FIBRA Prologis (FIBRAPL14) Earnings Call Transcript & Summary

Hello, everyone. This is Carlos Peyrelongue, I'm BofA's Head of Equity Research for Mexico. Thank you all for joining us today for our roundtable with Prologis Mexico's CEO, Luis Gutierrez. As always, Luis, it's a pleasure to have you. I think this is the third or fourth year that you have been with us in this conference. I will pass on the mic to you for your remarks on the company, and then we'll take some questions from the audience and a few that I have prepared myself. Luis, thank you again for joining us. Please go ahead.

Thank you very much, Carlos. It's always a pleasure to be here. And now virtually, we always enjoy participating in this very important conference. And before I begin, I just want to say that today, September 16, which is the celebration of the Mexican independence. So please tonight have a brief sip of tequila to the health of Mexicans and Viva Mexico. So with that introduction, let me just make some few remarks. So who we are? We -- where we operate our investment strategy. This will help orient any new names interested in industrial real estate. And as we will reinforce the thesis for those that know us well. Our portfolio and investment strategy are why we have been able to perform so well. And this goes back to the very beginning of when we formed the company that would become FIBRA Prologis and it certainly applies today during the COVID pandemic. So we are a Public Real Estate Investment Trust or FIBRA, as is known in Mexico, in 2014, but we've been in business for much longer than that, close to 30 years of experience for the management team. We are a unique -- in that we focus on both consumption and light manufacturing. Two key structural drivers behind industrial estate as well as 2 of the biggest drivers of the Mexican economy. Our focus is just on 6 markets which are the best ones in Mexico. I will highlight Mexico City, the largest consumption market; and Tijuana, where it's been incredibly difficult to build market share. Our portfolio consists of a state-of-the-art buildings in master plan parks with security and all of the amenities sought after international customers. This means the state-of-the-art truck courts, trailer parking, cross-dock facilities, column spacing and clear height, which is -- features a lot of our international customers require. The quality of our properties and master-planned parks is a key component to why so many of our customers are multinational and high credit quality, and also speak to the resiliency of the operating results of the company. No meaningful development or land on our balance sheet. So that means we're not carrying any dead weight in today's environment. We have only stabilized properties. We have low leverage and significant -- 100% of our debt is U.S. dollars, and we have no debt maturities until June of 2022. Importantly, we'll not need to draw on our line of credit during the pandemic for liquidity, and we have the lowest cost of debt in the sector. Prologis is our sponsor, owning 47% of FIBRA Prologis certificates. Additionally, we have exclusivity to their development pipeline in Mexico as well as access to their customer relationships, banking contacts, proprietary systems and of course, world class research, which no other competitor in our sector has. Our company follows international best practices in terms of disclosure reporting transparency and corporate governance while delivering emerging market returns. So let me refer now to the stay home economy is accelerating e-commerce and the U.S. tensions with China is resulting in near-shoring opportunity. We believe FIBRA Prologis will be the beneficiary and will outperform as a result. We have a huge head start with e-commerce. Amazon is our largest customer. And we have also several key leases with MercadoLibre, the leader in Latin America e-commerce sales and the e-commerce divisions of several important retailers like Liverpool or Walmart are part of our client base. E-commerce remains low in Mexico as a percentage of overall sales compared with the other countries, but is growing at a faster pace, particularly as the Mexican COVID-19 pandemic is changing how the Mexican consumer shops. What could have taken a few years, now it's taking months. In fact, at the beginning of this year, e-commerce as a percentage of retail sales was approximately 4% in Mexico, and we believe this penetration has doubled in just a few months to 8%. Near-shoring is becoming more prevalent. The redundancy of supply chains away from China is becoming more important, given the disruptions from trade tensions and the health pandemic. Near-shoring office compelling efficiency gains as proximity to the North American consumers offers a speedier delivery. This phenomenon is similar to what happened after the Japanese tsunami in 2011 when the auto industry starting building factories in Mexico. So we see a trend of companies relocating to Mexico, looking for more efficiency and closer to the market. And now it's different sectors, as I was saying, it was the auto sector now is going to be sectors like pharma or sectors that have to do with security and technology. Supply chain will now focus on resiliency, not efficiency, which will result in larger inventory levels and as a result, more demand for space. So let me now talk about our results. Our second quarter operating and financial performance was ahead of our expectations. So leasing volume was 5.1 million square feet in the second quarter, almost 2x of the first quarter. The rain change on rollover was 13.2%, and occupancy was 95.5%. Importantly, we have derisked the portfolio by addressing almost all of the 2020 expirations, so only 5% of expired leases remain for the second half of 2020. And additionally, with this leasing activity, we have only 12% of our portfolio expiring in 2021. We ended the first half of the year with a very prudent leverage of 29% and with over $280 million of liquidity to take advantage of any opportunity that may arise. Additionally, we have both put options on the 2020 peso revenues late last year at an exchange rate of 19.50 pesos per U.S. dollar, which has insulated us from the wild swings in the exchange rate. Finally, let me update you on our rent collection, which has been a hot topic. In Q1, we have collected 99.5% of rents that came due slightly better than 2019. In the second quarter, we have collected 98.7% of rents that came due in line with 2019. July and August rent collection have exceeded 2019 by 350 and 230 basis points, respectively, and September is also coming better than expected. The rental deferrals have totaled less than 2% of total annual rent, and we expect 85% of them to be repaid before year-end with the remaining repaid in early 2021. So in summary, we have had an excellent growth generating reliable and sustainable cash flows. We have excellent prospects for external growth with proprietary access to the Prologis development pipeline and our balance sheet is a significant strength, allowing us to be opportunistic when others have to be defensive. So Carlos, with that, let me turn the call back to you for any questions.

