Fibra UNO (FUNO11) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra UNO's Q3 2022 Results Conference Call on the 27th of October 2022. [Operator Instructions] So without further ado, I would now like to pass the line to Mr. Andre El-Mann, the CEO of Fibra UNO. Please go ahead, sir.

Thank you, Michael, and thank you, everybody, for joining us in our quarterly call. We are here to present our results of third quarter of 2022. And I am very excited about the extraordinary results that we had in the company for the last quarter. Before I pass the mic to Jorge to get into the depth of the analysis, I would just like you to know that we have been growing at a very interesting rate. Our income grew almost 12% year-on-year. Our NOI grew almost 10% year-on-year. Our adjusted NOI is 16% up year-on-year and our adjusted FFO up 13% in the same period. So what we see for the company is that we have been delivering extraordinary results and taking into account that we have had in the last 12 months 500 basis points up on our interest rate -- regardless that only 1/3 of our debt is variable, 500 basis points should impact in the results of our company. Nevertheless, we have swallowed that increase on the interest, and we are presenting this type of increases on all of our important lines for the last quarter. 12%, again, on the income. 10% on NOI. 16% on the adjusted NOI and AFFO 13% up. We feel that we have been delivering extraordinary results, and I would like to see and try to analyze the company in this rightful measure. I would like to share with you my philosophy how I see the company because I do not necessarily agree with the analysis posted by our analysts that cover the company because I only see the headlines saying "strong result but just in line or just off the line." For me, it has been a challenge for all our team in Fibra UNO to deliver these results, all of them over double digits, in an environment like this. I feel like we have been spoiling the public by delivering consistently, consistently, the last 47 quarters, increases in all of our important lines again, but it is really a hard task to achieve these metrics. And we have been delivering and we are continuing to deliver every single quarter. So for once, I would like you to see the company through the scope that we see it and taking into account the challenge that has been for us to deliver these results. We see for the next quarters to continue to have strong results, solid results, continue to enhance our numbers, all of our important lines are enhancing every single quarter. And we have been beating the inflation all of this -- all of these quarters. We will continue to deliver these results. We expect a lot of our company, and we will continue to beat again all the increases that we have been receiving from the interest rate. I have said many times in this forum and in many others that, in Mexico, we don't see such a direct correlation between the interest rate and the value of the properties. We always talk about our rent, and our rent is always in actual numbers. Real numbers, not nominal numbers. We always capture the inflation. All of our contracts, 100% of them, dollars and pesos rate contracts, all of them are indexed to inflation. So every time we present rent, we are presenting real numbers, including the inflation. That's why we don't see a direct correlation -- such a direct correlation between the interest rate and the value of the property. We are continuing to enhance the numbers, the income, the NOI, the FFO. We are standing by our commitment to continue to have a very healthy cost, a very healthy [Foreign Language] margin on our operation and on our lease [ debt. ] So before I pass the mic to Jorge, I just urge you to try to measure our company with this scope that we see it, and we know that we have been delivering the very successful numbers and we are very excited about that. I will pass now the mic to Jorge to get into the detail of the numbers. Jorge, please?

