Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Analysis

FIBRA Macquarie's Solid Q3 Growth and Outlook

FIBRA Macquarie reported a strong third quarter with a record certificate price of MXN 43, supported by property gains. They declared a Q3 distribution of MXN 0.5250 per certificate, in line with the full-year guidance of MXN 2.10 and updated full-year AFFO guidance to MXN 2.58 per certificate, the top end of the range. Available liquidity exceeded USD 350 million, hinting at a robust balance sheet. Investments continue, with anticipation of a substantial full-year taxable result, ensuring growth potential and strong financial standing.

FIBRA Macquarie: Valuations, Distributions, and AFFO Guidance

Investors should note FIBRA Macquarie's impressive in-place cap rates, standing at 7.9% for their industrial portfolio and a higher 9.6% for retail. These rates reflect the return on investment based on the income the properties are currently generating, which are healthy signals, especially in a market where rates often hover around 4-5% in other regions. They have maintained consistent distributions with a third-quarter distribution of MXN 0.5250 per certificate and are expecting to keep their annual distribution in line with the forecasted MXN 2.10 per certificate. In a proactive move, the company updated its AFFO (Adjusted Funds From Operations) guidance for the year to the higher end of the previous range at MXN 2.58 per certificate, showcasing confidence in profitability.

Nearshoring Tax Incentives: A Potential Boost for Tenant Demand

The recent approval of tax incentives for nearshoring has been welcomed by FIBRA Macquarie, with expectations that they may stimulate tenant demand. The incentives include accelerated depreciation for new investments and upgrades, which could encourage more capital expenditures in the industry. While the true impact of these incentives is still to be seen, they are anticipated to complement the existing strong demand driven by nearshoring, thus holding up the balance between demand and supply.

Occupancy and Market Performance: Sturdy Despite Slight Changes

Occupancy rates have seen minimal fluctuation, with the portfolio sustaining rates around 98-99%. Scheduled roll-offs were noted, which are common and expected in the ordinary course of real estate operations. The strength of the Monterrey market is underlined by a recent lease-up and upcoming projects, reinforcing the company's presence in key regions. Additionally, the retail sector is also showing positive signs with steady same-store NOI growth and occupancy reaching 91.7%, presenting an upbeat outlook for the company's diverse asset portfolio.

Development Plans and Land Bank Status: Poised for Growth

Looking at the roadmap, FIBRA Macquarie is on track with their development, set to deliver significant square footage by the next year's first half, with expectations for impacting FY '24 NOI positively. An additional 3 million square feet of potential development space in core markets are on the horizon, subject to strategic deployment. Importantly, the land bank is considered to be well-aligned with underwriting and investment plans, which should allay any concerns regarding the necessity of significant future infrastructure investments.

Competitive Landscape and Business Model: Staying the Course

With peers like FIBRA Uno and Terrafina considering internalizing their business structures, FIBRA Macquarie is choosing to maintain its course. The company's current model is highlighted by good alignment and a fee structure that ensures 'skin in the game'. This strategic choice reflects confidence in their model and in the leadership's ability to execute on growth strategies, suggesting stability and clarity in the company's path forward.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to FIBRA's Macquarie Third Quarter 2023 Earnings Call and Webcast. My name is Alicia, and I'll 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]

Thank you, and good morning, everyone. Thank you for joining FIBRA Macquarie's Third Quarter 2023 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 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.

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 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've not already done so, I would encourage you to visit our website at fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab.

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

[Simon Hanna, executive]

Good morning, everyone, and thank you for joining us. On today's call, we will discuss our third quarter 2023 results and our growth initiatives. Andrew will also provide an update on our balance sheet, robust capital position and our outlook for the remainder of 2023.

Our third quarter results demonstrate our sustained financial performance, driven by strong demand for our high-quality, well-located assets and supported by continued positive nearshoring tailwinds. With this backdrop, we saw solid growth in our industrial portfolio, a sustained recovery in our retail shopping centers and ongoing successful execution of our development program.

We have built a leading industrial platform that is delivering best-in-class products, which in turn is contributing to per certificate earnings and NAV growth and which we expect to accelerate in the coming quarters as our pipeline under construction is added to our stabilized portfolio.

Building on our demonstrated track record of delivering new developments at accretive yields, we most recently leased up our 210,000 square foot facility in Monterrey to a global auto parts manufacturer at a strong 11.9% build on cost.

