Concentradora Fibra Danhos SA de CV

BMV:DANHOS13

Earnings Call Analysis

Retail Thrives, Office Sector Stabilizes, NOI Margin Goals Set

Retail foot traffic has rebounded to 2019 levels, signifying a robust market, though slightly impacted by new mall Parque Tepeyac. Strong sales indicate healthy consumption across properties. Office lease rollovers are handled case-by-case with a 4-year average lease term and a cautious but active market. No exact occupancy forecast was provided for the office sector. NOI margins historically at 78%-80% are currently lower due to Tepeyac's ramp-up but should recover over quarters. Factors like inflation, supplier negotiations, and labor costs are under watch, with long-term NOI margin targets intact. Retail leasing spreads are accelerating, nearing inflation rates, and expected to continue growing, potentially into double digits within a year.

Fibra Danhos Posts Strong Growth in Second Quarter Revenues with Retail Properties Leading the Way

Fibra Danhos reported a solid second quarter in 2023, with total revenues reaching MXN 1.5 billion, marking a 13% increase compared to the previous year. This growth has been fueled by significant contributions from fixed rent, overage, and parking revenues. Notably, a 40% surge in maintenance, operation, and advertising expenses was observed, partly due to the new Parque Tepeyac operations which began in the fourth quarter of 2022. Despite facing higher consumption costs and tariff increases, such as water and energy combined with increased labor demands, the company has demonstrated resilience with a reported Net Operating Income (NOI) of MXN 1.1 billion, up by 10% year over year and boasting a margin of 77%.

Challenges from Financial Expenses and Exchange Rate Losses, but Strong Performance in AFFO and Stable Dividends

While the company's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) increased by 10.7%, higher financial expenses and exchange rate losses have impacted the Adjusted Funds From Operations (AFFO) which totaled MXN 959 million, translating to MXN 0.62 per Certificado Bursátil Fiduciario Inmobiliario (CBFI). However, the consistent distribution of MXN 0.60 per CBFI with economic rights maintains parity with the second quarter of the previous year, and the payout ratio stands at a commendable 97%. Fibra Danhos also maintains a strong balance sheet with leverage at 10.4%.

Sustainability-Linked Bond to Boost Financial Flexibility

In a strategic move to enhance financial flexibility, Fibra Danhos announced the issuance of a long-term sustainability-linked bond through its debt program, worth up to MXN 2.5 billion, with a seven-year fixed rate. Boasting a AAA local rating by Fitch and HR, the proceeds from this bond are earmarked for debt refinancing and other corporate uses, signaling the company's intention to maintain a robust and sustainable financial standing.

Retail Properties Experience an Uptick in Visitor Traffic, Comparable to Pre-Pandemic Levels

Fibra Danhos' retail segment showed a strong performance with foot traffic rising to levels similar to 2019, indicating a resurgence in retail activity. The recent inclusion of the Parque Tepeyac mall in these figures further emphasizes the growth. The company's malls continue to demonstrate strong sales and occupancy rates, with retail properties achieving 91.3% occupancy. Such positive indicators suggest that the retail market within Fibra Danhos' portfolio is robust and expected to maintain strength going forward.

Office Portfolio Faces Uncertainty Despite Positive Market Uptick

The office segment's trajectory remains cautious, with Fibra Danhos working on retaining tenants at a case-by-case level. With an average lease term of around four years within the portfolio, the company is yet to provide clear guidance on expected occupancy levels for the remainder of the year. However, an uptick in market activity, gauged by the amount of Letters of Intent (LOIs) and property visits, suggests a degree of optimism for future office space leasing.

Long-term Goals to Achieve Pre-pandemic NOI Margins Despite Inflationary Pressures

Efforts are underway to normalize the portfolio's NOI margin, aiming to return to the historical range of 78% to 80%. While current margins are somewhat lower due to the new Tepeyac property and office portfolio performances, there is confidence in reaching these targets as the retail sector stabilizes and maintenance income grows. The company acknowledges the upward trend in labor costs and electricity costs but remains committed to its long-term margin goals amidst these inflationary challenges.

Earnings Call Transcript 2023-Q2

[Operator]

Good day, everyone, and welcome to today's Fibra Danhos Second Quarter 2022 (sic) [ 2023 ] Results Conference Call. [Operator Instructions] Please note this call is being recorded, and I will be standing by to need any assistance. It is now my pleasure to turn today's program over to Rodrigo Martínez, Investor Relations Officer.

