Logistic Properties of the Americas (LPA) Earnings Call Transcript & Summary

Good morning. Welcome to LPA's Second Quarter 2024 Earnings Conference Call. My name is Rob, and I will be your operator for today's call. [Operator Instructions]. And please note that this call is being recorded. [Operator Instructions]. Now I would like to turn the call over to Ms. Juliana Dominguez, Investor Relations. Please go ahead.

Welcome to LPA Second Quarter 2024 Earnings Conference Call. My name is Juliana Dominguez, with LPA Investor Relations team. Joining me on today's call are Thomas McDonald, Chairman of the Board; Esteban Saldarriaga, CEO; Paul Smith, CFO; and Annette Fernandez, Chief Operating Officer. Before we proceed with reviewing LPA financial and operating results, please note that the information presented during this call is intended for informational purposes only and does not constitute an offer to buy or sell any securities. Forward-looking statements made during this call are subject to a number of risks and uncertainties, which are discussed in LPA's filings with the SEC. Our actual results, performance and prospects opportunities may differ materially from those expressed or implied in these statements. We undertake no obligation to update or revise any forward-looking statements after this call. We have prepared supplementary materials that we may reference during the call as well. If you have not already done so, we encourage you to visit our website at ir.lpamericas.com and download these materials. With that, I'll turn the call over to Thomas.

Thanks, Juliana. Welcome, everyone, and thank you for joining us. I'd like to say a few words before turning the call over to Esteban and Paul. To our LPA shareholders, you have invested in Latin America's premier cross-border vertically-integrated industrial real estate platform. Your confidence and foresight have enabled LPA to be well-capitalized, allowing us to deepen our presence in existing markets and enter Mexico. The region's most interesting and fastest-growing industrial sector, benefiting from strong near shoring trends supported by Asia and Europe as well as strong e-commerce tailwinds. These trends drive substantial demand for institutional quality properties for clients like those already serviced by LPA. Additionally, you entrusted us to lead your investment via a strong and independent board, along with the management team, possessing exceptional operational and regional expertise. As a result, we believe LPA is optimally positioned to execute a well-defined strategy to expand our differentiated and unique platform within Latin America's underpenetrated industrial real estate markets and achieve even higher levels of growth. I'd also like to remind you that a few weeks ago, we announced the addition of Francoise Lavertu and Javier Marquina to LPA's Board as independent directors. Francoise brings considerable expertise in scaling businesses and possesses a deep knowledge of AI solutions for supply chain management. Javier, a former member of LPA's predecessor entity has an intimate understanding of our company and a strong track record of investing in and growing real estate companies in Latin America. Both bring extensive international, and more importantly, regional experience, further strengthening our Board. To conclude, thank you very much for entrusting your capital to fund LPA's exciting new growth phase. We look forward to engaging with you in the future. And now I'll pass it over to Esteban.

