FIBRA Prologis (FIBRAPL14) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us and welcome to the FIBRA Prologis Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Montserrat Chavez, Head of Investor Relations. Montserrat, please go ahead.

Thank you, Alexandra, and good morning, everyone. Welcome to our third quarter 2026 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 and 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 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 refer during this call. We invite you to visit our website at fibraprologis.com and download our earnings materials. On today's call, we will hear from Jorge Girault, our CEO; and Alexandra Violante, our CFO, who will discuss our strategy, market conditions and will review results. Also joining us today is Federico Cantu, our Head of Operations. With that, it is my pleasure to hand the call over to Jorge.

Thank you, Montserrat. Good morning and thank you for joining us. FIBRA Prologis delivered solid operating performance this quarter. Period-end occupancy was 96.5%, around 360 basis points above the market. We believe this reflects the quality of our portfolio and the strength of our operating platform. Market conditions are improving. Customer demand is strengthening, net absorption is increasing and construction starts are declining. Together, these trends point to a more balanced market. The construction pipeline declined 34%, more than we expected. This supports our outlook. If development remains disciplined, we believe market will continue to move towards a healthier balance. Leasing activity in our markets reached approximately 9 million square feet. Including build-to-suit deliveries in Mexico City, net absorption was approximately 12 million square feet, more than twice the first half average. We expect net absorption to reach around 30 million square feet in 2026. That will be just below 2023 peak and about twice pre-pandemic levels. Companies serving the data center sector accounted for approximately 20% of our leasing activity year-to-date, totaling an estimated 6 million square feet. We will continue to monitor this growing source of demand. E-commerce and logistics also remain potential sources of demand. Over the past 2 years, fulfillment networks have expanded more slowly than e-commerce sales, which we believe should create a new need for additional space. On this note, our global customer relationship gives us a good visibility into customer real estate needs and help us support their future growth. Market vacancy increased 10 basis points this quarter to 7.1%, less than we expected. We anticipated it will remain near these levels as available space is absorbed and pending move-outs are completed. Market rents declined 1.7% this quarter. Our portfolio still has approximately 25% mark-to-market potential, which we expect to capture as leases roll over. Conditions have changed since the peak years of nearshoring. We will stay flexible and close to our customers, drawing on our global platform, local knowledge, and financial strength. We continue to see interest in high-quality assets with strong long-term potential. We evaluate each opportunity based on its expected return relative to our cost of capital and its impact on our balance sheet. Recent capital market movements have reinforced the importance of maintaining that discipline. We remain focused on sound investments and on pursuing opportunities that reflect the continued interest in Mexico high-quality assets. I want to thank our team on the ground for serving our customers and executing our strategy. Our portfolio balance sheet, and Prologis' unique global platform position us to respond as market conditions evolve. We remain focused on creating long term value for our investors. With that, I'll turn it to Alexandra Violante to review our financial results.

