Macquarie Mexico Real Estate Management SA de CV

BMV:FIBRAMQ12

Q2-2025 Earnings Call

[Operator]

Good morning, and welcome to FIBRA Macquarie's Second Quarter 2025 Earnings Call and Webcast. My name is Diego, 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, executive]

Thank you, and hello, everyone. Thank you for joining FIBRA Macquarie's Second Quarter 2025 Earnings Conference Call 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 informational purposes and is not a solicitation or 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've prepared supplementary materials that we may reference during the call. If you have not already done so, I would encourage you to visit our website at www.fibramacquarie.com and download these materials. A link to the materials can be found under the Investors, Events and Presentations tab.

And with that, it's my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon. Simon, you may begin.

[Simon Hanna, executive]

Thank you, Nikki, and thank you for joining us for FIBRA Macquarie's Second Quarter 2025 Earnings Call. The second quarter was another productive period for the team and for our business as we continue to focus on a high-quality capital allocation strategy that combined with a focused effort on same-store performance, driving impressive financial and operating results. This success reflects the quality of our real estate portfolio, a high impact made by our vertically integrated platform and our strategic positioning in key markets.

We're excited to report that the June quarter delivered record per certificate results in underlying U.S. dollar terms across a number of key metrics, including consolidated revenues, NOI, AFFO and NAV. All this contributes to a high-quality distribution with an attractive dollarized cash yield of 8%, supported by a prudent [ mid-80% ] payout ratio.

Let me dive into some highlights for the quarter. First, our industrial portfolio continues to deliver reliable results with leased GLA holding steady over the prior quarter and year. In 2Q, we executed 1.3 million square feet of leasing activity and grew rental rates by 6.8% to an industry-leading level of $6.45 per square meter. And what's especially encouraging is the stickiness that we're seeing from our existing customers. Of note, we achieved remarkable renewal spreads of 28% on commercially negotiated leases.

Last quarter, we spoke about the opportunity to add momentum to our results by selectively pursuing accelerated lease renewals on favorable terms. This quarter, we were able to achieve exactly this with the renewal of a sizable 420,000 square foot lease to a Tier 1 auto supplier in Hermosillo, realizing a double-digit lease spread. Further south in Guadalajara, we also completed renewals of 0.5 million square feet, with the highlight being the long-term renewal for a 170,000 square foot space for domestic-focused tenant where we were not only able to increase the rents by a substantial double-digit spread, but we were also able to convert the underlying lease currency from Mexican pesos to U.S. dollars. These are just 2 highlights that represent the value that FIBRAMQ can best deliver through the execution capabilities of our full-service in-house platform.

Our proactive approach to lease management has helped us maintain an impressive retention rate of around 90% for the quarter. And as we enter into the second half of the year, we have less than 5% of scheduled expirations, providing a stable outlook for leased GLA. Industrial occupancy at quarter end was 94.8%, up 10 basis points sequentially. As I mentioned earlier, our lease GLA performance has been particularly robust and has driven the record NOI results.

Much of our available GLA is accounted for by the delivery of new generation lead buildings that we are confident will deliver fantastic incremental income as the market for new leasing comes back. We, of course, continue to see macro and investment uncertainty, very much connected to tariffs and contributing to slower decision-making, primarily impacting new leasing. We remain confident in our assets and positioning and believe the long-term positive tailwinds that we have experienced in recent years will return, strengthening new customer interest once there is more macro clarity, especially with regards to the U.S. MCA renegotiation which now seems likely to drag into the first half of 2026.

On the growth CapEx front, we're particularly excited about our expanded development program in Tijuana, which aligns perfectly with our growth strategy focused on key markets. We've partnered with Grupo Frisa with whom we have enjoyed a strong and successful partnership for more than a decade to develop an industrial park that will feature up to 4 Class A buildings totaling 750,000 square feet of GLA.

What makes this development special is its location in a prime Tijuana submarket strategically positions close to labor and important transport connections. Furthermore, our internal platform, NPA, which has a strong existing local presence in Tijuana, comprising specialist property management, leasing and engineering professionals will be responsible for the property management of the assets upon completion, with FIBRAMQ earning market-based property management fees from the JV for this service.