Thank you, Thomas. Good day, everyone. It is a pleasure to welcome you to our inaugural earnings call as a public company, marking a significant milestone in our platform's ongoing evolution. We are pleased to inform you that in the second quarter of 2024, LPA's portfolio of operating assets demonstrated robust performance driven by our strong fundamentals and favorable market trends and dynamics. Before we proceed with our review of second quarter results, I would like to provide some important context. Listing on the New York Stock Exchange was a means, not an end. As we have expressed before, it provides a liquid capital base and market access for us to continue expanding in our existing jurisdictions, and more importantly, to enter the Mexican market to capture growing demand for institutional quality industrial real estate. Much like the other growth markets where we operate, Mexico presents a substantial opportunity to serve global, regional and prominent local companies as premier Class A real estate facilities are not offered at the same pace at which supply chains need to readjust to new economic and geopolitical realities. Similar to the other countries where we operate today, but at a larger scale, Mexico's industrial real estate benefits from strong e-commerce trends led by growing internal demand as well as from favorable shifts in near shoring and reshoring. We aim to capitalize on these opportunities by extending LPA's vertically-integrated real estate platform to Mexico with a focus on the northern region and what we refer to as the USMCA trade corridor for international and domestic companies produced goods destined for the U.S. market and where we can maintain our U.S. dollar exposure. Our Mexico strategy centers on catering to the region's extensive manufacturing distribution ecosystem through LPA's premium facilities, of which new builds are environmentally certified through the IFC's EDGE designation. We have a strong pipeline of attractive opportunities in Mexico that are currently under careful analysis, which we are ready to act on with our available capital. Rest assured, we will apply the same demanding investment criteria to consistently guide our approach. Given that Mexico is a new market for LPA, but not for its executive team, we intend to walk before we run, focusing on partnerships with companies that operate stabilized assets, but lack internal development capabilities and who recognized our exceptional operating performance in other markets. We intend to be rational and disciplined bidders for assets, as we are fully aware of the competitive dynamics in this market. As we think about asset acquisitions, we are thoughtful about how each asset will complement, fit within and strengthen our existing property and tenant portfolio. Remember, the Mexican assets underlying performance will be largely independent of those in Costa Rica, Colombia and Peru, where we operate today. Expanding on that though, we expect to gain access to tenants whose performance is very much delinked from our current tenants, effectively diversifying our overall portfolio risk as we expand our tenant roster. At the same time, operating in Mexico will give LPA more direct exposure to U.S. consumption as these are export-driven markets, whereas our existing asset base primarily serves logistics for domestic consumption. Lastly, Mexico offers the opportunity to keep dollar-based rents [indiscernible] of preference. In summary, both organic and inorganic investments in Mexico will add significant value and complement LPA's overall asset portfolio, enabling us to grow and continue serving our existing multinational tenants while enhancing our capital deployment in opportunities we believe will be highly accretive to our enterprise. By way of example, we're currently assessing several operating asset acquisitions. Although we do not expect nor need to close on all of them, this would be additions to our portfolio where several sellers seek partnerships to accelerate their access to capital and develop adjacent land beyond. They value a partner like LPA because of our established reputation, the quality of our tenants, sophisticated development capabilities and our strong track record of successfully operating stabilized assets. Through our network, we identified properties that are appropriate for LPA and generally off market. Additionally, we continue to see abundant opportunities in our current markets with LPA's existing land bank and an attractive pipeline of prospects to grow and strengthen our competitive advantage. As communicated, leading up to LPA public listing, we also plan to increase our GLA in Costa Rica, Peru and Colombia. For instance, our 750,000 square foot project in Costa Rica is in the later stages of development and has attracted considerable interest from potential tenants. This development is adjacent to one of our existing parks and is being codeveloped with the owners of the land they are contributing. It's important to highlight that the project is being financed through capital raised locally by LPA for which we charge fees. These project-level partnerships are a testament to how local investors value the quality of our product and development processes and recognize the strength and reputation of LPA, which has been further enhanced by our recent NYSE American listing. In several of these instances, LPA will own a fraction of a project's equity, keeping control provisions to manage the development, financing, leasing and day-to-day operations, while the balance of the equity comes from local investors we've assembled, such as family offices and other institutions. Over time, we have been steadily building and institutionalizing this capability, creating locally-sourced joint ventures, while raising fee-paying capital for LPA, which improves our unit economics. Further, we plan to replicate this model in Colombia, as we have already done in Costa Rica and Peru. With that context, I'll pass the call to Paul to discuss in more detail our second quarter performance.

