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BMV:TERRA13

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CI Banco SA Institucion de Banca Multiple FF/00939
BMV:TERRA13
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Price: 39.89 MXN -0.23%
Market Cap: 30.8B MXN
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Earnings Call Analysis

Q2-2024 Analysis
CI Banco SA Institucion de Banca Multiple FF/00939

Terrafina's Strong Q2 2024 Performance and Future Prospects

Terrafina reported a robust performance in Q2 2024, with rental revenues up 4.6% to $56.4 million. The company saw high occupancy levels of 96.9% and continued double-digit leasing spreads at 18.2%. NOI increased 6.4% year-on-year to $54 million, achieving a 93.5% margin. EBITDA rose 5.9% to $47.1 million, and FFO grew 3.2% to $28.4 million. Terrafina expects to deliver an additional 560,000 square feet by Q3 2024, adding $1.8 million to annual NOI. The dividend yield for the quarter was 4.5%, and the company maintained a solid balance sheet with a 32.5% LTV ratio, in line with its 35% guidance.

Strong Demand in Industrial Real Estate

In the second quarter of 2024, Terrafina witnessed a robust demand for industrial real estate driven by several macroeconomic factors. The company reported a solid occupancy rate of 96.9%, bolstered by an impressive leasing spread of 18.2%. This growth can largely be attributed to strong market conditions where the supply of new properties is limited, particularly in the Northern regions, which now constitute over half of the company's leasing activity.

Leasing Activity Highlights

Throughout the quarter, Terrafina experienced a total leasing activity that covered 2.9 million square feet, significantly exceeding the average quarter's activity. The breakdown showed that 1 million square feet came from renewals and 1.5 million from early renewals, indicating reliable customer retention despite some lease expirations. Specifically, in key markets like Chihuahua and Ciudad Juarez, Terrafina achieved an outstanding average occupancy rate of 98.7% with an average rental rate of $6.60 per square foot.

Financial Performance Metrics

Financially, Terrafina's second quarter revenues hit $56.4 million, marking a 4.6% increase year-over-year. Noteworthy is the company's EBITDA, which amounted to $47.1 million, reflecting a healthy EBITDA margin of 81.5%. The Net Operating Income (NOI) stood at $54 million, with a remarkable 93.5% NOI margin. Furthermore, Funds from Operations (FFO) totaled $32.9 million, achieving a FFO margin of 57%.

Future Growth Projections

Looking forward, company executives forecast a slight contraction in rental growth to a range of 10% to 14% as they anticipate a plateau due to the prevailing high demand. This projection points to the market stabilizing after the rapid increase in leasing rates over the past 18-24 months, which signifies a degree of caution in the fast-evolving industrial real estate landscape.

Property Development and Investments

In terms of property development, Terrafina is on track to deliver an additional 560,000 square feet by the third quarter of 2024, which is expected to increase the company's annual NOI by $1.8 million. The development yields for upcoming projects are projected to fall between 10% and 14% depending on whether land is owned or purchased, reflecting prevailing market conditions affecting property development costs.

Strategic Asset Management

As part of its strategy to improve portfolio quality, Terrafina sold 118,000 square feet in Monclova for $5.9 million during the quarter, demonstrating proactive asset management. This aligns with their broader objective of optimizing their property portfolio while navigating the challenges related to renewing leases in specific areas.

Healthy Balance Sheet

Terrafina ended the quarter with a strong cash position of $57.5 million and impressive total investment properties valued at $3.1 billion, marking an increase of 11.2% year-over-year. The company maintained a low leverage ratio with a Loan-to-Value (LTV) of 32.5%, comfortably within its guidance of 35%, enabling operational flexibility amidst market fluctuations.

Potential Market Challenges

Despite the positive outlook, Terrafina's management expressed cautious optimism considering the evolving political and economic dynamics. There are potential concerns regarding U.S.-Mexico relations that could affect the industrial landscape, especially in manufacturing for export, an area crucial for Terrafina's growth and development.

Earnings Call Transcript

Earnings Call Transcript
2024-Q2

from 0
Operator

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrafina's Second Quarter Earnings Conference Call. [Operator Instructions]

Thank you for your attention. I will now turn the call over to Francisco Martinez, Terrafina's Investor Relations Officer. Please go ahead.

