Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to FIBRA Macquarie's Fourth Quarter 2022 Earnings Call and Webcast. My name is Darryl, 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]

Thank you, and good morning, everyone. Thank you for joining FIBRA Macquarie's Fourth Quarter 2022 Earnings Conference Call and Webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer. And to answer any questions you may have at the conclusion of today's prepared remarks, we also have 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. 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 fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab.

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

[Simon Hanna, executive]

Thank you, Nikki. Good morning, and thank you for joining us. On today's call, I will discuss our fourth quarter and full year 2022 results, provide updates on our growth initiatives and robust capital position, introduce our outlook for 2023 as well as discuss the favorable backdrop, which is expected to support our continued growth.

We reported healthy earnings growth for the fourth quarter and full year of 2022 as we realized strong occupancy gains, ending the year at a record consolidated portfolio occupancy of 96.8% as well as delivering solid rental rate spreads. These results reflect the continued execution of our strategic plan, the favorable positioning of our portfolio of high-quality industrial assets located primarily in the high-demand Northern markets and the ongoing recovery of our retail portfolio.

The fourth quarter concluded with an AFFO result of MXN 0.6762 per certificate, up 9.3% from the prior year quarter, contributing to our full year AFFO per certificate results of MXN 2.71 that exceeded our prior guidance and was a 13.8% annual increase.

Our industrial portfolio continues to perform strongly and delivered several record metrics, which we believe is a tangible demonstration of the strength of our portfolio and the favorable dynamics in our key markets. We reached a new record industrial occupancy level of 97.6% at year-end, up 166 basis points from a year ago and up 63 basis points from the end of the third quarter. These occupancy gains were achieved through a record retention rate of 91% over the trailing 12 months and were complemented by record low move-out activity in the quarter.

Beyond the impressive occupancy trends, industrial rental rate performance was also a highlight. Portfolio rents grew 2.0% in Q4, supported by quarterly lease renewal spreads of 10.2%, consistent with the 10% positive re-leasing spread executed throughout the year. The fourth quarter was also our most active quarter of the year with respect to leasing activity with 2 million square feet of GLA leased or renewed across 25 contracts. This included 271,000 square feet of new leases, which can be directly attributed to near-shoring trends. Of note, new leasing included the establishment of a new operation for a Taiwanese-based electronics firm in Ciudad Juarez and a new lease to a Chinese-based technology manufacturing firm in Monterrey.

Renewals for FY '22 totaled 4.8 million square feet. Looking ahead into 2023, scheduled lease expirations totaled 4.9 million square feet, equivalent to 16.6% of leased GLA. We are confident in our ability to manage the similar rollover volume in a manner that will allow us to continue to capture positive financial and qualitative leasing outcomes.

The nearshoring and e-commerce structural tailwinds that we have been discussing continue to accelerate and set a favorable backdrop to drive demand and support our ongoing investment activity. To that end, we are observing many companies looking to relocate elements of their supply chain closer to centers of demand. Mexico offers a number of competitive advantages, which makes it a beneficiary of this dynamic, including its close location to the United States, cost efficiencies and the availability of skilled labor. This trend is driving demand, particularly for manufacturers and has resulted in high market occupancy and positive net absorption, particularly in our key markets. Notably, net absorption for this quarter and throughout the year has seen occupancy reach 100% in 10 of our core markets, including Ciudad Juarez, Tijuana, Monterrey and Mexico City, where we are experiencing strong demand trends, which we expect to continue for some time. Importantly, we have positioned FIBRA Macquarie to capture a greater share of this demand by investing in our growth CapEx program with a focus on our core industrial markets. This can be seen with a record 1.8 million square feet of industrial GLA currently under development. These projects have a remaining investment requirement, approximately $120 million, which is mainly scheduled to be deployed in FY '23.

For our industrial development projects, we continue to target a stabilized NOI yield of between 9% and 11%, which is consistent with the 10.4% NOI yield we achieved on our recently delivered project in Monterrey, comprising 183,000 square feet of GLA. As a reminder, this project was fully leased on completion under a U.S. dollar-denominated lease for an initial 10-year term. We anticipate delivering approximately 1.4 million square feet of GLA in 2023, realizing income contributions from these developments in 2024. This includes the announcement of a new industrial project in the vibrant Tijuana market, following the acquisition of a 25 hectare site, where we plan to construct 3 properties comprising approximately 900,000 square feet of GLA. The first phase of this project includes construction of a 400,000 square foot building, which we expected to deliver in the first half of 2024.