Thank you very much, Andre, and thank you, everybody, for joining us for the third quarter 2022 results call. As usual, we start with the discussion of the quarterly MD&A. Looking at our revenues. The quarter's revenues increased by MXN 217 million, and we broke the MXN 6 billion mark for the quarter with MXN 6.018 billion or 3.7% above the second quarter of 2022, which is mainly attributable to a combination of the increase in the rents with the effect of the translation of inflation in active contracts as well as renewal of additional contracts. The initial contribution of some projects that were under development are now operating. And this, I'd like to highlight that, as you know, one of the highlights of the quarter is that we delivered the Mitikah shopping mall area and opened the condo tower with the delivery of more than 200 units at this stage. It's important to mention that, even though we opened Mitikah already, we are yet to see the contribution of this property. As you know, it's in this ramp-up phase. So we'll expect to see the real contribution of the Mitikah project during 2023 starting in the first quarter, but during 2023. Similarly, with Tepoz Park, which was also a property of recent delivery to FUNO, we are starting to -- we're still yet to see the contribution of those properties. So those 2 are still upside that we have in the company's numbers. And also, the exchange rate depreciation and its effect, which was, in this case, a negative effect for U.S. dollar-denominated rents, given that we report in pesos. In terms of occupancy, we had a stable occupancy compared to the previous quarter of 93.2%. Industrial portfolio increased 10 basis points to 97.6%. Retail dropped 10 basis points to 89.3%. This is basically due to a change in tenant mix. We are actively managing the content of our shopping malls, and we have decided to part ways with some tenants and are adding new ones. That should be reflected in the coming quarters. So we are very positive about the performance of this segment. The office portfolio recorded a 75% occupancy, 10 basis points below the previous quarter. As we mentioned, this is something that we see is going to be stable for the foreseeable future in the next couple of years. Stable occupancy is going to be what we expect from the office, and that's what we are seeing. The others portfolio was 99.2%, 10 basis points above, mainly due to a sale of properties from this segment. We don't have properties in the "In Service" category, which was actually very good news and very positive news. Because, as you know, we just recently delivered Mitikah. Normally, when we deliver a property, it goes into the in-service category, in the case of a shopping mall for 18 months, unless it is an occupancy of 90% or above, which is the case of Mitikah. So we're very happy to say that we are opening the shopping mall with 90-plus percent occupancy from day 1. In terms of operating expenses, property tax and insurance, total operating expenses increased by MXN 39.1 million or 6.3% quarter-over-quarter. And this is mainly the effect of general inflation in the overall economic environment. Our property taxes increased only by 1.1% (sic) [ MXN 1.1 million ] -- 0.6% mainly due to new inclusion of square feet that were under development and are now operational. Insurance expenses increased by MXN 7.9 million, 8.8% versus the second quarter. Again, mainly due to contribution of properties to our operating portfolio. In terms of net operating income, we had an increase of MXN 238.3 million, which is 5.2% compared to the second quarter of 2022. If I annualize these figures, that means that on an annual basis, it's a growth of almost above 20% on an annualized rate to reach MXN 4.78 million. This is mainly due to a combination of the increases in revenues surpassing inflation as well as the normalization of the company's operation, which reduced -- which resulted in a reduction of doubtful accounts provision, which reduced administrative expenses. As you know, the provision for doubtful accounts, we had 1 specific for COVID, which was eliminated from our results a couple of quarters ago, but we normally have a reserve for doubtful accounts. And this one has a methodology in which we look back a year and look at the performance of accounts receivable in that year. And based on the probability of payment of those accounts receivable, generate a reserve. Given that we have improving conditions, it is normal to expect that we will have a reduction in the amount of that reserve, and that resulted in reduction in administrative expenses, which, obviously, is a welcome sign of a better performance of the overall economy and the company. In terms of interest expense and interest income, net interest expense increased by MXN 300 million (sic) [ MXN 304.2 million ] or 15.9% compared to the second quarter of '22, mainly due to an increase in total debt by MXN 3.2 billion as well as the aforementioned increase in our variable rate debt. In terms of funds from operation, as a result of the above, funds from operation controlled by FUNO decreased by MXN 66 million or minus 2.8% compared to the second quarter of 2022. Adjusted funds from operation increased MXN 42.5 million or 1.7% from the second quarter of '22, reaching MXN 2.5 billion. This is mainly due to the sale of properties from the Azul and Rojo portfolios as well as an extraordinary profit resulting from an in-kind collection of past due rents, and we can touch a little bit more on that a little bit later in the call. I think it is important to highlight that the reported 7.2% cap rate that we reported on the sale of assets reflects the net proceeds received by FUNO. If we consider the closing costs