CI Banco SA Institucion de Banca Multiple FF/00939

BMV:TERRA13

Earnings Call Analysis

Terrafina Records Robust Q3 Performance

Terrafina delivered a potent Q3 with a stand-out occupancy rate of 98% and robust demand in Northern and Central regions. They embarked on an aggressive expansion through a sidecar acquisition of 2.6 billion feet of fully leased properties and are launching new developments expected to contribute to cash flows by H1 2024. Financially, they reported a significant 6.1% year-on-year growth in Funds From Operations (FFO) per certificate, buoyed by a 12% increase in rental revenue. Their solid performance led to a 7% year-on-year rise in distribution per certificate. Going forward, Terrafina remains committed to strategic growth focused on stabilized assets while navigating potential challenges in the market.

Robust Industrial Market Fuels Growth for Terrafina

Terrafina showcased a resilient third quarter, highlighted by strong demand in the industrial market, particularly in Northern and Central regions. Renewed operations in Bajío bolstered occupancy levels to a remarkable 92.5%, while Northern and Central regions maintained near-full occupancy. This buoyant atmosphere elevated portfolio occupancy to a record 98%, signaling robust market conditions.

Strategic Property Acquisitions and Development

The company's strategic acquisitions, including 2.6 billion feet of fully leased properties situated in key growth markets, exemplify Terrafina's astute expansion efforts. By integrating more than half of sidecar resources ahead of schedule, Terrafina enhances its market foothold and potential returns, all without diluting certificate holder value. Proactively mitigating development constraints, Terrafina focuses on acquiring stabilized assets and securing ready-to-develop land reserves, as observed in their latest Toluca project, expected to contribute to cash flows by the first half of 2024.

Financial Resilience with Innovative Credit Facility

A new $500 million sustainable credit facility has refinanced previous credit lines, improving Terrafina's capital structure and extending debt maturity. In alignment with ESG objectives, the credit facility underscores a strategic pursuit of stakeholder value preservation.

Occupancy and Leasing Activity Reach New Heights

Terrafina's consolidated occupancy rate hit 98% for the second consecutive quarter, driven by solid demand, especially from the aviation, automotive, and industrial goods sectors. Renewals were at 100%, and new rentals amounted to 400,000 square feet. Particularly impressive were the Northern region's activity, Bajío's resurgence, and Central region's strong logistics and distribution presence.

Financials: Revenue Growth and Portfolio Valuation on the Rise

Terrafina's financial health shined with a 5.9% growth in net asset value per certificate quarter-on-quarter, and a 6.1% increase in FFO per certificate year-on-year, fueling a 7% rise in distribution per certificate. These gains are attributed to Terrafina's growth strategy and increased demand for industrial spaces.

Strong Collection Performance and Solid Balance Sheet

Terrafina achieved a collection status totaling $54.2 million, marking a 10.1% increase from the previous year. A stable 81.5% EBITDA margin aligns with annual objectives, and the balance sheet reflects a healthy liquidity position, with controlled leverage within the guided range.

Future Outlook: Deployment of Sidecar Resources and Demand Trends

Terrafina is near the completion of deploying the remaining sidecar funds, with optimistic prospects for new acquisitions. The company's strong occupancy track record is expected to persist, buoyed by stable automotive sector demand and recent near-shoring incentives that may provide additional tailwinds.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Ali, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrafina's Third Quarter Earnings Conference Call.

[Operator Instructions]

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

[Francisco Martinez, executive]

Thank you, Ali, and good morning, everyone. Welcome to our third quarter 2023 conference call. So we're 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.

Before we begin, we would like to refer you to the note on forward-looking statements in the quarterly report. So any information expressed or implied during the call may include forward-looking statements, which could involve certain risks or 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. The company has 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. Alberto, please go ahead.

[Alberto Castillo, executive]

Thank you, Paco. Good morning, and thank you for joining us today.

The third quarter once again yield positive operating and financial results. The industrial market remains robust particularly in the northern and central regions where demand continues to be strong. We also witnessed significant leasing activity in the Bajio, which resulted in an occupancy level of 92.5%. Meanwhile, the Northern and Central regions continue to be sold out markets with average occupancy levels of 99.4% and 99.2%, respectively.

