Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, and welcome to FIBRA Macquarie's Third 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.

[Nikki Sacks]

Thank you, Donna, and good morning, everyone. Thank you for joining FIBRA Macquarie's third 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'll 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 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 have prepared supplementary materials that we may reference during the call as well. If you do not -- if you have not already done so, I'd 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.

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

[Juan Monroy, executive]

Right. Thank you, Nikki. Good morning, and thank you for joining us. On today's call, I'll discuss our third quarter 2021 results, provide updates on our growth initiatives for capital position as well as our outlook for the remainder of the year. FIBRA Macquarie's third quarter results demonstrate the continued positive momentum that we have experiencing throughout 2021, which is demonstrated by the underlying strength of our industrial portfolio and an improving outlook for retail assets. We believe we are well positioned to capitalize on constructive market dynamics with our high-quality portfolio, select growth and development initiatives and disciplined capital management strategy.

As of September 30, consolidated occupancy was 94.8%, an increase of 38 basis points for the quarter and 105 basis points over the prior year period. This increase was driven by leasing momentum in our industrial portfolio, which accounts for almost 90% of our consolidated net operating income. AFFO per certificate was MXN 0.5972, a result that exceeded our expectations and provided momentum to raise our full year AFO per certificate guidance to MXN 2.34, a meaningful $0.05 increase from the midpoint of our prior guidance. Our reported results continue to be impacted by peso volatility despite the underlying strong performance we are seeing in our portfolio. Importantly, we are seeing growth in top line results for both our portfolios.

Our industrial portfolio revenues in underlying U.S. dollar terms as well as our retail portfolio revenues in Mexican peso terms both posted quarterly revenue results that are at their highest levels since the onset of epidemic. These 2 data points best summarize where our business performance lies as of today with our consolidated portfolio benefiting from our exposure to the thriving Mexican industrial market in both the manufacturing and logistics sectors. Whilst the resilient retail portfolio is making progress in a recovering retail market. We're optimistic that these improving dynamics will continue for the fourth quarter and into 2022.

Our industrial portfolio NOI for the third quarter was MXN 776 million, with NOI in underlying U.S. dollar terms up a healthy 5.7%. The combination of our high-quality industrial assets and a best-in-class property management platform has driven strong leasing activity. In the third quarter, our lease GLA climbed to a multi-year high with closing occupancy of 95.5%, an increase of 153 basis points year-over-year. During the third quarter, we executed 9 new leases, totaling 424,000 square feet as we expanded our tenant base with 7 new customers. A highlight for the quarter included a 10.5 year lease totaling 207,000 square feet into equates to an international manufacturer of consumer products. Renewals of 869,000 square feet across 16 leases drove a healthy retention rate of 83.2% over the last 12 months and represents the highest retention rate since the onset of epidemic.

Weighted average rental rates increased by 3.7% from the prior year period to $5.16 per square meter per month. We expect macro tailwinds to provide a favorable backdrop to support both ongoing leasing and growth through expansions and development. We have a revolved pipeline of potential customers looking to diversify their supply chains and to fill ever growing e-commerce needs. With more than 80% of our portfolio in the northern states of Mexico, along with our active development projects in consumer markets, we are well positioned to capture this demand for nearshoring and e commerce logistics.

Turning to our retail portfolio. Quarterly revenues reached a post pandemic high with MXN 12.9 million of rent discounts lowered by 4.2% sequentially and down 43.2% compared to the prior year quarter. NOI improved on a year-over-year and a sequential basis to MXN 99 million. We have executed on stronger leasing activity in each quarter so far in 2021 as the impact of the pandemic continues to subside. We signed more than 100 new and renewal leases during the third quarter, representing our strongest quarter of leasing activity since 2019.

Of note, we entered into a new long-term lease with Smart Feet, a leading gym operator in one of our Mexico City retail properties, which we believe is a positive indicator for the continued recovery of the retail segment. Foot traffic continues to improve and was up 13% from the prior year, although remains approximately 35% below pre-pandemic levels. With increasing levels of vaccination in Mexico, we anticipate that trading conditions and consumer confidence will continue to improve through the remainder of the year.

