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Good morning and welcome to FIBRA Macquarie's Third Quarter 2020 Earnings Call and Webcast. My name is Victor, 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.
Thank you and good morning, everyone. Thank you for joining FIBRA Macquarie's Third Quarter 2020 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, our CFO.
Before I turn the call over to Juan, I want 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 sell or buy 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 have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I would encourage you to visit our website, at www.fibramacquarie.com, and download these materials. A link to the materials can be found under the Investors Events and Presentations tab.
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 will discuss our third quarter 2020 results and the ongoing impact of COVID-19 on our business, the strength of our platform and our outlook.
Our results reflect both the strength of our industrial portfolio as well as the defensive positioning of our retail portfolio. After enduring more than six months of pandemic-induced challenges which has impacted so many aspects of society and the broader economy, our operating performance remains robust. Indeed, it is in periods such as these that the benefits of our long-running disciplined capital management strategy have been demonstrated. We take much pride in our ability to reliably deliver cash distributions with a comfortable payout ratio, while also pursuing accretive growth opportunities that add further quality to our resilient portfolio.
Turning now to our third quarter results. Rent collections in our industrial portfolio remain strong, at 96%. However, with ongoing COVID-related government restrictions and social distancing measures, many of our retail portfolio customers continue to be affected in the current environment.
For the third quarter, AFFO per certificate was MXN 0.6119, down 8% from the prior year. These results were in line with expectations, and the benefits we saw from the appreciation of the peso and the corresponding impact on our U.S. dollar-denominated revenues were offset by a decline in same-store NOI, primarily due to rent discounts and higher bad debt provisions related to the impact of the pandemic on some of our customers.
We also had increased interest expense in the quarter from the higher balance on our revolving credit facility which we had drawn in light of the early uncertainty of the pandemic. As our overall operating performance has largely stabilized, we have now fully repaid the remaining USD 90 million balance.
On a quarter-over-quarter basis, there were meaningful improvements in key metrics that indicate a continuing resilient performance of the portfolio. Firstly, rent concessions eased in the third quarter to MXN 43.2 million, lower by 63% on a sequential basis.
Secondly, cash collections increased to MXN 1.1 billion, up 12.3% from the prior quarter, with 95% of current quarter income collected.
Thirdly, net trade receivables, excluding VAT, reduced to MXN 73.3 million, sequentially lower by 35.7%, underscoring quality of earnings complemented by strong cash collections on the one side and prudent provisioning on the other.
These sound results reflect a focused effort by our property management and leasing teams to work closely with our customers, and I would like to take this opportunity to thank them for their dedication in striving to meet our objectives.
Please note that we have again provided additional detail regarding rent collections, trade receivables and related information in our supplemental materials available on our website.
In the industrial portfolio, fundamentals going into the COVID-19 environment were solid. We, in particular, do well when our customers are doing well, and on the whole, we are very much seeing a resilient performance of our customer base.
For the third quarter, our industrial portfolio delivered NOI of MXN 812.1 million, up 12.6% compared to the prior comparable period. This increase was driven by the appreciation of the Mexican peso as well as contractual rental rate increases, partially offset by lower average occupancy.
As has been the case since our FIBRA inception, the proportion of leases denominated in U.S. dollars is proving to be extremely sticky, up by almost 200 basis points over the last 12 months, to 93.5%. Average rental rates increased 2.3% on an annual basis, driven by contractual increases and positive leasing spreads on renewal leases.
Industrial cash collections gained pace from the second quarter, up 12.5%, to MXN 1 billion, with collections improving in respect of current quarter income as well as paying down prior period receivables.
We also saw the level of deferrals drop sharply, by 76.3% in the third quarter, and today deferrals represent 2.6% of industrial annualized base rent. Over 91% of concessions provided were in the form of rent deferral support for [ 15 ] customers, totaling MXN 16.8 million. We have already collected 97% of scheduled deferral payments, and 87% of the remaining deferrals are scheduled for collection this calendar year.
