Deutsche Bank Mexico Reit

Good morning, and welcome to Fieber & McQuarrie's third quarter 2025 earnings call and webcast. My name is Rob, and I'll be your operator for this call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero, and an operator will be happy to assist you. I would now like to turn the conference call over to Nikki Sachs. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining Fieber-McQuarrie's third quarter 2025 earnings conference call and 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. Our actual results, performance, prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statement. 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've not already done so, I would encourage you to visit our website at febermcquarrie.com and download these materials. A link to the materials can be found under the Investors, Events, and Presentations tab. And with that, it is my pleasure to hand the call over to FIBA Macquarie's Chief Executive Officer, Simon Hanna. Simon?

Thank you, Nikki, and good morning, everyone. I'm excited to share that we've delivered another solid quarter of financial and operating performance, with record-breaking results across key metrics. At the same time, we executed on both strategic and opportunistic initiatives that create value for our certificate holders and continue to position us for sustainable growth. The third quarter showcased the strength of our business model, starting at the top line. For the quarter, we achieved record consolidated revenues, up 8.4% in underlying US dollar terms over the prior year. This momentum translated through to our quarterly US dollar AFFO, which increased an impressive 6.6% annually. Best of all, our quarterly distribution reflects a significant 17% increase from last year, all whilst maintaining a comfortable and prudent payout ratio. Turning to our industrial portfolio, we continue to see strong performance amidst a subdued market backdrop, with average rental rates increasing 6.8% year over year. Notably, we achieved another quarter of double-digit renewal spreads, 17% on negotiated leases, with high quarterly retention of almost 90%. Our full-year 2025 performance continues to shape up rather well, perhaps best demonstrated by the 6.1% increase in US dollar same-store NOI year-to-date. So in summary, we are very satisfied with sustained momentum enjoyed from our industrial portfolio through to today, and we expect that momentum to carry through to the fourth quarter, providing for a strong finish to the year. Moving to our capital allocation and asset recycling initiatives, we have an active quarter closing on a number of transactions, I'm excited with the continued growth of our Mexico City footprint with the acquisition of a prime 250,000 square foot logistics facility. We acquired the property through a sale and lease back for $35 million, leased to a leading global consumer company under a three-year US dollar denominated contract. It not only provides 2025 NOI and AFO contributions, but also positions us to capture embedded real rental rate growth. This acquisition exemplifies our thoughtful approach to capital allocation. In this case, we secured a scarce, well-located infill asset that enhances our portfolio quality while providing visible earnings and NAV accretion. We're optimistic about repeating this type of success in other deal opportunities under our review, alongside pursuing additional strategic land investments in our pipeline. We also continue to selectively pursue asset recycling initiatives. And during the third quarter, we sold a vacant industrial property in Chihuahua City for $14 million, representing a 30% premium to book value. This transaction demonstrates our commitment to active portfolio management, allowing us to accretively recycle capital into attractive opportunities like the Mexico City acquisition I just mentioned. Turning to our retail portfolio, we also delivered strong results and achieved a post-pandemic record occupancy of 93.6%. Rising occupancy and rental rates contributed to annual NOI growth of 4.1%, essentially reaching record levels of operating cash flow. We maintain a cautiously optimistic outlook on the operating performance of our retail portfolio and expect median term growth trends to continue. Looking at the broader market environments, while we acknowledge the ongoing uncertainty around trade policy, we also remain confident in Mexico's strategic position within North American supply chains. The long-term fundamentals that have driven Mexico's manufacturing growth over past decades remain firmly intact, including high-quality labour, proximity to major US markets and continued trade advantages. Notwithstanding the evolving geopolitical landscape, Our high-quality portfolio, internalised platform and strategic market positioning enables us to continue to deliver strong results and capitalise on growth opportunities. It is also worth mentioning our unique vertically integrated platform gives us, amongst other benefits, privileged access to market intelligence and allows us to respond swiftly to changing conditions. This positioning, combined with our ability to capture embedded rental growth allows us to continue delivering value to certificate holders while building long-term portfolio resilience. Before turning the call over to Andrew, I want to highlight our ongoing commitment to sustainability. We are proud of achieving three green stars in our 2025 Grids assessment, including a score of 94 points for the Development Benchmark, exceeding our peers on a regional and global basis. We're also taking this opportunity to publish our annual ESG report that is now available on our website, which provides a comprehensive overview of our sustainability initiatives and performance. Andrew, over to you.

