Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Analysis

Record Quarter with Strong Development and Growth

FIBRA Macquarie reported a record quarter with significant revenue, NOI, and NAV growth. NOI increased by 6% year-over-year, driven by a strong supply-demand environment. The company maintained its full-year guidance for AFFO, expecting a 7% increase from the prior year. Key milestones included the delivery of a third building in Apodaca Industrial Park and progressing well on a Tijuana project. Industrial portfolio performance remained robust with 5.9% higher NOI and strong retention rates. The retail portfolio saw occupancy reach 92.1%. The balance sheet is strong, supported by a $150 million IFC credit facility. Full-year AFFO is anticipated to be MXN 2.55-2.60 per certificate with distributions of MXN 2.10.

Strong Financial Performance

FIBRA Macquarie reported a strong quarter characterized by record revenue, Net Operating Income (NOI), and Net Asset Value (NAV). The company achieved a 6% year-over-year increase in NOI in underlying U.S. dollar terms, attributed to a favorable supply-demand environment. For the fiscal year, they maintain AFFO and distribution per certificate guidance with a 7% increase expected, indicating resilience and growth potential.

Key Industrial Development Updates

The company is actively executing its industrial development strategy, realizing target NOI yields on cost between 9% to 11%. The recently opened 200,000 square foot building at Apodaca Industrial Park contributed positively to this figure, and a forthcoming 400,000 square foot project in Tijuana is expected to complete by year-end, expanding their operational capacity in critical markets.

Robust Leasing Activity and Portfolio Performance

In the quarter, total leasing activity encompassed 2 million square feet, reflecting strong demand. They achieved a remarkable 13% increase in renewal lease spreads and a solid retention rate of 86%. Retail portfolio metrics are also improving, with occupancy rising to 92.1%, the highest since early 2020, illustrating the recovery and growth potential in this segment.

Solid Balance Sheet and Strategic Financial Management

FIBRA Macquarie reported a record NAV per certificate at MXN 47.8, marking a 13% increase from the prior period. Their balance sheet remains well positioned with a real estate net loan-to-value ratio of 33.3% and a healthy net debt-to-EBITDA multiple of 5.2x, offering a solid foundation for future growth initiatives. Additionally, they have secured a USD 150 million credit facility aimed at financing sustainable building projects, enhancing their liquidity and operational flexibility.

Future Revenue and Growth Expectations

The company anticipates solid full-year revenue growth, maintaining an AFFO range of MXN 2.55 to 2.6 per weighted average certificate and a distribution of MXN 2.10 per certificate. This outlook is buoyed by expected improvements across both industrial and retail portfolios despite challenges from financing costs linked to recent investments.

Recent Acquisition Strategy

FIBRA Macquarie has made strides in their acquisition strategy, recently launching a tender offer for Terrafina with an enhanced exchange ratio of 1.185x. This strategy aims for yield accretion, fostering a competitive edge in the market while enhancing the value of their platform.

Market and Economic Trends

The management remains optimistic about Mexico's industrial real estate landscape amid favorable near-shoring trends and structural drivers supporting growth. They expect continued demand for real estate in Mexico, especially in core markets with rising rental rates and opportunities for cap rate compression in the future.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to the FIBRA Macquarie Second Quarter 2021 Earnings Call and Webcast. My name is Melissa, and I will be your operator for this call. At this time, all parties are in a listen-only mode. [Operator Instructions].



I will now turn the conference over to Nikki Sacks. Please go ahead.

[Nikki Sacks, executive]

Thank you, and hello, everyone. Thank you for joining Super Macquarie's Second Quarter 2024 Earnings Conference Call and Webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer; and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I'd like to remind everyone that this presentation is proprietary and all rights are reserved.



The presentation has been prepared solely for informational purposes and is not a solicitation or an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Our 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 have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I'd encourage you to visit our website at fibramacquarie.com and download these materials. A link to these materials can be found under the Investors Events and Presentations tab.



And with that, it's my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon?