F
Francisco Martinez
executive

Thank you, Kelly, and good morning, everyone. Welcome to our Second Quarter 2024 Conference Call. We are pleased to have with us today from Terrafina: Mr. Alberto Chretin, Chief Executive Officer; and Mr. Carlos Gomez, Chief Financial Officer. Mr. Chretin will take us through the company's overview and operations, and Mr. Gomez will discuss our financials.

So before we begin, we would like to refer you to the note on forward-looking statements in the quarterly report. Any information expressed or implied during the call may include forward-looking statements, which could involve certain risks and uncertainties. Terms such as estimate, project, plan, believe, expect, anticipate, intend and similar expressions may identify such statements. Listeners are cautioned that forward-looking statements made during this call or by the company's management may change based on various important factors out of the company's control. These comments represent the company's judgment at the time of this call, and they have no intent or obligation to update these forward-looking statements.

Thank you again for your attention. And at this point, I will turn the call over to Mr. Alberto Chretin for his remarks. Mr. Alberto, please go ahead.

A
Alberto Castillo
executive

Thank you, Paco, and good morning, everyone, and thanks for joining us today. As every quarter we are pleased to have the opportunity to share more information on our earnings results and highlights for the second quarter of 2024. During the first half of the year, the macro scenario for industrial real estate was solid. We saw a strong demand for available space and a slow delivery of new supply, despite some new inventory being developed in primary markets, mainly in the Northern region. Supported by this backdrop, Terrafina saw once again positive operating trends. Occupancy levels continue to be high at 96.9% and leasing spreads are still in the double-digit territory at 18.2%. This has directly benefited our organic rental revenue growth.

During the quarter, we registered 460,000 square feet of lease terminations, which was mostly offset by new leases that covered 370,000 square feet of our available GLA. Our renewal rate for the quarter remains at some levels at 84%. Total leasing activity covered 2.9 million square feet, which is well over the average amount of lease assigned on an average quarter. Out of this, 1 million square feet were renewals, 1.5 million square feet early renewals, and the rest were new leases.

The Northern region led the way, representing 51% of our total leasing activity. Most of these came from Aerospace, Automotive and Electronic tenants. Chihuahua, Ciudad Juarez and Tijuana were the most active markets, reaching an average occupancy rate of 98.7% and an average rental rate of $6.60 per square foot per year, and Bajio maintained a positive trend representing 18% of our consolidated leasing activity. Silao, Guadalajara and Queretaro were the best performance market within this region with an average occupancy of 95.5% and an average rental rate of $5.90 per square foot per year. The Electronics and Automotive sector were the most active within this region. Finally, the Central region accounted for 31% of our leasing activity led by Cuautitlan Izcalli and Toluca. Most leasing activity here happened with tenants in the Logistics and Industrial Goods sector. The average occupancy rate was 100% and an average rental rate of $6.41 per square foot per year. On average, our new leases were signed at a rental rate of $6.70 per square foot per year.

It's also worth highlighting that as part of our strategy to improve our portfolio's quality, we sold 118,000 square feet of GLA for $5.9 million in the secondary market of Monclova, Coahuila. We also continue to make progress in our new development projects, having delivered 222,000 square feet this quarter and expecting to deliver an additional 560,000 square feet by the third quarter of 2024, adding $1.8 million to our annual NOI.

Finally, our distribution per certificate grew 6% year-on-year, and we distributed a total of $20.8 million, or USD 0.0265 per certificate. Also, considering the average share price of MXN 40.56 Terrafina's annualized dividend yield for the quarter was 4.5%.

Moving on to the strategic alternatives that remain on the table for Terrafina. Let me start by saying that we continue to act in a diligent and transparent manner, looking after the best interests of all of our stakeholders. On July 8, the authorization granted by Terrafina's Technical Committee to acquire more than 10% of the outstanding services through a public tender for up to 100% of the certificates concluded We will continue to work with the current bidders in the different processes that are in place, and any material information that comes up and can be communicated will be communicated to our stakeholders as fast as possible.

Thank you for your time, and now I will pass the call to Carlos. Please go ahead with the financial highlights.

C
Carlos Espinosa
executive

Thank you, Alberto, and thanks to all the participants for joining us on today's conference call. Please note that all figures discussed in this call are in U.S. dollars, but Mexican peso figures can be found in the earnings report. Additionally, NOI, EBITDA, and FFO figures exclude non-cash items, as well as non-recurring and transaction-related expenses, the latter of which are only included in the AFFO.