This followed the lease-up of our 0.5 million square foot Mexico City development project earlier in the year to an e-commerce tenant at an 11.8% yield on cost. These dollarized leases will meaningfully contribute to earnings growth and reflect our capability to deliver market-leading products at attractive returns to our investors.

In addition to the 2 projects I just mentioned, we have an additional 1.2 million square feet of premier industrial GLA under construction, which we anticipate delivering in the coming quarters, bringing our total development product under construction or in stabilization to 2 million square feet.

Whilst we are excited to see our most recent deliveries exceed our target yields, we believe the current pipeline is well positioned to be completed and leased up, in line with our target development yield on cost of 9% to 11%. Whilst the financial returns we have delivered are impressive, I would also like to call out the quality of the lease and product that is equally relevant. For example, this year, the U.S. Green Building Council completed the LEED Core and Shell certification of our 183,000 square foot Monterrey development that was delivered last year with a 10.4% yield on cost.

We were immensely proud to say that this achieved elite platinum certification with a 90-point score.

Notably, this is the only industrial property in North America that has achieved platinum certification and was awarded the highest point score of any building globally for this particular lead industrial development category. Accomplishments such as this do not happen by chance. They are the product of a tremendous level of planning, focus and hard work in optimizing sustainability features that also enhance commercial performance.

So delivering what arguably could be called the best-in-class sustainable developments for any developer around the world at double-digit yields in core markets is a fantastic example of how the FIBRA Macquarie team is leading the Mexican real estate sector. I look forward to sharing more news on the upcoming LEED certification outcomes of our development portfolio in future updates.

In terms of our quarterly performance, consolidated NOI was up 14% year-over-year in underlying U.S. dollar terms. This result is reflective of the continued strength of our portfolio and performance, especially as this 14% increase is also on a per certificate basis, which is the ultimate reflection of value creation.

We continue to see real annual rental rate growth play an important role in higher NOI for both our industrial and retail portfolios, along with continued strong occupancy.

In our industrial portfolio, we maintained a high occupancy of around 98%, up 84 basis points year-over-year with lease GLA also increasing through the quarter. Renewals in the quarter reached 2.2 million square feet, the highest quarterly renewal volume since 2021, driving a solid retention rate of 92% over the past 12 months. But even more impressive is the fact that this was achieved whilst increasing real rental rates and lease term.

Furthermore, our re-leasing spreads on commercially negotiated renewals reached 16.3% in the third quarter which is a very nice improvement from the 10% re-leasing spreads we have been striking in prior quarters. New leasing activity comprised 641,000 square feet of GLA, the highest recorded quarterly level since 2016.

Highlights included the lease-up of our development property in Mexico City that I mentioned earlier as well as in electronics manufacturer in Saltillo, a market which has been gradually improving and where, in fact, we have actually experienced the highest percentage occupancy gains over the past 12 months for any of our markets.

Of note, we have approximately 25% of our lease book scheduled to roll for the next 5 quarters through to the end of 2024, which also provides near-term opportunity to continue with positive momentum on leasing spreads.

We continue to see favorable supply demand dynamics in our key markets. We derive almost 80% of ABR from Northern and border states, a high industrial demand region, benefiting from compelling new nearshoring tailwinds. Even with this positive backdrop, we recognize that the sustained high interest rate environment and [ MEG ] infrastructure challenges could impact company's capital decisions to make new investments in Mexico. While there could be some demand risk associated with this, we are pleased to see continued new investment announcements in Mexico and also welcome the recently announced fiscal incentives by the Mexican government to continue to attract new investments.

Turning to our retail portfolio. As we have been discussing throughout the year, recovery is ongoing, and we are seeing our portfolio of necessity-based shopping centers continue to perform well and indeed ahead of our expectations. Occupancy improved both year-over-year and sequentially and ended the third quarter at 91.7%. Additionally, average rental rates increased by 6.1%, collectively contributing to an annual growth of 17% in retail NOI.

Foot traffic continues to build, and we are seeing improvements in leasing conditions. We signed 62 new and renewal leases during the quarter totaling 17,000 square meters across a diverse range of tenants, including cinemas, entertainment centers, banks and homewares. With this strong leasing activity, the retail portfolio benefited from strong retention of 87% over the last 12 months.