[Rodrigo Martínez Chávez, executive]

Thank you, Brittny. Hello, everyone. I am Rodrigo Martínez, and I run Investor Relations for the company. At this time, I'd like to welcome everyone to Fibra Danhos 2023 Second Quarter Conference Call. We issued our quarterly report yesterday and if you did not receive a copy, please do not hesitate and contact us. Please be aware that they are also available on our website and in Mexico Stock Exchange website. Before we begin the call today, I would like to remind you that forward-looking statements made during today's call do not account for future economic circumstances, industry conditions and company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures here included were prepared in accordance with IFRS standards and are stated in nominal Mexican pesos, unless otherwise noted. Joining today from Fibra Danhos is Mr. Jorge Serrano, CFO of Fibra Danhos; and Elias Mizrahi. Now I will turn the call to Jorge Serrano for opening remarks and financial and operating indicators. Jorge, please go ahead.

[Jorge Esponda, executive]

Thank you. Good morning, everybody. Thank you for joining us to our second quarter 2023 conference call. Total revenues of MXN 1.5 billion were 13% higher against last year. Fixed rent overage and parking revenues posted strong growth during the quarter against last year's figures and last consecutive quarter. Maintenance, operation and advertising expenses were 26% higher. 40% of this increase comes from Parque Tepeyac that started operations on 4Q '22 and is not comparable on a same property basis. Most relevant increases are due to higher consumption and tariff increases, including water and energy, cleaning and security services, explained by higher headcount and labor costs.

NOI of MXN 1.1 billion during the quarter is up 10% year-over-year with a 77% margin. EBITDA increased 10.7% year-over-year. However, higher financial expenses and exchange rate losses affected AFFO that posted MXN 959 million and accounted for MXN 0.62 per CBFI. Distribution was determined at MXN 0.60 per CBFI with economic rights, flat when compared to second quarter of last year. Payout ratio stood at 97%. Balance sheet remains strong. Leverage stood at 10.4%. During the quarter, we announced the issuance and public offerings of long-term CEBURES on the Fibra Danhos debt program. Our sustainability-linked bond would be for up to MXN 2.5 billion, 7 years fixed rate and has a AAA local rating by Fitch and HR. Use of proceeds will be to refinance debt and other corporate uses. Our portfolio overall occupancy increased 70 basis points to 85.9% driven by retail properties that reached 91.3% occupancy with tenant additions at Tepeyac, Duraznos, Antenas, Toreo, Puebla and [ Alameda ]. With this, I finish my opening remarks, and let's move to the Q&A session.

[Operator]

[Operator Instructions] And we'll take our first question from Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

The first one is regarding retail. On traffic, we saw food traffic growing nicely. So I would like to know your expectations for the coming quarters in that regard. And the second is regarding office. How you're seeing the rollover trends for rents.

[Elias Daniel, executive]

Vanessa. This is Elias. Regarding retail the flow of visitors is, I think, now comparable to 2019. So there has definitely been an increase in visitors. Remember that, that figure also includes our recently opened mall Parque Tepeyac, which was not accounted for in the second quarter of 2022. But overall, I think what we're seeing is that the retail market is very strong. Our malls are performing very well, and consumption continues to be strong throughout the properties. Sales are doing well. So we believe that the retail market has been performing very well as we've expected. Regarding the rollover -- and sorry, just wanted to clarify. This is on retail or office.

[Vanessa Quiroga, analyst]

For us retail, yes.

[Elias Daniel, executive]

I mean rollover for office as we've mentioned in previous quarters, we have an average lease term in our portfolio of around 4 years. And depending on the property, we're looking at the renewals on a case-by-case basis. So depending on some properties, we feel that we have a stronger case. And we're actually working to retain our tenants and that's our main goal.

[Vanessa Quiroga, analyst]

Okay. Okay. And what's your outlook for occupancy for the rest of the year for office?

[Elias Daniel, executive]

I mean it's hard to say. What we do feel is that -- and we get a sense of the market by the amount of LOIs we received the amount of visits we have in our properties with brokers and so on. And there has definitely been an uptick in the market. So there's been some leasing activity, but it's hard to say how much it's going to be towards the end of the year. Obviously, this is one of our main priorities, as you know. We've been focusing on this. And we've been able to get some leases executed during the year. And this is one of our main goals, but it's hard to give guidance on where we see the occupancy. It will all depend on some LOIs that we can execute them in the market really.

[Operator]

We will take our next question from Rodolfo Ramos with Bradesco BBI.