Thank you, Jorge, and good morning, everyone. FIBRA Prologis delivered healthy results. Our FFO was $97 million, up 8% compared with 2025 or USD 0.057 per certificate. AFFO was $76 million, down 2% year-over-year. Turning to our operational results. We leased nearly 3 million square feet during the quarter. This brings year-to-date leasing to 9 million square feet or 90% of 2026 expirations. Period-end occupancy was 96.5%, up 70 basis points from the second quarter, while average occupancy was 95% and retention 66%. Net effective rent change remained strong at 36%, consistent with expectations. Same-store cash NOI was approximately 2% and GAAP around 3%. Rental income increased from strong rent change on rollover and annual bumps, mainly offset by higher bad debt reserves. These reserves are mainly related to two customers facing financial difficulties. This is an isolated situation involving these tenants that face specific challenges and ultimately ceased their operations. We recently resolved nearly 40% of the exposure by re-leasing the space at rents approximately 50% higher than the previous one, and we are actively working through the remainder, building on our team's track record of successfully resolving similar situations. Moving on to our balance sheet. With the current interest rate environment, we maintain a sound capital structure with strong debt metrics. We have a loan-to-value of 24%, with 70% of our debt fixed and an average maturity of 6 years, plus our liquidity is north of $1 billion. This gives us significant flexibility as we evaluate opportunities in the market. We will remain prudent and disciplined in deciding where, when, and how to deploy capital while maintaining the strength of our balance sheet. Now let me turn to our updated guidance. We are narrowing our forecast for period-end occupancy to a range of 96.5% to 97.5%. We are revising our same-store cash NOI growth to 7% to 8%, primarily reflecting the impact of higher bad debt reserves. We are also adjusting the acquisition guidance to $100 million. Finally, we are narrowing our FFO per certificate to range between USD 0.24 to USD 0.25. The rest of the guidance remains unchanged. In closing, I'd like to thank our team for continuing to deliver solid results and adapting to changing conditions. Our results reflect the strength of our operating platform and disciplined financial management. We remain focused on operational excellence, maintaining a healthy balance sheet and executing our long-term strategy. Thank you. I'll now turn it back to the operator for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Rodolfo Ramos with Bradesco BBI.

Just a couple, if I may. 2027 is not particularly heavy on lease expirations. But as you look at those specific contracts, what kind of rent rollover do you think is achievable next year? And whether you wanted to see what kind of fixed dollar escalators are you including them? And that's a very quick one. So just a second part on the development pipeline. You've been a bit more cautious than peers in the current environment. But when you look at Prologis' development pipeline, what are some of the key industries that have already leased to in the case of pre-leases? Or what industries are you targeting with spec buildings? And can you remind us of the time line?

Thank you, Rodolfo. Let me take the second part. I'll let Federico take the first part of your question. Regarding the development pipeline that Prologis is undertaking, as you've seen at the beginning of the year, we acquired one building leased to e-commerce player in the State of Mexico. We have seen that all over the place, especially in the consumption markets. So Prologis is the focus, as you can see in the pipeline that we have in the Mexico City area, Juarez, et cetera. And you will see eventually some of these acquisitions going forward. As I said in my opening remarks, e-commerce and logistics have been increasing, and we believe there's going to be an additional request for space given the increase in sales. So I think in those lines, you will see more developments or acquisitions in 2027 down the road. That would be my take today with what we see in the market. Federico?

Thank you, Rodolfo, for your question. This is Federico. As it relates to your first question, as you commented, next year, we're on the lighter side in terms of roll. We expect, as far as U.S. dollar escalators around 3.5% on dollar-denominated leases and Mexican inflation, INPC indexation on peso-denominated leases.

And for rollover, I mean, as far as the level goes, I mean, is there anything you have in mind compared to what we've seen so far perhaps this year? I know that it's a good proxy or benchmark.

We have conversations with our customers, and we're already -- our teams are tackling a roll in next year. We've already had some leases tied up that are expiring next year. We're optimistic. And as you see, it's a mix of manufacturing logistics customers, no concerns in terms of the roll.

Rodolfo, just a quick comment on that. One of the things that you should take into consideration is that we are very close to our customers. Federico and his team are very close. As real leases come to roll, we anticipate ourselves -- so we have very good visibility on that. That's why Federico can give you that time line.

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

I was wondering if you can provide a bit more detail on the type of clients that led to the bad debt expense that you mentioned earlier, some sort of -- what industry, what region? And also, if you can comment on your retention rates, they did improve sequentially. It was 66% this past quarter, but it's still below the historical average of 83%. So I just want to understand if this retention rates that we're seeing recently around the 60s, is this a one-off? Or is this a level that we could continue to expect for the near term?

Thank you, Jorel, for your question. As it relates to the industries, so it's a couple of customers in our border markets. One of them was hit with the tariff situation and the other is in the auto sector related just to financial difficulties. As Alexandra mentioned in her opening remarks, our teams already resolved 40% of that exposure, and we're working through the rest. And in terms of retention, again, we've had some consolidations in our portfolio as companies optimize their networks. We continue to stay close to our customers and have good expectations for the remainder of the year and into 2027.

