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Good morning, and welcome to FIBRA Macquarie's Second Quarter 2021 Earnings Call and Webcast. My name is Donna, and I will be your operator for this call. [Operator Instructions] I would now like to turn the conference over to Nikki Sacks. Thank you. Please go ahead.
Thank you, Donna, and Good morning, everyone. Thank you for joining FIBRA Macquarie's Second Quarter 2021 Earnings Conference Call and Webcast. Today's call will be led by Juan Monroy, our Chief Executive Officer. And to answer any questions you may have at the conclusion of today's prepared remarks, we also have Simon Hanna, CFO. Before I turn the call over to Juan, I'd like to remind everyone that this presentation is proprietary and all rights are reserved. The presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any securities.
Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation whether as a result of new information, future events or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified. As usual, we've prepared supplementary materials that we may reference during the call as well. If you've not already done so, I'd encourage you to visit our website at fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab. And with that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Juan Monroy. Juan?
Thank you, Nikki. Good morning and thank you for joining us. On today's call, I'll discuss our second quarter 2021 results, provide updates on growth initiatives and capital position, along with our outlook for the remainder of the year. Our second quarter results demonstrated the resiliency of our business with a continued strength of our industrial portfolio being complemented by a recovering retail portfolio that is benefiting from improving trading conditions. Overarching fundamentals continue to improve. And whilst many key macro challenges remain, we are well positioned to capitalize on these favorable dynamics with our high-quality portfolio, select growth and development initiatives, and disciplined capital management strategy.
During the second quarter, we delivered an FFO per certificate result of 0.6066 Ps, down 4.7% from the prior year quarter. However, when looking at our results on a U.S. dollar basis, AFFO per certificate was up 11.1% year-over-year after taking into account the meaningful peso appreciation of 14% over the last 12 months, which represents a strong performance in natural currency terms. Additionally, the second quarter represents an FFO per certificate increase of 8.3% from the first quarter, the largest sequential increase in FFO since the onset of a pandemic. Moreover, when we look at our results against the first quarter for our consolidated portfolio, I am proud to note that we delivered positive metrics across the board, occupancy, rent collections, rental rates and NOI margin.
Turning first to our well positioned industrial portfolio, which accounts for 89% of our net operating income, for the second quarter, NOI was Ps 783 million or $39.1 million, up a healthy 5.5% in underlying natural currency terms over the prior corresponding period. Contributing to this growth was a 3.6% increase in average annual rental rates climbing to a record $5.12 per square meter per month. This increase was driven by contractual increases and positive leasing spreads on renewal leases. Additionally, expenses were lower year-over-year, primarily driven by a 69% reduction in provisioning for bad debt expense. We closed the quarter with net trade receivables of just Ps 20.6 million.
A particular highlight of the quarter was the strong leasing momentum, which helped us return to a 95% occupancy level at quarter end, a 69 basis points increase when compared to the prior quarter. Lease GLA is now at a 2-year high, reflecting strong new leasing activity, inclusive of all developed properties being fully occupied, combined with a healthy rolling 12-month retention of 76%. Moreover, the current quarter retention was an impressive 92% with move-outs totaling a mere 112,000 square feet of GLA. Our leasing team had an active quarter with 8 new leases executed across a diversified range of customers in 6 markets.
In addition to new leasing activity, we renewed 1.3 million square feet of GLA across 16 leases. Looking ahead, for the second half of the year, scheduled expirations are at a manageable level, 8.2% of annualized base rents. Looking beyond 2021 and into 2022, we're currently forecasting lease expirations of 11.3% of annualized base rents, the lowest scheduled annual rollover since IPO, a number that provide us with an exciting opportunity to further optimize our occupancy levels.
The solid performance is due to the combination of our experienced asset management platform and our high-quality properties concentrated in key markets with favorable supply-demand dynamics. Robust market fundamentals continue to be supported by limited supply and increasing demand driven by tailwinds such as nearshoring, effort store supply chain diversification and a growing e-commerce sector. More recently, we also take note of a tightening labor market in the U.S., including in the manufacturing sector, which further consolidate Mexico's competitive positioning in the region. This backdrop is facilitating a healthy leasing environment, and we anticipate a stable occupancy profile through the remainder of the year.