Thank you, Simon. I'm pleased to report another quarter of strong financial performance that reflects both the quality of our portfolio and the effectiveness of our capital allocation strategy. For the third quarter, we delivered an ASFO of $29.7 million, representing a solid 6.6% increase year-over-year and demonstrated our continued ability to grow earnings on a per-certificate basis. Our balance sheet remains exceptionally well positioned. During the quarter, we successfully completed the refinancing expansion of our sustainability-linked credit facility. This US $375 million facility comprises a $150 million four-year term loan and a $225 million three-year revolving credit facility. The transaction delivered multiple strategic benefits. Firstly, it enhanced our liquidity position to approximately $625 million, providing substantial financial flexibility to fund growth initiatives. Second, it reduced our weighted average cost of debt to approximately 5.5% while extending our debt maturities. And third, the sustainability linked features align our financing strategy with our ESG objectives through green building certification targets with the sustainability linked portion of our drawn debt now representing 68%. As of September 30, we maintain a prudent debt profile being 92% fixed rate. with our CNBV regulatory debt-to-total asset ratio standing at 33.2% and a robust debt service coverage ratio of 4.6 times. Embedded firepower stands at approximately US$500 million, whilst managing to a 35% LTV ratio, including the potential recycling of our retail portfolio. Turning to our guidance, we are reaffirming our FY25 AFFO per-certificate guidance to a range of 2.8 to 2.85 PFOs, and our FY25 ASFO guidance in underlying US dollar terms to a range of $115 to $119 million, representing annual growth of up to 5%. We are also reaffirming our cash distribution guidance for FY25 of 2.45 pesos per certificate. This represents a 16.7% increase in peso terms and translates to an expected FY25 ASFO payout ratio of approximately 87% based on our guidance midpoint, representing a well-covered distribution. This guidance assumes stable market conditions and no material deterioration of the geopolitical landscape or Mexico's key trading relationships, including the potential implementation of tariffs. Looking ahead, our strong balance sheet, ample liquidity and disciplined approach to capital allocation position us well to navigate market uncertainties while selectively pursuing growth opportunities that create long-term value for our certificate holders. In closing, I want to recognize the exceptional work of our entire team. Their dedication and expertise continue to drive our operational excellence and strategic execution. With that, I'll ask the operator to open the phone lines for your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad and a confirmation tone will indicate your line from the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for our first question. Once again, it's star 1. Thank you. Thank you. And the first question comes from the line of Andre Mazzini with Citigroup. Please receive your questions.

Yes. Hi, Simon and Andrew. Thanks for the call. So my question is around the potential economic deceleration Mexico is supposed to be having now in the second half of 2005. A lot of talk on that among investors and media. So we wanted to understand if you're feeling that, you know, this economic deceleration in your conversation with tenants, maybe splitting between the three tenant types, industrial light manufacturing, industrial logistics, and the retail tenants as well. Thank you so much.

Yeah, thanks, Andre. Thanks for the question. Yeah, I guess it's a bit of a dynamic backdrop out there, as you can appreciate, really where we're much more correlated with the US GDP, US economy, more so than Mexico, and that's obviously going to be where most of the activity will basically drive outcomes for us. When we break it down between those three categories, look, I'd say in general for industrial light manufacturing, fair to say that volumes production is slightly off compared to last year. When you look at auto parts production, it's off around sort of 7%. compared to last year. So I'd say nothing that's fundamentally causing a problem there from a demand perspective, maybe a slightly lower utilisation but in general sort of I'd say steady demand backdrop and something which we expect to prevail regardless of that Mexican economy dynamic, more so just to do with how trends continue out of the US. That would very much then link into the logistics part of industrial, at least for the business-to-business, where we have most of our exposure. It would be correlated more or less with the trend on light manufacturing. So again, I'd say for both manufacturing and the B2B logistics, going pretty steady, and I think the outlook is steady as well. Obviously, the name of the game there is really USMCA as a real catalyst to change that demand. probably heading towards the second half of next year. Retail, yeah, definitely more sort of linked to Mexican economy fundamentals, but I'd say the consumer remains in pretty good health. We're seeing good employment, wage numbers, et cetera. General foot traffic and activity in the shopping centres, we've been happy with that. You would have seen some of the encouraging metrics come through the quarter, record occupancy, rising rental rates, same store. We're up about 5% year over year foot traffic at the NOI level. So I'd say generally good conditions there. Cinema's continuing to struggle a little bit more, I'd say, compared to the rest of the tenant mix, to be fair. Gym's doing rather well. Supermarket's doing rather well. Restaurant's rather well. So it's probably cinema, probably the main weakness that we're still looking for a bit of a pickup. But again, we have a cautiously optimistic outlook as well when it comes to retail, expecting fairly steady demand environment. So overall, that leads us up to a pretty good outlook for heading into 2026. Thank you, Simon.

Thank you. The next question is from the line of Helena Ruiz with . Please proceed with your questions.

Hi, hello, and thank you for giving my questions. I have a couple. The first one is from . I was wondering if you could give us, like, any color, if you expect them to remain, like, at this level for the last quarter of the year and next year. And also, if you could give us a breakdown, like, this growth is coming from all regions, like, especially one market. And then my second question is, as you can see, like, looking at each market, like, most markets remain green. really strong. They're only ones that are dropping occupancy rates in the region of Ciudad Juarez. So if you could also give us a bit of color on where the occupancy is in those markets.

