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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone, and welcome to today's Fibra Danhos Second Quarter 2019 Earnings Call. [Operator Instructions] Please note this call may be recorded. [Operator Instructions]
It is now my pleasure to turn today's conference over to Elias Mizrahi, Investor Relations Officer. Please go ahead.
Hi, everyone. Good morning. I'm sorry for the delay. We had an IT issue with the phone bridge. But at this time, I would like to welcome everyone to Fibra Danhos' 2019 Second Quarter Results Conference Call.
We issued our quarterly report yesterday after market close. If you did not receive a copy, please do not hesitate to contact us, and be aware that they are also available on our web page.
Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions and company performance and financial results. These statements are subject to a number of risks and uncertainties. I would like to introduce Mr. Jorge Serrano, CFO of Fibra Danhos, for initial remarks. And I will now turn over the call to him. Please go ahead, Jorge.
Good morning, everyone. So as everybody knows, our long-term strategy consists on developing and operating state-of-the-art real estate assets located in densely populated areas, mainly in Mexico City, while maintaining a prudent capital approach.
As we face uncertainty and higher-risk aversion in the market, we have maintained discipline and focus on the best possible execution of such strategy. In line with this goes our intention of reducing our leverage by amortizing our short-term debt at year-end and maintaining an efficient portfolio. Sound operating indicators across our portfolio and the ramp-up process of our most recent opening sustained the strong financial results posted during the second quarter.
Total revenues and net operating income increased 15.4% and 16%, respectively, with a net operating margin of 81%.
Lease spreads for the quarter were close to 7%, and we received over 31 million visitors during this period. Same-property occupancy stood at 98.3%, while total occupancy increased to 91.6%.
Net operating income, excluding key money, reached MXN 1.06 billion that represents MXN 0.75 per CBFI with economic rights. This figure compares with MXN 919 million in the same period of the previous year, which represented MXN 0.67 per CBFI, and increases of 15.5% and 13.5%, respectively.
AFFO reached MXN 990.8 million during the quarter, representing MXN 0.70 per CBFI. AFFO and AFFO per CBFI posted growth of 8.5% and 6.2% year-over-year.
Our second quarter distribution of MXN 0.61 per CBFI represents a 1.7% growth year-over-year.
Dividend payout for the quarter was 86%. Our dividend remains stable while reserving MXN 0.07 per CBFI, equivalent to MXN 130 million to meet short-term debt maturities.
Regarding corporate governance matters, we held an extraordinary shareholders' meeting that approved certain adjustments to the consideration paid to the contributors of the commercial component of Toreo Parque Central and Toreo Virreyes, resulting in a net issuance of 9.1 million CBFI, which represents 0.6% of outstanding CBFIs. This was a pending issue that was announced on the IPO documents aimed to determine the contribution value of these assets, which at the time were under development according to their stabilized cash flow generation. The agreed methodology was completed considering best practices and aligning minority interests with those of the contributors, resulting on a partial cancellation of 7.3 million CBFIs for Toreo and a substantially lower issuance of 16.4 million CBFIs for Toreo Virreyes. Regarding lease progress in our properties, Antenas continuous -- Parque Las Antenas continues to stabilize, reaching around 80% and growing the number of visitors in our shopping center. Toreo office Tower A incorporated new tenants, reaching 95,000 square meters leased, while shopping center remains fully leased. Puebla on the other hand inaugurated the hotel business class recently, and the Aquarium will be ready by the fourth quarter of this year. So overall occupancy reached close to 92%.
Regarding development, work process continued for Parque Tepeyac that is now scheduled for the first half of 2021, with an estimated investment of MXN 3.6 billion, out of which 50% corresponds to us. Our cash position reached MXN 1.6 billion, including MXN 467 million tagged for this project on top of overall progress already achieved.
With this, I conclude my initial remarks, and I will open a question-and-answer session. Thank you very much.
[Operator Instructions] And our first question comes from Sheila McGrath with Evercore.