Moving to our retail portfolio, the second quarter showed positive progress on a number of fronts. As of July 26, approximately 95% of our tenants based on GLA and ABR were open and operating, continuing the steady increases we have been experiencing since the beginning of the year. With more stores open and operating, we're also benefiting from higher cash collections and lower discounts and provisions for capital debts. Cash collections of approximately Ps 140 million were up 14% sequentially for the quarter and represented the highest quarter of cash collections since the onset of the COVID pandemic.
In the second quarter, we granted temporary rent discounts of Ps 13.5 million, which marked a meaningful improvement and were approximately half the level of both the prior year and the prior quarter. Average rental rates were up slightly over the prior comparable period and roughly flat on a sequential basis as contractual increases and positive new and renewal rental rate spreads were partially offset by the impact of small shop moveouts. Occupancy at the end of the second quarter was 90.6%, down to 110 basis points from the prior year and 49 basis points from the first quarter, mainly driven by additional vacancy arising from the impact of COVID-19.
We believe that the leasing activity in the quarter is a positive indicator as we signed 82 retail leases representing 13,900 square meters, a 2-year high. While we have a lot of work to do to fill our current vacancy, we are confident that our grocery anchor portfolio will realize benefits from any sustained improvement in the retail sector. For the quarter ending June 30, 2021, we recorded another decline in net accounts receivable of approximately Ps 10 million, with 92% of receivables prudently provisioned.
An important element of FIBRA Macquarie's value proposition is our vertically integrated property administration platform. One of its key pillars for success is providing our customers with superior customer service. To that end, we participate in the Kingsley Tenant Experience Assessment. Kingsley is considered the industry leader in tenant satisfaction assessments, and we complete surveys every 2 years. I'm proud to report that our 2021 results were very positive, with a marked improvement over 2019. For the first time, we beat both the Mexican and the U.S. indices. And I will note the U.S. index includes 9 of the 15 largest industrial property owners.
Turning to development, we continue to prudently pursue new development opportunities in our core markets, building on our successful development track record. We are continuing pre-construction work at our project in the prominent industrial sub-market of Appalachia in the Monterrey metro area, and in our project in Mexico City, with completion of the first phases of both projects expected late in the fourth quarter or early 2022. We expect these investments will help to drive NOI growth in 2022 and beyond. And we continue to grow and evaluate a pipeline of development opportunities, while maintaining the same capital allocation discipline we have continuously displayed.
Similarly, we have maintained a conservative approach to our use of leverage and maintain a well-positioned balance sheet. As of June 30, 2021, we had Ps 5.1 billion of liquidity, inclusive of unrestricted cash and drawing capacity on our committed revolving credit facility and no maturities until 2023. Our net debt-to-EBITDA multiple was 5.3x, and our regulatory LTV was 35.5%. Moreover, we continue to maintain a healthy debt service coverage ratio and comfortable headroom with respect to our debt covenants.
During the quarter, we reinitiated some certificate buyback activity and modestly deployed Ps 7.8 million, repurchasing 335,000 certificates. We have a remaining repurchase capacity of approximately Ps 1 billion, and we'll continue to evaluate our capital allocation priorities with a goal of maximizing total returns on a per certificate basis. As a reminder, all repurchase certificates are canceled to ensure a permanent accretion benefit of the buyback program.
We have maintained a well-covered distribution and authorized a second quarter distribution of Ps 0.4750 per certificate and continue to expect a full year distribution of Ps 1.90 per certificate. We're also reaffirming our FFO per certificate guidance of between Ps 2.27 and Ps 2.32.
Finally, I want to provide an update on our ongoing ESG initiatives. We believe that one element of future success is a commitment to ESG matters, which are becoming increasingly woven into all aspects of our business. This commitment has been recognized with our recent inclusion in the S&P BMV Total Mexico ESG Index, which is designed to measure the performance of stocks within the S&P BMV Total Mexico Index that meet sustainability criteria. FIBRA Macquarie is one of only 28 other Mexican issuers that qualify for inclusion. We were also recognized as a 2021 Green Lease Leader by the institute for market transformation in the U.S. Department of Energy's Better Buildings Alliance. FIBRA Macquarie is honored to be the first Mexican based real estate participant to be recognized as part of the Green Lease Leader program. For additional details about our goals and accomplishments relative to ESG, I invite you to review our recently published 2020 sustainability report, which can be found on our website.