In addition, we are announcing the commencement of a new project in the broader market of Reynosa to be constructed on an existing land parcel owned by FIBRA Macquarie. These 2 projects complement our previously announced developments in Mexico City, Monterrey and Ciudad Juarez.

With respect to our Mexico City development, we are making steady progress on our 2 building 700,000 square foot project in Cuautitlan. After a period of delay with the local authorities, we have obtained all relevant permits to complete construction, achieving a critical milestone and providing a revised path for scheduled delivery in the first half of this year.

An important element of our development strategy is the integration of sustainability into our design and build. In addition to being good stewards of the environment, providing customers with energy-efficient buildings is a necessary requirement in attracting and retaining high-quality tenants. The building we delivered in Monterrey is expected to achieve a minimum LEED Gold certification, adding to a green certified building footprint of 64 properties or 33.1% of consolidated GLA as at the end of the year.

With regards to our retail portfolio, we continue to see a steady recovery. Foot traffic maintained its positive trajectory, up 4.4% year-over-year, whilst remaining approximately 20% below pre-pandemic levels. Year-end occupancy was up 84 basis points from the prior year to 90.9%, contributing to strong quarterly rental revenues of MXN 170 million. Rental rates were up 6% year-over-year with a solid lease renewal volume of 9,000 square meters. 2022 marked a step in the right direction with total new and renewal leasing activity of 63,000 square meters, up by 35% from the prior year. While we remain encouraged by new leasing activity and strong cash collections, we also maintain a prudent stance and have increased our provisioning levels at 31 December, contributing to a lower NOI margin for the quarter.

Turning to our balance sheet and capital position. As previously announced in December, we closed $150 million sustainability-linked unsecured credit facility consisting of a $75 million term loan and a $75 million committed revolver, providing additional capacity to fund our growth CapEx program. Our leverage metrics remained well positioned with real estate net LTV of 33% and a net debt-to-EBITDA multiple of 4.9x as at 31 December.

FIBRA Macquarie has committed an available liquidity of $385 million, comprising an undrawn committed revolver capacity of $322 million and an additional $63 million of unrestricted cash. For the fourth quarter 2022, we have declared a cash distribution of MXN 0.50 per certificate. In addition, we have declared an extraordinary distribution in order to meet applicable Mexican FIBRA tax rules that require the distribution of a minimum of 95% of taxable income. FIBRA Macquarie's 2022 taxable result includes certain noncash gains, primarily driven by the high levels of inflation and the appreciation of the peso against the U.S. dollar. As a result, we have declared an additional cash distribution of MXN 0.88 per certificate for payments on or about March 10, 2023. Notably, our strong and liquid balance sheet position has ensured that FIBRA Macquarie is able to comfortably manage the payment of this extraordinary distribution without impacting its FY '23 distribution outlook and investment plans.

I would also like to note that in December, we formally announced our commitment to support a goal of net zero greenhouse gas emissions by 2040 or sooner by prioritizing the reduction of real economy emissions. We acknowledge that there is an urgent need to accelerate the transition towards global net zero emissions, and FIBRA Macquarie is committed to playing its part to help deliver the goals of the Paris agreement.

With regards to our outlook for 2023, we are initiating guidance for AFFO per certificate of between MXN 2.70 and MXN 2.75. Our outlook anticipates solid NOI growth in both our industrial and retail portfolios, which is expected to be partially offset by higher interest expense as we invest in our growth projects. This guidance also considers the assumed impact of peso appreciation relative to 2022. It is important to note that in U.S. dollar equivalent terms, we are in fact seeing an underlying increase in AFFO per certificate. We are also initiating guidance for cash distributions in FY '23 of MXN 2.10 per certificate, reflecting an increase of 5% over last year. The significant investment being made in growth CapEx during 2023 will position FIBRA Macquarie to benefit with increased AFFO from 2024 and onwards.

We believe Mexico is well positioned to capture growth opportunities arising from global and regional trends, and we expect FIBRA Macquarie to be a key beneficiary as we continue to invest in a disciplined manner and create value for our certificate holders. I want to take this opportunity to extend my thanks to the FIBRA Macquarie team and to all of our stakeholders for your ongoing support.

