CI Banco SA Institucion de Banca Multiple FF/00939

BMV:TERRA13

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrafina's Third Quarter (sic) [ Fourth 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.

[Francisco Martinez, executive]

Thank you, Holly, and Good morning, everyone. Welcome to our fourth quarter 2021 conference call. And we are very 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 the financials.

Before we begin, I would like to refer you to the note on forward-looking statements in our quarterly report. 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 of the company's control. These comments represent the company's judgment at the time of this call, and 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. Please, Alberto, go ahead.

[Alberto Castillo, executive]

Thank you, Paco. And Good morning, everyone, and thank you for joining us today. I am pleased to be here sharing our fourth quarter results with you. We had a solid year and expect to continue delivering positive results in our key performance indicators going forward. I would like to highlight that we had a very active year in terms of our 3-year growth plan's execution, which I will explain in detail during the call.

Let me start with some key highlights for our operation in 2021. Throughout the year, we saw strong leasing activity supported by the hard work and commitment from PGIM real estate and our property managers. In total, we signed 2 million square feet of new leases, 2.5 million square feet of leases that were renewed early and 5.5 million square feet of leases that were renewed in accordance with their normal schedule. This means that over 2021, we signed leases that cover a total of 10 million square feet of GLA. The northern region was the most dynamic, representing approximately 55% of our leasing activity. Ciudad Juarez, Chihuahua, Ramos Arizpe and Tijuana led the way with an average occupancy rate of 98.5% and an average rental rate of $5.46 per square foot.

In these markets, manufacturing tenants remain predominant as the region is still a preferred location for multinationals. We expect that this strong performance will continue into 2022 as we see incremental demand in new development opportunities that we are already working on. We were quite active on the e-commerce front during the year 2. Our new logistics space developed in Tijuana is one of a time as it integrates e-commerce operation with packaging services and last mile operations. We are convinced this will be a flagship asset for Terrafina's portfolio in coming years as it is part of the select group of properties currently available with these characteristics in Mexico.

Moving on, 25% of our leasing activity for the year was concentrated in the central region, led by the Cuautitlan and Toluca markets, which maintained an average occupancy rate of 97% and an average rental rate of $9.91 per square foot at the end of the year. As economic activity continues to recover from the pandemic, the logistics sector is playing an important role in the central region, which explains the demand trends we are seeing and the result in high occupancy levels and rental rates.

Finally, Bajio represented 20% of our overall leasing activity in 2021. Queretaro, Silao and San Luis Potosi were the best performers market with this region with an average occupancy of 86% and an average rental rate of $5.06 per square foot. This region shows a gradual recovery. It is relevant to mention we have been able to maintain stable results, and we'll continue working on different strategies to increase our leasing activity, always focused on developing a strong tenant base with long-term operations in Mexico. As a result of our success in leasing space, our average occupancy rate remained around the 95% mark and our annual rental rate per square foot closed the year at $5.40.

Looking at same property rental rate, we closed the year at $5.45 per square foot. Our net asset value per certificate increased 12.6% year-on-year as our new developments were mark-to-market and the overall appraisal value of our existing portfolio remains strong, reflecting positive demand supply dynamics in the industrial real estate space. On the development front, we completed 354,000 square feet of GLA intended for e-commerce use in Tijuana as well as a 210,000 square feet facility for a packaging tenant that serves the e-commerce tenant activities. Both assets will generate an estimated $4.1 million of annualized NOI. And moreover, our e-commerce tenants signed another 5-year lease for an additional 50,000 square feet, where we will develop a last mile operation. We estimate this generate an additional annualized NOI of $320,000 for Terrafina.

As for new developments, by the end of the year, we also announced the launch of 2 new industrial projects in Ciudad Juarez and Monterrey. These are expected to have a total GLA of 473,000 square feet and are being developed in Terrafina's land reserves. These projects will represent a total investment of $18.6 million, which will be executed during 2022, and we estimate they will generate a total annualized NOI of $2.1 million when stabilized.

2021 was also a good year for asset recycling efforts. Terrafina sold at the end of the fourth quarter, 2 properties in Coahuila, which together amounts to 930,000 square feet for a total amount of $44.3 million. After this transaction, Terrafina has reduced its exposure to nonstrategic markets and improved its net asset value per share. It is also relevant to mention that the proceeds from these sales will be reinvested in the development supporting our 2022 growth plan.