included the brokers fee paid to CB Richard Ellis as well as all the closing costs, meaning the price paid by the buyer, the actual cap rate at the time of sale is 6.81%. And again, if you have questions on this, we'll be happy to take them when we have concluded with the MD&A discussion. FFO and the AFFO per CBFI remained stable during the second quarter of 2022. We repurchased 22 million -- 22,381,893 CBFIs, closing the quarter with 3.799 billion (sic) [ 3.779 billion ] CBFIs outstanding. The FFO and AFFO per average CBFI were at MXN 0.6015 and MXN 0.6651, respectively. This implies a decrease of 2.8% and an increase of 1.7%, respectively, versus the third -- versus the last quarter. Compared to the third quarter of 2021, FFO and AFFO increased by 2.9% and almost 14%, respectively. Now looking to the balance sheet. Accounts receivable in the third quarter of '22 totaled MXN 2.76 billion, an increase of MXN 60 million or 2.2% compared to the previous quarter. This reflects mainly an increase in the total amount of invoicing that the company has. So higher revenues mean obviously a little bit higher accounts receivable. In terms of investment properties, the value of our investment properties, including investments in associates, increased this quarter by MXN 5.2 billion or 1.7% versus the second quarter, mainly due to the following: fair value adjustments due to high inflation environment and its effect on the net present value of rents for certain properties as well as the increase in replacement cost of real estate assets in Mexico and an increase in the cost of comparable transactions where applicable. As you may recall, we have been very conservative with the increase in the value of our properties since the pandemic began. And this is the first time that we have adjusted upwards the valuation of our properties because the 3 main drivers for valuation of our real estate assets are pointing upwards. In addition to this, normal progress of construction under development, CapEx invested in our stabilized portfolio, and this was also compensated or resulted in a slight reduction by the sales of the Rojo and the Azul portfolios. In terms of debt, in the third quarter of '22, we finished with MXN 142 billion compared with MXN 138.8 billion recorded in the previous quarter. The variation is mainly due to a net increase in bilateral credit for MXN 2.2 billion, and exchange rate variations where the FX went from MXN 19.94 to MXN 20.38 (sic) [ MXN 19.9847 to MXN 20.3058 ] per U.S. dollar from the close of the previous quarter to the close of this quarter. Total equity increased by almost MXN 2 billion or 1.1%, including participation of controlling and noncontrolling interest, compared to the previous quarter. This is a combination of net income generated by the quarterly results, derivatives valuation, shareholder distribution and the employee compensation plan. In terms of operating results, moving to leasing spreads, without considering inflationary effects, nominal increases in renewed contracts in Mexico's pesos were plus 810 basis points in industrial, plus 720 in retail and plus 210 in the office segment. Real leasing spread was 40 basis points in industrial, negative 50 in retail and negative 560 in the office segment, all compared to the peso inflation. This is completely consistent with the message that we have been giving in previous quarter. For dollar-denominated leases, nominal rent increases were 610 (sic) [ 620 ] basis points from retail, 130 basis points for office and minus 220 basis points in the industrial segment. I would like to highlight that, in case of the industrial segment, this has to do with the fact that almost 40% of the renewed GLA included tenant improvements in the prior version of the contract, which are -- have been amortized and are not included in the existing new rent. And that appears as a reduction in the rent levels that we are collecting, but we're now no longer amortizing tenant improvements included in the buildings. In terms of constant properties, rental price per square meter for constant properties increased 5% -- 5.4% compared to annual weighted inflation of 7.6%, so a decrease of 2.2% in real terms. This is mainly due to the FX appreciation and the effect it has in U.S. dollar rents as well as a natural lag that we have in collecting inflation in our contracts. And to a very small degree, limits the inflation in some U.S. dollar-denominated contracts in the light manufacturing segment. At the subsegment level, the portfolio's total annual rent per square foot increased from USD 10.1 from second quarter of '22 to USD 10.3 or 1.6% above, mainly due to FX appreciation as well as the increase in both current contracts and some renewals. NOI at the property level for the quarter increased 6.4% compared to the previous quarter. These variations are mainly due to the following: in the industrial segment, logistics NOI increased a very solid 3.1% (sic) [ 13.1% ]. The light manufacturing sector increased only 0.6%, basically the effect of foreign exchange variation. Business parks increased 8.8%, mainly due to occupancy gains and lessened by the FX appreciation. In the office segments, NOI increased by 8.5%, mainly due to occupancy gains. In the retail segment and stand-alone subsegments, NOI increased 2.9%. Regional centers increased 4.9%, and fashion mall decreased 8.6%, the latter mainly due to the extraordinary variable rents that we saw recorded in the second quarter of '22. Other segments NOI grew by 14.6%, mainly due to an increase in variable rents from the hotel segment. With this, I conclude the comments on the management MD&A of the financial and operating results. Please, Michael, if we can open the floor for Q&A.