Our industrial portfolio occupancy experienced a decline, ending the quarter at 94%. This was driven by the move-out of 5 customers whose lease term had expired. In each case, they vacated for reasons specific to their respective businesses.
These move-outs were partially offset by 14 new and renewal leases, comprising 1 million square feet of industrial GLA, including 4 new leases and 10 renewals. New leasing activity has been modest, perhaps partially impacted by COVID-19-related travel restrictions. However, underlying market fundamentals remain robust, supporting a cautiously optimistic outlook for the remainder of the year and into 2021.
Industry indicators are encouraging, with improving U.S. auto sales, including positive sales growth in September, as well as generally improved levels of Mexican industrial production throughout the quarter.
In our retail portfolio, our shopping centers are supermarket-anchored and have remained open throughout the pandemic. While most nonessential businesses have reopened, many are operating at reduced hours and/or capacity limits. As of October 26, 96.9% of GLA and 95% of ABR is open and operating. Foot traffic at our centers have recovered since the second quarter but still remains at around 60% of prepandemic levels. With the ongoing high number of COVID-19 cases in Mexico, the environment for nonessential retail remains uncertain.
The retail portfolio delivered NOI of MXN 94.8 million, compared to MXN 148.7 million in the prior year period.
Occupancy decreased 56 basis points from the end of the second quarter, driven primarily by tenants in the small shop category who have been most impacted by COVID-19.
In the quarter, overall rent collections totaled 86.3%, as of October 26.
Rent concessions of MXN 24.8 million were provided to some of our impacted nonessential tenants during the quarter, lower by 43% on a sequential basis. Approximately 26% of the deferred rents are expected to be collected in the fourth quarter, 60% in the first semester of 2021 and the remainder in the second half of next year.
As we look ahead, we anticipate ongoing pressure on the Mexican macroeconomic environment from continued social distancing measures and subdued consumption drivers. We expect that these will likely mean near-term challenges in retail portfolio occupancy, particularly related to nonessential small shop tenants. Although a recovery will likely take some time, our shopping centers are defensive in nature and well located in prime markets.
Furthermore, in select cases, we are preparing for a recovery and are commencing limited remodeling work to better position our properties. I am pleased to report that the remodeling work at Coacalco Power Center, which we began in the first quarter, is largely complete, and we intend to begin remodeling works at City Shops Valle Dorado in the fourth quarter. These properties are both located in strong markets, and we anticipate that our work to refresh our properties will be positively received by both tenants and shoppers.
This period is certainly one that has challenged the general Mexican retail real estate landscape. Nevertheless, with the prime locations of our properties, the quality of our assets and the largely defensive and essential nature of our customers' businesses, we maintain our confidence in our positioning over the long term.
Turning to our strong balance sheet position. We fully repaid the precautionary draw we made on our revolver credit facility at the outset of the pandemic as a result of a stabilizing outlook. As of quarter-end, we had approximately MXN 18.3 billion of debt outstanding, MXN 5.3 billion of available on the undrawn revolving credit facility and MXN 0.8 billion of unrestricted cash on hand.
On the liability management side, we enjoy a very comfortable position of having no scheduled loan maturities until 2023.
In terms of capital deployment, we are being thoughtful in light of the current environment, but also opportunistic with select growth opportunities. In that regard, during the quarter we acquired a 50% interest in a land parcel in the Mexico City metropolitan area with the intent of developing more than 700,000 square feet of Class A industrial logistics GLA on the site. Given the prime location, we expect strong end-user demand from the logistics segment. However, we have designed the properties with maximum flexibility in mind to provide space solutions to a variety of other industrial end users. This project is a continuation of our successful development activity, such as the buildings we completed in some of our northern markets, such as Ciudad Juarez.
There are a number of benefits to this transaction, which include: one, a compelling opportunity for us to develop Class A industrial logistics facilities in one of the most prominent industrial corridors in Mexico; two, increased diversification; three, add scale with high-quality assets; and four, attractive risk-adjusted returns. Construction is expected to commence in the first half of 2021, and we look forward to providing updates as we progress.