In summary, we have an industrial portfolio that continues to deliver strong operating results and a retail portfolio that is benefiting from an improving macro landscape. We are encouraged by the positive momentum in the industrial segment, and we remain confident in our portfolio, strategy and the constructive dynamics in our key markets. As always, I want to commend the entire FIBRA Macquarie team for their unwavering commitment and to everyone listening for your ongoing support. With that, I'll ask that Donna open the phone lines for your questions. Donna?
[Operator Instructions] Our first question is coming from Alan Macias of Bank of America.
Just a couple of questions. In terms of occupancy, I guess, can we assume that you have reached bottom in the industrial sector? And when do you expect to reach bottom in the retail sector? And should we expect further rent relief aid during the second half of this year?
Thank you for the question. Yes, in terms of occupancy, I do believe that the worst is behind us for retail. Hard to predict. I think that we are at the bottom or nearing it. Obviously, Alan, as you know, the retail performance is directly correlated to COVID. So if things stabilize, I do believe that we have reached or about to reach bottom in terms of occupancy, and we'll expect a pretty healthy retail recovery over the next year or 2. As we've seen a very strong retail recovery in other more developed markets, we think that there'll be a nice upward trend once COVID stabilizes. Industrial is obviously the opposite, we are at a healthy 95% which is actually a 2-year high, and we continue to see very strong fundamentals, as strong as we've ever seen. So we think that's a pretty solid occupancy level and continue to see very strong demand for our existing banking properties as well as the development pipeline as well. In terms of rental levels, yes, in terms of rent relief as you noted, significant improvement in second quarter really for retail. For industrial, we've been pretty stable with essentially no rent concessions for a while now. And for retail, we have the support offered this quarter compared to prior periods, so we're encouraged by that. And as we continue to see our customers up and operating and continue to see increased foot traffic, we believe that those rent discounts will continue to dissipate. Again, all this conditioned on the COVID situation in Mexico. Thanks, Alan.
Our next question is coming from Gordon Lee of BTIG.
Just one quick question. I saw that there was a slight decrease sequentially in the value of the investment portfolio. I was wondering if that is FX related or if you had additional markdowns in the retail portfolio? Maybe if you could just remind us what those markdowns have been since peak for the retail side?
Yes. Hi, Gordon, it's Simon here. So yes, we did overall have a net revaluation movement of around Ps 370 million for the quarter, including at the JV level. As a reminder, all these valuations are done independently. And then breaking that down by portfolio in natural currency, it's pretty straightforward. Industrial, we're at $1.78 billion. That's around a 0.9% increase for the quarter, 1.4% for the start of the year. That accounts for the vast majority of the revaluation gain that's being booked. The retail portfolio is at Ps 6.3 billion. That's a relatively modest gain. It's about 1.3% gain for the quarter, 2.5% gain for the full year. You may recall during FY'20, we had a 19% markdown for the full year compared to the 4Q'19 pre-pandemic levels. So considering the valuation movements through to 30 June, the cumulative adjustment now is around 17.2% nominally versus Q4'19, so still well off the pre-pandemic high. So even during this first half of the year, we have worked through some of the valuation impact that's been considered mostly those short-term rent discounts, which has sort of come through the DCS primarily. That mostly explains the small current year gain that we've seen in retail. But taking that step back, we're still very much at the markdown valuation since our pre-pandemic levels and the independent value-add continues to apply. I'd say fairly conservative leasing and operational assumptions on the retail portfolio. And then when you look at the portfolio, total portfolio basis, the independently derived book value, we actually had a net per certificate sort of around Ps 33 is where it is at 30 June, so that's just come off slightly from Ps 34 at 31 March, but that implied NOI cap rate based on the book value of around 8.2% on that all-in basis or 10% based on the market cap. So we think that continues to compare very favorably compared to market comps that we're seeing in the sector. Hopefully, that gives you the background.
Our next question is coming from Francisco Chavez of BBVA.
Thanks for the call. My question is regarding the retail segment. You had an active quarter in terms of leasing activity. Can you give us more color on which kind of tenants are leasing space recently and also the terms of these contracts and leasing spreads?
