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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra UNO's Q1 2024 Results Conference Call on the 25th of April 2024. [Operator Instructions].
So without further ado, I would like to pass the line to Mr. Andre El-Mann, the CEO of Fibra UNO. Please go ahead, sir.
Thank you, Michael. Thank you, everybody, for being here with our first quarter of 2024 results call. I am very glad to deliver yet again, very good results, very exciting news from our company. And getting the risk of sounding like a broken record, I'm going to tell you that we have broken our own records again for the 50-and-something quarter again, with the highest numbers of revenues, highest numbers of NOI ever, and we are very pleased to deliver these numbers with current environment in Mexico in the region. As you know, we have elections this year here in Mexico and also in the U.S., and everything is somehow stressed.
But for our company, we are continuing to regain the position that we were aiming to since the pandemic struck, the pandemic struck 5 years ago. We try to get to the pre-pandemic levels. We reached the pre-pandemic levels in the industrial side. As you already know, way before this call. And we reached our occupancy level of the retail space, pre-pandemic retail space occupancy level just last quarter at the end of last year. And we are yet about to get to our pre-pandemic levels on the office sector. I think we are very close to achieve that number.
And we have been seeing the recovery of our economy in our world, our real estate world, diversified real estate world of our company. We are seeing this recovery and we are seeing it, following it very closely. So I think that the good results that we delivered that we posted yesterday are just the result of the hard work of -- that we have been implementing to the company in the last quarters. I think that we are going to be distancing ourselves from the rest of the bunch. I think that our results will continue to improve in the next coming quarters. Of course, that we have been feeling the pressure of the high rates as you can see in our numbers posted yesterday. But I think that we've reached the highest level that we will post, and let me expand a little bit on that.
I think that we don't have any other expirations coming this year or next year. Everything that we needed to renew, we already done. And we are today posting the impact of that renewal and we won't be posting any other impact in the near future. And that's why what I am trying to explain that we already reached the peak in the impact of the high rate.
Of course, we expect, as all the market has discounted that we expect that the rates at some point late this year or early next year, will begin the way down. So having said that we don't have any expiration this year or next, I think that we are in a very good position to start the recovery in terms of the cost that we have been -- that has been impacted our balance in terms of the interest rates.
So having said that, we -- of course, Jorge will talk about the numbers in detail. But before he does that, I would like to say that we are continuing to work very hard on 2 fronts. The first front is on the internalization process that is going very good. We expect to have this finished -- we expect to have this finish this very quarter, second quarter this year. And we are working also in the carve out of the industrial portfolio.
I just want to repeat and again, risking to sound like a broken record that we have the best portfolio whatsoever in the industrial side. And we have the best future ahead of us in the industry side for a number of reasons. And we will get into that world. We will get our carve out, and we will get the repricing of our properties in due time. We are working in different fronts. Jorge will get into the details of it again, but I just want to stress that we have -- we are working in different fronts. We are not limited to any of those -- and of course, we will get it done, and we will get the best opportunity for the company I think in these coming months.
So -- having said that, we expect that the company will continue to perform as we have been performing for the last 50-and-change quarters. And today, I see a very bright future for our company. And it doesn't really have any impact on this company, we don't expect an impact for this company, neither for the elections in Mexico or the election in the U.S., I think the impact on the interest rates is already capped, and we expect all the work that we have been doing in the last couple of years coming out of the pandemic, it will begin to show in our numbers in the next coming quarters.
So thank you very much for being here. I would like to pass the mic to Jorge to go into that with the numbers. Jorge, please?
Thank you very much, Andre, and thanks, everybody, for joining our first quarter '24 call. As usual, we're going to the quarterly MD&A. Starting with our revenues, we reached another milestone of MXN 6.8 billion, 0.6% above revenues for the fourth quarter of 2023 and 7% above year-over-year. This is obviously a combination of rental increases that result from the inflation pass-through in our active leasing contract. The lease renewals that we've had mostly and largely positive spreads that I will discuss briefly in a second. And obviously, we also are showing the offset of the negative effect of the exchange rate appreciation that we had on the dollar portion of our revenues.
In terms of occupancy, as Andre was mentioning, we have had a very clear focus of the company to recover the occupancy that we had pre-pandemic in all the different segments. And as per our strategy to be at a 95% occupancy for the overall Fibra UNO.
