our differentiated customer service, a strong property management and a strategic real estate location. At the same time and by design, we maintain sector-leading exposure to key consumption-driven markets, notably Mexico City and Guadalajara which delivered very strong performance during the quarter. Thanks to this solid diversification, FIBRA Prologis delivered a strong financial and outstanding operational results and we maintain clear visibility getting into the second half of the year. Jorge will provide more details shortly. Let me now touch on what we are hearing directly from customers and brokers in the field. As we highlighted in our last call, we have seen a pickup in interest from select manufacturing sectors, particularly electronics and after April 2. However, trade clarity remains a critical factor influencing decision-making for new projects. While interest remains, customers are more cautious and material commitments are likely to take longer in the absence of resolution of global trade terms. On the other hand, demand coming from the Consumption segment remains healthy. We continue to see a strong activity from e-commerce customers seeking a space to support ongoing growth. Competition for space, especially modern large format facilities remains intense. Despite expectations of flat GDP growth this year, vacancy and rental growth in consumption-led markets continued to perform exceptionally well. Turning now to overall market dynamics. New leasing activity totaled 5 million square feet below the 2024 average of 11 million, largely due to softer demand in manufacturing regions. Notably, most of the leasing in those areas came from smaller expansions or first-time suppliers, typically requiring lesser space. Net absorption came in at 10 million square feet consistent with the 2024 average and was boosted by the delivery of several large pre-lease spaces in Mexico City, Monterrey and Guadalajara, mainly to e-commerce customers. New supply reached 15 million square feet, the highest level on record, leading to an 80 basis points increase in vacancy, now at 4.9% and slightly above the 10-year average of 3.6%. Construction starts were 8 million square feet and are down to 40% year-to-date as developers have reduced the pace of new projects in the border. As we mentioned last quarter, overall market rent growth has flattened, but trends remain highly market specific. Mexico City and Guadalajara continued to show a strong rent growth approaching double digits. In contrast, [indiscernible] track to post a mid-double-digit decline by year-end. Most other markets remain generally stable. In terms of asset values, quarterly appreciation was modest, but positive at around 1%. In summary, while the external environment remains challenging, particularly with ongoing trade uncertainty and reduced manufacturing momentum at the border, our portfolio continues to demonstrate resilience. This is driven by our strategic exposure to consumption-led markets and disciplined operational execution. We expect to close the year on a strong note, both operationally and financially. And with a robust balance sheet, we remain well positioned to act on new opportunities as they arise. We are cautiously optimistic and remain closely aligned with evolving tenant sentiment and policy developments. Above all, we stay committed to delivering long-term value to our shareholders. With that, I will hand the call over to Jorge, who will walk you through the quarter's financial and operational highlights.