To start, our quarterly rental revenues reached $56.4 million, which implies a 4.6% year-on-year increase. NOI was $54 million, a 6.4% year-on-year increase, that implies a 93.5% NOI margin. EBITDA totaled $47.1 million after a 5.9% year-on-year increase on an 81.5% EBITDA margin. Our FFO reached a total of $32.9 million on a 57% FFO margin. This implies a 1.3% year-on-year increase. Finally, FFO reached a total of $28.4 million, a 3.2% year-on-year increase. Our distributions for the second quarter were $20.8 million, or USD 0.0265 per certificate.

Moving on to our balance sheet, we closed the quarter with $57.5 million in cash. Our investment properties closed the quarter at $3.1 billion, an 11.2% year-on-year increase, as the appraised value continues to be supported by solid market trends. Our total debt at the end of the quarter was $1,068.8 million, with an average cost of debt of 5.7%, and an average weighted maturity of 3.8 years. Finally, our LTV reached 32.5% in line with our guidance of 35%.

Thank you for your time and attention. I will now ask the operator to open the line for questions.

Operator

[Operator Instructions] Your first question is coming from Pablo Monsivais with Barclays.

P
Pablo Monsivais
analyst

I was wondering what is the in-place rent that you have for the properties that are expiring next year, and what is the rent or -- differently? I would like to know what could be the potential lease spreads for next year.

A
Alberto Castillo
executive

Thank you, Pablo. I think that as you start seeing the -- we had substantially higher leasing rates increase in the last 18 to 24 months. We see that although demand continues to be high, I think that there will be somewhat of a plateau on the growth of rental growth, and it's probably going to stay within the double digits, but then on the lower double digits, probably between the 10% and the 14%.

Operator

Your next question is coming from Gordon Lee with BTG.

G
Gordon Lee
analyst

Just a quick question on your development pipeline. If you look at the 2 properties that you delivered this quarter, they had a pretty significant spread in the development yield. One, I think was a little above 14%; the other one, was close to 10%. So I was wondering, going forward and specifically thinking about the pipeline that's going to be delivered over the next couple of quarters, will your development yields be sort of within that range? Or you think -- I guess, I'm interested to see where you think up-to-date development yields are, considering all the various different factors in terms of rising costs of land, but also obviously, significantly higher rents relative to where you probably underwrote the projects. So if you could give us an update of what you think future leasing spreader -- sorry, development yields might look like, that would be interesting.

A
Alberto Castillo
executive

Absolutely. Thank you very much, Gordon, for the question. Yes, indeed the -- I think, let me make a difference between when we make developments in our own land -- I'd like to remind you all that we do have land, and we have been developing some of these properties in our own land. And when that is the case, in our land, since quite some time ago, we already had the infrastructure, and it was fully developed or what we say, shovel-ready. And that's where we have the higher development yields, like in the range between 12% to 14%.

Now, in the -- we have done this in the past, where we buy the land -- and because as you mentioned Gordon, the cost of the land has gone up substantially, as well as the cost of development. So that's why we see sometimes developing yields that are closer to the 10% instead of the 12% or 14%. Even, we see some projects in which it may be even a little bit lower than 10%.

So to answer your question, I think that there's been a challenge on some of the developing yields because of the higher cost of land, especially in the primary market like Tijuana and around Mexico City. But to summarize the answer, I think it's going to continue between double digits, closer to 10% when we have to buy land, and higher when we do it on our own land.

Operator

Your next question is coming from Francisco Chavez with BBVA.

F
Francisco Chávez Martínez
analyst

My question is regarding the sidecar. Can you give us an update on how the sidecar operations are going, and also if there are any plans for additional investment?

A
Alberto Castillo
executive

Thank you, Paco. Yes. Well, the sidecar is working very well. As a matter of fact, we're very close to reach the 100% deployment of the capital of sidecar, including as you know, that we are financing at the property level, the developments that we made with the sidecar. To answer your question, it's doing very well. I think that we had the partners approved the last project a couple of weeks ago, in which -- this project, we're going to totally complete the deployment of the capital. These are 2 properties that are over 500,000 square feet in the market of Apodaca, and again, with very good tenant possibilities. So it's -- to summarize the answer, the sidecar is doing very well. I think it's been very well managed by PG Real Estate. And that -- and again, this -- we already included some numbers of the sidecar in our report of this quarter, so it's going very well. I think it was a success and we look forward for opportunities like that.