These all combined led us to a record high occupancy of 98% for the portfolio. We successfully kicked started our sidecar activities during the third quarter by acquiring 2.6 billion feet of fully leased properties. These assets are located in Tijuana and the State of Mexico and are equipped with additional land reserves earmarked for future developments.

This strategic transaction allowed Terrafina to allocate more than half of the sidecar resources ahead of schedule, expanding our presence in rapidly growing markets with attractive returns. This is expected to unlock value to investors as new GLA decided to the portfolio, all while avoiding any dilution to our certificate holders.

As we have seen over these last couple of quarters, one of our main challenges is to keep up with increased demand, driven by the growing relevance of near shoring activities. We are aware of developing constraints related to permitting and access to electricity.

Because of this, Terrafina's growth strategy is mainly focused on acquiring stabilized assets. We also remain committed to securing land reserves with the necessary permits and access to utilities. Our recent sidecar acquisition is a prime example of this new approach as we added 500,000 square feet of land ready to be developed.

In fact, we have already started working on a new development in Toluca, a highly exclusive market with top rental rates. We expect to have these new developments pre-leased before finishing its construction contributed to cash flows by the first half of 2024.

In the third quarter, we also signed new sustainable credit facility for $500 -- or $500 million. This facility has replaced the previous revolving credit line in the term loan facilities, resulting in a notable improvement in Terrafina's capital structure in overall average debt maturity. Importantly, this credit facility is intentionally aligned with our ESG green building certification goals, which traces a more strategic course that looks after all of our stakeholders' priorities.

Let me share some key operating and financial highlights for the quarter. As mentioned before, our consolidated occupancy rate reached 98%. This is the second consecutive quarter of reaching a record high occupancy for Terrafina. Occupancy has been driven by solid demand in primary markets in a gradual recovery in the Bajio. We renewed 9 of the 11 contracts that had to be rolled over during the quarter.

It's worth noting that the remaining 2 contracts will also later renewed. So it's fair to say our renewal rate was 100% by quarter end. Again, these numbers demonstrate the sustained demand for industrial space, and we expect to see a similar trend going forward. As for our leasing activity, we signed renewals for 900,000 square feet and secured new contracts for an additional 400,000 square feet.

The Northern region remained the most active representing 65% of our signed leases. Chihuahua, Ciudad Juárez and Ramos Arizpe, were the standout market for the quarter with an average occupancy of 99% and a rental rate of $6.62 per square foot. Most of the leasing activity in this region came from the tenants in the aviation, automotive and industrial goods sector.

The Bajio region had an important recovery with an occupancy of 92.5%. It accounted for 22% of the total leasing activity, which mainly happened in the San Luis Potosi market with tenants in the automotive sector. The average rental rate in this market continued to rise, reaching a record high of $5.90 per square foot for renewals closed during the quarter. Finally, the Central region, the Cuautitlán Izcalli and Toluca market reached 99.5% average occupancy rate at an average rental rate of $7.52 per square foot.

These markets continue to be dominated by logistics and distribution activities. The average leasing rate per square foot for all contracts signed during the quarter was $7.16. This implies a 12-month trailing leasing spread of 31.3%. Due to an increase in demand, we saw a 5.9% quarter-on-quarter growth in net asset value per certificate. We anticipate that industrial real estate appraisals will continue to rise, benefiting overall gross asset valuations.

Finally, our FFO per certificate for the quarter had a 6.1% year-on-year increase as a result of our growth strategy benefits. Our distribution per certificate for the quarter achieved a very solid 7% year-on-year growth. Before I pass the call over to Carlos, let we emphasize Terrafina's unwavering commitment to continually assess the most effective strategies to unlock value for our investors while adhering to the highest corporate standards.

Given the recent developments in Terrafina's corporate structures, the Practice Committee has met and diligently initiated an analysis to better understand any potential implications, the [ surge in ] rent recent developers may have in the business of Terrafina. We will be glad to share more details with you as we make progress on this analysis.

Thank you again for your time and interest in Terrafina. Carlos will provide more information on the financial results for the quarter. Please go ahead, Carlos.

[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 noncash items as well as nonrecurring and transaction-related expenses, the latter of which are only included in the AFFO.