Thank you, Hector, and good morning, everyone. We are pleased to share that our second quarter results exceeded internal expectations. This strong performance highlights the tenacity of our team, the strength of our strategy and the quality of our balance sheet and portfolio in challenging environment. While year-over-year comparisons are influenced by the Terrafina acquisition, the benefits of this transaction are clearly reflected in our results. Let's begin with the financials. FFO came in at $93.8 million or $0.59 per CBFI, which represents a 21% increase versus last year. AFFO totaled $77 million, up 38% year-over-year, mainly driven by the successful integration of Terrafina. We also had a strong quarter operationally. We leased 2.1 million square feet right on target. Occupancy remained high, ending the quarter at 97.7% with an average occupancy of 98.2%, both exceeding expectations. Tenant retention reached 86%, well above our internal goals. Net effective rent change on rollover hit a record high of 68%, showing the execution ability of our team and the strength of our mark-to-market strategy. While same-store cash NOI was relatively flat, GAAP NOI rose 5%, reflecting healthy rent growth and built-in escalations despite some FX headwinds. Regarding our balance sheet, our balance sheet remains solid. We successfully refinanced short-term debt with long-term loans under FIBRA Prologis, improving liquidity, extending maturities and lowering our relative cost of debt. A similar strategy is in motion for Terrafina. In terms of impact and sustainability, also known as ESG, we're proud to share our new annual impact and sustainability report, which is now available with enhanced disclosure that better reflects our progress and long-term commitment. I would like to now spend a moment on the integration of Terrafina. We're just a few weeks away from the first anniversary of the successful Terrafina acquisition, and it's a great opportunity to reflect on what we have accomplished. As of December 1, 2024, we took over all systems and fully assumed operational control. We've integrated all Prologis markets and replaced third-party managers as applicable. We will continue to reduce costs during the year by eliminating certain third-party services, among other efficiencies. On the revenue side, we've achieved rent increase and rollovers that are about 3x higher than what Terrafina achieved on its own. All of this is consistent with our initial projection and in line with our original underwriting. To put it in perspective, if we isolate Terrafina operations, FFO per CBFI is now approximately 10% higher than what it was before the acquisition. With this, let me update you on the CI Banco situation, Terrafina property. As shareholders' approval last July 11 regarding change of trustee, we expect that CI Banco transition will be completed in the next 2 to 6 weeks. Terrafina operations remain unaffected to ensure timely delivery on all obligations without any disruption. Let me now change gears to guidance. Because of the strong performance and positive outlook of our portfolio, we have updated our 2025 guidance as follows. We raised our FFO per certificate range from $0.20 to $0.22 up to $0.22 to $0.24, which is a 9.5% increase to the midpoint. We're keeping the rest of the guidance unchanged, which you can find on Page 8 of our supplemental financial information. We are closer than ever to our customers. Policy stability and established trade agreements will be key drivers of new demand. In closing, I want to recognize our teams in the ground for their outstanding execution this quarter. We remain laser-focused on our long-term strategy and ready to adapt as needed, guided by discipline and corporate agility. Thank you. I will now turn back to Christa for Q&A.

[Operator Instructions] And your first question comes from Alejandra Obregon with Morgan Stanley.

I guess I was trying to look at record net effective rent change of nearly 70% and perhaps understand a little bit better. How much of this is renewal versus new business? If you can also help us perhaps understand how much of this is coming from the legacy FIBRA Prologis versus Terrafina mark-to-market? And of course, if you can help us square the impressive spread in Juarez versus the vacancies in the state and the trends that you guys mentioned earlier in this particular one, it's quite impressive?

Thank you, Alexandra. This is Federico Cantu. As it relates to our net effective rents and the rent change, a record net change, that came primarily from renewals. As you can see, most of the activity had to do with renewals on the over 2 million square feet. And our teams have been quite focused on making sure that we mark-to-market our leases upon every renewal. In Juarez, we continue to have good mark-to-market in our leases despite some adjustments in market rents there in that market. As Hector mentioned, we've had some double-digit adjustments there, but we still have a positive mark-to-market in that market. And again, most of the leasing activity, 2/3 of that was in Mexico City and Guadalajara, where we have the strongest fundamentals. So with our current lease mark-to-market in the portfolio is 44% across our 6 markets. So we expect to continue to harvest good rent change into the future.

One comment, Alejandra, regarding Ciudad Juarez. With incorporation of the Terrafina portfolio and the long-term hold, now we have 12.5 million square feet in Juarez. And that converts Prologis as a clear market leader in the market. When you have this leadership position, you have a permanent competitive advantage as all of the transactions, the new ones, the renewals, potential expansions, et cetera, all of them knock at our door. So today, more than average in Ciudad Juarez. We have a very clear understanding of the sentiment of customers and potential new business.

Your next question comes from the line of Rodolfo Ramos with Bradesco BBI.

Congratulations on the results. My question is a little bit of a follow-up. The current state of demand and your view on rental adjustments ahead of what seems to be it will be a very important period for lease expiration and your portfolio has performed better than the market, but we're still caught in this context that you described, Hector of Mexico's negotiation, these tariffs. Just wanted to get a sense of what kind of pickup in activity do you foresee in the next 12 months once we clear these negotiations, which we have remained optimistic. And also, can you talk about any preliminary discussions with your existing clients ahead of next year's -- this year and next year's expirations?