Thank you for your question. Yes, fairly active quarter for retail. We are encouraged by seeing an upward trend in foot traffic at our properties, which is ultimately the key leading indicator that we looked at as that will typically translate into sales of our customers, which indicate the health of our retail portfolio. So yes, as a reminder, our defensive cursory anchor well positioned portfolio with 52% of essentials is gradually improving. Most of the leasing activity that we are seeing is coming from a combination of restaurants. Some gyms are back at it. Gym operators are back at revisiting their store growth plans for the year. So not only we're seeing new leasing and renewal activity, but also from a lead indicator, which is our property basis and just development and growth managers being a lot more active, as really the past year they had been pretty passive and essentially not visiting properties. Now they are revamping their efforts to start opening stores, which is great. And to answer specific to your question, has been more around the categories of food and gyms. Thank you. Simon, you want to contribute something to that?
Yes, just to complement that, Paco, I'd also refer you to Page 18 of our supplementary information. We've actually done a bit of a refresh for our supplementary info pack there, which hopefully you'll benefit from. And also, we've added some color in terms of some of those retail leases that have been done either on a new or renewal basis in terms of the type of customer there. So yes, you can also look at Page 18 for a bit more detail.
Great. And these new contracts are -- how many years are the terms of these contracts? And also, if you can give us an idea on the leasing spread?
Yes. They're consistent with our historical averages in terms of existing space. This is around 3 years, which is consistent with what we typically do historically. And rents I'll say are holding up well. Obviously, we believe that as inflation grows, rents will be well supported. And for now, we're seeing neutral leasing spreads at similar rents to what we had in those spaces pre-COVID impact. So yes, I think that we are encouraged by what we are seeing and rents seem to be holding well in the retail space.
Our next question is coming from Vanessa Quiroga of Crédit Suisse.
My question is regarding leasing spreads in industrial. Could you talk about how you're seeing leasing spreads in the markets where you are present? What kind of growth are you expecting in the industrial markets? Also, if you currently have any portfolio -- just a refresher if you currently have any portfolio that you're willing to sell on the industrial segment? And regarding retail, can you tell us how is traffic, foot traffic performing right now compared to pre-pandemic levels in the different retail formats that you have?
We hope you are well too. Thank you for your question there, for your questions. In terms of industrial rents, we continue to see very strong supply demand dynamic. Occupancy levels continue to increase across the market. Obviously, we've seen inflationary pressures in Mexico globally, and we believe this will ultimately continue to support rent growth. We have now consistently been able to deliver a pretty healthy rental rate growth. This quarter we had a pretty good rental rent growth there of north of 3.5%, I think it was 3.6%, which is pretty healthy obviously, considering the U.S. dollar nature for rental income. So my expectation has been always very conservative in terms of rental assumptions. But based on what I'm seeing as of today, I do believe that there is considerable negotiation leverage or pricing power and believe that there is a good amount of upside potential in terms of rental rates and a positive rental trend for the foreseeable future. With regards to asset sales, we completed a pretty comprehensive asset recycling program and we are not necessarily exploring selling additional industrial properties at the moment. We can be open minded, and as always, we might sell something here and there that might not be a good fit either from a geographical perspective or just in general, considering our investment thesis. But nothing that we are actively pursuing at the moment, Vanessa. And lastly, in terms of retail foot traffic, that's something that we do monitor on a weekly basis. And we've seen now for the entirety of the quarter, an upward trend compared to last year. It's gradual. I'd like to see that move faster, to be honest, and we are still significantly below the 2019 levels. No real differences on a per property basis. They have all been sort of trading or performing in a constant sort of range. Obviously, we see the impacts of [indiscernible] every couple of weeks, and they defer in terms of socioeconomic levels. But in general, a constant and gradual upward trend for the quarter with a significant upside potential as we are still well below 2019 levels, Vanessa. Thank you.
Our next question is coming from Fernando Mendez of J.P. Morgan.
Juan, you are already retaining enough AFFO to finish the development of the Monterrey and Mexico projects. But what should we expect on the capital allocation side going forward since you seem to have space in the balance sheet to increase leverage and could help obviously increase buyback activity as you have done in the past? Or should we expect stronger investments in land? And given that there could be some portfolios coming out to the market, under what conditions would you be a buyer?