[Simon Hanna, executive]

Thank you, Nikki. Good morning, everyone, and thank you for joining us.



We are pleased to be reporting another strong quarter where we delivered record revenue, NOI and NAV while also advancing our industrial developments and further enhancing our balance sheet position. With respect to our operational results, we achieved another strong quarter of NOI growth, up 6% year-over-year in underlying U.S. dollar terms, driven by a continued favorable supply demand environment.



With our performance year-to-date and our positive outlook, we're maintaining our full year guidance for AFFO and distribution per certificate, a 7% increase from the prior year at the midpoint, assuming current [ SUMIFs ] outstanding. As we've discussed, a key element of FIBRAMQ value proposition is our industrial development program. We've been diligently and successfully executing on our investment strategy and have been realizing our target NOI yield on cost of between 9% and 11%.



During the quarter, we delivered a third building in our Apodaca Industrial Park. This 200,000 square foot building adds to the 2 completed facilities in our Class A projects. In addition, construction is progressing well on our 400,000 square foot project in Tijuana with an anticipated delivery by year-end. We currently have approximately 1.5 million square feet of GLA in stabilization across Monterrey, [indiscernible], Mexico City and Reynosa.



I'm pleased to share that just this week, we executed the lease for a 225,000 square foot building in our Mexico City development project where we hold an 82% equity interest. This represents a tremendous result with the project achieving an above-target double-digit development yield. As a reminder, our neighboring 510,000 square foot project was delivered and leased up last year, also at a healthy double-digit NOI development yield, and it's been independently appraised at a 6.5% cap rate.



This should be a good indicator that we are on track to deliver a considerable total return through AFFO generation, NAV uplift and some associated development and property management fees earned by FIBRA Macquarie, which altogether reflects the differentiated value creation that we are capable of delivering for FIBRAMQ Investors.



Turning to our industrial portfolio. Performance remains robust with growing average rental rates and strong retention. For the second quarter, NOI was $48 million, a 5.9% increase compared to the prior year. We saw continued momentum in renewal lease spreads, achieving a positive 13.0% on industrial renewals. Total leasing activity comprised 2 million square feet of GLA, including 136,000 square feet of new leases.



Renewal leases comprised 21 contracts, driving a solid retention rate of 86% over the last 12 months. In our retail portfolio, our operating metrics are all generally trending in the right direction with higher NOI, positive leasing spreads and strong cash collections. Occupancy increased to 92.1%, the highest level seen since the first half of 2020.



We feel constructive about our retail leasing pipeline and the outlook for our properties, which provide a range of mainly essential services in high-density urban areas. Our disciplined capital management and focus on value creation is essential to our strategy, and we enhanced our capital position with our recent refinancing, which Andrew will shortly discuss.



Our mission is unchanged to be the premier owner of real estate in Mexico and to capitalize on favorable tailwinds to create meaningful value. We remain confident in the FIBRA Macquarie platform with our well-located, highly occupied portfolio that delivers reliable earnings as well as our robust development pipeline and strong balance sheet.



And with that, I will hand over to Andrew.

[Andrew McDonald-Hughes, executive]

Thank you, Simon. For the second quarter, we delivered AFFO per certificate of MXN 0.6028. Our higher same-store income and NOI from our new developments was offset by higher interest expense as well as the CBFI issuance associated with our required extraordinary distribution last quarter.



We are also reporting a record NAV per certificate of MXN 47.8, which represents a 13% sequential increase. Taking this increase into account, our certificates are trading at a meaningful discount and we believe represent tremendous value as we continue to execute on our operating and development strategy. Our balance sheet remains well positioned with prudent leverage metrics and strong liquidity to support our growth strategy.



During the quarter, we are pleased to have completed an unsecured sustainability-linked credit facility with the IFC for USD 150 million maturing in 7 years. Proceeds are being used to finance FIBRA Macquarie's Green Building Development Program with the facility incorporating a Green Building certification target, which upon achievement will result in enhanced additional credit savings of 15 basis points.