And in Guadalajara, we continue with predevelopment planning and infrastructure works in anticipation of commencing construction for the first of 2 buildings that will comprise 460,000 square feet of GLA. I want to take this opportunity to emphasize our commitment to disciplined capital allocation. which has always been a key pillar for FIBRAMQ and more important than ever in the current environment. We will continue to selectively pursue growth in core markets, and these investments demonstrate the execution of that strategy to expand our portfolio in a manner that drives long-term sustainable growth.

The developments we pursue continue to target an NOI yield on cost of between 9% and 11%, while also incorporating the highest sustainability standards, which also generate operational efficiencies for our customers. In our retail portfolio, we continue to see steady improvements and we delivered 4.5% NOI growth in the quarter, with occupancy reaching a post-pandemic high of 93.4%, up more than 130 basis points year-over-year with average monthly rental rates also increasing by 5.2%.

These steady improvements in occupancy and sustained rental rate growth contributed to a record quarter of rental revenue. Moreover, we've continued to expand our tenant base, particularly in the entertainment and leisure segments and even our last mile logistics conversion, which has enhanced the diversity and quality of our rent roll. These results demonstrate the resiliency and quality of our retail portfolio, which is mainly located in high-density urban areas and provide shoppers with the range of essential goods and services.

As I mentioned earlier, the macro environment presents a complex picture. Our ongoing negotiations and tariff policies and broader economic uncertainties have introduced additional complexity to the investment landscape. However, Mexico's strategic position in North American supply chains remains robust. While we remain mindful of this backdrop, we're successfully navigating at the current market conditions while staying focused on our long-term growth strategy.

Before I turn the call over to Andrew, I would also like to take the opportunity to congratulate the Fibra Next's team on their IPO. It's a great transaction for the sector, and it's fantastic to see IPO activity come back into the Mexican Stock Exchange, which bodes well for the future.

Andrew, over to you.

[Andrew McDonald-Hughes, executive]

Thank you, Simon. I'm pleased to report we delivered another quarter of sustained financial performance. For the second quarter, we delivered record AFFO of USD 30 million, representing an 8.6% increase year-over-year. This result takes into account certain one-off expenses related to the establishment of our new industrial joint venture as well as costs associated with our trustee substitution that was carried out in recent weeks.

Speaking of which, I want to express my thanks to the FIBRA Macquarie team who acted swiftly and diligently taking immediate action and appointing HSBC as our new trustee as they provide a combination of local expertise, global reach and strong regulatory compliance supported by a deep global relationship with our sponsor. We received overwhelming support from certificate holders, lenders and stakeholders, and we have now formally executed trustee substitution documentation.

Turning to our balance sheet. FIBRA Macquarie remains well positioned with prudent leverage metrics and robust liquidity. As of June 30, our real estate net LTV was below 33%, and we maintained ample liquidity of USD 420 million. During 2Q '25, FIBRA Macquarie made a debt repayment of USD 50 million and anticipates subject to stable market conditions to steadily repay its drawn revolving credit facilities through the remainder of the year.

I would like to take this opportunity to discuss yesterday's update regarding our guidance for the full year. We are reaffirming our outlook for 2025. We continue to expect AFFO in the range of USD 115 million to USD 119 million. We are also maintaining our guidance for cash distributions of MXN 2.45 per certificate for FY '25 to be paid in equal quarterly installments.

Given the recent appreciation of the peso, we are updating our assumption with respect to FX for the remainder of the year to MXN 18.5 per U.S. dollar from a prior assumption of MXN 20.5. This does not impact our USD AFFO guidance range as noted above. However, we are revising our peso per certificate AFFO guidance range to MXN 2.8 to MXN 2.85, reflecting the impact of the updated FX assumption.

This guidance assumes stable market conditions and no material deterioration in the geopolitical landscape or trading relationships. The implied FY '25 AFFO payout ratio of approximately 87% based on the guidance midpoint and represents one of the most well covered distributions in the sector.