Thank you for your question. Yes, good one and capital allocation is something that, as you know, pretty -- something that's pretty close to how we look at our business and something that we take very, very seriously here. We see it as a critical component of our business strategy. So yes, I guess a priority in terms of capital allocation, is to fund our existing growth CapEx needs or development pipeline. We have 2 fantastic properties that we were able to buy, irreplaceable land locations in Mexico City and Monterrey. So the focus is to fund those development projects, which we believe as we build world-class facilities will help and strengthen the quality of our portfolio whilst delivering a fairly attractive development yield there. We, as noted in my remarks, we did some buyback during the quarter.
We had been sitting on the sidelines as we, for the past few quarters during the COVID pandemic, as we were very focused on cash conservation. Given or strong operating fundamentals, we went back at it and did do some buyback during the quarter as the economics are just extremely attractive when trading at Ps 24, Ps 25 and with a book value of close to Ps 34, well Ps 33.8. There is a very attractive economic proposition there. Important to note that for Ps 34 book value number is derived from an implied caprate from a third-party valuation process at around 8.3%, 8.4% implied cap rate. Important to note that we're seeing a pretty strong private market with deals done at between 7 and 7.5 cap rate, some deals even now are currently even below 7. So a pretty healthy upside to that Ps 34 if you apply let's say a 7.5%, sorry, you'll be getting close to Ps 40 or north of Ps 40. So very attractive economic proposition, and we've acted on that. Obviously, we need to balance that with our development pipeline and also our focus of maintaining a fairly resilient balance sheet as our medium to long-term focus will be to maintain leverage levels in the 35, low 30s level. So a little bit of a balancing act there.
Whilst we are very comfortable with our leverage levels over the medium to long term, we will like to see those come down to the low 30s. In the short to medium term, we might draw on our revolver facility as needed to fund our development pipeline as we are focused on continuing acquiring land in our core markets. So we might see a temporary marginal leverage increase, which will eventually come down as some of those development properties stabilize, and we see the valuation uplift there. In terms of allocating to acquiring stabilized product, I think that's probably less likely frontline as our preference is to build Class A, world-class product in core markets, something that we are not necessarily seeing out there trading in what's available. So that's critically important to us, a very important focus on quality and core markets. And also, the pricing, as I mentioned before, trading in the 7% to 7.5% is just a tough comparison vis-a-vis our development opportunities and our buyback opportunities. But as always, we look at everything that is out there, and we'll remain open-minded if we find something that will be a good fit with our investment criteria and our focus of delivering attractive total return on a per certificate basis to our investors. Thanks.
Our next question is coming from Andre Mazini of Citigroup.
So my question will be on the yield on costs. You guys have been delivering double digits, very nice attractive yield on costs. But at the same time, you're hearing a lot about inflation costs and there's a commodity boom in the world, probably a lot of the inputs to any constructions are going up, right, as we speak. So how are you seeing that? Do you think this can pressure the yield on costs going forward? Or on the other hand, you can fully compensate on rents, given scarcity of even some real estate asset classes, etc., how you're seeing the yield on cost dynamic going forward?
Yes. Good question. Andre, thanks for that question. Yes, definitely seeing the inflation pressure on construction costs. As you say, a global -- globally true. Certainly, Mexico is not an exception. And we are seeing that construction costs are going up really in a meaningful way. Hard to say when we'll stabilize, so if there is potential for those costs to come back. However, from my perspective, I'll say that eventually rent growth will catch up. We're starting to see pretty healthy rent growth of executed deals also in discussions with the major brokerage houses and the asking rent levels are going up in a meaningful way.
So my perspective is that in the medium term, we will see a conversion of rent levels to get our yield on costs back to normalized levels. So yes, starting to see that rent growth path proline, and I think it will be accelerated potentially. And ultimately, over the medium term, yield costs should be well supported by rent growth. Maybe a little bit of a short-term dislocation while the market adjusts, but I think that over time, the yield on costs will get back either via cost reduction, but more likely via rent growth proline.
At this time, I would like to turn the floor back over to Mr. Monroy for closing comments.
Yes, okay. Thank you, Donna. And thank you, everyone, for participating in today's call. We look forward to speaking with many of you over the coming days and weeks, as always, and as well updating you again soon on our third quarter 2021 results. Thank you very much, everyone. Have a good day.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.