On the share buyback front, at the end of 2021, Terrafina certificate price was trading at what we consider a very attractive valuation. To us, this represents an opportunity to allocate a total of $2.4 million to acquire a total of 1.8 million certificates at an average price of MXN 27.68 per certificate. This represents 0.02 of the total outstanding shares. It is worth noting that going forward, we will continue to be active with share buybacks, carefully evaluating when it's convenient to buy more certificates throughout 2022.

I would also like to touch on our ESG strategy, which continues to evolve. I am very proud of the Corporate Sustainability Assessment score we obtained from Standard & Poor's. We significantly improved from 46 to 63 over the last year. This led us to be recognized as an industry mover on the S&P Sustainability Yearbook 2022. Terrafina is part of the top 50% real estate companies that achieved the strongest improvement in the CSA results. It is worth reminding you that during the year, we were also able to improve the terms of our revolving credit facility and term loan with a new sustainability linked loan for a total amount of $485 million due in July of 2026. This achievement was a result of our joint effort with [indiscernible] to continue improving our ESG strategy as well as our cost of debt.

Now moving on to our view for 2022. Let me just say that we are encouraged by the strong momentum in the industrial real estate sector. Demand for new space continues to increase and leasing activity in core markets, especially in the northern region where Terrafina has a leading position remains extremely strong. We expect to see high occupancy level and good rate increases, which should favor our cash flow generation. We understand some challenges remain as supply chain disruptions will continue for some time. Having said that, we see our tenants' operations in good shape, and most of them expect to continue improving their activity during the year.

Supply chain issues could also have an impact on our development process as the cost of construction materials has gone up materially. And some existing and potential tenants may struggle to source key components for the manufacturing activity, perhaps limiting their growth. As mentioned before, we are also aware of the impact the proposed electric reform may have on our sector, but it is still uncertain how this will evolve. Hence, we maintain committed to staying in front of potential issues that may arise. So far, as I said before, this issue has not just permeated into our operating assets and the impact on our developing efforts as of today has not been material.

Within this context, leases that cover 5.6 million square feet or 15% of our total GLA will mature during 2022. Approximately 47% of these leases will expire in the first half of the year and the other 53% during the second half. Almost 70% of the rollover is concentrated in the Ramos Arizpe, Ciudad Juarez, Chihuahua and Cuautitlan Izcalli markets, which, as of today, have been good performance relative to other markets. Because of this, while keeping a conservative approach with our internal forecast, we expect an annual renewal rate in the low 80s percent, similar to what we saw in 2021. This means we are budgeting a scenario of 1 million square feet of lease termination.

In our conversation with tenants in the past, the most common reason for not renewing has had to do with consolidation purposes. In fewer cases, it was triggered by the need to increase or decrease the current amount of space, which we couldn't immediately accommodate. We're comfortable with this scenario. Since 50% of these terminations should happen in what today are strong markets with good leasing dynamics likely to experience significant demand. Moreover, we expect to close around 1.5 million square feet of new leases, which in the end will leave us with very stable occupancy figures.

Following up on our 3-year growth plan. As we initiated the development of 1 million square feet of GLA over the end of 2021, we will focus on starting operations and stabilizing this asset first. The total investment for these projects was $68 million, and we expect they will generate $7 million in NOI per year as these properties are fully stabilized by the third quarter of 2022. Furthermore, throughout 2022, we will be developing new projects for manufacturing logistic activities in our land reserves while maintaining a disciplined approach to the use of our balance sheet.

We will maintain our 70% payout ratio, use the remaining 30% of our AFFO to continue funding our growth. There are additional development projects that will be launched in 2022, which we estimate will add approximately 1 million square feet to our portfolio's GLA and once stabilized, should contribute approximately $5.4 million to our annualized NOI. As to additional growth activities, we have already identified 100,000 square feet of potential expansions.

As I said before, we made good progress with our asset recycling program with recent asset sales. With the latest transaction, we have covered 60% of our goal to sell $100 million of noncore assets by 2023. For 2022, we expect to close an additional asset sales during the first half of the year, which will imply a nearly 100% completion of our asset sales target. Overall, we intend to continue to make progress on our growth strategy, maintaining a disciplined management of our balance sheet and choosing the best projects to generate long-term value for all of our stakeholders.