In closing, while we remain mindful of broader market uncertainties, our strong operational performance, robust balance sheet and strategic positioning continue to drive sustainable growth and value creation for our certificate holders. As always, Simon and I would like to take this opportunity to thank the team for their tireless efforts and our investors and stakeholders for your continued support.

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

[Operator]

[Operator Instructions] And our first question comes from Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

Just wanted to get some color on the potential lease spreads going forward. What's the current gap between your in-place rents and the market rent for your industrial portfolio?

[Simon Hanna, executive]

Thanks, Pablo. Simon here. Yes, it's a good question, given the -- we saw a very pleasing result for the second quarter, record spreads of 28%. At the start of the year, I guess we said we would be disappointed if we didn't get to double digit at a minimum for the full year. So it's fair to say at the halfway point and with just 5% remaining of scheduled expirations for the year. We're well on track to meet that. Yes, I guess with regards to what's left in the year, it is relatively small on a sort of an overall basis being less than 5%. But again, I think we'd be disappointed if we didn't get to solid double digits in the -- with what's left. So we like -- we like what's left. We think it's very manageable. And hopefully, we can continue the good performance that we're seeing on that so far.

[Pablo Monsivais, analyst]

If I may, Simon, you were to give some color for 2026 lease spreads, do you think it's going to be similar to this year?

[Simon Hanna, executive]

Yes, it's obviously a while to go before we get there, and we'll be giving our overall guidance update for next year, as you know, in a couple of quarters. But I think we still see good momentum heading into 2026. There's still a bit of a pre-COVID book, if you want to call it that, or [indiscernible] book, if you want to call it that, to roll over into 2026. So I think there's some still good renewals to be had in 2026. And overall, I think we still see momentum there, certainly in the second half of the year and for a good chunk of the renewals in '26, but it's still a little bit early to make a definitive call on that.

[Operator]

And your next question comes from Antonio Hernandez with Actinver.

[Antonio Hernandez, analyst]

Just a quick one regarding retail activity. What trends are you seeing right now? How is this relatively resilient to all the tariff noise that -- that, of course, affects the overall outlook of the industrial portfolio?

[Simon Hanna, executive]

Yes. Thanks, Antonio. Retail, we had a really good quarter. As you know, it's about 15% of our overall NOI. So it's a nice little contributor for the overall performance. I think when we think about retail heading into the second half of the year, in general, we'd probably see more tailwinds than headwinds from a portfolio performance perspective.

I think it's generally still a little bit of a fickle or fragile retail market backdrop. You see that in some of the retail industry statistics. But overall, we're pleased with the progress of our own portfolio. It's definitely in line with the budget that we established for the retail portfolio at the start of the year. So again, I think when we think about second half performance, we would be a bit disappointed if it wasn't at least as strong as first half when we think about some of those key operating metrics, occupancy, rental rate, particularly NOI contribution.

So I think you should be expecting a resilient performance heading into the second half of the year, manageable expirations again. And look, I think also just given that we think about ourselves fundamentally as a U.S. dollar business model, I think the recent peso appreciation has also been a little bit of a bonus in that sense as well. So we're quite happy with the way that retail is contributing into an overall free cash flow perspective given current FX.

[Operator]

And your next question comes from Igor Machado with Goldman Sachs.

[Igor Machado, analyst]

It might be early, but I was wondering if you could please comment on commercialization for the Frisa JV in Tijuana. Are you having any early conversations with potential investors? Or what type of tenants do you envision manufacturing, logistics? Any color would help.

[Simon Hanna, executive]

Yes. No, thanks, Igor. Yes, we're obviously very excited about that project that we completed in the second quarter. For the time being, we're still in the preparatory work. So getting all the -- all the earthworks and basic infrastructure ready to go vertical. I was visiting the site earlier in the quarter, and it's coming on very well. We really like the location. It's -- it's effectively a walk-to-work type labor market. There's a lot of residential around it. So it's actually going to suit both manufacturing and logistics quite well given that and the proximity has 2 highway connections. So I would say it's, it's definitely got flexible end-user optionality there for whether it's manufacturing or logistics, could suit both.