Operator

Your next question is coming from [ Andres Segura ] with GBM.

U
Unknown Analyst

I was wondering, what dynamics are you currently observing in the market? Are clients taking longer to make decisions? We noticed that some properties with expired leases were not renewed, especially in markets such as Tijuana. Could you provide insight into the reason behind this?

A
Alberto Castillo
executive

Sure. Sure, Andres, I'd be happy to. Well, again on the first question, I think that the -- there continues to be a very good dynamics on the leasing activity, as I mentioned before. Yes. In the market like Tijuana, we do have a couple of contracts that did not renew. And the reason was that we -- one of the companies about 140,000 square feet in Tijuana, we didn't renew a contract. But then even before the exit of the tenant, we already leased that facility to a supplier of Boeing. It's an airway -- an aviation tenant.

So that really that -- but again, we recorded that as a non-renovation, but the other one was a very small office space of about 70,000 square feet. So, to answer your question, no, I don't -- I think that the dynamics continue to be very good. And this is a normal course of business where we have sometimes some tenant that is going to -- that are not going to review. And we know most of the time, almost 100% of the time, we know ahead of time, and we start marketing that prior to that expiration. And that's why we successfully lease the non-expiration in Tijuana.

Something similar happened also in Chihuahua, where one of our tenants, it was an ECM, an Electronic Contract Manufacturer. They built their own facility. They have -- they built their own distribution facility because of the size of the operation. They've been growing a lot. And we were able to lease that 126,000 square feet already to another tenant that we were able to negotiate even before we closed it. So I think that the demand continues to be strong, the dynamics continue to be good. And eventually, once in a while, we'll have contracts that do not renew. But again, as I mentioned before, we know ahead of time And we have very, very good market officers from our Property Managers that are constantly addressing the market. And this was the case this time, and we're able to renew those contracts.

Operator

Your next question is coming from Edson Murguia with SummaCap.

E
Edson Murguia
analyst

The first one is related to the property that you sold at Monclova. But my question is, looking forward, do you have a strategy for recycling assets? Or you're planning to sell more properties because of the dynamics in specific locations?

And my second question is regarding leverage. Specifically, your credit line with [ BBVA ] is a short term loan, USD 50 million, and is due to December 2024. Do you have a strategy for a new credit line? Or what will be the strategy behind this?

A
Alberto Castillo
executive

Thank you for the questions. Well, in terms of the property that we sold in Monclova, this is a property that we bought in our portfolio. And the tenant there, [ Alphabet, ] they've been there for about 20 years. And this was a strategy to establish a manufacturing operation of this company in Monclova, because they already have operations in Juarez and in Chihuahua, and they were looking for a place to have a more stable labor force and to have a reduced cost. This company makes wire harnesses for the automotive sector, and that is a very competitive environment. And therefore, they wanted to go to that location. They've been there for 20 years. On the last lease contract negotiation they requested, we gave them an option to buy the building. I think that for them, they're very pressured to maintain low rents.

So I think it was part of our strategy -- as of a recycling capital strategy to sell properties that are either empty, they may be in markets where we want to reduce our exposure, or just we want to comply also with a request from a tenant. That because of a reason like this one, or they may want to make modifications for the building that is going to be very difficult to approve because they may turn that building into a unique facility. So that's why number one, just to answer your question to recycling capital, our initiative has to do with improving the quality of the portfolio. And we will continue to do that in the market where we want to reduce our exposure or facilities that are -- there may be a challenge to renew. That is in terms of the first question. And the second question, Carlos, please go ahead.

[ Regarding leverage, ] Carlos, can you please go ahead and answer that?

C
Carlos Espinosa
executive

Sure, Alberto. Yes. The portion of our debt that matures on December is a USD 50 million loan that we have with the bank, and we are expecting to renew it in the same terms and conditions as we have done in the previous 2 years. So I think that's the only portion that matures this year, and we don't see any problem to renew it.

Operator

Your next question is coming from Isabela Salazar with GBM.

I
Isabela Salazar Leipen
analyst

My question is also regarding the Monclova disposition, which I understand was executed through an acquisition option in the lease contract. But we saw its price per square feet was around USD 60, which sounds somewhat lower than what we normally see in the Northern markets. And I was wondering if you could shed more color on those details?