Thank you, Luis. Before I ask you the first question, for all those investors on the line, if you would like to send a written question via the Webex, please do so now. And I will read your questions to Luis. With that, Luis, let me ask you a few questions regarding reshoring or near shoring. As you mentioned, this is a great opportunity for Mexico. Can you comment if you have seen any evidence of leasing so far related to these or intentions of leasing with regards to near-shoring?

Thank you, Carlos. So the short question (sic) [ answer ] is, yes. And I think the -- this trend is something that was already happening. And the pandemic -- given that the disruption of some of the sectors, and the supply chain just accelerated it. And we're beginning to see a faster flow of companies trying to seek more a change in the supply chain reconfiguration. So yes, we have seen in several sectors. So let me mention, I guess, electronic sector, and this is not proprietary information, but Foxconn is a huge Asian company that is -- has a lot of divisions and it's beginning to reconsider growing their presence in Mexico, bringing some products that were not manufactured here and that would come good with their corporate strategy. We have seen also in the medical device sector. We have seen it in some consumer products. We have seen some Chinese companies, mainly on the furniture business beginning to expand. And also we have seen some e-commerce related business in the border in which companies are beginning to take advantage of the labor arbitrage, in order to do all the Pick & Pack, which is very labor intensive, setting operations in the border. So the markets are more active are mainly Monterrey, which is industrial hub of Mexico. But also, we've seen some activity in Tijuana, Juarez and a little bit in Reynosa. So I think reassuring is one factor. But I would have to say that on the manufacturing side, the other driver, which is what I would say, the bread and butter is still there, and we have been seeing companies that have operations in Mexico that ship product to the U.S., expanding their operations and either bringing new divisions for growing their own facilities because with the peso devaluation, they have just become more competitive. So the 2 drivers of manufacturing are there present. And we have been seeing healthy numbers of absorption in the border markets and moderate during this year.

Indeed. Indeed. So as you mentioned, Luis, it's not just the COVID obviously, but it's also the trade conflicts that the U.S. and China have been suffering in the past couple of years. And as a result of that, we started seeing as early as last year or even the year before, a shift of some of the Asian producers coming to Mexico to set up operations. Would you say that you're also seeing that from also European manufacturers that had their production in Asia and are starting to shift some of that to Mexico that they were servicing out of Asia to service North America. They're now expected to do so from Mexico? Would you say that that's something that you're seeing?

Yes. Yes, for sure. So what I think is happening is companies are beginning to rethink their supply chain strategy. And I think a lot of the things that are for the Asian market are staying out over there, as some of them are beginning to consider countries like Vietnam or other Malaysia, India, depending on which sector. But yes, this is not only American company. So this is European components and even some Asian companies coming from Korea for Taiwan. And for the first time, we have been seeing some Chinese companies also come down. Chinese companies normally don't like to invest in land and build their own facilities, although we have been seeing some cases in which, they are beginning to lease property. But yes, so what is different is that we have been seeing some names of companies that were not manufacturing in Mexico. And that is kind of good news for us. I think exports will be a major driver of the Mexican economic recovery.