On the development front, we continue to prudently pursue new growth opportunities in our core industrial markets, building on our successful track record. We are continuing pre-construction work at our projects in Apodaca, Nuevo Leon and Mexico City. We currently anticipate completion of the Apodaca development early next year in the first phase of the Mexico City project in mid-2022. We expect these investments will contribute to NOI growth in late 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.

Our balance sheet remains well positioned. As of September 30, 2021, we had MXN 5.2 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 a prudent 5.1x, and we continue to maintain a healthy debt service coverage ratio and comfortable headroom with respect to our debt covenants. We have a well-covered distribution and have authorized a third quarter cash distribution of MXN 0.4750 per certificate. We're also taking this opportunity to reaffirm our full year distribution guidance of MXN 1.90 per certificate, implying a full year AFFO payout ratio of 81% based on our upgraded full year AFFO per certify guidance.

Finally, I am pleased to report that earlier this month, we retained our 3 star rating from GRESB, a leading ESG benchmark for real estate investments on a global basis. Our 2021 GRESB scores increased from 2020 and resulted in FIBRA Macquarie now ranking above its GRESB peer groups and the broader GRESB averages and recognizes our continued focus on sustainability, green building and green leasing and stakeholder engagement. We continue to demonstrate our commitment to all elements of ESG with continued improvement and enhancements to our transparency, and we look forward to providing ongoing updates as we execute on our sustainability initiatives.

In summary, we have an industrial portfolio that continues to deliver strong operating results and a macro backdrop that supports growth in the coming years, whilst our retail portfolio is well positioned to benefit from an improving market outlook. 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 so that we make a positive impact and maximize total returns on a per certificate basis. As always, I want to comment an entire FIBRA Macquarie team for their unwavering commitment and to everyone listening for your ongoing support.

With that, I'll ask Donna to open the phone lines for your questions. Donna?

[Operator]

[Operator Instructions] Our first question is coming from Gordon Lee of BTG.

[Gordon Lee, analyst]

2 quick questions. The first is some of your competitors on their remarks following the quarterly release for the third quarter are pointing towards -- or they think they will see leasing spreads for the industrial portfolio in the high single-digits, low double-digits over the next 12 to 18 months. Is that something -- I mean, I know you mentioned the positive macro tailwinds, but is that a magnitude of strength that you would compare with when looking at your markets and your portfolio? And then the second question was just on, you had a higher tenant improvements in CapEx this quarter. Is that something that's directly linked to the leasing activity that we saw during the quarter and perhaps maybe the lease you just mentioned, Juan, the 10.5 year lease that you signed or is this a level that we should expect to see going forward regardless of leasing activity?

[Juan Monroy, executive]

On rental rates for our industrial portfolio, what I'll say is that, we are seeing industrial market fundamentals, Gordon, probably the strongest that I've ever seen. Very strong set of fundamentals both in the manufacturing export sector for business with nearshoring trends being very firmly established in what we are observing on the field on a day-to-day basis when we look at pipeline and negotiate leases as well on the logistics front, driven by e-commerce dynamics. So very strong fundamentals in lease fundamentals. As we've discussed in the past, from our perspective, are here to stay for the medium to long-term.

So I'm very encouraged by what we are observing. And obviously, with that, what we've seen is fairly tight levels of vacancy in the market, definitely a strong environment for landlords to see rent growth. In addition to that, we have observed also construction expense inflation that is significant. So those 2 factors are indeed supporting a fairly healthy rent increases. I think that we'll see that for the next 12, 18, 24 months, translating that into specific numbers, high single-digit, low double-digits. I'm not sure. We are always very cautious in terms of our budgeting and our modeling.

So I don't know if we'll get to those levels, Gordon, but definitely a very positive environment, which is allowing us to enhance lease structure rent levels, etc. So that's regarding one. Simon, you want to address that question from Gordon?

[Simon Hanna, executive]

Yes, I think your observation is correct. When we see the sort of the run-up we've had this year, it's really -- a large part of that is off the momentum we've seen on the leasing side. And obviously, that sort of can translate into some TIs. So I think that the TIs and even a little bit of leasing commissions, just with the sort of the pretty high rollover, but having that rollover sort of being converted into pretty good leasing results. That does follow with a little bit of a step-up in TIs.

