Fibra Uno Administracion SA de CV

BMV:FUNO11

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra UNO's Third Quarter 2023 Results Conference Call on the 25th of October 2023. [Operator Instructions]

So without further ado, I would now like to pass the line to Mr. Andre El-Mann, the CEO of Fibra UNO. Please go ahead, sir.

[André Arazi, executive]

Thank you, Michael. Thank you, everybody, for your attention to this call. We are now presenting our third quarter of 2023 results, and we are very excited and very happy about all the things that we have going on in the company. First of all, the results, as you saw, are in line with what we expected to be. We have increases all across the board, and we are very happy to have the company very steady and very predictable on what will be our NOI, our FFO, et cetera, et cetera.

We have been very much pressuring on the expenses in order to raise our NOI margin, which we have in a few bps, and we expect to continue the trend in the next coming quarters. As we already disclosed, we just opened our regional mall, Tapachula . We've had in the past various concerns about the location in the Chiapas state. And -- but finally, we got on with all the permits. We got on with all of our partners there, the grocery store anchors. And finally, we opened to the public a very -- which will be a very successful shopping mall, which is currently leased at close to 90%. We just opened a month ago, a couple of months ago, and we expect it to be -- from what we see on the food traffic, we expect it to be one of the most successful in the country.

Aside of that, we are currently under construction on our expansion on La Isla Cancun. We are expanding our high luxury scope there. And we expect -- we already signed the contracts with all the major brands. We are delivering. We already delivered to some of them, and we are delivering. We expect to complete the delivery of all the spaces through this month -- this next month of November. So we expect them to be open to the public before summer vacation next year.

So aside of that, we -- in the company, we feel very comfortable with all the performance of all the different segments of the company. And as you know, we reached a very good amount of validation of our initiative to carve out the industrial part of the company. This is only to reveal to live the vein that is currently covering the real size and the real potential of our industrial portfolio. I know that we have been disclosing and reporting separate industrial side. And in theory, it should be very visible.

But we think that it has not been realized in its entirety, in its real value and real potential. We have the best -- by far, the best portfolio of industrial space. Today, the industrial space is very hot in the world and especially in Mexico. Jorge will walk you through what we have been experiencing in the last few weeks, and we expect to have a very successful placement of the new company in which we will contribute with our current properties, current industrial space. So this only will bring good news to our company, and I am very pleased and very excited to share them with you.

Aside of that, I would like pass the mic to Jorge Pigeon in order to go in depth to the numbers. Thank you very much.

[Jorge Pigeon Solórzano, executive]

Thank you very much, Andre, and thanks, everybody, for joining our third quarter results call. I'll go directly into the MD&A as usual. Total revenues for the quarter closed at MXN 6.448 billion, basically stable compared to the second quarter of '23. The main reason why revenues were stable was a combination of factors. Very importantly, a decrease in revenues related to the sale of the Reynosa portfolio, which was finally settled and closed in the second quarter of '23. So we continue to collect rents up to that date when we finally collected.

This third quarter, obviously, having collected the money from that sale. We did not have the revenues from the Reynosa property. So that's why you saw a drop in that. And obviously, that shows you in the drop in the industrial sector as well, but it's not because of lack of performance, quite the opposite. We'll talk about the leasing spreads in the office sector, but we are very, very pleased with the performance of that. And then again, also rent increases resulting from inflation being passed through to our tenants, lease renewals as well as occupancy gains. We're very happy with the performance of the office portfolio, and we'll discuss that in a second.

In terms of occupancy, the overall portfolio, we're at 94% occupancy, so 1% below the target of 95%, which has historically been the target of occupancy that we expect to have at FUNO, let's say, 95%, plus/minus 1%. So we're exactly where we want to be in terms of occupancy for our portfolio.