[Operator Instructions] The first question comes from Mr. [ Edson Mugir ] from Suma Capital.

I have 2 of them. The first one is related to Mitikah. You mentioned in your remarks that you expected to contributing to NOI in 2023. So I was wondering if you have a specific number or you have an idea of how much of the NOI will contribute Mitikah. I know that the property will -- it's on a ramp-up period, but I'm just trying to understand how much it's going to contribute. That would be the first one. The second one, could you please repeat about the closing coverage of the properties that were sold in the quarter? It's -- if I understood correctly, was it 6.8%, something like that?

Just to answer on the second question, the closing cap rate was 6.81%. That's the cap rate of the closing.

And in terms of Mitikah, we should expect about MXN 1.5 billion for Phase 1. It's the total stabilized [ any ] NOI that we expect for Mitikah based on today's pricing. So that's an additional contribution of MXN 65 -- MXN 600 million more or less during 2023.

The next question comes from Mr. Juan Macedo from GBM.

My only question is regarding on the profit from the payment in time from overdue rents. Could you give us some color on that? Was it related to previously giving COVID discounts?

No, it has nothing to do with COVID discounts. We had a past due rent from a tenant. We received land in exchange for the cancellation of the past due rent, and the valuation of the land is significantly higher than the size of the amount that was due to us. So we are required to record a profit for the excess value of the land that we received.

Just to give you a little more light on this, the debt that we have with this tenant was MXN 57 million. The assets are worth MXN 161 million. So the profit was MXN 97 million.

Great. And a quick follow-up is, is he still a client or have you canceled all leases?

Is still a tenant with us?

No, no, no. We canceled the leases with them. It was in the office sector.

Okay, in the office sector.

Our next question comes from Mr. Anton Mortenkotter from GBM.

My question is regarding your debt refinancing. I saw that you pushed back some debt that you have due during this quarter to the next quarter. I was just trying to understand, is this because you are still involved with the banks to try and refinance those? Or what's kind of like the environment of that [indiscernible]?

Sorry, Anton, but your line is cutting up, and I couldn't hear the question. Could you repeat, please?

Yes. Can you hear me better?

Yes, better. Thank you.

Okay. My question is regarding your debt. I saw you had some debt due during this quarter, but you managed to push them back to the next quarter. I was wondering is this because those debts are still -- are you still in talks with the bank to try to refinance those? Or what's going to happen to those debts? And how the outcomes of that look?

No, I think we have a very -- basically, we put it active and normal course of business liability management, in which we're in constant conversations with our banks. In terms of the short-term lines of credits, normally, what we do is either renew them or package them and issue a bond, depending on what we see is available in the market. Part of the company's philosophy has been to try to finance ourselves long-term fixed rate in the market. If the market is not available, then we have bank lines available. We have roughly around MXN 10 billion of bank lines available, plus the revolving line of credit, which is a committed revolving facility. That's MXN 13.5 billion and $410 million. That facility is completely unused. And then after that, obviously, we have the ability to provide collateral for banks if we wanted to or needed to refinance exclusively with banks without tapping the markets. As you very well know, obviously, the markets are very volatile today -- not specifically today, but recently and maybe today as well. I haven't actually looked at the market. But they've been very volatile of late. So we have a lot of flexibility to decide what to do and when to finance and refinance the things, but short-term lines of credit, it's absolutely business as usual for us.

The next question comes from Mr. Gordon Lee from BTG.

Two quick questions. The first, Jorge, I was wondering if you could -- if you think about the industrial leasing spreads and the impact of the amortization of the TIs that had on the sort of the base comparison, I was wondering whether there are more industrial contracts in the portfolio with those features. I mean, I guess, the question is, is this going to be a recurring feature as rents roll over? And then the second question is on the portfolio as a whole. Just to confirm that the vast majority is not the totality of your rents in both pesos and dollars are CPI-linked or CPI-indexed. Just to confirm that.