I wanted to ask you a little bit more detail on the debt that you plan to pay down. We do think it is a positive that you retain cash flow, paid dividends out less than AFFO. And you mentioned that you're going to pay a piece of debt down. I'm wondering when that pay down is and what the current coupon on that debt is.
Sheila, this is Elias. So regarding the debt, this is -- just let me give the overall debt profile for Fibra Danhos. We have 3 outstanding bonds, out of which 2 of them are fixed rate maturing in 2026 and 2027. The third bond, which is the one we intend to pay, is actually a floating-rate bond. Right now, it's quoted at TIIE plus 65 basis points, so it's around 9.5 -- well, 9.2%, roughly what we're paying every 28 days. This is a monthly payment bond. This is set to expire on December 2019.
So part of the strategy we're doing with the cash retention is basically retain cash for 2 main purposes. First, to pay down this debt, which will give us 2 main benefits. First, this will translate into an immediate MXN 100 million cash savings in interest payments for Fibra Danhos. And second of all, it would lower our LTV even from 10% to 8.5%. And I would say even more importantly, this will give us flexibility given that we will have no maturities until 2026 and 2027. And both of those bonds are in a fixed-rate level. That will give -- or that will make our average cost of debt even slightly lower than it is today at around 8.1%, 8.2%.
And just to talk a little bit also on the cash retention that we are pursuing, the second purpose is also Parque Tepeyac, which we resumed the works. So with the cash retention, we intend to pay down the debt and we also intend to finance Parque Tepeyac that we will -- and in this way, we will not need any more debt or equity to finance Parque Tepeyac fully.
Okay. That's very helpful. And on Parque Tepeyac, could you tell us a little bit more about that project in terms of office and retail and what kind of returns you're targeting? And also, will you receive any fees from your joint venture partner?
Yes. So basically, Parque Tepeyac is a retail center. We have no offices there. This is a retail and entertainment center. We have 2 anchor stores joining the project. We're looking at a grocery store as well and a couple of entertainment components similar to what we have in other malls that will make the entire place also an entertainment hub. This is a -- Fibra Danhos is participating with a 50% stake. We are collecting no fees. We're basically coinvesting with them with our partners in this project.
To give you a little bit of specs on the project, this is a 50,000 square meter plot of land where we are doing close to -- slightly more than 200,000 square meters of construction. The project will have more than 100,000 square meters of commercial area and around 70,000 to 75,000 square meters of leasable area.
And the returns we're targeting -- yes. We're -- Fibra Danhos is in charge of operations, management, leasing, construction, so we're basically doing the whole thing. And the target -- the rates of returns we're targeting for Parque Tepeyac is roughly from 11% to 12% cash on cash. I think this is a fairly conservative number.
Our next question comes from for Froylan Mendez with JPMorgan.
So we saw a very good leasing spread despite all the deterioration in economic activity in Mexico. I just wanted to understand if this is reflecting in higher occupancy costs for tenants. So can you comment on the level of occupancy costs you're seeing today? And how has this level evolved versus last year?
I mean occupancy costs, Froylan, has been around 10% over the past quarters. There was a good number in leasing spreads close to 7%. But also, if you look at tenant sales and something that's interesting about tenant sales, if you look at both the quarterly number and the first 6-month number, which actually during the first quarter, there was an impact because of parking tariffs -- sorry, the parking measures with the cars, the gasoline shortage in Mexico City and other factors. When you look at the first 6 months of the year, that number was compensated for. And actually -- so sales are doing well. Rates -- leasing spreads are doing well as well. So this is -- this shouldn't be reflecting on higher occupancy costs, stabilized basis.
[Operator Instructions] Our next question comes from Jorel Guilloty with Morgan Stanley.
So I have 2 questions. The first one is on your net CAM. Again this quarter, the net CAM was around MXN 30 million, which is basically similar to 1Q. Our understanding -- we believe that it's likely driven by advertising as it happened last quarter. But what we want to understand is, one, is this -- is it really driven by advertising? And second, are there more opportunities for you to grow this line item, growing the net CAM going forward?