Obviously, as Andre mentioned, the office -- the industrial portfolio continues to show very strong performance, stable occupancy at 97.6%, the retail portfolio increased 10 basis points. We're getting close to 91% occupancy. The office portfolio, we are very happy to report an increase of 170 basis points. As you recall, Andre mentioning 4 or 5 quarters ago that we expected to end 2023 with an 80% occupancy. We are 79.7% occupied in the office sector with stable rents. So we're very pleased with the performance of the portfolio in that regard.

The other segment remains stable at 99.1%. And In Service portfolio recorded an occupancy of 92.6%, an increase of 13.3%, mainly due to the leasing space of the Tapachula shopping mall that Andre was mentioning, it's going incredibly well. We are very pleased with the performance of this new delivery. So very happy with the occupancy trends that we're seeing in all of the segments.

In terms of operating expenses, the initiatives that we have internally at the company to rein in or control the growth of expenses are starting to work. We saw an increase of MXN 14.4 million or almost 2% quarter-over-quarter, mainly due to seasonality as well as increases above inflation still by some of our services and suppliers. But as Andre mentioned, we continue to have this cost control initiative. So we expect to return to the margins that we were seeing, let's say, pre-pandemic levels closer to the 80% level that we were before. So again, happy with our performance of the portfolio.

Property taxes decreased by 4.6% (sic) [ MXN 4.6 million ], mainly due to the sale of the Reynosa portfolio. And obviously, insurance expenses remain stable at $98.2 million.

In terms of NOI at the end of the day, what this translates to is NOI remains basically almost flat quarter-over-quarter, an increase of 0.1%, MXN 5.03 billion. NOI margin calculated over rental revenues of 86.6% and 78% above total revenue. So we're increasing, targeting to return to our pre-pandemic level margins.

In terms of net interest expense, we saw a decrease of MXN 32.5 million or minus 1.3%, compared to the second quarter of '23. This is excluding a financial expense related to the early termination of some financial instruments that we had in the balance sheet that we sold. And basically, we had them recorded in the balance sheet as held to maturity. And when we sold them, we had to basically mark-to-mark the sale and that's resulted in a noncash loss basically an accounting loss of how we had recorded the instrument.

An increase in net interest income of MXN 32 million and capitalization of interest expenses of MXN 451 million related to development basically the final stages of Mitikah and largely completion of Tapachula and Portal Norte developments primarily. And this was offset in exchange rate depreciation from MXN 17.07 to MXN 17.72 per U.S. dollar.

The effect of all of the above results in functional operation controlled by FUNO was an increase of MXN 41.8 million or 2% quarter-over-quarter, reaching MXN 2.26 billion for the quarter. Adjusted FFO is basically the same number or increase of MXN 41.8 million or 2% quarter-over-quarter, MXN 2.2 billion mainly, there were no property sales during the quarter, so FFO and AFFO remained the same.

During the third quarter of 2023, we did not issue or repurchase any CBFI. So we closed the quarter with 3.8 billion CBFIs outstanding. So the FFO and the AFFO per average CBFI were MXN 0.5823 per CBFI, which represents an increase of 1.5% in both cases versus the previous quarter.

Moving on to the balance sheet. Accounts receivable totaled MXN 3.1 billion, an increase of MXN 181 million, 6.1% compared to the previous quarter. This is normal regular business operation activities.

In terms of the value of our investment properties, including financial assets and investments in associates, you recall the financial assets is this memorial portfolio increased by MXN 2.2 billion or 0.7% quarter-over-quarter. Mainly coming from progress in the construction projects under development. Largely the Portal Norte is the biggest contributor. We also have still some investments in Tapachula and the final stages of Mitikah that's still requiring CapEx to finish Stage 1, normal CapEx -- operating CapEx in our portfolio. And we had almost 0 value adjusted fair value adjustment in the valuation of our properties, MXN 73.4 million, basically stable quarter-over-quarter.