As a final point, I would like to share our 2022 guidance. We estimate occupancy rate will be in the 94% to 95% range. We expect our annual NOI in the $180 million to $181 million range, and we forecast annual maintenance CapEx of USD 0.30 to USD 0.33 per square foot of our total GLA. For our annual distribution, we will maintain our 70% AFFO distribution payout ratio policy, which lead us to a distribution per share of USD 0.0910 to USD 0.0920.

Finally, our growth strategy. We estimate a total investment of $50 million to $67 million for new development during this year. These activities will be financed with our AFFO reserve, asset sale process and if necessary, additional debt. Note that we expect to maintain sound LTV ratios looking to close a 35% loan-to-value level by 2023.

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

[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 all included in the AFFO. We will focus on same properties comparisons for the main financial metrics. Therefore, my comments will be based on adjusted financials, considering the exclusion of the assets that were sold by the end of 2020 for the full year 2020 figures.

To start, same-store net collections in 2021 reached $189.6 million, a 2.4% increase compared to the fourth quarter of 2020. Rental and quarterly rental revenues reached $187.4 million and $46.6 million, respectively, which implies a 1.1% year-on-year decrease. NOI was $182.1 million, of which $45.6 million came from the fourth quarter, a 1.7% year-on-year increase that implies a 93.8% NOI margin. Full year EBITDA totaled $161.3 million, of which $45.6 million were generated in the fourth quarter, demonstrating a 0.8% increase and an 83.1% margin.

Finally, 2021 AFFO reached a total of $102.3 million, with $24.7 million from the fourth quarter, a 7.1% year-on-year increase. Considering a 70% payout ratio, our distributions for the year were $71.6 million or USD 0.0959 per certificate. And our distributions for the fourth quarter will be $17.3 million or USD 0.0219 per certificate.

Moving on to our balance sheet. We closed the quarter with $89.1 million in cash as we sold 2 properties in the fourth quarter. Our investment properties closed the year at $2.4 billion, a 6% year-on-year increase, as Alberto mentioned, since the appraisal value for the new developments increased with the termination of the construction phase and the overall portfolio remains solid. Our total debt by the end of 2021 closed at $981.6 million with an average cost of debt of 4.45% and now our average weighted maturity of debt was 6 years. Finally, our LTV reached 35.4% in line with our objective to reach 35% by 2023.

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 for today is coming from Vanessa Quiroga.

[Vanessa Quiroga, analyst]

Vanessa Quiroga from Credit Suisse. So I guess the first one, if you can confirm the amount of investment that you will make on new projects on development? And also, if you can give us some color on the recovery that you are seeing in Bajio or what you expect for Bajio for 2022? And congratulations on the Tijuana leasing agreement. I was wondering if you can give us some details on how the process went there. And if you think that kind of project could be replicable with more logistics companies?

[Alberto Castillo, executive]

Yes. Thank you, Vanessa. Thank you for your questions. Well, first of all, the investments that we plan to deploy during 2022 are between [ $5 ] million and $7 million for a total of about 1 million square feet. And this is in line with our growth plan. These projects, we -- now that -- let me try to answer about the -- also your third question on the Tijuana process. The Tijuana process was a very successful joint effort between PGIM, our property managers and Terrafina, by which we were able to capture the opportunity and win the business because of the site that we were able to acquire for that process and the timing of the execution of the construction as well as in negotiation with the tenants.

So the process is a good example of how we have a good relationship with -- not only with the current tenant, but also with future tenants, especially on the e-commerce. This also was an opportunity to prove that we can do repeat with them. because not only we were able to have the lease contract with the e-commerce, but also because of the good performance there, we will refer also to their packaging supplier, if we were able also to materialize in our business with the packaging supplier of that e-commerce tenant. In addition to that, in the press of doing that, we were asked also to provide solutions for a last mile requirement that they had that we were able to provide that also in that market.

