CI Banco SA Institucion de Banca Multiple FF/00939

BMV:TERRA13

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. My name is Carolina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terrafina Earnings Conference Call. [Operator Instructions] I will now turn the call over to Maria Barona of i-advize Corporate Communications. Ma'am, please go ahead.

[Maria Barona, executive]

Thank you, and welcome to Terrafina's fourth quarter and 2017 year-end conference call. I am Maria from i-advize Corporate Communications, and we are pleased to have with us today from Terrafina Mr. Alberto Chretin, Chief Executive Officer; Mr. Carlos Gomez, Chief Financial Officer; and Mr. Francisco Martinez, Investor Relations officer. Mr. Chretin will be taking us through the company overview and operating review and Mr. Gomez will review the financials.

Before we begin, we'd like to refer you to the forward-looking statements as to the note in the quarterly report. Any information expressed or implied during the call may include forward-looking statements, which could involve certain risks and/or uncertainties. Terms, such as estimate, project, plan, believe, expect, anticipate, intend and similar expressions that 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 not under the control of the company. These comments represent the company's judgment at the time of this call. The company disclaims, however, any intent or obligation to update these forward-looking statements.

Thank you for your attention. At this point, I will turn the call over to Mr. Alberto Chretin for his remarks. Please begin, sir.

[Alberto Castillo, executive]

Thank you, Maria. Good day, everyone, and thank you, all for joining us today as we report a very solid year at Terrafina. We are happy to say that throughout 2017, Terrafina achieved a strong operational and financial performance. As such, we not only delivered to -- on our objective with the market, but we also laid the groundwork for consistently successful operations going forward. This is of particular significance as we enter 2018 as this year is shaping up to be the year of change in the commercial framework in which we operate.

Starting with the NAFTA negotiations, which continue to be discussed among the critical economies involved, as well as the upcoming presidential elections in Mexico. Looking back from 2017, as you can see in the fourth quarter and full-year figures, our results remain solid and our objectives were reached. And we are pleased to state that despite what many consider to be a challenging year, it was Terrafina's best year so far. We reached record highs both in our main operational, as well as financial indicators, thereby validating the business strategy we follow.

In terms of M&A, for the full year, we closed acquisitions value at over $660 million, for a total of 76 new properties, representing 10.1 million square feet, the highest annual industrial position activity in the Mexican REIT sector. Additionally, most of these properties are located in the northern region of the company, and seamlessly beat our profile with a range of multinational tenants in the manufacturing-for-export sector, holding door at dominated lease. These are quality Class A properties with the stable rental rates in occupancy in the range of 100%. Additionally, the average state of our portfolio continues to improve, with the addition of newer properties with an average lease contract maturity of about 5 years.

At the same time, we focused efforts on strengthening the balance sheet in order to obtain the best possible financing conditions for the company. With the refinancing in February of 2017 of $150 million in secured credit loans at a rate of 4.5 -- 4.35% and a 3-year maturity, thereby improving the average weighted loan maturity.

And then later in November, we concluded a $350 million unsecured term loan for debt refinancing purposes. At this point, we paid down the total unsecured credit loan we previously held with JP Morgan and BBVA for $150 million and used the remainder to pay down the existing revolving credit facility, thereby, lowering the cost of debt, and once again, improving average weighted maturity.

This transaction activity was especially important as it took place during a very difficult market environment. The company was able to not only [ fulfill ] its leveraged financial costs, but it also was able to do it so with the institutions it has adversely worked with, as well as sold new ones, which is evidence of the trust that the lenders gave Terrafina.

Finally, during the year, we've referred a 25 billion pesos shelf registration program, which officially launched in July. This program gives us the flexibility to quickly raise funds for identifying positions and under ultimate conditions for the company. At that time, Terrafina announced a successful follow-on on the shelf registration program, raising a total of $380 million.