Going into the details of the industrial portfolio, we closed the quarter at 98.4%. That's 10 basis points below the fourth quarter of '23. This is just a normal course of business operation in an incredibly tight market. Actually, everybody seems very happy when we talk to people about 98% occupancy. It is good, but at the end of the day, it's also inefficient. We'd like to have a little bit more space in order to provide further growth of our tenants, and we don't have that. So the market is very hot, very strong, and it continues to show that in the industrial segment.
In the retail portfolio, we closed the quarter at 92.2%. That's 40 basis points above the fourth quarter of '23. So we continue with the trend of recovering the occupancy in the office in the retail sector. The office portfolio closed at 81.6%. That's 10 basis points below the previous quarter. Again, this is part of that normal course of business, but we do expect to finish the year somewhere between 83% and 85% occupancy for the office segment. We are seeing a return of people to the offices and a lot of people that gave back space during the pandemic are coming back to us and asking for some of that space back. So we do expect to continue to see recovery in occupancy. I'll talk about the rents in a second. But just to state something that we have been stating specifically in the office sector for a while, we expect to see recovery of the occupancy, but not necessarily improvement in the rent. So any marginal improvement that we get. We obviously are very pleased and happy to see that happening.
The other portfolio recorded a 92.2% occupancy, which is basically stable against the previous quarter. And the Tapachula property was removed from the in-service category, one of the criteria that we have for properties coming out of in-service is once they reach occupancy above 90%, and that is with Tapachula is, we're very pleased with the performance of that shopping center. So we now don't have properties in the in-service category.
Moving to the operating expenses, property tax and insurance. We're happy to see a reduction of $50.9 million or 5.7% compared to the previous quarter, mainly due to the seasonality of some expenses, which usually tend to increase towards year-end. We continue to see an increase in property taxes of 2.4% compared to the previous quarter, mainly updates in taxes in some municipality and insurance expenses increased almost 10% versus the previous quarter, mainly due to updates in our insurance policies. But we continue to have, obviously, a strong focus in containing the growth of the operating expense line of the company.
This, at the end of the day means that our net operating income increased by MXN 75.5 million or 1.5% compared to the fourth quarter of '23 to reach almost MXN 5.2 billion. NOI margin calculated over rental revenues was 84.2% and 76% compared to total revenue. So we have about a 1 percentage point recovery in margin compared to the previous quarter. Still not where we want to get, but we are on track in the direction where we want to head.
Going to a little bit more detail to what Andre was describing in his introduction, the net interest expense line increased by MXN 147.5 million or 6.1% compared to the fourth quarter of 2023. If you recall, we issued $600 million of new senior 2034 unsecured notes. There's 2 elements that impacted the interest expense line. One of them is obviously that we are replacing a bond that had a coupon of 5.25% with a new bond that has a coupon of 3.75%. So it's part of the rate increase that we are seeing. The good thing is that we have a very long-dated debt. So we don't have to reprice all of our debt immediately. We did the refinancing of the '24 this year. And as Andre was saying, we don't have any more refinancings to do this year or the next. The next one is 2026. So we'll see where rates are in 2026 when we have to deal with the '26 bond.
The other element that also increased interest expense is the fact that we did a make-whole call on the 2024 bonds and the make-whole call called for a 30-day notice period, which required us basically to have the carry of 2 bonds at the same time, and that increased obviously the interest expense line. In addition to that, obviously, that increased the average cost of debt for the company. We had capitalized interest for MXN 551 million. And also the impact of the pricing of the derivatives of financial instruments had an effect on the interest expense line, and that is partially offset by the exchange rate appreciation from MXN 16.92 to MXN 16.70 per USD. So that benefited us a little bit. But net-net, basically, the issuance of the new '24 -- the new '34s to replace the '24s had the biggest impact in our interest expense line.
And today, we stand as Andre was mentioning, with a very solid position where in an environment where we expect interest rates to have peaked and expect to be more on the downside. Obviously, this is going to benefit us since we have a good portion of our debt with variable rate and that is going to benefit directly through the FFO once rates start coming down.
As a result of all of the above, funds from operations controlled by FUNO decreased by MXN 76 million or 3.3% compared to the fourth quarter of '23, reaching MXN 2.23 billion. Adjusted FFO is the same number, MXN 2.23 billion and also 3.3% below the previous quarter. On a per CBFI basis, during the first quarter of '24, we did not repurchase or issue any additional CBFIs. So the FFO and the AFFO per average CBFI was MXN 0.5858, which is a 2% decrease compared to the previous quarter.