So to answer your question also, it was -- this is -- that's what I remember calling it classic development because we are not only talking to that e-commerce tenant but other e-commerce tenants also in order to be able to repeat this kind of transaction. So it was a successful transaction. It was a joint effort and it was a good example of our ability to execute in this e-commerce business. In terms of the Bajio, the Bajio continues to improve gradually. As I mentioned before, on the recycling of capital initiative, we are able to sell some facilities in markets that are not performing as we wish. And this give us an opportunity to also to sell properties that have a lower rent and deploy the process of that sale in developments like the ones that I mentioned, Tijuana where rents are substantially higher.

We understand that 2022 is going to be a year of consolidation because as you can imagine, we sell the properties and that we lose some NOI. We deploy the proceeds on development, and it takes time for those developments to start producing the NOI. And as I mentioned, some of the developments that we're going to be doing during 2022 are going to be stabilized towards the end of the year. And that explains why some of our numbers for guidance are somewhat flat during this year because we are in that transition. However, at the end of the day, we aim and we are increasing the NAV per share immediately as we perform these dispositions with the new operation of the new properties. But as far as to increasing the FFO per share, which is one of our very important goals, that is going to materialize towards the end of the year or perhaps during 2023. So that is [indiscernible]. I hope I answered your question, Vanessa.

[Vanessa Quiroga, analyst]

Yes, no, for sure. For sure. And I guess I was wondering also about rents. I mean when you say gradually recovering, are you talking about occupancy or rents or both?

[Alberto Castillo, executive]

Both. I think that we -- let me talk about 2 things. One is the fact that we are selling some properties that are in markets that are not performing well, perhaps we sell some empty facilities that help us to increase the occupancy, but also the rents because as I mentioned, the rents of the properties that we're selling that are already leased, they have lower rents than the rents of the new developments, which are substantially higher than the other one. So we had -- the expectation is to enhance both.

[Operator]

Your next question is coming from Scott Glaser. Your next question is coming from [ Juan Masato ].

[Unknown Analyst]

Juan Masato from [ GBM Care ]. I was wondering -- you mentioned 2 developments, one in Monterrey and Juarez. And I was wondering if you could give us some color on those 2 projects as well as future projects that you may have in consideration where they could be located or [ decided. ]

[Alberto Castillo, executive]

Absolutely. Thank you, Juan, for the question. Yes, we have a very good track of land that we're developing in Juarez, in the [ Mar del Plata ] market. And this development is already under construction, and we expect that to be fully developing by the third quarter of this year. It's a very good location, and we already have several potential tenants that are looking at that development. So this is what we call the spec-to-suit because when we started the development, we already have prospects to do that. This has already give us an opportunity also to capture some of the -- not only the occupancy in Juarez, but also the higher rents that, that market is experiencing. This is going to contribute also to the enhancement of the portfolio that I just mentioned. So that is one in Juarez.

We also have a developmental process in Monterrey. This is a joint venture with one of our property managers. This is in the Apodaca market, which is a market with very high occupancy and very high rents. And that will -- it's -- we expect also to stabilize towards the end of the year. And these are examples of what we are developing and we already located. Again, this is the beginning of the year, and we expect to have more like these opportunities to develop properties in our own land, which, as you know, allow us to capture a higher development yield because we're using our land reserves.

[Operator]

[Operator Instructions] There appear to be no further questions in queue at this time. We actually have Scott Glaser. It seems like we've lost Scott. We do have a question coming from Francisco Suarez.

[Francisco Suarez, analyst]

Apologies if this question was already asked before. I got disconnected from the call for some reason. The question that I have is that on your projections on your overall building certifications for the year, can you give us a breakdown on how much of this new GLA to recertified comes from the -- from properties under development and how much of that comes from retrofits to existing buildings?

[Alberto Castillo, executive]

Certainly, Paco. Thank you very much for the questions. And good talking to you, Paco. Yes, in terms of the property certification, we have a combination. We do have a lot of -- let me see, probably over 5 or 6 property certifications that are on buildings already in our portfolio. And this is what they call the O&M certification for a total of approximately 3.5 million to 4 million square feet. We also are certifying the new properties. All of the new properties that we have developed in 2021 are on their certification process or already certified LEED or LEED or O+M. And this also I think -- let me use this opportunity to tell that all of the new developments are going to be certified.