As a result, for the upcoming year 2018, we are confident that we can relate a very solid and prudent foundation and that we are well positioned for the future. 2018, specifically, is a year of consolidation for Terrafina, one in which we will continue to strengthen our existing portfolio, so it remains profitable and stable, while reaching maximum potential across all the properties with the quality tenant profile , both in terms of the existing ones as well as the new ones that come down the pipeline.

We know that 2018 could be another challenging year for Mexico. On July 1, the Mexican elections will take place and could bring about significant government changes. We are confident, however, that manufacturing-for-export activity in Mexico plays such a vital role in terms of job creation, and represents such a significant percentage of the company's [ wealth and ] domestic product that any ruling party will seek ways to protect and attract additional foreign direct investment as means to [ offer ] job in conception in the country.

In terms of potential changes to NAFTA as a result of the negotiations that are taking place. Again, an important theme in Mexico, it's such a smart alternative for global companies due to its low relative cost and successful history that we believe is certainly extremely resilient. Changes, such as high tariff, for example, have been addressed by the manufacturing-for-export sector and many companies have expressed that we need to absorb some of this cost due to the huge impact that these Mexican operations have on their corporations.

And what we believe that there will be opportunity in both different scenario. We will certainly be proceeding with caution. For the time being, we remain confident that Terrafina today has a proven fundamental operation that either resolve discipline decisions that has been made, as with the debt restructuring, the portfolio composition and the shelf registration program that I just mentioned.

These decisions were specifically made in order to withstand any potential weights in a business environment that provides certainty to operations despite all of them. Thus we are confident in the fact that we can set the stage for continued success in the years to come as a result of this decision.

As such, our goals for 2018 are, first, we want to continue maintaining the strong occupancy and the stable rental rates. Next, we seek to fully assimilate the benefits of the [ debt ] decisions that we concluded in the final quarter of 2017, while at the same time potentially engaging in some M&A activity, we see the deployment of the remaining resources obtained from the equity offering. And finally, executing all our on-going initiatives to reinforce the balance sheet, while maintaining sound capital structure. These initiatives will include refinancing opportunities to include the current maturity schedule, as well as paying down debt with the resources obtained from the [ VIT ] reimbursement that I stated to come in during the next 6 months.

On the operational front, we foresee continued efficiency generated by our property managers. Hence, strategic partnership with players, who show results on larger volumes is truly the backbone of a successful business model as it allows us to provide better and faster solutions for our existing tenants. And also gives us the benefit of tackling into and taking advantage of the network of new leasing opportunities.

For example was the addition of [ Alisa ] a new property manager resulting from our acquisition in December of 2017. These were very exciting for us, because [ Alisa ] brought with it 15 years' experience in the development of industrial properties in the northern state of Coahuila. We believe that as we taught property managers we can work with, there is a potential for growth from [ activity ] with [ Alisa ].

American industry is a good example. If you recall in 2013, we purchased a portfolio of properties from them. Then a few years later, they returned to us with additional seamless properties, which we successfully acquired last year.

That said, March 19, marks the company's 5-year leasing anniversary, and discovering Terrafina's very solid track record that has led us to become a premier Mexican builder. We are very proud of all that we have accomplished and stay close to market players who have contributed to our success. Of course, our talented team, our sole adviser and our solid tenant base continues to be vital in our overall growth. And we maintain focus on attracting and retaining stall borrowers and tenants that keep our profile and contribute to our successful run.

We are confident that we are making the best decisions for the overall health of the company, constituting a well-run operation that continues to be recognized by both the equity and debt markets. And we know that in 2018, we will need to maintain our promise of prudent decision-making, focus on strengthening the efficient operations and sustaining the level of excellence we have achieved with what we have. Our bond needs to continue strengthening our operation in the coming years for generating value for our holders in the state of [ Becalos ].

Looking ahead to the next 5 years, we will continue to take advantage of the growing Mexican industrial real estate market, supported by technological upgrades that really continues to positively impact manufacturing-for-export activities. As such, we have taken additional investments for the production lines will benefit Mexico as a preferred manufacturing platform for global companies as a result of the steel labor and competitive cost structure.