And my second question is on administrative fees. We saw that those dropped nearly 10% year-on-year. So I wanted to get a sense if we should consider the administrative fees for 2Q as a run rate. Or is there room for more efficiencies going forward?
Jorel, so basically, regarding CAM -- and I think there's 3 components to this question. Advertising revenues have been strong for Danhos in the past 5 years. They continue to be strong. They represent a good source of income for us, and that should be revenue that is actually -- on a net basis, there should be a lot more revenue than expenses on advertising just because there's so many spaces that we sell to advertising agencies and so on. So this is obviously -- there's a big part of this in the net CAM number.
Something that's also interesting, and we've been talking about this in previous calls, is the energy contract that we signed is actually now paying us the savings of some costs regarding the long-term energy contract that we've been discussing. To -- just to remind some aspects of the energy question, I'm going to tell -- I'm going to ask Jorge to comment on that.
Yes. So basically, Jorel, as you recall, we signed a long-term contract to fulfill about 80% of our energy requirements. And basically, we fixed a price that it will be green energy. And since there's been some delays on the actual delivery of the energy, the agreement was to pay us the difference between what we paid to CFE to what we have to pay to this private generator.
So actually, since March, we started receiving certain savings. We expect to receive the energy still in the next 12 months. So we will be getting savings to compensate these costs. And then we will have basically all our properties with most of the energy required being generated by a windmill, and this will be for a long-term period going forward.
Yes. And I would say that lastly, in all of our shopping centers -- or most of our shopping centers, most of our tenants pay an 18% maintenance fee on top of their rent. And basically, whatever we can achieve on savings with our suppliers, especially on security, on maintenance, on gardening, et cetera, which we have a lot of power with, just given the scale of Danhos, we believe that we have achieved economies of scale. So we can -- as rents continue to grow, this 18% continues to grow and we are maintaining our costs, I would say, controlled. So this also generates a surplus for us.
Is there anything on the -- more on the revenue side that we could expect going forward? Because you guys addressed more on the cost side of the CAM but I was just wondering more opportunities on -- like advertising going forward?
Yes. I mean, this is something that we've done for the past 5 years. We expect to continue selling advertising spaces. It's a big part of our business. We sell close to MXN 120 million, MXN 150 million per year. So this is something that's obviously very important.
We'll now take a question from Andrea Lara with Signum Research.
I have 3 questions. First, will you maintain this new level of loan-to-value in the long term? Or do you plan to issue new debt after the maturity of the bond that matures on December?
Also, what are your perspectives for the lease spreads in the next years? And if we could expect an important reduction especially for the office sector.
Finally, what payout ratio could we expect for the following quarters? And if you are planning to maintain that level.
Yes. Regarding the question of the leverage. I mean we're actually at the 10% leverage. And after paying the short-term bond, we will be at around 8.5%. For the moment, and as we explained earlier, we do not intend to get additional debt, not for our CapEx program and -- I mean we -- in case needed, we have access to credit lines. And this would be only used if new projects arise. So our leverage will be below 10% at about 8% or 8.5%.
Regarding -- Andrea, regarding leasing spreads, we don't see a substantial decrease. I don't think there's the reason for that. I think properties are fully stabilized and there's a lot of interest to be in prime quality properties. The office sector -- and it's something we've been talking about in previous calls, but the office sector is oversupplied in certain corridors. We believe that our office space is not very exposed to those corridors. So depending on the lease and on the tenant, this is something we analyze contract by contract.
And then could you repeat your last question, please?
Sure. What payout ratio could we expect for the following quarters? And if you are planning to maintain that level.
So the payout ratio -- this is something -- we don't have a strict payout ratio based on percentage. The payout ratio that we've discussed in the past and we've talked about in the past is to have a stable distribution trend. We don't intend at all to cut dividends. And given the CapEx program and given that we do intend to pay debt, we do intend to retain cash for these 2 needs but we do intend to have a stable and growing distribution trend.
[Operator Instructions] Our next question comes from Lombardi Vinicius with Bradesco BBI.