Great. Great. And on your remarks, you also mentioned that pharma and security and tech or new industries that are also expanding in Mexico. Can you elaborate a little bit on that? I know obviously, the automotive sector has always been the core of the manufacturing in Mexico, but it's interesting to see that this is expanding to other industries.

Yes. I think at this time, in this cycle is going to be different. So when we had the tsunami in Japan, there was a huge disruption in the auto sector. And I guess, the expansion of the auto companies into Mexico was mainly led by that Japanese tsunami supply interruption. And that boosted Mexico's capacity as a car manufacturer, and that is great. And we saw the [indiscernible] mainly search as a result of it. I think this time, the U.S. is going to be very sensitive in certain products that need to be manufactured more closer to home. So -- because what happened in this COVID situation, is that the U.S. wanted to have like respirators more on time, but they had to rely on Chinese supply and that got disrupted. So I think we have been seeing a lot of talk about the pharma sector. So I think pharma has raw materials and has the equipment aspect of it, which I think is going to be relocated to home. And then everything that is security sensitive. And of course, security is now also related to tech. So I think there is a huge opportunity for hardware that is going to be used in this new digital economy. And this has to do with electric cars. This has to do with a lot of the other new devices. I think those are going to be more manufactured closer to home than far away. It doesn't mean that the flow between China and the U.S. is going to stop. But I think there is a proportion of products that Mexico will be better suited to do that as well as the U.S., of course, a lot of those products will be manufactured in the U.S., for sure.

Great, Luis. Let me switch gears here and talk a little bit about e-commerce. As you highlighted in your remarks, FIBRA Prologis is by far the leader among the Mexican REITs in this regard, close to 15% of your area that is leased, is leased to e-commerce. Can you comment, I have a question here from Alan Macias from Bank of America asking, if there are any new players coming into Mexico, and if you could elaborate on further growth from the existing players that you mentioned, Amazon and MercadoLibre.

Yes. So thank you, Alan, for the question. So I think this pandemic has had companies that are growing and some companies that are staying as they are, and some companies, being more affected. Certainly, the companies that have been growing and even asking for additional space even during the emergency periods were kind of the 3 PLs, which are very related to the distribution of products from e-commerce and of course, the e-commerce companies. So I think what's happening in the consumer phasing we've seen the 2 leaders, Amazon and MercadoLibre going into what I call the second phase. So the first phase was setting up shop, bringing their products, putting their systems, testing the Internet capacity, testing the banking, testing the product delivery. And now setting up the first fulfillment center. And we, in Park Grande have the 2 million-footers, one from Amazon and one from MercadoLibre. The second phase is of the expansion of these leaders is going into the mid cities. And we just saw the announcement of Amazon opening fulfillment centers in Guadalajara and Monterrey. And as part of the second phase, we have been seeing some activity of additional expansion in mid-tier cities by Amazon and MercadoLibre is following. They also have requirements or will be opening Monterrey and Guadalajara, and we believe, eventually, they will all also open mid cities. And then the third phase will be start reporting their service levels and increase their speed to delivery by adding more space closer to markets, and that would be kind of the last-mile delivery. So we have not been seeing any new players, but what we have been seeing is that some of the players that have a mix channel that they have e-commerce and brick-and-mortar, they had to stop their brick-and-mortar operations and now they're trying to figure out how they can increase e-commerce because they need to compete, and they need to improve that channel. So we have been seeing major systems and infrastructure investment in a lot of retailers that are beginning to enhance their e-commerce capacity. And for sure, this will be, as a result, additional demand for space for warehousing, for e-commerce and additional demand for space for transportation and delivery of goods so this will be some of the trends as a good opportunity for the future. And I [indiscernible] to take advantage of it.

Understood. Understood. And have you seen any interest from Asian e-commerce companies? Or is really just focused on Amazon and MercadoLibre? Or are you seeing interest from other players, new players?

No -- we have not seen presence or any of the big Asian companies looking at our market yet.

Understood. Understood. Okay. Let me ask you now about M&A. You've done some M&A in the past. Could you comment if you see any opportunities out there either to purchase certain assets, try to increase market share, for example, in Tijuana or other areas? Or for that matter, any recycling opportunities that you might see where you might have interest from some of your assets that you would be willing to sell in order to reinvest in other developments that Prologis, that parent is doing?