Additionally, we are continuing to evaluate options for the 17,000-square meter facility from our retail portfolio which became vacant earlier this year. As a reminder, this property is positioned in a densely populated prime urban location in Mexico City on a significant land area of 27,400 square meters, with flexible use and zoning rights.
Despite the ongoing challenges, we have continued to deliver stable results. To that end, I am pleased that we are updating our AFFO per certificate guidance for the year to MXN 2.56 to MXN 2.59, noting the tightening in our FX assumption from MXN 22.7 to MXN 21.5 for the current quarter.
We're also reaffirming our distribution guidance of MXN 1.90 per certificate, a level that we have been able to comfortably maintain throughout this period, whilst continuing to maintain a disciplined payout ratio. The high-quality earnings that we noted earlier provides the basis for a high-quality distribution that we continue to deliver.
As we look ahead, while the macroeconomic environment will likely reflect the effect of the ongoing pandemic, we also see a number of opportunities and positive indicators, particularly in terms of our industrial positioning. In particular, the manufacturing for export sector is performing well, driven by a rebound in U.S. manufacturing. We anticipate seeing future benefits from the USMCA, which went into effect on July 1. Over the long term, we are optimistic about near-shoring and the likelihood for Mexico to benefit from corporations that need to diversify and enhance the resiliency of their supply chains in the North American region as well as from increased demand from ecommerce-related customers.
Finally, I would like to call your attention to our second sustainability report that we published this summer and which can be found on the FIBRA Macquarie website. The publication of this report underscores our commitment to all elements of sustainability, including environmental, social and corporate governance. We are committed to continual improvement and transparency in all of these efforts. We also formally achieved LEED certification on our recently developed and fully leased industrial property in Ciudad Juarez, with plans for additional green building certifications for other properties within our portfolio over the next 12 months.
ESG is integrated into every element of our strategy, as we truly believe not only in the importance of our positive contributions to the environment, people and communities, but also believe it will result in tangible value creation for FIBRA Macquarie and certificate holders.
This year has certainly pushed all of us in ways we had previously not even imagined. I'm incredibly pleased with the resiliency of our platform and with the unwavering commitment and hard work of the entire team.
I hope that everyone stays well, and thank you for your continued support.
With that, I will ask Victor to open the lines for your questions. Victor?
[Operator Instructions] Our first question will come from the line of Francisco Chavez from BBVA.
Two questions, if I may. The first one is regarding the new logistics development that you just announced. Any thought on the CapEx investment or potential returns? And when do you expect this property to start generating revenues for FIBRA? And also, will you have a 100% interest or a 50% interest on this development? That will be my first question.
And the second question is regarding the commercial portfolio and the rent [indiscernible] for these tenants. What can we expect for the fourth quarter of this year? Can we expect similar numbers from your commercial portfolio?
Thanks for the question. Appreciate it. [indiscernible] So pretty excited with the acquisition of this prime parcel of land in one of the most sought after industrial corridors in Mexico. We're observing a very high demand of ecommerce-related logistics, and we took the opportunity to invest in one of the last remaining sites in the corridor. So pretty excited about that.
We anticipate commencing construction in the first half of next year and should be in a position to have a completed building before the end of 2021.
In terms of expected yields, it's not too different from what we have been articulating before in terms of our development plan, where yields range between 9% and 10.5%, 11%. This being a prime location where land tends to be more expensive, I think that we'll be closer to the high-single-digit range.
And so I think that's that. And the CapEx, we'll be reporting that as we progress with the project as we commence construction.
With regards to -- I think the second question was with regards to retail performance. And I see Simon wanted to comment on. I'll just say that, before turning over to you, Simon, I'll just say that difficult to predict how Q4 will end up, although we already have some good visibility in what we are observing in our ongoing dialogue with customers. Certainly, things are improving. As we noted earlier, the vast majority of our retail customers are now open and operating, some with certain restrictions, but most open and operating, which is certainly good news. Very focused on tracking on a daily basis.
Foot traffic remains impacted, at around 60% compared to prepandemic levels. However, I can tell you that we have been observing a gradual increase over the past 4 to 6 weeks. As people feel more comfortable, we've seen a gradual increase in foot traffic, which ultimately is what drives occupancy and rental rates.
