Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to FIBRA Macquarie's Third Quarter 2018 Earnings Call and Webcast. My name is Gigi and I will be your operator for this call. [Operator Instructions]

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

[Nikki Sacks, executive]

Thank you, Gigi, and good morning, everyone. Thank you for joining FIBRA Macquarie's third quarter 2018 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; and Peter Gaul, MPA's Head of Real Estate Operations.

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 the 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 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 -- or 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 the U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified.

As usual, we have prepared supplementary materials that we may refer -- 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 the materials can be found under the Investor Relations Events and Presentations tab.

I'd now like to turn the call over to Juan Monroy. Juan?

[Juan Monroy, executive]

Thank you, Nikki. Good morning, and welcome to FIBRA Macquarie's third quarter 2018 earnings conference call. On our call today, we will review our operational and financial performance and discuss our ongoing progress for driving long-term growth.

The third quarter was strong, finishing with record consolidated occupancy of 94.3%, and we delivered another quarterly AFFO per certificate result of 9.9% year-over-year to MXN 0.6281. Reflecting our ongoing strong results and continued momentum, we announced an increase in our quarterly distribution to MXN 0.41 per certificate, representing a 9.3% increase year-over-year and a 5.1% increase from the second quarter.

Our portfolio continues to generate robust results, as demonstrated by a 3.7% increase in net operating income in the third quarter compared to the prior year quarter. This growth was driven in part by an industrial same-store occupancy increase of 78 basis points, along with realizing average rental rate increases in both our industrial and retail portfolios. Our positive outlook is supported by healthy macroeconomic conditions in both the U.S. and Mexico.

Earlier this month, Canada, the U.S., and Mexico negotiated revisions to NAFTA, which are expected to be ratified in the first half of next year. We believe that the impact in Mexico investing fundamentals, and particularly to the auto sector, which constitutes 40% of our industrial portfolio tenants, is largely neutral. More importantly, completion of the negotiations have reduced uncertainty in the business community, which we believe should lead to improve leasing conditions.

Consumer spending continue to increase above inflation during the third quarter, with Mexico's same-store sales growing 6.1% year-over-year according to ANTAD, Mexico's National Retailers Association. This performance is supported by strong employment conditions, along with ongoing increases in remittances from the U.S., slightly offsetting these positive factors is Mexican annual inflation, which was marginally up to 5% per annum, largely driven by rising energy costs.

We delivered on our commitment to creating and returning value to our certificate holders. During the quarter, we continued to execute on our strategy of targeted expansions of existing properties and have also been very active with our certificate buyback for cancellation program. We are pleased with the continuous organic growth that our portfolio is producing and are seeking opportunities to utilize our capital to invest in and accretively grow our portfolio.

Turning now to our results for the quarter. In our industrial portfolio, we ended the quarter with occupancy of 94.4%, which is a 180 basis points increase from the second quarter and a 206 basis points increase from the end of the third quarter of 2017. We also delivered rental rate growth as our closing weighted average rate of $4.80 per leased square meter per month was 4% higher over the prior year and 2.4% higher than the second quarter. Some of the improvement was due to the completion of our July dispositions, which had lower occupancy in the rental rates than the portfolio average. More significantly, we also saw year-over-year improvements on a same-store basis where occupancy increased 78 basis points to 94.4%, and same-store rental rates increased by 2.5%.

Our industrial portfolio NOI increased 3.5% year-over-year to MXN 680 million, which is a particularly impressive result given the July dispositions. On a same-store basis, NOI in the third quarter increased 7.9% from the prior year. We also had an active leasing quarter, particularly with regard to new leases as we continued our positive trend of completing a higher volume of new leases each quarter. This was complemented by a robust retention rate of 85% on a trailing 12-month basis, reflecting strong relationships with our existing customers in a generally favorable leasing environment.

During the third quarter, we signed 21 new and renewal leases, comprising 1.5 million square feet. Notable new leases in the quarter include 3 automotive parts suppliers in Puebla, Monterrey and Querétaro, along with a manufacturer of tools in Ciudad Juárez.

Renewal activity was diversified across geographies and customer types. For example, just to give some color, we renewed with customers who manufacture in the packaging, truck trailer and lighting sectors.