Thanks, Esteban, and good day, everyone. As Esteban noted at the beginning of his remarks, the fundamentals of our business remains strong and in line with our expectations. Our operating assets continued to perform well during the second quarter, supported by favorable macro trends and leasing dynamics. Second quarter rental income increased by 10% year-over-year, driven primarily by Costa Rica and Peru growth. Leasing dynamics remain positive, particularly with regard to renewals in these markets. We're being tactical and patient with our available space, aiming to mark GLA to market lease rates. For example, in Colombia, we consistently see leasing spreads between 15% and 25% higher. With this in mind, we are managing occupancy accordingly. This is why occupancy has decreased slightly in Colombia. I will elaborate on this in a moment. Our SG&A increased markedly compared to last year's quarter. This was due to expenses incurred in taking LPA public in the U.S. This includes legal, compliance, reporting and marketing expenses totaling $1.8 million. The [indiscernible] noncash expense of $1.1 million related to implementing stock-based compensation. Upon going public, merger accounting [ inflations ] require us to register a onetime noncash expense of $44.5 million in the first quarter. This expense is attributable to the customary share dilution embedded in the process and is reflected in our 6-month results. Since the transaction was booked in accordance with accounting rule IFRS 2, the difference in the fair value of the shares deemed to have been issued by LPA and the fair value of [ accounting acquiree's ] identifiable net assets represents a share leasing service received by LPA. And thus had to be recognized as an expense upon competition of the merger. Again, this was a noncash expense. Moving further down the income statement, we reported $10.8 million in other income, bolstering our cash position. This was mostly the nonrecurring fee income related to the release of circling LPA shareholders from their lock-up agreements. Now I'd like to provide a few highlights regarding our markets. In Costa Rica, year-over-year revenue increased 9.3%, reflecting the completion of a park there that's now leased up. Also noteworthy was a 61.3% increase in expenses, driven by the incremental maintenance, property management and other costs associated with bringing 2 new additional buildings online. We expect the earnings power of these buildings to increase in a few months as the initial rent abatements expire, and this property is aligned with our revenue expectations. Moving to Peru. Year-over-year revenue grew 20.7%, mainly reflecting new leases coming online. As communicated previously, we signed a 10-year lease for 239,000 square feet in our new logistics park in Callao with a global consumer products company. In Colombia, rental revenue decreased 2.3%, primarily due to last year's tactical divestment of [ building 500 to Bancolombia subsidiary ] as previously announced. Nevertheless, we successfully implemented inflation adjustments for 44.8% of our portfolio during the quarter. So far, we have captured approximately 20% of the potential rent growth to date, with the remaining adjustments expected to be made in subsequent periods. Lastly, in both Peru and Colombia, occupancy fell slightly, mainly due to being more selective as we market the limited space to new rental rates to those tenants who need our premium product the most. Before we move to the Q&A, we're announcing on this call that we have refinanced [ La Verbena ] Logistics Parks in Costa Rica for $60 million. Despite the new loans [ target ] size as well as its longer-term and 20-year amortization profile, inverts a lower interest rate. This highly favorable refine with the local bank is a function of the quality of our relationships, assets, operating capabilities and tenant base. When this property was underwritten, it was projected to be leased up in 48 months. It actually took only 30 months and the rest were also above forecast. Additionally, we've also used a part of the funds for distribution to the product equity holders. LPA has a roughly 24% stake in this property, although we control it. Previously, it was unthinkable in our industry and markets to use debt to pay a distribution to the shareholders of a development project. In effect, we have been changing the financing landscape in our markets and to our advantage. This speaks of how well we manage the LPA financially as well as operational. That concludes my review. Operator, please open the call for any questions.

[Operator Instructions] And our first question comes from the line of Felipe Barragan from BTG.

So it seems like you guys are very confident on the industrial estate market. Obviously, you've been very [ hyped ]. Last week, we saw Prologis finally finalized the Terrafina transaction. So I'm just curious, you guys talked in the opening remarks, the new issuing opportunities, the e-commerce. So I'm just curious what sort of markets in Mexico you might be looking at, if it's very holistic or you guys might be looking something more towards the north or something more in Mexico City? That would be my question.

Thank you, Felipe. We appreciate joining us for the call today and for your question. In a nutshell, we're focused on what we call the USMCA corridor. That basically does encompass the north, the lines through which take us to Mexico City. And those, I would say, are the main markets we're looking at. So we're definitely looking at Monterrey, Juarez, we're interested in Luis Potosi and Mexico City and Puebla. So that's kind of the focus where we're mostly looking at right now. The recent transaction, we agree, it's supportive of the industry. It reflects an interesting dynamic, and it's one that we think we can also benefit from. So that's a summary of where we're focused on right now in Mexico is the first market we address and approach.

Ladies and gentlemen, with that, we'll be concluding today's audio question-and-answer session. I would like to turn the floor back over to Juliana Dominguez, Investor Relations for any webcast questions.

Thank you, operator. At this time, there are no further questions. I would like to turn the call over to Esteban for closing remarks.

Thank you, Juliana, and thank you all again for joining us today. We're really excited about the many opportunities that we see ahead in both our current markets and Mexico. We strongly believe that we have the right strategy, platform and team to effectively capitalize on these opportunities and drive substantial value for our shareholders. We look forward to updating you on our progress on future earnings calls as well as meeting some of you in person. Please reach out to Juliana from our LPA's Investor Relations Office. If you'd like to arrange a call or a meeting. Once again, thank you for your time and interest in our company. Have a good day, everyone.

This concludes today's conference call. You may now disconnect.