A
Alberto Castillo
executive

Absolutely. Thank you. Yes, thank you. Yes, indeed, you're right. It's about $50 per square foot. We bought that property as part of the portfolio at a lower cost than that. And again, this is -- although it's in the north, Monclova is in the border. It's indeed a secondary market with not that much activity. So that properly, for almost 20 years, provided good rents. But again, it's often, it's part of the -- we did not sell this property to make a profit. And I guess all of our recycling capital initiatives have to do with enhancing the quality of the portfolio.

And in many cases, like in this one, the property is low. But again, that was not the objective. And so, you cannot -- we should not compare the price per square foot of a property that we sell for $50 to the ones that we developed that end up with a price of about $100. So you're right. This is a low price. But again, the property provided good NOI and good distribution for 20 years. And the prospects of that future, we're not very optimistic. That's why we decided to sell this property.

Operator

Your next question is coming from Juan Macedo with GBM.

J
Juan Pablo Macedo Carrillo
analyst

My question is regarding the political environment. How are you feeling the dynamics are doing for industrial real estate with the incoming government? We've been hearing increasingly positive feedback from other players regarding their interest in boosting nature and trends.

So what are you feeling there?

A
Alberto Castillo
executive

Well. Thank you, Juan. Yes. We are cautiously optimistic. I think I like very much what I hear from the President-elect. Especially from Marcelo Ebrard, the Secretary of the Economy. Certainly, the fact that they have a very good liaison between the business community. And the government is very positive. And I think that the relationship that the Secretary of the Economy as well as the new government establishes with AMPIP, domestic industrial park and other, as well as the AMEFIBRA, other business organizations, in which we collaborate is positive. There is enthusiasm. There's some information about the willingness and initiatives to enhance the grid -- the electrical grid in Mexico, as well as encourage production of electricity.

So to answer your question, I think we're optimistic. Of course, this continues to be just no longer the political environment of who's going to be the President, but I think that we're going to continue to work with AMPIP and AMEFIBRA to collaborate with the plans that the new government has to enhance the infrastructure. I think that there's a general consensus that the infrastructure needs to be improved, that the opportunities are going to be there. And there's a very clear message that the government -- new government understands what needs to be done, and that -- and we're going to work together with them to do this. Basically, that's what we think on the political environment in terms of what happened in Mexico.

In U.S., it's a little worrisome about what's happened lately with the Republicans and with Donald Trump's speech last night. But again, I think that we've been through several instances like this. So again, we just brace for impact on some things that may happen. But I think that the USMCA is very strong. I think that the government, President-elect, what do you say? Or ex -- what Vice President or not -- the former President Trump, he was part of the signing of the USMCA. So I think that I hope that this rhetoric, it's not that damaging and that we'll continue with Mexican and the U.S. economy working as well as we did for over so many years.

The U.S. and Mexico are being [ symbolized ] in terms of the economy and of course the issues that are, I probably took too long to answer that, but that's where -- so we're monitoring what's going to happen. But I think -- let me finish the answer by saying that the fundamentals in manufacturing for export in Mexico and the relationship between U.S. and Mexican companies and U.S. companies operating in Mexico is so strong and so vital for the U.S. economy that we think that it's going to be -- at the end of the day, we're going to continue with this positive trend in our sector in manufacturing for export.

Operator

Okay. It seems you do have one follow-up question from Edson Murguia with SummaCap.

E
Edson Murguia
analyst

Yes. A follow-up, if I may. It's regarding the event that was released today about one of the bidders and the adequacy of the proposal. So my question is, if this bidder improve the offer, it will be considered? Or it will be in the process of the other bidders of the process?

A
Alberto Castillo
executive

Sure. Well, absolutely no idea. Of course, these bidder, his offer is still alive. It's the offer -- that offer expires on August 5. And indeed the offer from acquirer is right there. So it's a choice for investors to select which one they're going to choose. Of course, the timing is different. As you know, the Prologis tender offer expires on this coming Monday on July 22. For Blackstone, it expires on Wednesday the July 24 and Macquarie until July 5 (sic) [ August 5. ] So the investors have the option to participate in any of the 3, including Macquarie, the one that you just mentioned.

Operator

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Mr. Chretin for any closing remarks.

A
Alberto Castillo
executive

Thank you, Kelly. Well, thank you all for attending today's call. I would like to thank you for your continued trust in Terrafina. We are very excited about the new prospects and are convinced that evolution will lead to value creation for all. We look forward to sharing this with you. Have a great day.

Operator

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.