In terms of total debt, we finished the quarter with MXN 131.6 billion, compared to MXN 128 billion the previous quarter. Variation is mainly due to an increase in credit lines of MXN 900 million associated with the development of the Portal Norte projects primarily as well as minor investments at the tail end of Mitikah. Obviously, the impact of exchange rate variation when the FX went from MXN 17 to MXN 17.7 per U.S. Dollar. This was slightly offset by the repurchase of bonds that we did for [ $54.6 million ], using the proceeds from asset sales to reduce debt in this way, which we thought was very accretive.

Now moving to equity. We saw a decrease of 1.6% including the participation of controlling and uncontrolling interest as of the third quarter of 2023. This is a combination of the net income generated by the quarterly results, the valuation of derivatives, shareholder distribution related to the second quarter results and the provisions of the employee compensation plan.

Moving to the operating results. As Andre was mentioning, we are very, very pleased with the performance of our portfolio as we are now in the process of working to carve out the industrial portfolio. We're very pleased to see that we have a 17.7% leasing spread in peso contracts in the industrial segment. Almost 8% increase in other segment, 7% increase in retail and a 40 basis points decrease or basically flat rents in the office sector.

So as you recall, we've always been saying that we expected to see occupancy gains in the office sector without rental increases. This is exactly what is happening. And if you recall also, we said that we expected to continue to see an increase in occupancy with strong performance in the retail sector. This is exactly what we're seeing. And again, very solid performance in the industrial sector, which is exactly what we are seeing.

Moving to dollar contracts. We saw an increase of almost 8% in dollar contracts. So very happy with that. 7% dollar contracts in the retail segment, so very solid performance in the retail segment. 2.3% increase in dollar-denominated rents in the office sector. So we're very happy to see that even with a market that is not as solid as the other markets, we are seeing increases in occupancy. And at the end of the day, the ability to maintain the average rent of our portfolio stable, which is exactly the prediction that Andre gave us of what his expectation was for the business about a year ago. We are spot on to what we expect it to be by the end of the year. So very happy with that performance as well.

Looking at constant properties, the rental price per square meter increased 3.4%, and we recorded a 2.9% decrease in real terms when we compare to inflation. Basically, this is mainly due to the changes in the peso-dollar FX appreciation of 11%, which obviously had a negative impact on constant property performance. There's a natural lag in higher inflation being reflected in our contracts and the renewals of some office rents, as we were mentioning, without some increases. So performance of the portfolio, as Andre mentioned, exactly predictable as we expected. So very pleased with our performance that we have.

At the subsegment level, the portfolio's annual rent per square foot increased from $11.8 to $12.1 or almost 2% increase, mainly due to increase in current contracts, new contracts and some of the renewals with the leasing spreads that you saw described above.

NOI at the property level for the quarter increased 1.2% compared to the previous quarters, and the variations were mainly due to the following: the Industrial segment's logistics decreased 2.8% and live manufacturing decreased 17%. This is basically the sale of the Reynosa portfolio. Business Park decreased 0.8%, basically flat quarter-over-quarter.

In the office segment, we saw an increase of 7.6% and which is mainly the result of the recovery of 170 basis points in occupancy with sort of flat rents. The retail segment, the stand-alone NOI subsegment remained stable regional centers increased by 7%, Fashion Mall increased by almost 1% this is mainly due to the effect of increases in renewals and some occupancy gains that we are seeing. The other segment NOI increased 1.2% mainly due to variable rents related to hotels seasonal effects. And we can have more detail on the subsegment performance in Page 25 of our report.

And with this, we close the discussion of MD&A results for the quarter. Again, very pleased with the performance of the portfolio, very predictable exactly as we expected. Solid recovery in office, strong performance in retail and very strong performance of our industrial portfolio. So Mike, now, if we can open the floor to Q&A.

[Operator]

[Operator Instructions]

We acknowledge text question that came from [indiscernible] Alexander already. We'll give a few minutes or so for the questions to come in. First question will be from Juan Ponce from Bradesco BBI.