And yes, look, I think it's something where Tijuana, it's probably something we feel good about in general, actually, when you think about the near-shoring markets. There's definitely a lot of softness out there. Even in Tijuana, we saw a little bit of vacancy increase. But the dynamic heading into the second half of the year, we are seeing a fair bit of activity on a relative basis in Tijuana compared to some of the other near-shoring markets. So I think probably feel a little bit more confident around sort of going vertical there earlier than other markets, but it's something that we have to just assess as we head into the second half of the year. And as I said, I think the optionality we have for that park it's abundant given that it's got great labor with both manufacturing and logistics in play.

[Operator]

And your next question comes from Piero Trotta with Citibank.

[Piero Trotta, analyst]

My question is regarding your CapEx program. I would like to know if you see any risk on the yield on cost levels between 9% and 11% going forward? Like what are your main concerns for this rentability? Just this one.

[Andrew McDonald-Hughes, executive]

No, thanks for the question, Piero. It's very relevant just given what we're seeing in the broader market. And I think generally speaking, we remain confident in those levels and continue to maintain that assumption and forecast for our development program. I would say we have seen sort of a step-up in underlying land prices over the last 12 to 18 months, also combined with some step-ups in infrastructure costs and being able to ensure that we can deliver utilities to those sites, which is an important part of the commercialization aspect of those projects. However, we're confident in the underlying market rental rates that we've seen for those projects and confident that we can still maintain that 9% to 11% range with potentially sort of the lower end of the range being in more active markets, like Tijuana and Mexico City, where land prices tend to be more expensive and our other core markets trending sort of to the midpoint of that range.

[Operator]

And your next question comes from [indiscernible] with GBM.

[Unknown Analyst]

First of all, I want to make sure if you can hear me well.

[Simon Hanna, executive]

Yes, Enrique, loud and clear.

[Unknown Analyst]

Perfect. Your current net real estate leverage is at 32.8% with a debt maturity profile average in 3 years. Are there any refinancing activities or strategies planned to extend maturities or further optimize your debt structure?

[Andrew McDonald-Hughes, executive]

Thanks, Enrique. I appreciate the question, Andrew here. Yes, we're actively looking at our refinancing program as we move through the remainder of this year given the maturity profile we have through FY '26 and FY '27 in particular and actively planning the extension and I would say, sort of expansion of our balance sheet positioning. Very comfortably maintaining our guidance with respect to leverage between -- an LTV between 30% and 35%. And so very comfortably sort of holding the range, if you like, that we have provided to the market, but are certainly working through that refinancing program to extend maturities. And we're seeing very positive, I would say, indications from the debt markets more generally with strength across the commercial banks and public markets as well. So we're confident that we'll be able to deliver a solid result with respect to the extension of those maturities.

[Operator]

And your next question comes from Felipe Barragan with JPMorgan.

[Felipe Barragan Sanchez, analyst]

Mine is on your cash balance. So you have around $200 million and your development program is for $50 million to $100 million, and you have about $44 million allocated for the Tijuana project. So I'm just curious on what the rest of the cash could be or if -- I mean, I guess a portion of it will be for more developments. And just curious on if maybe that could -- some of that cash might be used for the Prologis, Terra and Legacy assets that might be sold -- sorry, that will be sold. We had a peer say yesterday that you guys -- sorry, that those assets -- that there's like -- the assets were finally listed last week. So any color on that would be appreciated.

[Andrew McDonald-Hughes, executive]

No, happy to. And Felipe, just for your benefit, you may recall that in the first quarter of this year, we did do a precautionary drawdown of $225 million against our credit facilities and revolving credit lines, really just to precautionarily guard against any particular market dislocation that we saw that could potentially arise from those -- the tariff discussions and broader macro uncertainty.

During this quarter, we've actually repaid $50 million of that drawdown as we've seen those debt markets stabilize. And I think the outlook remains fairly robust, and we're progressively considering the repayment of those revolving or drawn revolving credit lines through the remainder of the year, subject to continued stable market conditions. But absolutely right that certainly a portion of that will be earmarked for the development program and with, I would say, a good pipeline of opportunities to deploy through the remainder of the year. But I would say hitting the top end of that pipeline -- of that guidance will depend on some acquisitions or closing of additional new land parcels or opportunistic transactions in the second half of the year.