In summary, I am pleased with the execution of our strategy, which combines the delivery of reliable organic growth from our in-place portfolio as well as contributions from our accretive development program. We have 2 million square feet of development GLA in stabilization or under construction, representing a 6% increase in our industrial portfolio footprint and more than 5 million square feet when each of the industrial parks are completed.

Furthermore, one of our key priorities is maintaining a well-positioned balance sheet, which provides us with the liquidity and flexibility to invest in our growth.

We are proud of our track record of pursuing disciplined growth and delivering attractive returns. We have both organic and new investment opportunities to continue to deliver value to all of our stakeholders. I want to thank the entire FIBRA Macquarie team for their valued contributions.

And I would now like to turn the call over to Andrew.

[Andrew McDonald-Hughes, executive]

Thank you, Simon. For the third quarter, we delivered AFFO per certificate of MXN 0.6121 or USD 0.0359, which represents a 2.3% increase on a dollar basis from the prior year. Our balance sheet remains well positioned with prudent leverage metrics and strong liquidity to support our growth strategy. As of September 30, our real estate net LTV was 33% and our net debt-to-EBITDA multiple was 5.1x.

Taking into account committed undrawn credit lines and surplus cash, FIBRA Macquarie has available liquidity in excess of USD 350 million. And now this quarter reached a record high of MXN 43 per certificate, which in part reflects the contribution of gains recognized upon stabilization of our leased-up development properties.

FIBRA Macquarie's portfolio-wide valuations imply an in-place cap rate of 7.9% for the industrial portfolio and 9.6% for the retail portfolio. In line with the release of our quarterly results, we declared a third quarter distribution of MXN 0.5250 per certificate, in line with guidance. In addition, we are reaffirming our full year distribution per certificate guidance of MXN 2.10.

We are also taking this opportunity to update our AFFO guidance for the full year to MXN 2.58 per certificate being the top end of the prior guidance range. Finally, I would like to provide an update on our taxable result for FY '23, which establishes a baseline for managing our distribution levels, taking into account expectations for our FY '23 taxable income, if we consider prevailing FX levels were to hold through to December 31, we anticipate that FIBRA Macquarie will be subject to a full year taxable result in excess of our scheduled FY '23 cash distribution.

While the final taxable result cannot be determined until after year-end, we have identified a number of options with regard to timing and type of payment, either in cash or in kind via certificate and we continue to maintain a strong balance sheet with ample liquidity.

As we move towards the end of the year, we will keep the market informed of any updates in such regard. Along with Simon, I want to thank all of our stakeholders for your ongoing support.

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

[Operator]

[Operator Instructions]. Our first question comes from the line of Hugo Grassi with Citigroup.

[Hugo Grassi B. Soares, analyst]

Congratulations on the results. This is Hugo from André Mazini's team and Citi. The question is the following: Will the recently approved tax incentives for nearshoring move the needle in terms of tenant demand? And if you could provide perhaps any color on what are the incentives in particular? That should be on my side. Will the approved tax incentives for nearshore and move the needle for tenant demand.

[Simon Hanna, executive]

Very much welcome the incentive package. The primary form of the incentive is to do with accelerated depreciation on some of the CapEx coming in for -- particularly for new investments or even upgrading on existing investments. So that's going to be something which is, as I said, available on an accelerated basis than it otherwise would have been the case.

So I think certainly, it's quantifiable in an amount which I think, in aggregate, hopefully will move the needle. It's only just been announced. So I think we still need to see exactly what the industry action will be to that. I honestly think there's been so much tailwinds anyway. And I think pent-up demand that will be coming through in following quarters and years that alone, I think, will be more than sufficient to hold up demand supply fundamentals. So this will definitely help and can only help support, I guess, those will align our decisions to be real. So yes, let's see how that goes.

[Operator]

Our next question comes from the line of Felipe Barragan with BTA Pactual (sic) [ BTG Pactual ].

[Felipe Barragan, analyst]

I have a couple. One is just to understand the 100 bps decrease in industrial in the north in occupancy. Is it just a scheduled lease that may move down and maybe coming back this quarter. Any color on that would be great. And I just would like to hear your thoughts. We heard last week that Danos was going to go into industrial. Obviously, they mostly focus on retail and office. You guys also have retail. Obviously, your stake in retail is significantly lower, but I just wanted your thoughts on that play from Danos.