Actually, here is Roberto Waissmann speaking from Bradesco BBI. We have 2 questions here. First of all is regarding Mexico retail sales, which is positively surprising. How do you think we could expect this going forward given that we have a slowdown in GDP forecast for Mexico and macroeconomic indicators in general?
And the second question is regarding the fair value for that adjustment for properties. Could you give us a little more visibility of that, why this adjustment go -- went down and then which are the properties we're talking about here?
So Roberto, regarding your first question, I mean I think we have a pretty good representation of the Mexican consumption market with the mix of formats that we have in our shopping malls regarding commercial format, services, entertainment. And for this reason, the figures are pretty much in line with the NPAT figure that is published also every quarter. It was something around 4.5%. And this basically incorporates department stores and grocery stores as well. That, in fact -- I mean it replicates pretty much the mix of payments that we have. And that's why we reported, I mean, a little bit above NPAT figures but a figure that is similar to that.
We've seen a -- the kind of a slowdown in general in the Mexican economy. But as you know, the concentration that we have in Mexico City makes our portfolio much more resilient. And Mexico City maintains the economic dynamism compared to the rest of the country. That's why we feel comfortable with this concentration in Mexico City.
I mean we've seen the -- regarding your question, the economic variables are different from the public figures and they have private analysts but we too are seeing a slowdown in the GDP for this year. But fortunately, this is not still reflected in the numbers of our portfolio.
Yes. And regarding the adjustment, this is something that we receive every quarter from the appraisal company that we have. So basically, this is Coldwell Banker Commercial doing the appraisals. According to IFRS, there's yearly appraisals and quarterly adjustments to those appraisals. These movements are due to market. Obviously, there's been a lot of things happening in the Mexican market, interest rates, inflation, just general market conditions. This is not attributable to one property. I would say this is a generalized portfolio issue and this is something that we're not worried about. It's a number that is less than 0.2%. So this is not something that worries us at all.
Our next question comes from Cecilia Jimenez with Santander.
I actually have 2 questions. First, I would like to know if you have any plans for the buybacks. Basically considering the level of where the stock is today, what would prevent you to being more active on the buyback side? That's question number one.
And then on question number two, you mentioned in the press release that the window for -- the agency window in Mexico City has restarted after the temporary shutdown. So could you give us some color regarding the timings of the developments and the processes? And if whether this delay could have an impact on the schedule for the ramp-up of Parque Tepeyac? And if you have seen an improvement or slowdown in the process of getting permits under the new administration? Those would be my 2 questions.
Cecilia, this is Jorge. Well, regarding the -- your question about Tepeyac, we did have some delays because we had our licenses revised. But once the process was finalized, we have license in place and we already started the project. So now we have a very clear picture of the time line for the project. We estimate this project to be ready by the first half of 2021.
This is an important project, a big project. Elias mentioned it's more than 200,000 square meters of construction. So it will take approximately between 18 and 24 months. But it is very clear for us today that it will be ready by 2021. And we already started the commercialization of the project. We have letters of intent for these projects. So we are working not only in the construction but also in the commercialization of the project.
And regarding buybacks, we do have a buyback program in place but now the priority is to pay down debt. We have this MXN 1 billion maturity in December. After paying down debt and after meeting our CapEx requirements, having said that we will retain some of the cash flow we generate from the quarter, maintaining a stable dividend, we will probably think on the buyback program. But right now, the priority that has been given by our Technical Committee is to pay down the debt. We will maintain the buyback program in place.
Okay. Perfect, very clear. Maybe just a follow-up on the agency windows in Mexico City. Has -- or has it restarted for all the projects? Or is it in a gradual way, project by project? My question is has it -- is it reopened for everyone? Or you were among the first on the line to resume operations on the property.
So basically, Cecilia, the release of Parque Tepeyac, this is for us. So in our case, we have the permits and licenses ready and we are working on the project. I wouldn't be able to comment on the rest of the projects in Mexico City. This is something that every developer is looking at on a personal level. In the case of Fibra Danhos, we're happy and -- because we have the permits and the licenses in place. So this is the only project which we have under construction today.
[Operator Instructions] And we'll now go to Alan Macias with Bank of America.