This loan marks IFC's first debt commitment to a Mexican FIBRA, and we are excited to deepen our relationship with the World Bank Group and appreciate the strong support and continued confidence of our lending partners. As of June 30, our real estate net LTV was 33.3%, and our net debt-to-EBITDA multiple was 5.2x. Our weighted average cost of debt is 5.6% following the closing of the IFC refinancing. And moreover, we have no scheduled maturities until 2026.



We have available liquidity of USD 440 million, which positions us well to efficiently fund our developments, thoughtfully commence new buildings in our existing projects and selectively pursue land acquisitions to execute on our growth pipeline. We continue to expect a full year 2024 AFFO range of MXN 2.55 to MXN 2.6 per weighted average certificate and full year distributions of MXN 2.10 per certificate based on the assumptions published in our second quarter earnings release.



Our outlook anticipates solid NOI growth in both our industrial and retail portfolios, which will be partially offset by the continued impact of financing costs of near-term investments in FIBRA Macquarie's industrial growth CapEx program, which we expect to meaningfully contribute to additional revenue and AFFO growth over time.



We believe Mexico is well positioned to capture growth opportunities arising from global and regional trends as new sharing continues to drive demand for real estate in Mexico. With FIBRA Macquarie's portfolio positioning and our track record of disciplined capital management, we expect to be a key beneficiary.



Simon, back to you.

[Simon Hanna, executive]

Thanks, Andrew. Finally, and as many of you are aware, earlier this month, we received approval from our investors for the acquisition of Terrafina and launched a tender and exchange offer for up to 100% of outstanding CBFIs, subject to the terms and conditions set forth in the tender offer prospectus. Earlier this week, we increased the exchange ratio in our offer to 1.185x.



Importantly, this increase is being facilitated by a conditional reduction in the fees paid to the manager. We maintain confidence in the long-term value that will be created by bringing Terrafina into the FIBRAMQ platform, and as such, have positioned FIBRA Macquarie with what we believe to be the superior offer in the market.



FIBRAMQ offer uniquely integrates a competitive tender price with earnings accretion, superior fee package, attractive upside and long-term value creation and growth potential for all stakeholders. The combined vehicle would benefit from FIBRAMQ scalable, vertically integrated property administration and development platform. Our tender offer remains open until August 12. As a reminder, we're unable to take any questions relating to the Terrafina tender process.



And with that, I will ask the operator to open phone lines for your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Rodolfo Ramos with Bradesco BBI. Please proceed with your question.

[Rodolfo Ramos, analyst]

Thank you Simon and Andrew for taking my question -- congrats on the results. My question is more of a strategic one. I mean, you've been focused on integrate on strengthening your operations, growing your portfolio and pipeline in the key near-shoring markets, very attractive economics. But more from a strategic perspective, I mean, what is next for FIBRA Macquarie.



We're likely reaching the end of this Terrafina process? -- not wanting you to comment anything on related to that process specifically, but I'm not sure this means there could be some more avenues for consolidation later down the road, perhaps taking advantage of your retail portfolio one way or the other. So, I just wanted to get your senses more from a strategic vantage point. Thank you.

[Simon Hanna, executive]

Yes. Thanks, Rudolf. Great question. And look, I think we remain very, very well placed with regards to our outlook, whichever way we go with the process. I think where we are today, we have a great balance sheet to support the growth through the industrial development program.



We've seen the recent print of the Mexico City development, 12% yield on cost, that's going to stabilize, we hope into a 6% area. So [indiscernible] repeats on that for the rest of our development in stabilization. That's a great value creation. So, I think that complements very well the well-positioned same-store portfolio, where we continue to see positive re-leasing spreads, very good performance.



So, I think a continuation of what we have today should drive value creation. -- amongst all that, as you say, there may be other opportunities that we consider as always, from time to time. around the sector. That remains an opportunity. I also think it's very valid the point you see on retail, the asset recycling opportunity there as we continue to see the retail portfolio do very well. Over the last couple of years, that continues to create value.