In terms of the quarterly distribution in the first quarter of '24, we distributed MXN 1.5 billion, which responds 100% to fiscal result and is equivalent to an FFO payout of 68%, almost 69%. An amount of almost MXN 370 million of cash flow generated during the first quarter of '24 was used to pay a complement of the 2023 fiscal result. As you recall, the fiscal result has been larger than the funds from operation for the last couple of years, given the high inflation plus high interest rates plus the FX and the strong peso, which is a combination that obviously we did not expect that to happen, but we have been able to weather that storm, and we think we're in a position now where that is going to change, and we're going to go back to having a fiscal result that is smaller than the FFO that we are generating.
In terms of leasing spreads, contracts renewed in pesos were 12.5% or 1,250 basis points higher in the industrial segment. So we continue to see that teens and double-digit leasing spread in the industrial segment, almost 10% or 990 basis points in the other segment, 790 basis points, almost 8% in the retail segment. And we managed to get 2.6% or 260 basis points improvement in the Office segment, which, as I mentioned, expectation in this segment is to be flat to manage -- to be able to manage to have a positive leasing spread even if it's not with inflation, it's positive news that we are happy to see.
Now when we look at leasing spreads about the weighted average inflation, which was almost 5%, they were 750 basis points in industrial, 500 in others, 300 in retail and negative 220 for the office segment. Basically, because almost 50% of the square feet that were renewed in the Office sector where either at a small discount or flat to the previous rent that we have.
Now for dollar-denominated leases, we had almost 10% in the retail segment, 960 basis points, 8.4% or 840 basis points for the Industrial segment, and a negative 70 basis points or almost flat basically in the Office segment as expected.
Leasing spreads compared to the weighted average dollar inflation of 3.5% for the CPI, were plus 620 in the retail, plus 490 in industrial and minus 420 in the Office segment.
In terms of constant property, the rental price per square meter in constant properties increased by 2.8% compared to weighted average inflation of 4.6%, therefore, a negative 1.8% decrease in real terms, mainly due to the appreciation of the FX of the dollar, which was 8.7% for the quarter and the effect that this has on our dollar-denominated contracts. And obviously, as you know, there is a natural lag in the transfer of inflation of about a year more or less in our contracts.
Moving to the subsegment levels. The portfolio's total annual rent per square foot increased from 30% to -- 13% sorry, to 13.1% (sic) [ $13 to $13.1 ] or almost 1% compared to the previous quarter, mainly due to increases in current contracts and renewals, which, again, was offset by the FX appreciation, which has continued throughout this year, albeit a small -- slower pace than we saw at the beginning of the year.
NOI at the property level for the quarter increased 0.6% compared to the previous quarter and variations mainly were due to the following. For the industrial segments, Logistics NOI increased by 3%. Live manufacturing NOI decreased by 4.3%. Business parks increased by 2.3%. The decrease in light manufacturing is mainly due to the exchange rate appreciation of the peso and the negative effect that it has on the U.S. dollar-denominated rents.
The Office segment NOI decreased by 1.5%, mainly due again to FX appreciation and the effect this has when you translate the dollar rents to peso terms. In the retail segment, the stand-alone subsegment NOI increased by 5.2%, regional centers increased by 2.1%, fashion mall decreased by 1.6%, mainly due to the seasonality of variable income, which you know, usually the Christmas season is -- has a high percentage of variable income coming to the shopping in the Fashion Mall segment.
The other segment NOI decreased by 1.3%, again also due to seasonality of the hotel's variable income component that we have towards year-end.
With this, we close the discussion of the specific results. I'd just like to touch upon one of the things that Andre was mentioning, which is the strategy for the carve-out of the Industrial segment operations that we have at Fibra UNO. We are obviously very happy to have a very high quality, the best portfolio that's available in Mexico. And the objective that we have is to be able to segregate or carve out this portfolio into the publicly listed vehicle.
There's several alternatives that we have for that. One, obviously, is the IPO of Fibra NEXT, which we continue to work with the authorities. And in parallel, we have made an offer to do a joint venture and combining our assets with those of Fibra Terrafina, which would achieve similar results to what we have -- to what we have in the Fibra NEXT structure. And there's also some additional strategic alternatives that we are pursuing for the company.
So I'd just like to clarify that, that's the objective we have as a goal. And there's several roads that lead to Rome, and we'll figure out at the end of the day, which is the most efficient road that creates the most value for our shareholders, and that's what we are focused on. And with that, we'd like to open the floor to Q&A.
[Operator Instructions] Our first question comes from Mr. Rodolfo Ramos from Bradesco BBI.