Your next question comes from the line of Francisco Chavez with BBVA.

It's a follow-up on regarding the bad debt that you recognized this quarter. Is the impact of these two tenants fully reflected in your financials? Or can we expect further impact in the 4Q?

Francisco, thank you for your question. As you mentioned, there are two customers facing financial difficulties. These leases, I would like to mention that they represent around 1 million square feet. And as Federico mentioned, we -- and I mentioned in my remarks, we already resolved approximately 40% during this month, and we're addressing the rest. Regarding your question, it's fully reflected there for these customers. And just to highlight, we have faced similar pressure back in 2020, and our operating response helped us work through it. So our teams will work hard to resolve it as any vacancy that we have in our portfolio.

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

My question is related to the data center leasing activity you mentioned in the opening remarks. In which regions or cities you're seeing more or most of this demand coming from data centers?

Regarding -- thank you, Pablo, for your question. Regarding data centers, I think we have all over the place, we have seen in -- particularly in Juarez. We have seen some of that activity in Juarez. We have seen part of those clients also in Guadalajara. If you recall, Guadalajara is the "Silicon Valley" of Mexico, but many of the IT companies are there. We have a data center there. IBM is there. So there is some relation there, and we saw something in TJ and Monterrey, wires, for example, for optical wire -- yes, fiber optics. So I think it's in many markets. But if you have to point to two or three of them, I would say, Juarez, Tijuana, and Guadalajara have been the main drivers from a demand perspective.

Your next question comes from the line of Alejandra Obregon with Morgan Stanley.

My question is on your balance sheet. If I look at it on a historical basis, you've been able to maintain a solid balance sheet with probably 20 to 25-ish loan-to-values. And that leaves even more room or more balance sheet capacity, if I can call it like that. So my question is, what will ultimately determine how much capacity you're willing to use? I mean, is it an absolute leverage ceiling? Is it the metrics that you need to maintain before the credit rating agencies? Is it a spread between your acquisition returns and your cost of capital? If you can help us better understand what's the amount of leverage that you will be willing or you would be willing to undertake? And I'm not talking about probably like the average loan-to-value that you want, but stress it out a little bit. Like if you were to stress your balance sheet a little bit more, where would you still feel comfortable? What's kind of like the dry powder that you still have there?

Alejandra, thank you for your question. As you know, our internal limit of loan-to-value target is 35%. As you mentioned, we're around 25%. So that gives us a firepower of around $1.3 billion to be active in the market as it's needed or have that flexibility for the opportunities we might face. Our intention is to maintain our BBB+ rating as long as the sovereign rating allows us. So I think this gives you a good idea on how we manage our balance sheet. We could get to that 35%. We feel comfortable a little bit lower than that because that gives, like I mentioned, that flexibility.

Your next question comes from the line of Andre Mazini with Citigroup. The next question comes from the line of Andre Mazini with Citigroup. We will move on to the next question. The next question comes from the line of David Soto with Scotiabank.

Just a quick one. It's related to your acquisition guidance. Could you please share the rationale behind the revision? Is it related to a normalization that you're getting to the market? Or is it more related that you are looking to have a more prudent approach?

Thank you, David. This is Jorge. I mean, the quick answer to your question is timing. And let me explain. Normally, when we guide on the acquisitions, we guide looking at Prologis' pipeline. We already did $100 million, give or take, in the year. But the -- getting the utilities in has taken longer. In some cases, some permits have delayed our development, some things that we don't control. Remember that to do an acquisition from Prologis, the property has to be leased and occupied. So some things have taken a little bit longer. And because of that, we decided to -- at least for now, keep it at 100%, but that's the reason why, mainly timing.

Your next question comes from the line of Adrian Huerta with JPMorgan.