So as I mentioned, Paco, close to 2.5 million to 3 million square feet of certain value properties are already built. And this is -- I really appreciate the question because this is an good opportunity to tell you how dynamic and how effective this work -- joint work with our current tenants. Our tenants welcome the opportunity to participate on the certification process and very much provide support to the activities to do so. So it's -- so that's why we're even more optimistic than we were at the beginning of the year in terms of how we're going to achieve a higher 75% of our properties that are already in our portfolio.

[Francisco Suarez, analyst]

That's very helpful. And if I may, a follow-up on this idea. What about the economics of building certification? I mean, because not necessarily all the best certifications might be paid by the incremental or the potential incremental rents from -- after a building has been retrofitted or the like. Can you walk us a little bit on where the priorities might be if this is actually much more driven by the tenants themselves that they are interested in decarbonizing their value chain? Or is this is actually something that where the -- where we see a strong economical rationale behind it, meaning the additional CapEx required for building certification will be -- will earn a return? So perhaps you can walk us a little bit about what type of clusters, what type of regions, what type of industries might be much more willing to engage in these activities with you.

[Alberto Castillo, executive]

Absolutely. Well, first of all, I think that we do have a budget allocated for the certification process. And that includes a spectrum of activities that had to do with improved lighting, improved heating and also the disposal of the water and the procurement also of rainwater, et cetera. These activities have been identified. And these -- all of these certification process was driven by us, and we invited our tenants, and our tenants have been very proactive to participate with us. The reasons which we're doing these are several inquiries in Guadalajara, in Monterrey, in Chihuahua and in Cuautitlan Izcalli for the ones that are already in the O+M. And then the new projects, the ones that we are doing -- the ones that [indiscernible] in Tijuana are the ones that are going to be certified. In the process and the budget has been allocated to that. In some instances, there is going to be a benefit with the tenant. The tenant also may participate. I don't know, Paco, if you want to elaborate? Paco has been our champion on ESG, and you may want to make a comment on this, Paco?

[Francisco Martinez, executive]

Sure, of course. Just to complement your answer, Alberto. For 2022 budget, we are including approximately $1 million, which is USD 0.03 of total GLA portfolio, will be specifically used for this kind of improvements, lighting system, AC, other type of implementation that might help the overall ESG of our current tenants. So our main thought is as we are developing new GLA, our commitment is that all of these additional square footage, who is going to have a certification, which right now, we're working under LEED certification. But also it is quite important to have a certification process for those existing and operating properties.

We are using as well as the LEED OM, which is the operating and maintenance certification, which is also very relevant. And I think that the most important driver is that as we work along with our tenants and getting the certifications that they can share and demonstrate what has been the work being done with the subsidiary -- sorry, with the parent company. In this way, we are working together in different regions. And just to clarify, on the overall breakdown for this year, we're going to have something close to 1.7 million square feet of certifications. 60% is going to be under the LEED certification for new developments and around 40% for already ongoing operations.

[Operator]

[Operator Instructions] Your next question is coming from Juan Ponce.

[Juan Ponce, analyst]

Juan Ponce from Bradesco BBI. I just have a quick question regarding asset dispositions. I mean, I think you said you were going to finish your $100 million target in the first half. How much of this target is actually let to sell?

[Alberto Castillo, executive]

Yes. Thank you, Juan. Yes, we think that the -- we committed to sell the -- in terms of the recycling, about between 2 million to 2.7 million square feet of -- I'm sorry, million square feet of this position. In that with the sale that we are projecting for this first half of the year, we're going to complete the target of $100 million disposition that we had for the 3 years.

[Juan Ponce, analyst]

Okay. And how much is that in terms of square feet?

[Alberto Castillo, executive]

Square feet will be about another 1 million square feet.

[Juan Ponce, analyst]

Another 1 million. Perfect.

[Operator]

There are no further questions in queue at this time.

[Alberto Castillo, executive]

Okay. Well, thank you all for attending today. I would like to finish the call by thanking everyone in Terrafina as well as our partners for helping us deliver a good year. I am confident we will stay on the right track in 2022. The team is excited to strengthen its relationship with all of our stakeholders as we continue to consolidate our operations and look to work on having better initiatives for operations and buildings on the sustainability front. We look forward to speaking with all of you again soon. And thank you for your time, and have a great day.

[Operator]

Thank you, ladies and gentlemen. 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.