It is our view that various automotive, aviation, electronics and medical companies, will expand and modernize their platforms to support new product demands. This includes a electric, hybrid and sales wide cars, as they develop and become affordable for consumers. The assembly of [ therapies ] , which requires state of the art installations and qualified engineers and technicians. And the manufacturing of personal devices, which are in indispensable

of work tools. Additionally, we also see opportunities in the logistic and distribution centers, as e-commerce continues to expand domestically and Terrafina is ready to accommodate and diversify into all of these sectors.

And while we will, as I mentioned, practice prudency in 2018 in terms of M&A activity, we remain open to analyzing opportunities that come our way as they arise. Our approach has been and continues to be readiness to seize, uphold accretive and intelligent concessions that makes sense for the company. Particularly, if we are presented with the right asset, the healthy approach, the characteristics, and we can attend it through a disciplined analysis that would make sense to move forward.

Now jumping back to give you the quarterly operating results for the fourth quarter. We reached record occupancy levels of 95.5%, with a very stable artificial rate of $5.04 per square foot a year. Occupancy at the end of 2017, rose by 64 basis points versus the comparable period in 2016. Also, if we include the signing letters of intent, occupancy for the quarter will reach 95.6%.

It is also important to mention that fourth quarter same-store operating results were strong. Occupancy levels reached 94.6%, which remained stable compared to the third quarter of 2017, and an aggregation rate of $4.09 per square foot per year.

Moving to the occupancy and rental rates we sold by region. The northern region performed strongly with a 97.1% occupancy at $4.96 per square foot per year. Bajio, were 91.6% occupancy at the rate of $5.12 per square foot a year. In the Central region, the occupancy was 94.7 -- 94.4%, with the leasing rate of $5.23 per square foot per year. These rates are in line with the expansions. Thus, for the time being, we are very confident that there will be no major changes regarding maintaining this level in the near future. Additionally, same-store occupancy rental rates by region remained stable with the Northern region of 96% occupancy and $4.94 per square foot per year. Bajio had 91.5% occupancy and $4.99 per square foot per year. In the Central market, 94.4% occupancy and $5.23 per square foot per year.

Leasing activity, as I mentioned, remained quite active for the year, with renewal activity in 53 contracts out of 67 aspirations in 2017. Moreover, combined with the renewals Terrafina managed to sign leases for 4.8 million square feet during the year. In terms of new contracts, there was growth of 1.5 million square feet, which is positive news for the real estate industrial market, particularly given the challenging number of economic scenarios.

Terrafina's renewal rate for the quarter was 95% and remained solid at an average 85.7% for the trailing 12 months, while our overall activity for 2018 will be only a 14% of our total G&A. Terrafina generated annual distributions of $95 million or 2.45 pesos per certificate, which is a equivalent $0.1286 per certificate. And consequently, this resulted in an annualized dividend yield of 8%.

And just to conclude my remarks. I want to provide some guidance for the 2018 period. As we previously mentioned, we estimate operational metrics to remain stable, with occupancy levels remaining in the mid-90s and rental rates adjusted in the U.S. CPI. And regarding portfolio financial performance, we estimated a 3% to 4% increase in NOI and AFFO on the same-store basis. Moreover, including the acquisitions closed in 2017, we expect our AFFO for [ severity ] in the range of USD 0.13 to USD 0.14. And as far as the distribution policy, we remain on target to distribute 100% of the AFFO in 2018.

Thank you for your attention. I will now turn the call over to our CFO, Carlos Gomez, as he takes us through the financials for the quarter.

[Carlos Espinosa, executive]

Thank you very much, Alberto. And thank you all to the participants on the call for joining us today. I will begin with a brief review of our financials for the final quarter and the 12-month period of 2017. Please note that all the figures we discuss are in U.S. dollars. However, Mexican pesos figures are also found in the report for your convenience. Additionally, NOI, EBITDA and FFO figures, exclude noncash items as well as nonrecurring and transactional related expenses, the latter of which are all included as part of the AFFO.