Just a follow-up on the last question, I guess, you answered. But any perception you have of the new Mexico City government in having a more open view on construction permits and speeding up the process in order for construction activity to pick up in Mexico City? Have you seen any change in the government?
So basically, what we see is that the developers that comply with the regulations at 100% shouldn't have a problem with the issuance of their licenses and permits. Obviously, when the government started analyzing a lot of projects in January after they came in, they started looking at a lot of projects. Some of them did comply with regulations. And those licenses are now issued. Other projects did not comply with them, and that's part of the reason why they might not have licenses yet. I think that the government has the intention to continue investing or continue promoting development every time it is done inside the legal framework. And inside, it is done with the vision that they have for the city, respecting and complying with the laws.
So in the case of Danhos, we're a serious developer. We look at the city as -- we are part of the city and we intend to continue investing in the city every time within the legal framework. So this is something that's important to us, and I think that's the reason why, in the case of Tepeyac, we have permits and licenses.
And we'll now go to Francisco Chávez with BBVA.
My question is [ for activity ] in the last few months on the office buildings, specifically in Toreo. We have seen a slight progress in the leasing activity. What do you expect for the coming months? When can we assume that these office towers will be stabilized? And also, if you can give us some color on the kind of tenants that are leasing new space and on the level of rents that you are signing contracts.
Paco, this is Elias. So in Toreo, we believe we've achieved a great progress. To give you an idea on the general progress, we've leased more than 95,000 square meters to date, which represents more than -- close to 80% of the office inventory for this project. And the office towers were delivered -- Towers B&C were delivered in 2016. Tower A was delivered mid-2017. So I think achieving that progress to date with the market we have today says a lot about Toreo.
During the quarter, we leased more than 5,000 square meters and we have letters of intent for an additional 7,000 square meters. Some of the tenants we have come from the banking industry. Some come from the telecom industry. These are all AAA tenants, very strong credit quality. We have Mexican companies as well. So we continue -- and to see interest in the space, this is obviously a process that has taken some time but we believe we've achieved tremendous strides. So this is one of our top priorities, and we'll keep on working on this.
Great. And also, if you can comment on the rent levels that you are signing contracts now in Toreo?
Yes. We're basically leasing around $20 -- in the low $20s, per square meter.
Great. And another question regarding the hotel that started operations recently. Can you give us any color on the occupancy? And how well is that hotel doing?
So basically, this is a business-class hotel that we inaugurated in Puebla. Actually, the formal inauguration was last week. This hotel is operated by Grupo Posadas under the brand name Fiesta Inn. The data we've received is positive so far. We don't have many numbers yet. So the hotel just started operations in mid-April, and the formal inauguration was held literally last week.
So this is something that we intend to give more color on to the market probably when there's more months under operation. But this complements the shopping and entertainment complex pretty well. It adds a new component to the project and hope this will continue. Actually, this started contributing revenues since April and will continue stabilizing yet further during the remainder of the year.
And we'll now take a follow-up question from Sheila McGrath with Evercore.
Yes. I wonder if you could clarify on your earlier comments that you expect to retain enough cash flow to fund both debt paydown and funding Tepeyac. Is that accurate, you don't need any more debt? And what will the leverage level look like after completion of that project?
Sheila, this is Jorge. I mean we do plan to maintain our dividend stable. And then depending on the cash flow generation going forward, we will prioritize debt payments and CapEx needs. And I mean we will try to reach these needs with those cash retentions. In case needed, we do have available the revolving credit line committed facility. But it will all depend on the cash flow generation and the CapEx needs going forward.
Okay. That's great. And then if you could give us any insights on how we should think about key money expectations for the second half of the year?
So basically, we expect around the similar levels we've received in the first 2 quarters. So -- yes, and we will start getting key monies from Tepeyac probably by the end of the year. So that key money from Tepeyac, we'll get in the fourth quarter and probably more towards 2020, Sheila. But during the last 2 quarters of this year, we expect to have a similar number than Q1 and Q2.
And we have no further questions at this time. This does conclude today's program. Thank you for your participation.