With that, I will ask that our operator open the phone lines for your questions.

[Operator]

[Operator Instructions] Our first questions come from the line of [ Juan McDelta with GPM ].

[Unknown Analyst]

Congrats on the results. I have 2 things to ask. The first is regarding the impairment of accounts receivable. We saw a slight increase during this quarter. Could you give us some details on that?

[Andrew McDonald-Hughes, executive]

Yes, happy to, [ Juan ]. We've actually seen a conservative approach to our -- continue to take a conservative approach with our accounts receivable. And in fact, our net accounts receivable when we look specifically to the retail portfolio is now reduced to only MXN 3 million. So I think we've really taken the heat out of any risk with respect to cash collections on any of the AR and our portfolio, and we'll continue to do so going forward, and we think that's the prudent and appropriate way to manage those.

[Simon Hanna, executive]

Yes, that sets us up for a very good year next year, obviously, taking that, I guess, downside risk off the table as we build that into our earnings outlook.

[Unknown Analyst]

Great. I have a second question regarding the delay of developments that you were expecting to conclude this quarter. Could you give us some color on why that happened, particularly in Mexico City, are you having difficulty with the development? Or why did this happen?

[Simon Hanna, executive]

Yes. Thanks, [ Juan ]. Look, nothing really there to flag as an issue per se. What we've been working through over the course of last year was getting through all the permitting with the local authorities. So I guess from a project planning materials, preparedness point of view, that's all set in place and actually as of [ now ] we are constructing and have a clear path to delivery for this first half. But what we saw as we went through the second half of last year was just a delight as we progressed with the permitting with the local authorities, which is now being fully resolved. So as I say, we're now constructing and have that clear path for the first half of this year.

[Unknown Analyst]

Great. Congrats on the results.

[Operator]

[Operator Instructions] Our next questions come from the line of Felipe Barragan with BTG Pactual.

[Felipe Barragan, analyst]

Congrats on the results. I have a quick question. We saw this quarter a quick -- sorry, a slight decrease in the occupancy rate for the joint venture portfolio -- sorry, for the retail portfolio, specifically in the joint venture portion. Is there anything in particular as to why there is a slight decrease, where on their end the wholly portfolio increases? Is there anything structural here, or is it only cyclical?

[Simon Hanna, executive]

Thanks very much. I would say, look, if it's quarter-on-quarter, we obviously have some move-ins and move-outs, depending on the property, which fall into whether the JV or the wholly owned bucket. This quarter, we did have a move out in one of our JV properties, which is actually in the process of being backfilled with a good leasing prospect coming in this first half of the year. So nothing structural to note. I will just say to the ordinary course of having move out and then move into which don't always go evenly amongst both portfolios.

But overall, what we are seeing is a good progression with regards to recovery right throughout the year, including this most recent quarter, we've been signing new and renewal leases, particularly with the most impacted tenants being gyms and cinemas. So this quarter alone, we did a renewal for a cinema in San Roque, and we did a new lease with Smart Fit in Tecamac, really exciting to see, and as I say, continues the trend of seeing those most impacted customers really coming back in a decent way, and we hope to do a bit more of that in 2023.

[Andrew McDonald-Hughes, executive]

And perhaps just to complement, Simon, what we also saw specifically in the joint venture portfolio was a move out of a delinquent tenant. So the actual impact from an economic standpoint is nil. And in fact, we are -- we have a number of strong leads with respect to the re-leasing of that specific space. So I think that this could deliver an ultimately net positive outcome over the medium term.

[Felipe Barragan, analyst]

Beautiful. If I may ask another question real quick. Do you guys have any plans for cycling…

[Simon Hanna, executive]

Yes. Look, it's something where we are always open to the idea of doing some recycling. We've been pretty proactive on that historically, and we think have largely cleaned up what we consider to be the noncore element of our industrial portfolio selling approximately 44 properties. So as I say, nothing from a, I'd say, portfolio or sort of multiple asset point of view that we have in the works at the moment. But we always remain open and opportunistic if the right time, right moment for an asset was to be sold, then we would certainly act on that, but nothing material that we have in the works for now.