To your point on the FIBRA Prologis or Terrafina portfolios that are in the market, I think as the market is well aware, we did participate in the Terrafina bidding process last year. We do see some interesting assets across their portfolio. We're certainly looking and analyzing those, but we'll remain very disciplined with respect to our capital allocation and looking at what the quality, location and strategic fit with our portfolio would look like on a combined basis for any of those portfolio transactions. So something that we're monitoring and taking a close look at. But certainly, we'll remain disciplined from a CapEx deployment perspective.

[Operator]

[Operator Instructions] And your next question comes from Abraham Fuentes with Bank of Santander.

[Abraham Fuentes Salinas, analyst]

My question is today Macquarie is trading with a significant discount versus your net asset value. So would you be willing to do some buybacks?

[Simon Hanna, executive]

Yes. Thanks, Abraham, and thanks for joining the call. Yes, it's something where, obviously, from a buyback point of view, we appreciate the, I guess, the financial value aspect and something that we have an active program available. We've got that renewed through the year to -- with holders. So we have that MXN 1 billion through to June of next year as normal.

So yes, certainly, we see the -- you will appreciate the financial and accretive element to it. There is a trade-off there as well that we also just balance as always. So whether it's to do with reduced trading and liquidity that comes with buyback, increasing leverage as well where capital is precious, and we have obviously a lot of great growth CapEx opportunities on the real estate side. So we'll continue to make that analysis. Fair to say we have been active in the past. We've done about 6.1% of our market cap, we've done as buyback in the past. It's something that we're open to, as I say, conscious of the potential accretion, but it's a balancing act with the other capital allocation priorities and something that we'll monitor in the second half of the year.

[Operator]

And your next question comes from Alan Macias with Bank of America.

[Alan Macias, analyst]

Just a question on licensing and permits. Have you seen any change there in terms of timing?

[Simon Hanna, executive]

Yes. Thanks, Alan. Not greatly. I think it continues to be something where, generally speaking, we see that, in particular, Northern markets a little bit more, let's say, tuned to industrial development and sort of the licensing that goes around that when you get to places like state of Mexico. Mexico City becomes a little bit more variable. So it's something that we're mindful of. But overall, we haven't seen any major change through the year in that dynamic.

But look, on that topic of just market trends, I guess, maybe just give some running commentary there as well. I think we are seeing that for the time being, it's those smaller buildings, maybe less than 100,000 square feet plug-and-play type buildings there. We're seeing that there's a little bit more activity across the country for those type of spaces. That's what we've seen in the lease-up in the second quarter. And I think the pipeline for us on the leasing side also suggests that for the second half of the year.

I think Tijuana looks quite good at the moment on a relative basis compared to some of those other near-shoring markets. I think we've seen a little bit of more pickup with Asian -- Asian electronics customers. And I think Mexico City, Guadalajara continues to remain pretty strong. Probably the -- on the challenge side, it probably boils down to a couple of categories. One is those sort of larger Class A buildings, the type of buildings we've delivered. They're subject to tenants making those larger CapEx decisions, and that's just a little bit more difficult in the current macro backdrop to pull the trigger on that. So that's something that we're assessing. And I think that will come back with more visibility on USMCA renegotiation.

And I would say that that's a general softness that we're seeing on the near-shoring markets, particularly Monterrey, Juárez, Reynosa, and I think continue to remain pretty soft. But again, we think that as visibility on USMCA picks up, we think that the pent-up demand there should lead to some good demand side fundamentals returning to the market. So that's what we're looking out for in the -- leading into the second half of the year.

[Operator]

Thank you and there are no further questions at this time. I'll hand the floor back to management for closing remarks.

[Simon Hanna, executive]

Thanks very much, Diego, and thanks, everyone, for participating in today's call. We do 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 third quarter. Have a great day.

[Operator]

Thank you. That concludes today's call. All parties may disconnect. Have a good day.