[Simon Hanna, executive]

Yes. Thanks, Felipe. Answering those in turn, look, I think on occupancy and markets, I think continue in general to perform well. We saw a little bit of scheduled roll-off and nothing unusual or ordinary course we're at that level at that sort of 98% level, which is effectively subject to frictional change. So I'd say that overall, we're very comfortable with the overall occupancy profile across all our core markets. They remain in that sort of 98%, 99% level in the main. We have one or two markets there, which obviously below that.

So Monterrey for us remains a very strong market in particular. And obviously, we announced the lease up of our 210,000-square-foot development. We have a another building next door, around that 200,000 square foot range, which we're currently constructing for delivery in the early part of next year, which we only add to our entry there, which we're looking forward to leasing up, hopefully, next year. So, yes, overall, nothing really there from a, I guess, quarter-on-quarter movement to note of [indiscernible].

With regards to Danos, yes. Look, I think obviously, it's very much a reflection of, I guess, the strength of nearshoring. And I guess a lot of people wanted to get exposure to that. That's great. We have retail, as you say, which is also performing well and actually ultimately should also be, I think, subject to any trickle-down benefit, if you want to call it that, with regards to nearshoring.

So retail continues to perform well, same-store NOI, again, sort of in that sort of 9% on a cash basis up year-over-year, which continues to reflect the solid recovery, not just on rental rates, but also occupancy hitting 91.7%. So it's been quite a few quarters now sequential progress there. So NOI coming together well, and we think that there are the opportunity for retail to continue to perform well through to the end of the year and into 2024. That's a real opportunity.

[Felipe Barragan, analyst]

Great. Definitely, 98% Occupancy in the north is still very good.

[Operator]

Our next question comes from Isabela Salazar with GBM.

[Isabela Salazar Leipen, analyst]

I saw that you are expected to deliver your whole current development pipeline by the first half of next year but still hold a hefty land bank. Are you planning on further development? Or would you focus first on the stabilization of recent deliveries? Also, does your land bank already have the necessary infrastructure? Or does it need investments before development?

[Simon Hanna, executive]

Thanks, Isabela. Yes, look, I think development is very much on track. We have the 2 million square feet, as I say, which is either subject to stabilization with some of those lease-ups are in progress. So seeing the full impact of that lease-up coming through, particularly in FY '24 NOI. And then the delivery of the remaining inventory of that 2 million called around 1.3 million, which will be put into our inventory over the coming quarters for ultimate lease-up. And you could say that our NOI contribution FY '24 or FY '25 on a sort of a more annualized basis. So, that's very much on track.

We have another 3 million square feet of potential GLA in core markets that we are yet to start on over and above that 2 million. I think we'll obviously take a -- our view as to when we put that 3 million in terms of our construction. And it's something where we're always, I guess, taking that dynamic view where we're generally looking to have around 1 million to 2 million square feet of GLA in construction through the year. So I guess, as we deliver the 2 million, there's an opportunity to start on some of those other buildings with that coming out of that 3 million potential.

With regards to infrastructure, again, I think it's something where we feel comfortable that things are moving along in line with underwriting and investment plans. So I would say that for the main part, nothing there from an underwriting perspective, which is necessarily causing us any concern. But obviously, we're cognizant of broader country-wide challenges with regards to energy investment and infrastructure.

[Operator]

Our next question comes from the line of Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

I have a quick one. FIBRA Uno is moving to internalize it's structure and just Terrafina said that probably they are following that path. What's the read-through for you of your competitors moving and doing that?

[Simon Hanna, executive]

Yes. Look, I think I don't necessarily want to comment on others, but I think from our own perspective, what we feel is a model that we have a very good alignment. For us, this is all about alignment. So I think from a fee structure skin of the game, we think that we've got that set up well to continue with the current business model.

We also think that from a balance sheet and growth point of view, that's obviously puts us in a very good position to continue with our current strategy. So as far as we're concerned, we're very much focused on execution of that strategy and feel, I guess, quite comfortable with the current position that we have.

[Operator]

There are no further questions at this time. I would like to turn the floor back over to Simon Hanna for closing comments.

[Simon Hanna, executive]

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 at the end of the fourth quarter.

[Operator]

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