Just a couple. The first one is on those roads that you described, Jorge. If you could tell us a little bit about -- besides going for another competitor or trying to look for a different shell, so to speak, what other strategic alternatives you would be considering? And on this point as well, I don't know if you had any feedback or how competitive you think your bid is, considering that there is some market risk associated with the bid itself, right? I mean you're assuming that your portfolio and Terra's is going to be priced at 7% equal cap rate. But just wanted to see if this -- if this structure, if there's some concerns on their part as far as the structure goes, and then I just have a quick follow-up on leasing spreads, if I may?
Sure. Thanks for the question, Rodolfo. On the strategic alternatives, obviously, those remain strategic for us, and we're -- we're not, at this point, disclosing what are other avenues we're thinking about, but you know that we are creating a bunch and can come up with different ideas of how to create value for our shareholders. That's the objective. That's what we're focused on, and that's what we will continue to be working on. Regarding the Terra bid, obviously, we think it's a competitive bid, but it's not up to us to decide. I think that the market will decide whether they like our proposal or not. And I don't think I have more to add than that regarding those 2 specific questions.
Okay. And just on leasing spreads. When we look at your leasing spreads, they're below some of the numbers that are being reported by peers. Just wanted to see whether this is more of a thing or a matter of vintage of these contracts? Or does it have to do something with the structure or location? That would be helpful.
No. I think that what happens, obviously, conceptually Fibra UNO, a part of our strategy has always been to have slightly below market rents. We do have a portfolio that is overall on average probably mid-20s below the market or 22% below the market, somewhere around there. There are some quarters in which we've gone closer to 18% or 19%, and this quarter, it came in at 12.2%. Nothing specific to the trend.
I think that you will continue to see to the extent that the market continues to be constrained on the supply side of the equation, and we continue to see growing demand for industrial real estate, which is the case that we have been seeing in the last few months. We'll continue to see rental pressure going up. And obviously, the mark-to-market of our contracts closer to where the actual rents are is going to continue. But I don't see anything specific in the number that we are posting that is different than the market dynamics that you're seeing.
Our next question comes from Mr. Pablo Monsivais from Barclays.
I was wondering to what extent the internalization process and the carve-out are intertwined. Is there any scenario in which you internalize Fibra UNO first without doing any transaction on the industrial portfolio? That's my first question. I have another question on dividends.
Timing is difficult to define here. Obviously, we'd like to be able to do both sooner rather than later. But both are independent, and they have their own track. So it's impossible to say which is going to happen first.
Okay. And on the dividends, you pay -- you explained already why the payout ratio was lower than in the first quarter than in previous quarters. Should we expect that for the next 3 quarters to be back to 100% or close to that level, the dividend payout?
I think we're going to try to stick to the fiscal results given the volatility that we've seen in the FX, the fact that we continue to see high rates, inflation is sort of picking a little bit up again. So we want to remain cautious. And the last couple of years, we've had to distribute 100% of what we generated and even more than what we generated in the year. So we want to remain cautious on that front. And I think that the expectation should be that we should adhere to what we are estimating to be the fiscal result at the time of distribution. And let's see what that number is at the end of the year, and I think we'll see the final adjustment in the fourth quarter of the year.
For the meantime, we'll try to stick to what we think is fiscal results.
Our next question comes from Mr. Francisco Chávez Martínez from BBVA Group.
My question is on Mitikah on the agreement that you reached with Afores. Can you provide more detail on the rationale of this acquisition? And how do you plan to fund this acquisition, which is going to be to retain cash or debt. And also, if you can give us any idea of the amount and the timing?
One of the things that we bought [indiscernible] is time to close that transaction over the next year or so, more or less. And obviously, we have different alternatives to fund the acquisition part of the idea of having that flexibility is to be able -- to have that flexibility in how we're going to end up financing the acquisition and asset sales continue to be an option for the company. We continue to have a good pipeline of asset sales available to us with very solid indications of interest that we haven't closed because we paid more attention to trying to get the Fibra NEXT IPO done, but those acquisitions -- those dispositions, sorry, remain there. One clarification is that I'd like to highlight is we're buying 38% of Mitikah and we are earning 6% of that in fees. That's how we end up with the 32%. So we're actually buying the 38% of Mitikah. And the portfolio's value, that's MXN 6 billion and change on the books, and I think we're paying a slight premium to that, we will be able to disclose it shortly.
Our next question comes from Mr. Andre Mazini from Citi.