I think that rent concessions have and rent concession requests have somewhat subdued, although some nonessential customers continue to experience a challenged environment. So we're still working through with a couple.
So I think it will -- should be better than the third quarter but still important headwind and challenges ahead. Simon?
Thanks, Juan. Paco, I think it's good just to reiterate the trend that we've seen sequentially has been a really good trend, not just for the rent relief coming down 63% quarter-on-quarter, but also cash collections coming up 12%; accounts receivables, net of provisioning, kept going down, 36%. So all heading in the right direction.
And specifically on that point on rent relief in the retail portfolio, what we saw for the quarter, it was a 41% drop in retail discounts. So as Juan says, I think that trend should continue, and hopefully we can do even a little bit better in Q4 if conditions keep improving.
The other point to note in there, Paco, is the doubtful debt provisioning has also come off a bit, around 25% for retail. It was MXN 15 million last quarter, around MXN 11 million this quarter. So that's also, I guess, another indicator of continued improvements. And it's good to see that number start to normalize. Obviously, it's still ahead of where we were prepandemic, but it's also a good indicator.
Our next question comes from the line of Gordon Lee from BTG.
Two quick questions. The first is you mentioned in the press release that the properties that were vacated in the industrial sector represent an opportunity, given the tightness of the market. So I was wondering whether maybe you could comment a little bit on that tightness, what you're seeing in terms of trends, et cetera, but also maybe if you could comment where do you think market rates are relative to where your leases are at the moment.
And then the second question was on the CBFI buyback, which has been inactive really this year. With the greater comfort on the operating outlook that you've described and with the loan to value on your balance sheet back more or less to prepandemic levels, I was wondering whether we should expect that CBFI purchases will recommence anytime soon.
Gordon, good morning. Thanks for the questions. In terms of the vacated properties that we had 5 expected customers that moved out as their lease expired, given specific considerations to their own businesses, we are seeing tightened market conditions in terms of the supply-demand balance, for sure, in these markets, primarily in the northern markets and also Mexico City as well.
I think that is driven by the [indiscernible] trends that we have observed and that from our perspective are stronger compared to pre-COVID levels. And these trends are near-shoring, on the one hand, to increase focus of global managers to increase the resilience of their supply chain and, obviously, ecommerce demand from the increased penetration of ecommerce in Mexico.
So as a result of all of these trends we are seeing a very healthy demand for space. With a limited supply in the northern markets where we had some of these new leases come back to us, we expect to be able to capture good levels of rents with long-term leases.
With regards to your second question on the buyback, we are happy that we have been historically one of the most proactive FIBRAs on that front, having reacquired about 6.1% of our total certificates outstanding, always for cancellation. And we have currently an approved MXN 1 billion program approved by shareholders through to June 2021.
And I think that the value proposition remains pretty attractive when our book value per share is at MXN 36 and we're trading at MXN 26, MXN 27. Remains a very attractive financial proposition. So we are open-minded. However, we also note that we will be balancing that with the opportunities that are available to us and that exist to invest in growth for the long term.
A good example of that is a recent acquisition of the prime location in Mexico City where we intend to continue developing, following developments that we've done in markets in Ciudad Juarez. We think that it's important to continue investing in development in Class A product in core markets. So we'll be balancing buyback with really investing in real estate assets for the long term, Gordon.
That's very clear. Actually, if I could just have one quick follow-up on that acquisition of the plot of land in the Mexico City metro area, are you developing that 100% on spec? Or do you already have clients alongside that you should line up pretty quickly?
We already have some early interest. However, it's somewhat -- the project is at a very early stage, but we have interest in it. Given the prime location, we already have interest from a handful of potential customers. However, we will be prepared to develop this on a spec basis, if needed, given what we have observed in terms of supply-demand dynamics in the Mexico City metro area and that particular corridor. So we'll keep you posted in terms of how those discussions progress, and we might have it leased before anticipated, but we are prepared to commence construction on a speculative basis, Gordon.