And I think the concept of converting that one day down the track into industrial development that makes sense. But that's not something that we're looking at right now. The focus for retail remains to maximize operational performance and a cut in a proposition down the track.

[Operator]

Thank you. Our next question comes from the line of Felipe Barragan with BTG Pactual. Please proceed with your question.

[Felipe Barragan, analyst]

Simon and Andrew good morning. Thanks for [ counting ] the question. Mine is a question probably been asked in other conference calls. But with the new administration, I'd just like your thoughts on now, what you guys are expecting in terms of how the administration can support industrial real estate. There's been lots of thoughts talked out there by different gears and whatnot. So, I would just like to hear if there's any changes in those expectations? Thank you.

[Simon Hanna, executive]

Thanks, Filipe. Look, I do think it's a constructive outlook. Probably it feels like we're better set in terms of the path ahead than what we've seen over the last 5 or 6 years in general. The current or the incoming administration, you can see is talking to talk, whether that's on green energy, energy infrastructure, new showing supporting new industrial parks, relocation of companies into Mexico, maintaining USMCA, I could go on.



But basically, all the key pillars, which support a good investment environment, we see it being consolidated with regards to the incoming administration. As I say, that's sort of -- it's good talking to talk, but we want to see them walk the walk over the next 12 months as well. So, that's going to be important to see.



I think importantly, we're not seeing anything or hearing anything from our tenants, which also would indicate that there's any fundamental change in the long-term structural drivers that have supported the near-string boom. We think that set fair regardless of what's going on either in the south of the border or north of the border with regards to the political cycle. So, I think that's very important as well.



So, I would say, definitely, we feel comfortable and encouraged by the discussion of the income administration, and we really just need to see that convert into action.

[Felipe Barragan, analyst]

Got it. That was very clear. Thank you, Simon.

[Operator]

Thank you. Our next question comes from the line of Andre Mazini with Citigroup.

[André Mazini, analyst]

Yes. Simon, and Andrew. Thanks for the call. A quick one. So, talking about the yield on costs on the new projects. So, the projects delivered so far had a yield on cost of 11.5%. The projects going forward have a yield on cost, which is slightly below that 11.1%. And also, if you go back a year, the expectations for the projects going forward results were 11.5%. So, the difference is pretty small and 11%, of course, a very good number, very nice profitability.



But what would you guys say caused a slight decrease from the realized cost to the expected yield on cost going forward? Is it construction costs, which are pressuring -- if you could talk a little bit about that labor costs or materials or just the expectation of rents were not as high as you had on the 11.5% that you actually delivered. Thanks.

[Simon Hanna, executive]

Yes. No, thanks. Look, I think broadly speaking, what we're tracking at is certainly a healthy number overall in the 9% to 11% on an actual basis. And the most recent delivery added 12%, a little bit better than that. The dynamic that we're seeing are really coming out of COVID and where we are today, though, is that we have seen a fundamental change in all the parameters going into the yield on cost equation.



So definitely, we've seen an increase in land prices, particularly in those core industrial markets where it's a little bit tied up, Tijuana, Mexico City to call out. Construction prices have definitely gone up importantly, but is starting to plateau out. I'd say, over the last 6 months, we have seen that plate bit. So definitely, the overall cost component has gone up compared to where we were pre Covid.



But importantly, the rents have gone up in tandem. So, we've actually been able to maintain, we think, an overall 9% to 11% in outcome and actually sort of pushing closer to 11% on the track record. We still think that's very achievable as a general reference point for yield on cost going forward in our focus area for development, which is in the core markets of Mexico.



So, I think we still think about 9 to 11 as being where we need to be. Some will be a little bit higher, like what we just printed, but some might come down a little bit lower as well into the low end of the range. But overall, we should be tracking at a very importantly, a very healthy rate that gives you a stabilization profit and then creates a great total return to investors.