[Operator]

Our next questions come from the line of Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Congrats on great execution on all fronts, great news. The question that I have relates with your overall pipeline and the overall conditions that we see in the market. Are you seeing conditions in a way in this hot market in real estate in Mexico that you are actually able to choose the type of industry exposure that you may want to have on your tenants on or if you could walk us a little bit through not only to the logic that is pretty much straightforward where you are allocating the capital that makes totally sense geographically.

But if you can walk us a little bit on the types of exposures, on industry exposures that you may prefer relative to others, and if that is actually something that might be possible? Also, my second question that relates to this is, how are you able and to leverage your overall internal platform or management platform in terms of the overall market intelligence to understand the overall growth prospects coming from your existing tenants and their willingness to allocate more exposure to other places within your portfolio?

[Simon Hanna, executive]

Thanks, Paco. I think -- and thanks for your remarks earlier on our results. Addressing your first question with regards to, I guess, the ability to select the sector tenants, et cetera. I think the beauty of what we're seeing at the moment, Paco, is that we're -- it's a very broad-based structural shift in demand, which is across multiple number of segments. So whether it be transitioning to EV part, which is what we saw in our lease up in Monterrey development project, whether it be electronics, medical device, consumer goods. It's a fairly diversified set of customers that are looking to come into Mexico. And we're seeing that -- not necessarily concentrated in one geographic market either. So that actually opens up quite a good deal of interest across sectors in each market. I would say that we're -- certainly, conditions are favorable, in the landlord favor.

And so as we go through our leasing decisions, certainly, we are being selective there in terms of what we're doing with -- what deals we're doing with whom and on what terms. I think we're certainly in that position, and we're able to improve both financial and qualitative aspects of the portfolio. I would say that we obviously have a bias towards having exposure towards growth industries. So we're certainly picking up our fair share, we think, of the EV parts sector, as I said, as evidenced before.

But we're also seeing and like doing business with a lot of those other manufacturing export segments, whether it's electronics, consumer goods, medical devices. So very diversified, and I think we're sort of moving to where the demand is coming into Mexico being probably representative of that. So we're happy on that front.

I would say that the other feature of our portfolio and of our strategy is very much a focus on the northern markets. We do have a high exposure, something like 80% of our GLA footprint on those broader markets. So that's right where we want to be in terms of consolidating that from a growth CapEx point of view. So very active in those broader markets, but also we're excited about the prospects in Mexico City, which is a fantastic market any which way we think the product that we're developing there could be sued for both logistics but also potentially manufacturing. So we'll see how that rounds out in the coming months. So hopefully, that addresses the first part of your question.

With regards to the second part on how we are able to leverage our internal platform. Look, I think this is one of the key features of FIBRA Macquarie and something that we see as a differentiator. Our internal platform is over 90 staff across the country, located in all our core markets. And that's a full service team comprising leasing, engineering, property management. So we're talking to our customers every day, we're seeing our properties, we're seeing what's going on with leasing deals, prospects, what our tenants want to do, what -- getting the full visibility of transactions, both from a leasing and M&A point of view to complement what we're seeing as well here in Mexico City.

And with that, that gives us really a great insight and a great read of the market. So I think that's why we're able to keep progressing in the way that we are, both from a very strong retention point of view, strong leasing renewal spreads, the ability to pick up increasing exposure from a development point of view in those key markets. It's all part of the great combination that we have between the Macquarie's institutional leverage combined with our internal platform. It's a very successful formula.

[Andrew McDonald-Hughes, executive]

I think maybe to complement just on that, I don't think we can sort of underestimate or underemphasize sort of the power of that platform and being in a position where we manage directly those relationships with the customers. And we've actually seen that and we've previously published our results with respect to client satisfaction, which have been above both Mexican and U.S. averages for the industry as a whole.

And the value of that relationship is really driven into being able to understand their needs, to understand their renewal requirements and also plan with our customers for their growth and expansion needs as well. So I think that dialogue on a first-hand basis is really sort of irreplaceable when it comes to being able to support our customers and support the growth of their business in parallel with ours.

[Operator]

[Operator Instructions] There are no further questions at this time. I would now like to hand the call back over to management for any closing comments.

[Simon Hanna, executive]

Thank you, and thanks for 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 first quarter. Thank you.

[Operator]

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