So yes, sort of -- we're at about towards the upper end of between 14%, 15% of NOI these days in terms of where we are as a percentage of the maintenance CapEx to TIs. And so that's sort of getting in the range where we think it should be sort of a run rate going forward. Having said that, we're obviously getting through a lot of leasing deals at the moment. So I do think that 4Q is still going to be up there to get through some of those TIs, even sort of working into 1Q, given that we do this on a cash deployment basis. So that I expect to sort of feed in for the next couple of quarters at relatively high levels.

But then looking at '22 as a whole, we've got just over 11% rollover our exploration profile which is a good deal less than what we've had in the last couple of years. So I do think also some of that TIs activity could also drop off as we get through '22 with the lower rollover.

[Operator]

Our next question is coming from Vanessa Quiroga of Credit Suisse.

[Vanessa Quiroga, analyst]

My question is regarding a follow-up on brands. Can you give us more detail on how the leasing spreads looked for your leasing activity in the third quarter? And what's your estimate of your rents compared to market? And then on retail, if you can provide us some update on where you see discounts going into the end of the year?

[Juan Monroy, executive]

I'll start with the second one on retail. Yes, I'll say, retail, definitely, we are observing an improving outlook on the back of a reduction of new COVID cases increased vaccination levels in Mexico, we are seeing a clear increase in foot traffic at our properties and an easing of restriction on our tenants, which is then ultimately having a positive impact on a significant reduction on rent discounts.

So I'm encouraging by what we are observing and are optimistic about how 2022 could end up based on how we are traveling the retail portfolio. So I do think that retail rent in discounts really coming down in a very meaningful way during third quarter, fourth quarter and into 2022 as well. And yes, with regards to rents for industrial portfolio, and how do we compare to that market. I'll say, the market is at the moment in transition anything that we are with our peers leading the charge as well as we -- as the market is transitioning to a slightly higher rent level.

So on new leases and renewals, we are ensuring that we capture that upside on rent levels and have been delivering a pretty healthy leasing spread over the last, I don't know, how many quarters now, maybe you have a count, Simon, but it's been a bunch.

[Simon Hanna, executive]

Well, yes, I mean, the actual positive spread on leading renewals really has been going on for 4 years or so.

[Juan Monroy, executive]

So that's definitely continuing and really trend is strengthening. So we are encouraging by that environment in our ability to continue increase and have positive spreads for U.S. dollar rents, Vanessa.

[Operator]

Our next question is coming from [indiscernible] of GBM.

[Unknown Analyst]

I was wondering if you could give us some more color on the new finishing dates for developments.

[Juan Monroy, executive]

On the what dates, Juan?

[Unknown Analyst]

You push some delivery dates for developments to mid-2022. Could you give us some color on the reason of that?

[Juan Monroy, executive]

Yes. Got it, on completion dates. One of the, Juan, yes, so we are progressing with our 2 development projects. Very excited about them. These are, as a reminder, fantastic locations, irreplaceable land parcels in great core markets and then a great location within the sub-markets of both Apodaca and Mexico City as well. So very pleased with locations.

And the projects that we're building there just world-class facilities that will house fairly strong customers. We're seeing a pretty good pipeline of interest for both of those projects and anticipate delivering the Apodaca, first building of the Apodaca project during the first quarter of next year, and that's progressing nicely, and the Mexico City project, the first phase of it towards the end of the first half of 2022. And that's been a little bit impacting by infrastructure works that are needed to be agreed with the municipality.

But we are encouraged by the quality of the projects and the interest of potential customers and the pipeline that we are observing. So yes, good projects that will come to complement the quality of our portfolio and that will ultimately add to our NOI growth for the coming years.

[Operator]

Our next question is coming from Francisco Suarez of Scotiabank.

[Francisco Suarez, analyst]

A follow-up question on leasing spreads. Considering the overall schedule on maturities, is it fair to assume that perhaps a portion of your lease expirations coming into 2023 might be actually early negotiated in 2022. As you mentioned, that conditions fundamental seems to be there. So to what extent do you think a portion of those leases can actually be released, sorry, negotiated earlier in 2022? And the second question that I have is that, do you see room for more dark kitchens, dark stores and that sort of space and a portion on your retail assets?