In the third quarter, we had a good collection status totaling $54.2 million with a 10.1% increase compared to 2022. Our rental revenue also delivered a solid result of $54.3 million and a 12% year-on-year increase. This was mainly attributable to our organic growth given the recent sidecar acquisition and greater leasing spreads.

NOI was $51.1 million, reporting a 9.2% year-on-year increase on an 83.3% margin. Our EBITDA reached $44.6 million with a stable 81.5% margin consistent with our annual objectives. This was an 8.9% year-on-year growth.

Our FFO increased by 6.1% versus the third quarter of 2022, reaching $31.9 million on a 58.3% FFO margin. These results are aligned with our expectations, especially in anticipation of an increase in interest rates by year-end. There was a 6.1% increase in FFO per certificate compared to the third quarter of 2022, totaling USD 0.0413 per certificate.

Finally, AFFO reached $26.2 million, which implies a 1.7% year-on-year growth. Distributions were $19.3 million or USD 0.025 per certificate. This was consistent with our plan to distribute USD 0.10 per certificate for the full year.

Moving on to the balance sheet. We closed the quarter with $41.4 million in cash. Our investment properties closed the year at $2.9 billion and our total debt at the end of the quarter closed at $967.4 million. Our average cost of debt closed at 5.6% and our average weighted maturity of debt was 5 years. Finally, our LTV closed at 32%, in line with our 35% guidance. Thank you for your time and attention. I will now ask the operator to open the line for questions.

[Operator]

[Operator Instructions]

Our first question is coming from Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

I have two, if I may. The first, I guess, Alberto, I would like to have your opinion on Mexico's industrial real estate competitive landscape on the back of what your competitors are doing on moving to an internally managed FIBRA? And then also my second question is whether you consider to follow that pad as well? And are the conditions set to do that in the near term?

[Alberto Castillo, executive]

Well, certainly, I think that, as I mentioned before, of course, we are very much aware of the changes and the developments that are happening in the FIBRA corporate structures. And that's why I mentioned that the Practice Committee of Terrafina is really very diligently and in a very hard working environment to assess and to making an analysis to better understand all any potential implications of what's going on in the sector. So I guess my answer to you, Pablo, is that first of all, we are aware of what's going on. I think that we are addressing that by means of talking to our Practice Committee. They are really independent as they show. As you know, the Practice Committee is comprised of exclusively independent members and they are working to address us. So when we have further information, we'll communicate that to you all.

[Pablo Monsivais, analyst]

Is there any timeline for that to happen to have a final decision.

[Alberto Castillo, executive]

Well, as I mentioned, they are currently working and making the analysis and the assessment and that when we have our information, I will be very pleased to share that with you. We don't have a timetable about the different events that may happen, yes.

[Operator]

Our next question is coming from Felipe Barragan with BTG Pactual.

[Felipe Barragan, analyst]

One is quickly a housekeeping question. What's the total number of CBFIs, I saw that you had 772 on 1 part of the presentation and in the part where we have the buybacks of 788. So that's my first question.

And another question is on you guys had a delay for one of your developments in the North. Obviously, [indiscernible] 50% complete. It's almost there. Just want to understand what happened there and if it's something we can see for the developments.

[Carlos Espinosa, executive]

Do you need the number of certificates in the market?

[Felipe Barragan, analyst]

Yes, exactly. So the one part, you said 772 million and then the buybacks at 788. I just wanted to double check that.

[Carlos Espinosa, executive]

Yes, the current number that we have today in the market is 772,480,755 certificates listed in the market. And we are -- we didn't buyback anything. Any certificates in the quarter, and we are not expecting to do any more buyback in the near future -- in the immediate future.

[Felipe Barragan, analyst]

Got it. So no buybacks this quarter.

[Alberto Castillo, executive]

And in terms of your second question, Felipe, yes, we had a delay on our development in the north because of -- we were -- the CFE was laid with the connection of the high KVA electricity for the buildings. We started working with a temporary location, but now that has been resolved. So that development has been completed.

[Operator]

Our next question is coming from David Soto with Scotiabank.

[David Soto Soto, analyst]

Just a quick question regarding the same-store NOI. You reported good lease spreads, but we still don't see the effect on the same store NOI. Should we expect this effect on the following quarters?