Our next question will be from the line of Jorel Guilloty from Morgan Stanley.
I have 2 questions. The first one, I wanted to get a better sense of the push-pull dynamics that drove this decline in occupancy sequentially. How much of that decline is due to your clients consolidating space versus an unwillingness perhaps to pay higher rents? Because if I look at the regions where we saw the decline, it was basically the north and the central region. You had occupancies declining, but you had weighted average monthly U.S. rents increasing. So I just wanted to get a sense of how that dynamic worked.
And then the second question is around retention rates for your retail portfolio. Those has been slowly declining over time. You were at 80% retention rates on an LTM basis in 3Q19. You're at 65% as of 3Q20. This is on a last-12-month basis, which suggests to me that it can be even lower for 3Q versus that 65%. So is this a concerted effort into improving your portfolio within retail? Or is it something else?
Sure. Thank you. In terms of the industrial rental-related question, I'll say our approach to leasing is always try and maximize rental rate without really killing the deal. So I don't think that we have pushed rent so high as to having a negative impact on occupancy. It's always a bit of an art and a balance there, but we're always prepared to retain a high-quality customer.
So I think that, in this particular case, these were known move-outs as the leases come to expire and people not necessarily even consolidating, but just changing business needs. An example is a global logistics company serving a third-party logistics account, just their contract coming to an end for various different reasons. So that's one example.
So not related to us pushing up rental rates and nothing specific in terms of a geographic trend or a sector-specific trend that we could note it.
With regards to retail retention, we'd like to see that being higher. We've had in prior quarters, have worked through cleaning out the portfolio with some lower-quality customers where their collection track record was not great. So we were happy to take some of that space back, as opposed to renewing to lower-quality customers. So we did do a lot of that in prior quarters.
And this quarter is certainly being impacted by COVID-related challenges. The asset management strategy is to try and work with customers that will have the flexibility to adapt to the new COVID reality and maintaining the end customer in mind so they can adapt to a new reality and ultimately work with those customers that will have business models that will be winners post-COVID.
So I do think that there will be potentially further impact on occupancy, and that will give us opportunities to try and identify those tenants that are really being proactive and flexibly adapting to the changing needs of an end consumer and ultimately, post-vaccine, emerge post-crisis with an even stronger and more defensive retail portfolio.
A follow-up, if I may, on that one. So does that imply that the tenant composition that you currently have for your retail portfolio can change meaningfully?
No, not meaningfully. By design, we are happy to have a grocery-anchored portfolio located primarily in the top market of the country in prime locations. And the way to think about our portfolio is you have mostly all grocery anchors, with 52% essentials. That's not going anywhere. That, complemented with 2 customer types that are sizable, on the one hand, you have movie theaters; and in the other, you have gyms. And then the other group will be restaurants, services, small shops.
On the second group, of movie theaters and gyms, I see a business model that is a winner for the long term; however, very vastly impacted during the crisis. But post vaccine and herd immunity, I think that's a business model that will come back at as strong compared to prepandemic levels.
I think that restaurants might change here and there. Some weaker customers might not be able to survive.
And then I think that where we might see a little bit of rotation will be with the smaller shop tenants, which is the smaller piece of our tenant composition, where I think some might not be able to survive and probably business models that are not winners. That's the category that I think that we'll be working with the most, the small shop tenant.
But the tenant composition, in general, shouldn't change fundamentally.
And our next question will come from the line of Froylan Mendez from JPMorgan.
Two questions. Could you provide further details on the specific location of the land parcel that you acquired and tell us what is the right price per square foot or per square meter for this transaction? That's the first one.
And secondly, what is the in-place rent that you see in that specific market for that potential property?
Thanks, Froylan. So this is a piece of land located in Mexico City metropolitan area, in the north, inside the caseta, how do you say that, the toll booth, as you exit towards Queretaro. So perhaps the most sought after industrial corridor in the entire country. And we acquired one of the remaining pieces of land there available and have designed what I consider to be a world-class logistics park there.