[Juan Monroy, executive]

On the leasing spread and rollover into 2022, 2023, I think that's a good point. We -- I do believe that we will be negotiating potentially some 2023 expirations during 2022. So we say a bit of a balancing act. Interestingly, I'll say that we have been observing as of late tenants wanting to enter into long-term leases as I'm sure they are observing the rent growth dynamics they want to try and lock in rents for a longer period. So from our perspective, obviously, it's a bit of a balancing act in being focused on capturing as much rent as possible and also securing an adequate term.

So I do think there is, given the somewhat lite exploration profile during 2022 and heavier 2023 and given the rent growth dynamics and vacancy being fairly tight. I do believe there is potential for some of those 2023 expirations to be negotiated earlier in 2022, providing for us capturing a bit of rental growth and also securing long-term leases before they're due. So yes, I think that's a good point, and we'll -- I'm sure we'll do some of those next year. With regards to the retail question, yes, we are happy to see that we've continued to sign these dark kitchen type leases. We have signed some in the past, as you know. And during this quarter, we signed one other. I'll say that, yes, there is a potential to sign some of these strong leases.

But more importantly, I think that's probably on the marginal side overall. But more importantly, I do see significantly improving outlook into 2022 for retail. So that's definitely encouraging and we will not only be dark kitchens, but we are seeing other tenants looking to expand. As noted, we signed an important lease at our Mexico City. In one of our Mexico City properties we are -- with gym operator, and we're seeing a number of tenants really topping off their growth plans and visiting properties and start meaningful dialogue for new leases, which I think will bode well for 2022 recovery.

[Operator]

[Operator Instructions] Our next question is coming from Andre Mazini of Citigroup.

[André Mazini, analyst]

I joined the call a little bit late, so sorry if this question was asked. But the question is around the energy reform and the energy supply in Mexico. Going forward, if you're seeing any -- at the margin, greater anxiety from tenants regarding energy security if you think that can maybe impact the marginal decision of new investments, new shoring in the manufacturing side, right, of your manufacturing tenants. And also, what FIBRA Macquarie could do, of course, I mean, the Group has best expertise in infrastructure and in energy as well. Do you think maybe solar systems near the properties would make sense that also has an ESG component, which I would imagine a lot of tenants and, of course, you guys as well want to have the best ESG rating as possible, so all of that. So if you think tenants can try to be a little bit more energy self-sufficient using solar, using wind and the energy reform.

[Juan Monroy, executive]

In terms of the energy reform, we think it's premature to assess what could occur as it's unclear. It will be approved and in what form. So we believe it's premature to comment on that. In terms of the energy availability, I'll say, it is an issue that we've been, as a sector, we've been dealing with now for the last couple of years. And it's an issue that we're very mindful of and assess every time we're doing a new development.

We do have ample capacity within our established industrial portfolio. But, yes, I will say that availability of energy is something that is top of mind as we evaluate new growth development opportunities. We have not seen any of these items really impacting nearshoring decisions on potential new entrances as we've been observing the market is extremely vibrant. Obviously, market participants are very vigilant about all of these items, energy rules, law, security, etc.

But so far, the benefits of operating in Mexico far weighed some of these issues. So we are encouraged by what we are observing, and will be -- in terms of market demand and will be vigilant in terms of how the potential energy reform bill progresses to assess any potential impact directly to our customers. In terms of alternative energies like solar, I'll say that rooftop solar is a real alternative or assessment is that rooftop solar shouldn't be impacted by the energy bill reform. So we believe that's a real alternative for us and our customers as we're looking to source clean energy alternatives and are continuing to explore rooftop solar, Andre.

[Operator]

Thank you. At this time, I'd like to turn the floor back over to Mr. Monroy for closing comments.

[Juan Monroy, executive]

Great. 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 well as updating you again soon on our fourth quarter 2021 results. Thank you very much, everyone. Have a great day.

[Operator]

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 enjoy the rest of your day.