So my first question is around a follow-up on Mitikah actually. In the documentation, I mean the earnings release seems wherever you guys have the noncontrolling participation right which now -- you guys are going to be buying in over [indiscernible], $320 million, right, converting at MXN 17 per dollar rate. So -- is that the valuation we should be expecting or anything different than what's in the books? That's the first question.
And then the second question will be around nearshoring. If you see that nearshoring is happening in Mexico City, industrial space as well given that Mexico City has many logistics and further from the border than, of course, in modern markets or even the [indiscernible] nearshoring is coming at the south of Mexico City?
On the Mitikah, I think what I mentioned to Paco is the same question. It's going to be a slight premium to what we have in the books. More or less, the number that you're describing is about right.
Regarding nearshoring, I think that we've always said as a company that we believe nearshoring is the whole of Mexico, not just the northern border. The Northern Border, clearly, obviously, was the ECP Kings, and it's -- if you produce something in Tijuana and you want to export it to San Diego, fine. We can produce in Tijuana and export it to San Diego. But if you want to produce something, for example, like the aerospace industry or the car industry, that are located in the center of the country. Those guys didn't go to the north because they want to export not just to the U.S., but also to other places. And even to the U.S., but through other routes, because if you go through the ports in the Gulf, you can reach the East Coast of the United States, Florida and the whole East Coast of the United States very efficiently.
Same happens if you want to go to the West Coast with the Port of Manzanillo, for example, or Lázaro Cárdenas or some of the other ports that we have in the Pacific if you want to export to the West Coast of the U.S. or even to Asia, where Mexico has a lot of free trade agreements and nearshoring is not just the northern border. We have seen some tenant set up shop in our logistics parts for light manufacturing, not heavy industry, not heavy -- on the heavy side of light manufacturing because we have seen some of those moving to the parts that we have in Mexico City, because in Mexico, we do have labor, we have electricity. We have less water scarcity compared to some of the northern markets where the markets are very tight in terms of vacancy.
Energy is somewhat complicated, not for the country because as a country, we generate about 10% more energy than what we consume. So energy is not -- generation is not an issue. The availability of energy depends on where you are and the availability of energy where we are located is not an issue because of -- you don't need to turn new transmission lines. You may need to turn a new transmission line if you want to set a factory somewhere in the north, but we don't need to do that in the center.
So -- those things are becoming obviously attractive to tenants that want to start with operations for Light Manufacturing. So now we have -- the way I would put it is that we have sort of resources of -- for demand for our logistics parts, which is the traditional third-party logistics and logistics operators, the e-commerce dedicated guys. And now we also have some Light Manufacturing tenants looking at our facilities.
So in a nutshell, yes, nearshoring is just not the northern border. It's the whole of Mexico. And it's large enough that we are not being able to keep up with the demand for space as a country.
Actually, most of the tenants that Jorge is talking about that are setting up shop in Mexico, in our parks in Mexico City, I mean, in the surroundings of Mexico City and our parks are 100% of their revenues are export. So even though they export everything to the U.S. in a hypothetical case, they're feeling very comfortable producing in Mexico City and exporting to the U.S. because the truck will take 10 hours to be in the border. And the raw materials come from elsewhere in the world, they are not coming from the U.S. They receive raw materials from South America or from Africa or from Europe and everything gathers here in Mexico City. So they receive their raw materials here, they process the product, and they send it up to the U.S. and makes very little difference for them to have their truck traveling 2 hours from Monterrey or 10 hours from Mexico City. That is not a decision-making issue for them.
In other words, you want to have the logistics for production on the back end or the front end. But either way, you still have to deal with it. So it's sufficient for them to produce in Mexico City or the center of the country, I'd say.
[Operator Instructions] In the meantime, we will take a text question from [indiscernible]. Good afternoon. Could you please share the investment amount that FUNO is considering for the acquisition of the 38% stake in Mitikah and how many installments?
Sorry, could you repeat the question, Michael? .
Could you please share the investment amount FUNO is considering for the acquisition of the stake in Mitikah and in how many installments?
We have the flexibility to do the payment over the next, let's say, 12 months. And it's likely going to be 3 installments. Final price is slightly above what we have in our books. We have in our books is MXN 6.1 billion, if I recall correctly. So we still have some flexibility to deal with that.
We'll just wait another few seconds in case there are any additional questions that come through. Okay. It looks like we have no further questions at this point. I'll pass the line back to the FUNO team for the concluding remarks.
Thank you, Michael. Thank you, everybody, for your attention for this call, and we expect to continue delivering good results in the next quarter, the second quarter of 2024. Thank you, everybody, and have a nice day.
Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.