As Alberto mentioned, 2017 was solid, a year in which Terrafina reached record high metrics with sound results across its operations as we continue to grow acquisitions that add value to our overall profitability. Also, in thinking for the dimension that acquisition that formally closed in December 11, only contributed to the [ overall ] P&L . Thus, the full impact of this acquisition will be more in during the first quarter of 2018. To begin, let me disclose our sales to our 2017 financial highlights compared to last year. Rental revenues increased by 2.5% for total of USD 135 million. NOI reached USD 135.7 million, which is a 3% increase, with a 91.6% NOI margin. At the EBITDA level, USD 121.8 million were generated with a 93% EBITDA margin.

Finally, FFO and AFFO reached USD 87.1 million and USD 77.6 million, respectively, representing increases of 4.1% and 3.1% compared to 2016.

Now for our consolidated numbers which is due to disclose in 2017, Terrafina experienced rental revenues increasing of 26.7% for a total of USD 156.9 million. And on a quarterly basis, rental revenue reached $43.8 million, which is a 31.2% increase. At the NOI level for the annual figure, USD 156.8 million were consequently met with a 92% NOI margin. For the quarter, USD 44 million were generated with a 93% NOI margin.

This have been a result of the operational efficiency as we maintain our real estate operation expenses with only a marginal increase of USD 0.2 million to reach USD 30 million in 2017.

EBITDA level improved by 27.2% compared to 2015, reaching USD 150.3 million and the EBITDA margin rose by 42 basis points to 83%. EBITDA for the fourth quarter reached USD 39.6 million contributing to $10 million increase compared to the fourth quarter of 2016.

Financial costs were USD 50.6 million, a 30.3% increase compared to 2016. This was due mainly to the revolving credit facility during the first quarter of 2017 to final part of the acquisition announced in January 2017. With regards to the FFO level, USD 105 million were generated in 2017, which improved by 26.4%, with the FFO margin of 58%.

Finally, AFFO levels reached USD 95 million, a 27.6% increase compared to 2016 with an AFFO margin of 52.4%. Total distribution per certificate was at $0.1286 per certificate for the entire year, an 8% dividend yield considering the average price of 34.65 pesos per certificate. In Mexican pesos, Terrafina will retrieve 1,798.2 million pesos or 2.45 pesos per certificate. A fixed [ 8% ] increase compared to 2016.

In terms of the fourth quarter, Terrafina increased USD 25.6 million or USD 0.0324 per certificate, which in Mexican pesos represent 484.9 million pesos or 51.3 pesos per certificate. Additionally, the annualized dividend yield is 8.1% considering the average price of 30.2 pesos per certificate. On the longer sheet as of December 31, 2017, Terrafina had cash provision of USD 162.6 million, as of which approximately USD 70 million are our payments towards our M&A activity, which is expected to be deployed during the year. Also the company expects [ DAT requirements ] from the acquisitions closed in 2017 by the first half of 2018.

As an additional source of liquidity, Terrafina has more than USD 200 million available in its revolving credit facility. With reference to total debt, Terrafina has USD 1,059.1 million by the end of 2017 and finished the year with a 41.2% LTV and a 6.4x debt service coverage ratio. It is in full compliance with our confirmed covenants.

Before we move to the question-and-answer session, I just want to mention that Terrafina successfully completed the refinancing strategy as we announced at the beginning of this month the renegotiation of certain types of additions for Terrafina's revolving credit facility. With these changes, the company will improve its weighted average to maturity and will also reduce the average cost of debt.

Thank you for your time and attention. At this point, I will ask the operator to open the lines for the question-and-answer session.

[Operator]

[Operator Instructions] And your first question is from Eugenio Saldaña with GBM.