[Carlos Espinosa, executive]

Yes, David. Perhaps the biggest effect that we see is because of the exchange rate, if you see it in Mexican pesos. If you compare it to the third quarter of 2022, the exchange rate was MXN 20.3 per U.S. dollar. And on the third quarter of 2023 is 17.61 at the closing of the quarter. So I recommend you to have the full effect, to see the full effect of our operations. You may -- I recommend you to see it in U.S. dollars since the functional currency of the company is in U.S. dollars. Then in the NOI, you can see a growth of more than 9%.

[Operator]

[Operator Instructions]

Our next question is coming from Isabela Salazar with GBM.

[Isabela Salazar Leipen, analyst]

I was wondering if you already have plans for the land acquired through the sidecar, and if you would be able to give us more color on that?

[Alberto Castillo, executive]

Yes, on together with the properties that we -- the stabilized properties that we bought on the sidecar, we also bought an up land to build another 500,000 square feet and we already sought a construction of a facility in Toluca in that track of land. That track of land has all the permits, it has all the infrastructure.

So we expect to finish that property early on next year and for sure, to be contributing to NOI by the first half of 2024. Actually, we do have now some interest of some potential tenants in the site as we start site preparations, there have been already some inquiries from potential tenants. So we expect to lease that facility even prior to the finish of the structure.

[Operator]

[Operator Instructions]

We do have a question from Felipe Barragan with BTG.

[Felipe Barragan, analyst]

A couple of more questions on my end, taking advantage of the call here. Any news on deploying more money from the sidecar? Any update on that? And my other question is -- first of all, congrats on the record high occupancy for the second time in a row. Can you just touch on the significant jump in San Luis Potosi. You noted it was an automotive sector company. Anything notably you'd like to touch on there. Just curious to hear your thoughts on the leasing activity on there.

[Alberto Castillo, executive]

Yes, actually, we do have -- I think that we have and we're making a lot of progress on the deployment of the balance of the sidecar. We are very close to finish that additional acquisitions, and we will announce them very soon, as soon as we complete the process. So we expect to finish the deployment of the 100% of the sidecar dry powder, you know, substantially ahead of time.

And in terms of the auto sector, yes, we continue to see demand for automotive -- for new automotive tenants as well as expansion from the current automotive sector. We are monitoring also some of the challenges that the automotive industry is facing on the U.S. strike -- in the U.S. that fortunately, it looks like it's coming to an end as well as some of the problems that some of the -- overall, the manufacturing for export tenants are facing in the water for crossing the border, but we -- those challenges seem to be progressing in a positive way. So we continue to be optimistic about the future of the automotive sector.

[Operator]

We have another question from Felipe Lenza with Citibank.

[Felipe Lenza, analyst]

Just a quick question. With the recent approved tax incentives for near shoring, move the needle in terms of tenant demand. Any color on what are the incentives in particular?

[Alberto Castillo, executive]

You mean -- I do want to make sure I understand the question. You mean the new demand because of near shoring.

[Felipe Lenza, analyst]

Yes, the recent approved tax incentives for near shoring.

[Alberto Castillo, executive]

Sorry, yes. I'm sorry for -- the incentive, I think that is going to have a temporary benefit for some investors that invest within that window of opportunity. And the ones that are going to give exports in that within the conditions of the incentive, most of our tenants as most of the companies that are doing manufacturing for [indiscernible] adhere to the legislation or the free trade agreement of NAFTA in temporary importation. So they are not going to be eligible to do that. The ones are already here. So I think that the impact in the feedback that we get from the association of Maquiladoras is that the incentive is going to be very limited to new investments through new companies that invest in that window.

So they really don't see a substantial advantage to that. But that doesn't mean that it's not going to be -- that is going to slow down or do anything on the current operations. So bottom line, the incentive may help in a few companies during a short period of time.

[Operator]

As we have no more questions in queue at this time, I will hand it back to Mr. Chretin for his closing comments.

[Alberto Castillo, executive]

Thank you, and thank you all for joining us today. It is obvious by now that the industrial real estate sector is delivering an impressive performance marked by active supply and demand dynamics.

All industry players, including ourselves, are operated in a growth-oriented environment collectively striving to offer the best industrial space to existing and potential tenants. We are excited to see what the next couple of months have in store for us, and we'll stay in touch with you to keep you updated. Thank you again for your time, and have a great day.

[Operator]

Thank you. This concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.