As we look ahead to 2019, we have another busy year in terms of renewals with approximately 18% of leases due to expire. Nevertheless, we are already proactively addressing some of these, and to put it in perspective, during 2018, approximately 24% of our leases have expired or due to expire, of which only 3.7% of total leased GLA is due to expire in the fourth quarter of 2018.

Now turning to our retail assets. Our retail portfolio delivered NOI of MXN 144 million in a proportionally combined basis, an increase of 4.3% over the prior comparable period. Rental rates were up 4.4% compared to the prior year. This growth was partially offset by a decline in closing occupancy to 93.6%. Leasing activity was solid as we signed 43 new and renewal leases, representing 10,500 square meters. However, the pressure on occupancy was driven primarily by the move out of a single tenant on Multiplaza Arboledas in Mexico City that occupied 6,900 (sic) [ 6,100 ] square meters. This was a long-standing delinquent tenant who has been fully provisioned for. So therefore, there is no impact to run rate NOI in this quarter and beyond. We see this move out as a positive opportunity to release the space to a vibrant new tenant. We also continue to make solid progress on our key initiatives in capital management strategy.

As we discussed last quarter, we completed the sale of 35 nonstrategic industrial assets for $80.2 million and have 2 more assets under contract for sale for an additional $7.2 million. With the completion of these dispositions, we have substantially accomplished our near-term asset recycling goals. We now have a higher quality portfolio with enhanced operating metrics, fewer single asset markets and a more flexible financial position. In addition, we continue to successfully execute on our strategy of targeted expansions of existing properties on a pre-leased basis, along with selective development in core markets.

During the quarter, we made progress on 2 new expansion projects. One is a 47,000 square-foot expansion in Reynosa in our industrial portfolio. The other is a 3,200 square meter expansion in our Multiplaza del Valle retail property in Guadalajara, one of Mexico's top retail markets. This expansion includes space for a leading cinema franchise, which is a high profit draw as well as additional GLA for small shops. Both of these projects are expected to return low double-digit NOI yields in line with our track record.

Since initiating our expansions initiative in 2014, we have completed or have in process 31 projects, adding a total GLA of 1.2 million square feet. This equates to a total investment of $62 million with an average NOI yield of approximately 12%. Our leasing team continues to work closely with our existing customers and potential customers to understand the real estate needs and find opportunities for additional expansion and development projects.

Another noteworthy use of our capital is our certificate buyback for cancellation program, generating highly accretive returns, whilst the certificates trade at a significant discount to NAV. Since commencing the program in June 2017, we have repurchased 38.1 million certificates for a total of MXN 808 million or $41.9 million. To date, we have repurchased 4.7% of outstanding certificates. As announced in our release last night, we have received approval for increasing our buyback program of up to MXN 1.2 billion for the 12 month ending June 2019. Based on what we've completed to date, we have approximately MXN 909 million still available. After we reach the 5% modest amount, we anticipate being opportunistic with our buybacks taking into account competing capital allocation priorities, including accretive real estate investments, whilst targeting a long-term real estate leverage ratio of 35%.

Turning now to our balance sheet and capital activity. Our balance sheet is in a very strong position. During the quarter, we utilized $40 million of proceeds from our asset sales to repay fully the outstanding balance on our revolver, providing us with additional flexibility going forward. Today, we have significant liquidity equivalent to approximately $300 million, including a fully undrawn revolver of $262 million, no significant maturities until 2021 and strong visibility into our cost of funding with 100% fixed rate debt until mid-2020 with a real estate net LTV of 36.6%, we have a capability and flexibility to pursue our growth objectives.

Reflecting our strong performance today, along with a constructive outlook, we are raising both our distribution, which I discussed earlier, and our FFO guidance for the year. We now expect that our full year AFFO per certificate will be approximately MXN 2.40 per certificate. Our solid execution has allowed us to raise our distribution to MXN 0.41 per certificate with a forecast annual distribution of MXN 1.60, and maintain a conservative payout ratio of 67%. This allows to return cash to shareholders while continuing to invest in additional value-creating initiatives. Our guidance is based upon a number of assumptions as disclosed in yesterday's earnings release.

Finally, we recently completed our inaugural ESG evaluation by GRESB, a leading assessor of environmental, social and governance sustainability practices, so that we can further enhance our ESG policies, set objectives and implement initiatives. As always, I'd like to recognize the unwavering value contribution from all of the members of the FIBRA Macquarie team.