Thank you, Rodolfo. And your question is a very difficult question as it has a fundamental when this trade uncertainty is going to end. What we -- our conversations with customers make us be confident that the projects that they are chasing and that it's today on standby pipeline is comprised by projects that have not been canceled. And I think that this is a very important point. Those projects are just waiting for definicians in order to be able to get their final approvals. And actually, we had a very active interaction with customers trying to update costs and trying to exchange ideas on when and how this situation is going to be solved. The particularly momentum that we're facing reminds me a little bit what happened in the pandemic days because on the pandemic days, all the activity was placed on hold as nobody really knew what was happening. And as the situation got under control and particularly when the vaccines went out in the market, there was an immediate recognition of projects. I think that probably in a different magnitude, this situation is what is going to be happening once that the final agreement between the Mexico and in the U.S. is reached about our trading situation. Projects will keep on being feasible as Mexico will remain with a competitive advantage no matter what is the final number of tariffs. And this is important -- a very important factor. Our location is not being modified and our availability of efficient labor hands is right there. So I'm very optimistic that once that the definition is reached under this trade uncertainty, then most of these projects are going to be reactivated and not only Prologis, but all of the market will start receiving a lot of requests for new space. This does not necessarily need to wait until 2026. This is just waiting for definitions. Hopefully, definitions are to be reached before year-end. This is our view.

If I may add to what Hector mentioned, in our conversations with our customers, we'd say they're increasingly looking past the headlines and planning for the long term in what has been an evolution of their thinking over the last few months where, as we know, the headlines constantly change. Interesting to note some data points, our showings over the summer, which typically tends to be a softer season are actually higher than last year's. So we're encouraged to see that activity in our spaces as well as proposal volume is actually pretty healthy. So I do feel that there is pent-up demand building and there is that as Prologis mentioned in the earnings call, water building up in the dam, I do feel there is that activity that will be released once we have a bit more certainty as to the trade landscape.

Your next question comes from the line of Pablo Ricalde with Itau.

I have two questions. The first one is pretty quick. I don't know if you can provide an update on the Terrafina delisting. I don't know if there's something on that front. And the other one is on the retention rate we saw in the quarter. I don't know if you can help us -- walk us through what are your negotiations evolving with the tenants. That's it.

Yes. I will answer your first question, Pablo, and Federico will take the second one. Today, we are very busy, and we are fully concentrated on executing what we anticipated we were going to do with Terrafina, I feel very pleased about the stabilization. And actually, some of an important part of the rent change that we're showing is part of what we offer when we were trying to get such transaction. We have full operational control. We can take any kind of disposition or leasing decision, and it is there where we are concentrated. I think that eventually, the Terrafina final privatization will happen. But as of today, we want to concentrate on what is under our control, which is on the operational side.

And Pablo, thank you for your question. On the second part of it, as you can see, this year, we've had very high retention, which is a reflection, as Victor mentioned in the opening remarks of the diligence and talent of our teams, our top locations in our markets. And I must say our diligence in locating in the best of markets in every city that we're in is reflected in this great performance. And of course, our platform, our teams on the ground do a phenomenal job. So it's all about staying in front of our customers and understanding their business. In this environment with high uncertainty, customers that are already operating and serving their markets are staying put and our planning, like I said, companies plan for the long term, have that long-term vision. And I -- we're bullish on Mexico in terms of our precision vis-a-vis trade with the U.S. and being the #1 trading partner. So this is the result again of just being in front and having the best customer service out in the market. We're optimistic in our conversations with our customers as far as what they see. But again, in this environment with uncertainty, new spaces are probably the ones that are more muted, but we do expect as we get certainty for that to be -- that activity to reignite.

Your next question comes from the line of Francisco Suarez with Scotiabank.

Congrats for the earnings sense, very well done. The question that I have relates with the decisions on PLD in Mexico in terms of overall starts. It's been a year since the company hasn't made any new starts. And the question that I have is because I already saw that PLD also canceled -- sorry, they actually expect zero deliveries for the rest of the year of new facilities. So I think that what I want to know and understand is if this is entirely linked to overall uncertainties related with precisely USMCA trade and everything or if there is anything that doesn't allows you to develop the properties, namely lack of energy, permits, whatever.