[André Mazini, analyst]

Very clear, Simon. Maybe a follow-up, if I can. So, 9 to 11, that's pretty healthy and compensate to guys for the development risk, right? If you guys were to sell a property recently delivered, stabilized as a good tenant. How much -- how many bps below the 9 to 11 with the going cap rates for stabilized property be, call it, like a 7, so 200, 300 bps delta, right, given that the entity buying do not incur the risk of development. So, this even cost to stabilize cap rate exit cap rate, if you will, what would that be? Thanks.

[Simon Hanna, executive]

Yes, happy to take that one, Andre. I think where we're seeing stabilized cap rates are in the order of and depending on market, mid-6s to mid-7 type territory depending on the particular geography. To give you an example, this quarter that you would have seen in the announcement, the lease-up of a property in Mexico City, and it was the second of our 2 properties in that 2-building project to a global e-commerce supplier on a 5-year U.S. dollar lease, that delivered a 12% development yield on NOI.



We saw the first building in that project revalued into 6.5%. So very healthy value creation opportunity that we expect to see movement in a similar direction with respect to the stabilization and valuation uplift once independently validated on that property. But I think certainly in core markets such as Mexico City, 6.5 type levels are very comfortable.



We're seeing actually some potential transactions that push a little lower than that. We're also seeing sort of comfortable levels in the 7 to 7.5 around all of the major markets around Mexico, I'd say, perhaps a little bit stronger in places like Tijuana and even Monterrey to some extent. So, I think that there's a very healthy spread Traditionally, that's been around sort of in the order of 200 to 300 basis points over development.



But certainly, we've seen that expand over time as development yields have been able to benefit from rising rental rates whilst we've seen, I think, the broader near-shoring tailwinds prove attractive to international and local investors, which has caused a cap rate compression to date, which has meant that, that particular spread has widened in recent months, but certainly very comfortable with that 6.5 to 7.5 territory.

[Andrew McDonald-Hughes, executive]

Yes. And look, just to complement as well. I do think it's worth reflecting on what we achieved in the Mexico City development this week with the 12% and how we describe it as a differentiated value creation strategy. In this particular case, we do have a fantastic JV partner who contributed to the land. That's the 18% minority holder.



We're able to leverage the capability and power of our vertically integrated property management and development platform in this case. And although the dollars or that big, it's really sort of the mindset and reinforcing the fact that our focus is on maximizing total returns for FIBRA Macquarie investors. In this case, we were able to basically use our vertical platform to deliver this project with not just great returns from a yield perspective, but also have a development fee and ongoing property management fees using our internal platform for the benefit of FIBRA Macquarie investors.



So that's the mindset and the focus that we have is to -- we're using any angle that we can and the opportunities as they come along to maximize total returns for FIBRA Macquarie investors.

[Operator]

[Operator Instructions]. Our next question comes from the line of Isabella Salazar with GBM. Please proceed with your question.

[Isabela Salazar Leipen, analyst]

It's a quick question regarding the property delivery you have scheduled for the second half of this year. Now, I was wondering if you could give us more detail of whether it's going to be delivered in the third quarter or if it's planned more towards the end of the year? Thank you.

[Simon Hanna, executive]

Thanks for your question, Isabella. Our anticipated delivery for that is during the fourth quarter of this year. So, we are expecting it sort of by year-end, subject to progress as we work through the completion of that 400,000 square foot project. Very exciting project for us to a landmark location in Tijuana, which has seen sort of really exciting levels of rental growth and activity in recent years.



So, we're certainly very optimistic and excited to be able to bring additional product in another one of our core markets.

[Operator]

Thank you very much. There are no other questions at this time. I'll turn the floor back to Mr. Hanna for any final comments.

[Simon Hanna, executive]

Thank you, Melissa, and thanks, everyone, for participating in today's call. Along with Andrew, I would like to thank all of our stakeholders for your ongoing support, and we look forward to speaking with many of you over the coming days and weeks as well as updating you again soon at the end of the third quarter. Thank you, everyone.

[Operator]

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.