[Eugenio Saldaña, analyst]

I just wanted to get a little bit more color or detail on the use of proceeds. I mean, my numbers are $200 million. I mean considering the tax that have to be refunded that you have in cash, the potential uses of this, perhaps repurchase of certificates or more acquisitions. More detail on that.

[Alberto Castillo, executive]

Regards to the remaining resources that we still have from the follow-on, we expect to use about USD 50 million for acquisitions and the rest for expansions and development.

[Eugenio Saldaña, analyst]

And -- sorry, just a follow-up, I mean, the development or is it online that you already have? Or perhaps you're buying more in the following months?

[Alberto Castillo, executive]

Yes. This expansion and development will be on current land that we already have in our balance sheet.

[Operator]

[Operator Instructions] Your next question comes from [ Fernando Loaiza ] from Credit Suisse.

[Unknown Analyst]

My question was about the future acquisitions also. If we can have some outlook on these, it will be really helpful for us if you can provide us some guidance. And also I would like to know why you spent so less CapEx than last quarter on this one?

[Carlos Espinosa, executive]

In terms of our financial acquisitions, we thought as confidentially. Overall, we have $50 million acquisition that we have identified, and we expect to close during the second part of the year. And that -- in these we have several options for those acquisitions. And then the other question is in reference to the CapEx.

[Alberto Castillo, executive]

Why we spent less CapEx in this quarter, rather than in the previous one? Well, it's a -- we are returning contact with our tenants and based on the needs that we have is the program of capital that we deploy. So it's just a matter of timing on the capital we spent on the last quarter.

[Operator]

[Operator Instructions] Your next question comes from Froylan Mendez with JP Morgan.

[Fernando Froylan Mendez Solther, analyst]

With your recent commissions on your cash flow statement that were much higher than previous quarters, while the number for the year was much lower and more similar to what has been reported in the cash flow statement in previous quarters. Can you give me the difference of why the difference in the cash flow versus the amount recognized in the AFFO? And if these large increase in the leasing commissions reflected in the cash flow was a one-off? That's my first question.

[Alberto Castillo, executive]

Well, the leasing commissions are in direct proportion to the leasing activity. As you know, we pay leasing commission, what we need to probably the same -- I mean there may be a slight difference in what -- because, on the first lease we are able to capitalize the initial commission on the initial lease, but on the subsequent leases we do -- the outcome of the flow -- is the cash flow of the period.

[Fernando Froylan Mendez Solther, analyst]

Okay. So -- and my second question would be regarding your strategy on leading the seller of the most recent acquisition as the administrator of the portfolio. So is the first time you did this? And therefore, how do you manage to align the administrator's interest to yours? It's -- the administrator no longer has -- still in the game, let's say. In that sense, who's in charge of the negotiation of the renewals in this structure?

[Alberto Castillo, executive]

Yes. When we bring a new property manager, even including the due diligence that we make of the acquisition, and we also gauge, the level of operation and the level of contact that the property manager have with the tenant. And also we did see a set of parameters that we're going to do by evaluating when we seize a property manager, including performance in terms of cost, including performance in terms of customer satisfaction. And it's actually question about the decision . Yes, the property manager is the one that is in contact with the tenant, but our sole adviser we think that we approve all the big transactions, including the rent and the terms of the lease contract or the expansions or the industrial things. But we monitor very closely one of the -- levels of activities that the property management is having in terms of contact with the tenant.

[Fernando Froylan Mendez Solther, analyst]

So, who's in charge of the negotiation of the renewals? You are or the...

[Alberto Castillo, executive]

The one that's in charge of the negotiation team is property manager, with the supervision of our sole adviser in Terrafina.

[Operator]

[Operator Instructions] And there are no further questions at this time. I would look to turn the call back to Mr. Chretin for any closing remarks.

[Alberto Castillo, executive]

Well, thank you all for your attention here today. We look forward to speaking with you all again and keeping you updated of the latest developments of Terrafina. Thank you very much, again, and have a great day.

[Operator]

And that concludes today's program. Thank you for your participation. You may now disconnect.