[Juan Ponce, analyst]

Congrats on the results. My first question is for Andre. You mentioned in the CEO comments that this is only the beginning of what we have in mind for FUNO and its future. Can you expand on that? What is the long-term strategy for the company following the listing of FIBRA next and an adviser internalization?

[André Arazi, executive]

Sure. Thank you for the question. We expect to continue to be part of the industrial space through the new company. We do not expect to bail out of the industrial business. And I think that this business will continue to grow. As for the rest of the portfolio, we are expecting to fill up the spaces. We are gaining occupancy quarter-on-quarter for a while now, and we expect to surpassed the prepandemic levels in no time. Actually, in the retail space, I think we are over the prepandemic level. And we're still meeting the prepandemic level on the office space, which we intend to reach next year.

So in that sense, we will fill up the space that we have. We are experiencing nowadays a very healthy leasing spread in the ex industrial spaces. So we expect that this trend will continue, and we will cover off all the missing spaces from the pandemic letters in the company. That's why we expect a very good time to come for the company.

[Juan Ponce, analyst]

Got it. And I have a second question, if I may. The asset disposition pipeline has been delayed a little bit in the past. How confident are you in executing this revised time line that you put in the report?

[Gonzalo Pedro Robina Ibarra, executive]

We have been under negotiations with the counterparties. Probably the ones that are closer to be closed during this end of the year, will be the hotel as well as the retail part of it. And probably, we will be able to close as well one of the office buildings that we have been getting some interest. Actually, we have an LOI on the table. We have to tune up a little bit the prices, but we are still working on the 3 segments.

[Operator]

Our next question comes from Mr. Andres Mendez from Santander Asset Management.

[Unknown Analyst]

This is [ Albert Randi ]. Congrats on the strong results. I just have a quick question regarding the decrease in the FFO, I don't know if you can tell us the reason of this decrease? Its just a small question.

[Jorge Pigeon Solórzano, executive]

Sorry, the FFO did not decrease. Actually, it was a slight increase in FFO I read my notes correctly, 1.9%, almost 2% growth quarter-over-quarter.

[Unknown Analyst]

It wasn't minus almost 3%?

[Unknown Executive]

Compared to the number to last year to the third quarter of last year, it's minus 2.6%. The main reason behind it is the increase in interest rates throughout this year. We have been seeing that effect in our FFO. Our NOI actually has been growing healthy every quarter. But because of the growth in interest rates, our FFO was going -- was having some decreases, but this is the first quarter where we can show a slight increase, because interest rates now are stable. So I don't know if that was the decrease that you were referring.

[Operator]

Our next question comes from Mr. [indiscernible] from Suma Cap.

[Unknown Analyst]

The first one is related to the office segment. Did you do something differently to increase their occupancy rate? And my second question is regarding, if I understood correctly, there's LOI in the office segment about recycling or selling a specific property, if I understood correctly, what Gonzalo was saying? Thank you.

[Gonzalo Pedro Robina Ibarra, executive]

Yes. We have an NOI to buy one of the buildings that is located on [indiscernible] and the guys that are trying to get it are guys that will be converting it into residential. We are still on the negotiation field with them. But that's the use that they will be given to it.

And in terms of -- if we have done something special in the office sector, actually in all sectors we are doing extraordinary efforts in order to raise our occupancy. And obviously, in the office, it's the toughest one. But at the end, we are trying to capture whatever absorption the market has. It has to pass through of course.

[André Arazi, executive]

We are doing 20 hour shifts is the only...

[Gonzalo Pedro Robina Ibarra, executive]

For only 7 days a week.

[Jorge Pigeon Solórzano, executive]

Andre makes it look easy, but in reality, the prediction of being able to be at 80% occupancy ran comes from 40 years of experience in the market and understanding the trends that we're seeing, et cetera. it is hard work. There's a lot of hard work behind it, but it's not that we are creating any magic. One thing that does work, obviously, in our favor and it is part of the business model of the company is that when you have great buildings with great locations, those are the ones that are preferred by the tenants.