Thank you for your questions, Paco. The short answer to your concern is related 100% to market conditions. PLD is eager to keep on doing things in Mexico. And I think that one of the competitive advantages that we have is that we have the ability to stop and to reignite development very rapidly. Today, the same situation that our customers are facing with uncertainty of what the final reconfiguration of the supply chain is going to be is affecting as well any potential decision of starting any speculative building. Actually, it's not only Prologis is the one taking these kind of actions. And most of the speculative development has been placed on hold until a definition and the final conditions are no. Regarding PLD, I want to reiterate that we have all the support that Mexico today is one of the best performing markets that they have. And if you analyze the PLD information, you will notice that there was an important increase on build-to-suit opportunities. Build-to-suit opportunities are coming from customers that are not being able to find in the market, the needs that they have from space. And in Mexico as well, they are not reflected in the numbers, but we are currently working on 2 or 3 important build-to-suit opportunities as well. It's not because of the lack of energy, it's not because of the lack of confidence in the market. It's just the moment that the market is facing.

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

Two quick ones. The first, and this may be a question for Hector or for Federico. I was wondering if you could give us a little color of how you're feeling about Monterrey. It's seen obviously a slippage in occupancy year-to-date. And from what I understand, there's a very significant amount of inventory that's going to hit the market over the next 6 to 12 months. So I was wondering how you feel about the resiliency of that market, which is obviously a core national market and a core market for you as well. And then just one quick one for Jorge. I was wondering, Jorge, why you decided to keep the distributions guidance unchanged in spite of raising the FFO guidance?

Thank you, Gordon, for your question. So talking about Monterrey, as you probably know, Monterrey benefits from having both manufacturing and logistics dynamics and demand. So we are seeing activity across both of those sectors. We've had showings. So we feel good about the prospects of that market. We continue to outperform the overall vacancy in that market. We did have some move-outs, but I would point towards very healthy occupancy at over 95%. And let's bear in mind, pre-pandemic levels, 95% was a very good occupancy. So we're slightly above that. And with the activity that we're seeing across various sectors, we feel good about the second half of the year and into the next year.

Thank you for making a question on the financials. I mean, the way that you have to see the dividend, to give you some background, I mean we increased 6.4% the dividend in dollar terms versus 2024. And yes, I kind of agree that increasing the dividend, though it sounds appealing and the results are strong and supported. It is also true that, as you know, we're selling half of Terrafina portfolio. And eventually, starting next year, there's going to be some debt refinancing. To this extent, we will be recycling capital. This process, as you know, takes some time. So we want to be prudent with our dividend distribution as we always have been and give you certainty -- give the market certainty on our guidance. That's it.

Your next question comes from the line of Jorel Guilloty with Goldman Sachs.

I wanted to address the decline in occupancy we saw in this quarter. So it was nearly 100 basis points. We saw it was concentrated in three markets. So Monterrey declined 300 basis points, Guadalajara 300, Reynosa 180 basis points. I mean when I look -- and this is just referred to, right, you still are at a fairly strong occupancy level at the high 90s. But I just want to understand what happened in these 3 markets? Is it just one-offs and move-outs? And how do you expect leasing to proceed for these three markets going forward?

Thank you, Jorel, for your question. One of the strengths that FIBRA Prologis has is our real estate strategy. We have a very balanced diversification between consumption and near shoring. Both of them comprise the industrial real estate world in Mexico. But the two of them eventually put off to different fundamentals. In the last couple of years, the fundamentals in the border were very strong because of this important nearshoring activity. Today, what is happening is that the border markets, including a little bit Monterrey, which is a hybrid market, is facing uncertainty because of this lack of definitions that we have been talking during this call. I think that the fundamentals are very strong, location, access to labor and the complexity of the already established supply chain where most of this investment is coming from the U.S. So eventually, as these definitions take place, and we have seen how definitions eventually get solved in just a weekend as it happened last weekend between Europe and the United States. So I'm optimistic that once that these definitions have reached, the new demand, which is what is driving vacancy up, will reignite and the markets that you are referring to will go back to their run rate dynamic of occupancy. Federico mentioned in the previous answer, the occupancy that we are showing makes us to be very proud about the performance of our teams on the ground. I mean a diversified portfolio as the one that we have showing these levels of occupancy, believe me, above market, I think that speaks very highly about the job that the teams are doing on the field. On the consumption side, which is a different story, we are seeing the two most important e-commerce players more active than ever. The two big players are showing and are working on important plans and PLB with the exclusive relation that has with FIBRA Prologis is very active on trying to entertain those leads. So I think that on the consumption and the e-commerce front, there will be a positive news that are not going to be hitting the 2025 numbers, but they will be impacting the 2026 figures.