Sure, Gordon. Thank you for the questions. Let me take the second question first, which is simpler -- easier. Less than 1% of the contracts have some form of cap. So 99% of the contracts are full inflation pass-through company-wide. Now secondly, going to the TIs, it's more of a one-off than something that is going to be recurring every quarter. As you know, this is more on the light manufacturing sector than on the logistics, and we are significantly more weighted towards logistics, where we have significantly less tenant improvement investments in the warehouses that we lease. This is more the norm for the light manufacturing sector. Now on the flip side, light manufacturing sector has very long-term contracts because of -- precisely because of the fact that they amortize. They need to amortize the investment that you do to the warehouse to adjust it to the requirements of the tenant. So sorry for the long-winded answer. But in a nutshell, no, this is not something that we expect to be recurring. It can happen again in the future, yes, but it's not a trend.

Gordon, just to add to Jorge's answer. We've been on the market for 11-plus years. In 11 year, we have had between 50 and 150 basis points on top of inflation. We expect that we will get back to that trend sooner than later. Remember that, in our view, we need to be compared with our comparables, with our peers. And Mexico still is very cheap. Maybe right now, we are going through a rough patch with our tenants -- with some tenants with either of the sectors. It's not particular for retail or for office spaces, in all the sectors, they may have been going through a rough patch because we have coming from, historically, for the last 20 years, low inflation to an inflation that is almost double digits. So maybe some of them are cutting, and we need to be there for them. But we will get back to a regular business as usual, which is 50 to 150 basis points on top of inflation.

And also, just -- you are aware of it, but just to recall, is that we, especially on the light manufacturing and, well, generally in the industrial sector, we are below market. That has been a philosophy of the group, but not as much as we are right now. The rent has been increasing in all markets. So probably, right now, we have a gap of 10% to 15%, depending on each one of the markets, it could be different -- Tijuana and Juarez have been increasing tremendously. But in average, I will consider that we are around 12% below market. So there's a lot of room to increase the rent.

Perfect. That makes a lot of sense. If I could just have one quick follow-up on an unrelated question, which was the payment in kind in the form of land. I was wondering, is that land that you're thinking of selling? Or is it land that's developable for you?

It's developable -- absolutely developable. It's industrial land. So we are right now working on the project. The first one is 2 different pieces of land. One is the top of my [indiscernible] 50,000 square meters and the other one is 100,000 with the smallest one. We are working on a project, and we think that we can be starting a new development here in 6 months. So by the end of the next year, we should be finished.

Next question comes from Gabriela from PineBridge Investments.

My question is related to the elevated leverage in terms of what -- in line with the rating bucket that FUNO is in. So what I wanted to ask is, how is the asset sales going? I know that you did some asset sales during the quarter. But I was wondering when will we see some more considerable asset sales in order to see our company's deleverage?

Well, we do have -- let me put it to you this way. We have a lot of appetite and interest of investors to buy property from us. What we have made public is what we have sort of in negotiations already signed, not a binding agreement, but at least a letter of intent on some form of more advanced negotiations, and that is what has been listed in our quarterly reports to the tune of roughly about MXN 7 billion. Part of that is what we closed this quarter, and the remaining still in progress. I would expect that we can close during 2023. And there is obviously more than we can do after that, and we will obviously disclose future asset sales as things continue to progress.

The next question comes from Mr. Rodolfo Ramos from Bradesco.

My first question -- two, if I may. The first one is a follow-up on Gordon's question about the increases on the industrial side. So you would expect you say on a historical basis 50 to 150 basis points. But when you look at that lag that you might have on inflation, say, if inflation next year starts converging to 4.5%, 5%, would you expect this a big catch-up to that number as you start rolling some rents at the higher inflation rate that we saw last year? Or does that really -- how the dynamic works? So that would be in the industrial side. And then on the office, if you have a view on when we could see rents stabilizing in real terms?