[Operator]

Thank you very much. Our next question before we go to the text question is from Nicolas Fabiancic from Jefferies.

[Nicolas Fabiancic, analyst]

Congratulations on the strong results. I was a little surprised that there was not more discussion about the details of the next IPO transaction, as we were excited to hear about that after the filings you made to the stock exchange of the prospectus and the roadshow presentation. So just 2 questions here from the perspective of -- for FUNO bondholders, okay? The first is that the prospectus refers to an offer to exchange on the bonds, where 50% of each bond issuance accept the 2024s would be moving to identical bonds at next, so I wanted to ask if this transaction structure is already confirmed? Or is this just a placeholder in the prospectus?

[Jorge Pigeon Solórzano, executive]

It is a [indiscernible]. It is the intention of the company to do something along those lines, but we will be able to discuss that once we have a formal offering memorandum. So we can discuss all of the details that I am sure every single one of our bond investors is keen to understand. And we appreciate your patience with us to be able to discuss this in detail. At this stage, it's just a placeholder to try to explain what we're trying to do, but the details will come when we have a prospectus. Unfortunately, we cannot comment more than that at this stage. And I'm sure that you and all of our bondholders are going to have questions along those lines.

[Operator]

We'll now move to the few tax questions. Next one is from Kamaal Busari from Barings.

What was the cause for the delays in the asset divestment plan?

[Jorge Pigeon Solórzano, executive]

Cause of the delay in the asset divestment plan. I think it's just part of the normal negotiations when you start getting closer signing and closing. But Gonzalo can give you a little bit more color. We have firm offers for the assets on the table.

[Gonzalo Pedro Robina Ibarra, executive]

In 2 of the cases that actually been negotiated, they depend on financing. As you know, rates have been not as stable as everyone was expecting at this stage. So that's why it's also taking a little bit more.

[Operator]

Our next text question comes from Mr. Martin Zetsche from Fundamenta Capital. And his question is regarding the line on anticipated liquidation on financial instrument expense, what is this specifically?

[Unknown Executive]

Thank you. Back in 2021, we decided to purchase some Mexican government bonds denominated in UDIs, which is a unit that hedges the inflation. So we decided to purchase those bonds in order to hedge the movement of the UDI because we also have ourselves debt issuances denominated in UDIs. This quarter, we decided to liquidate that position in order to get ourselves with cash for investing on the advancement in properties in CapEx rather than taking -- using our short-term lines that right now, our -- the current level of the TA, is very expensive. So we decided to liquidate that and also that all the movements from the UDI because of the high inflation, it's already -- as far as we expect and think it's already behind us.

We think that the inflation is now more steady -- so we thought that was the best use of those investments. At the same time, that investment was registered as held to maturity. So it was not valued at mark-to-market. So that's what you saw that expense on our numbers. But as Jorge explained, it's just an accounting expense. It has nothing to do with an outflow of funds or nothing related to operations.

[Jorge Pigeon Solórzano, executive]

Before we move on to additional questions, I just wanted to highlight that we're looking at the text questions that there are a lot of questions from our bond investors. And I apologize for not being able to address your questions at this time. We obviously need to have an offering memorandum available to be able to discuss all of the bond questions in detail. We expect to have that available shortly. So I appreciate your patience with us in this regard.

[Operator]

[Operator Instructions] We'll take a question from Juan Barreto from MXC Capital.

Okay. We'll give another minute or so for any additional questions to come in.

[Jorge Pigeon Solórzano, executive]

Michael, if there are not any additional questions?

[Operator]

No, it looks like all the questions were nicely answered on the call. I'll pass the line back to you for the concluding remarks.

[André Arazi, executive]

Well, thank you, everybody. Thank you for your attention to this call, and we expect to hear from you and for you to hear from us in the last quarter of the year. In the meantime, thank you very much, and have a good day, everybody.

[Operator]

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you, and goodbye.