And with that, I'll ask that our operator open the phone lines for your questions. Gigi?

[Operator]

[Operator Instructions] And our first question is from Gordon Lee from BTG.

[Gordon Lee, analyst]

Just two quick questions. The first was more of an operating question, which is with -- this is the first quarterly call that we've had, I guess, since we've -- since USMCA was agreed upon. And so I was wondering whether you have any color even if only qualitative in terms of how this has affected your perception of interest from your clients on the industrial front, either in terms of request for proposals or in terms of people that were on the fence moving a bit more quickly than they would have a couple of months ago? And then the second question is on the CBFI buyback. In the past, you had -- my impression was that you had interpreted the regulation as a one and done, you buy 5% and you're done, but it would appear from the reload and your remarks that, that you think this is something that can be renewed on an ongoing basis. Is that now your interpretation?

[Juan Monroy, executive]

Hey, Gordon. Regarding to your first question, I'll say that we're pleased to see that NAFTA noise being removed now from the equation what -- happy with a potential new agreement, the USMCA. And what we've seen on the ground on the field, talking to our customers is positive. We're seeing a leasing pipeline that I'll say is probably as strong as ever, Gordon. So we are encouraged by what we're actually seeing on the ground talking to customers and brokers. Our read of the USMCA more generally is that it should be a -- something neutral to positive for the sector. So we're certainly pleased with the results and expect a positive draw of momentum continuing into 2019. With regards to your second question on the buyback program. Yes, we have gone through the conclusion that FIBRAs can be more than 5% of the outstanding certificates after thorough evaluation, consulting with our tax and legal counsel. We feel comfortable that we can -- that FIBRAs are allowed to do more than 5% of the outstanding certificates. To date, we have -- as you know, we have an approved program of up to 5%. We have pretty much completed that program as we've done 4.7% of total certificates outstanding. And we are committing to continuing with the program and we're adjusting free to size a fit to a total aggregate program of up to 10%. Going forward, we -- approximately 10%. Going forward, we anticipate that we'll be after the 5% that we'll be opportunistic on the buyback program. And so obviously, we are very focused as well on investing in real estate project that will be accretive to the FIBRA and as well on maintaining our leverage levels and being mindful for long-term leverage target of approximately 35%.

[Operator]

[Operator Instructions] And our next question is from Eugenio Saldaña from GBM.

[Luis Saldana Flores, analyst]

I have just one quick question related to the situation. If we imagine that you didn't have or you don't have any tax loss to offset -- I mean, or to -- that, that would allow you not to comply within or allow you not to pay 95% of the tax results. What payout ratio do you see you would be paying, I mean, this quarter? And this is a question that I'm trying to do foresee, how is it going to be going forward after you -- in case you didn't have to pay the tax loss?

[Simon Hanna, executive]

Eugenio, it's Simon here. Yes, we're currently in a tax loss position of around MXN 787 million as of 30 September. We -- so therefore, the distributions that we are paying, well, since inception and including this quarter, it's treated 100% as a capital return, and therefore, no withholding taxes applied at source. We're very comfortable that obviously with that, that tax loss position at 30 September will allow us to continue paying distributions as capital. To the extent that the tax loss position reverts to being a taxable income position, that's when we'll start obviously to be paying out of income. Now based on the current FX, which is very important to the sensitivity of the tax loss position, it will take an FX result somewhere closer to below MXN 18 at the end of the year for that tax loss position to revert to 0. So based on that, we still expect that there will be future distributions leading into Q4 and at least part of 2019 as being treated as capital return. What we do ensure that we are carefully monitoring this on an ongoing basis and we're very proud in the transparency that we're providing on this. Page 32 of the supplementary information gives you the exact calculation and the key drivers, which go towards that taxable results. And that, I guess, gives you a visibility on a quarter-by-quarter basis as to how we're tracking from a taxable loss result. So also refer you to Page 32 for additional details.

[Operator]

[Operator Instructions] There are no further questions. I'd now like to turn the conference back to management for any closing remarks.

[Juan Monroy, executive]

Sure. Thank you, Gigi, 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 well as updating you again on our fourth quarter 2018 results.

[Operator]

The conference is now concluded. Thank you for joining our presentation today. You may now disconnect.