[Rodolfo Ramos, analyst]

Just a follow-up on Vanessa's question on the retail traffic. I mean, on a like-to-like basis, so adjusting for Tepeyac, where would you say are on, let's say, on a pre-pandemic level, just to get a sense of what the catch-up if there's still to happen? That will be my first question.

[Elias Daniel, executive]

So the retail traffic has been recovering since 2020. And we feel that we're on the same level, so pretty much in line with 2019 figures, slightly below, but pretty much in line.

[Rodolfo Ramos, analyst]

Okay. And just my second question was on your expenses line. I mean what would you expect now that you have Tepeyac, what would be your expected normalized level of maintenance and operating expenses and for property taxes as well for the -- on a yearly basis.

[Elias Daniel, executive]

Yes. So regarding the overall portfolio NOI margin, historically, we've been achieving a 78% to 80% margin. Obviously, those numbers today with Tepeyac ramping up and with the office portfolio, that number is slightly lower. In the case of Tepeyac, as the stores continue to open and the shopping mall stabilizes, we feel that eventually, we're going to get there. So we think that, that should take some quarters. And regarding the -- where we see margins going forward, obviously, there's been some inflation. I think we've been able to achieve good negotiations with our suppliers. We have a good team of suppliers. But obviously, labor costs have been increasing year-over-year. So that's something that obviously, there are some factors that we can't control as well as electricity costs. But in general, our maintenance income also grows. So I would say our long-term goal is to achieve that 78% to 80% NOI margin on our portfolio.

[Rodolfo Ramos, analyst]

And just if I may, a follow-up on your office comments -- this uptick in activity that you see in the office space, is this in any particular reason would you say that is perhaps near-shoring driven? Or is there anything that we can -- just to get a little bit of sense of what the recovery might be if there is one taking place?

[Elias Daniel, executive]

I mean I think there's various factors. I wouldn't say the near-shoring is a factor, at least not yet. I think -- and we believe we have the strongest or one of the strongest office portfolios. So in general, I think that our properties should outperform the rest of the office market. just because of the quality of the buildings. So I think that's #1. And the drivers, I think, behind this, I mean, I think general economic activity as well as many companies that during the pandemic and a couple of years after the pandemic that didn't take decisions in terms of relocating or getting space because in general, decisions for offices have been taking longer.

So companies have been deciding on what's going to be their working scheme and so on. So I think that a couple of years and 3 years from the pandemic, a lot of companies have started to come back to the office -- we've seen traffic or not traffic, but attendance at the office properties coming back. So I think as people come back and as companies adjust, they're looking at their new space programs again. So I think in general, that's the issue. And again, we feel that we have strong properties. And regardless of the corridor, when a tenant is looking at certain corridors, our properties are the ones that usually they look for.

[Operator]

[Operator Instructions] We will take our next question from Jorel Guilloty with Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

And I'm sorry if this is just came in a little bit late. I was just -- I have 2 questions regarding retail. One is how are -- this acceleration or this strength that you're seeing in retail, is it -- are you seeing it broad-based? Are there certain segments that you see are doing better than others perhaps service versus more transactions? That's my first question. And the second question is, we see leasing spreads that keep on accelerating for retail. I believe this time they're at or near inflation. How are you thinking about leasing spreads going forward right now, they're in the high single digits? Do you think that the [indiscernible] in keep on climbing perhaps you can see double digits in the next 12 months or so?

[Jorge Esponda, executive]

Jorel, this is Jorge. I think what we've seen is not any specific sector. I think the mix in general of our shopping centers is well balanced. We have a very strong mix of products and services, entertainment and food and beverage is also very relevant, as you know. And this mix is what attracts a lot of affluence and people visiting our shopping malls. This correlated to the economic and the consumption dynamism. And that, of course, has allowed us to approach in terms of lease spreads, something closer to inflation rate. It was tougher during '21 and '22, to have lease spreads close to inflation. But now we're approaching that. And if you go further back, we have been always able to have lease spreads on average or higher than inflation. And I think we're coming back given the demand we have for our retail spaces.

[Elias Daniel, executive]

And sorry, just to complement that. I think the goal and historically, we've been able to achieve high single-digit leasing spreads, and that's what we're aiming for. Obviously, with the higher inflation, it's more challenging in that environment, but that's usually the goal.

[Operator]

It appears we have no further questions on the line at this time. I will turn the program back over to our presenters for any additional or closing remarks.

[Elias Daniel, executive]

Thank you, everyone, for joining us today. It was a short call. So if you have any other questions in the meantime, please be aware that Jorge, myself or Rodrigo are always available, and have a nice day.