And in terms of rents and prices per square meter, I'll tell you they tend to be amongst the highest in the country, given the attractiveness. We have not necessarily disclosed that level of detail in terms of the purchase price and expected rent. We are in early negotiations and expect to achieve a market rent that will ultimately yield us an adequate return in the high single digits.
Thank you, Juan. And could you describe the size of similar opportunities that you see in the market that you could be taking advantage from and in which markets are you seeing these opportunities?
So we are focused on our core markets that are Mexico City, Juarez, Monterrey, Tijuana and Guadalajara. Our ambition is to develop about 1 million, 1.5 million, potentially, square feet of GLA on an annual basis, and we have a fairly progressed pipeline. And as I was noting earlier in answering Gordon's question, we'll be balancing those what I consider very attractive opportunities for investment to develop Class A product in core markets at attractive yields with other capital demands. But I think that's sort of, of a size of what we anticipate we can do on an annual basis, and the development pipeline that we have at the moment actually does provide for us to develop that over the coming years.
And our next question will come from the line of Andre Mazini from Citigroup.
So my question is on the breakdown of fixed versus variable rents. So for the third Q, if I'm reading it correctly, it was 95% fixed and 5% other, including the variable rent for the retail component. So going forward, would it make sense to increase the variable rent component given that retailers will probably be needing some more help going forward, getting out of this pandemic and people going back to their old shopping habits with some delay maybe? So where do you think variable rents can go, if that's a strategy that makes sense? You could maybe phase out the retailers who need a little bit more if they had the assurance that their rent would be a little bit more variable so they would be more okay with that. Does that discussion make sense? And is that something that you guys are willing to do?
Thanks for that question, Andre. I'll try and answer, and maybe, Simon, you can complement that. I'm not sure I captured the entirety of the question.
But with regards to the variable versus fixed rents, no, I don't anticipate that changing meaningfully, Andre. Our focus is to act to see that not changing. We are very focused on having a sustainable and predictable cash flow in the form of fixed rents. So most of our retail leases include a base rent, and some include a base rent plus variable. So our intent is to continue executing leases and negotiating on that basis. We appreciate that some customers might prefer to have more variable rent. However, that's a different application of risk that we are not entertaining at the moment.
Obviously, variable rent during the past 2 quarters for retail has been negatively impacted in a meaningful way, given that the customer type that tends to have that variable agreement that is more meaningful to us are movie theaters and some restaurants as well, and their sales have been obviously negatively impacted in a meaningful way.
So variable rent over the last 2 quarters has been pretty low compared to the historical performance. And we do anticipate that increasing maybe in the second half of next year as people return to normal, but it will be more in connection with increasing sales rather than changing any of the fundamental lease agreements.
And I'll just complement that to say the numbers that you're looking at are broadly right. We only had around MXN 1.3 million of variable income, linked primarily to tenant sales. So that has come off on a historical basis. It was around 5%. But given our income base for the third quarter is MXN 100 million, this is obviously a bit under that.
Also, just worth noting we do have car parking income over and above that. It was around MXN 5 million for the quarter; MXN 5.1 million, in fact. And it was good to see that actually improve sequentially, up from MXN 3.5 million in the prior quarter, but still down on historic levels meaningfully. So I think we'll look for further recovery not just in the variable income, but also the parking income line.
[Operator Instructions] Our next question will come from the line of Anton Mortenkotter from GBM.
Just a quick question here regarding the Mexico City development. On the press release, you mentioned an equity ownership augmenting over time in the joint venture. If you could provide some more color about how would this work.
In terms of the ownership structure, we acquired 50% of the land, and the other 50% was contributed to a JV trust where we'll be acting as developer, and we will be investing 100% of the CapEx needed to develop the project. So our ownership interest will gradually increase as we deploy capital into developing the project.
Thank you. I'm not showing any further questions at this time. I'd like to turn it over back to Juan for any closing remarks.
Great. Thank you, Victor. And thank you, everyone, for participating in today's call, and we look forward to speaking with many of you over the coming days and weeks as well as updating you again soon on our fourth quarter 2020 results.
Thank you very much. Have a great day, everyone. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.