Thanks, Helena, for those questions. Yeah, look, when it comes to lease spreads, firstly taking that one on, pretty good quarter again, around 17%. We have a sort of last four months run rate of about So that's been tracking, I'd say, at a pleasing level for us. When we look ahead, you know, virtually zero rollover on 4Q, so it doesn't really move the needle. So we should be somewhere, you know, close to that run rate level on a full year basis. Outlook for next year, you know, it's still early. We have about 16% rollover, 17% rollover next year. So, you know, we have some... opportunity there to continue capturing, I would say, positive momentum when it comes to spreads. A little bit early to say how much. Obviously, a little bit there depending on market conditions, but I think we would like to think that we can capture positive momentum in the same way we're seeing through the balance of this year. When it comes to some of those, I'd say, market by market dynamics, and I'd say there's It's quite an active market out there even despite the subdued new leasing conditions. I would say in general we are seeing that the same dynamic we have today is what we've seen for the last couple of quarters where steady occupancy and operating trends with USMCA being the real catalyst to, we think, unlock new demand. But taking that down to, I guess, market level, to answer your question, you know, Monterey is probably the most active market. It's also one of the biggest in the country, around 195 million square feet. So we still see a lot of activity there, a lot under construction. So supply is still coming through, and that's always been the Monterey way, to be fair, but there's probably around 8 million under construction. Amongst all that, though, on a quarterly basis, we're seeing sort of close to 4 million new leasing to basically offset some move-outs of about 4 million. So no doubt there's a little bit of vacancy there north of 5%. And, yeah, you could probably say it's more of a tenant market than a landlord market these days. But when it comes to, you know, the type of product that we're delivering in the market, this is in Monterey, but in other markets as well, I'd say that we're at the upper end of that tier. And that pro form of vacancy is not so much of an issue for us. We're looking at, you know, in terms of the best quality buildings in the market. That's who our competition is because that's what we're building in terms of location, quality of building size, utilities, et cetera. So that real competition is much more narrow. So whether you're even talking somewhere like Tijuana, where, again, you've seen a lot of vacancy or supply come on, it doesn't really change the equation for us. We're in the best part of town with some of those flagship developments up against really just a handful of building competitors. And so that noise around sort of 13%, 14% vacancy in Tijuana or 8% in Monterey, It's not as relevant when you actually just boil it down to what the hard competition is, you know, against our Class A development product. And we feel, you know, very well positioned to have some activity on that as we get through the year in USMCA in particular. You know, Quarez, I'd say, probably remains pretty soft. That one's got a lot more sort of undifferentiated vacancy. It's a bit more of a slower market than Monterey at the moment. much more USMCA linked as well. So I think we expect more activity in that second half of next year or maybe the summer. Renosa, again, sort of a key northern market. I'd say very quiet as well and had a good positive absorption quarter for the quarter, but on a year-to-date basis, it's pretty flat in terms of absorption. And again, you'd expect that to be more correlated with USMCA pickups.

Thank you. Thank you. The next question is from the line of with Goldman Sachs. Please receive your questions.

Yeah, thank you for taking my question. So my first question is around the recent M&A that you announced or mentioned in the report in Mexico City. So you bought an asset, $35 million, sale of Eastpac, and, you know, back on the envelope, this is like $1,500 per square meter. So I wanted to get a sense of what cap rates you saw for this asset. And also if the idea here is on further capital allocation, if it's in Mexico City that you want to focus on. And then, and I'm sorry if you spoke about this earlier, but I wanted to ask about Monterrey. where you saw obviously declines of 300 and 120 basis points each on a sequential basis. So we want to get a sense of what drove that, if it's one tenant or multiple, just to understand if this is a one-off or a trend. So any color would be very helpful. Thank you.

Okay, thanks for all the great questions there. The Mexico City acquisition, that was a fantastic one to do. Irreplaceable location around 15 minutes from downtown in the Vallejo sub-market and so that's a great last mile district to be in for sure. We're able to access that facility really thinking about the stabilised cap rate at around a 10% level US dollar sort of So that's the way we're looking at it and sort of seeing that stabilise into a 10% cap. Now, it's got an initial three-year lease period there with the user. So, you know, sort of coming in at sort of an 8% area, but that's definitely below where we think the market rates are. So just thinking about that on a real embedded rental rate growth profile when you actually look at, you know, three years down the track, we think that should land around a 10%. If you're able to access Mexico City last mile, stabilised 10%, dollarised 250,000 square foot, we take that all day long and we're very excited about that. And, yeah, potentially there could be one or two other opportunistic deals like that that could come along. We're currently looking at one deal in particular and would like to think that maybe there's an opportunity to do that opportunistically. Again, let's see. So I think that was a great transaction to pull off from a capital allocation point of view and happy to, as I say, repeat that success. Moving to the second question, Monterey Juarez. So yeah, I think from our own perspective, in line with the market trends, we did see some vacancy there. But when you actually look at what drove that year over year, Pretty simple story, Jerolyn, in the sense that we just delivered some Class A product that has not been leased up, so it's been added into our inventory. Both fantastic buildings, we think very marketable, and again, something that will probably be more linked to USMCA ultimately, given the type of buildings and locations they're at. So we feel very good about the buildings that have been added to inventory, even though they're unleased in the short term. we do think they've got great income potential over the medium term. And we actually take the step back there, Jerome, and actually not just what we've delivered in Monterey Enquirers, but the other Class A product we have that basically has income potential, and you add that up in terms of sort of getting close to the million square feet around the country. The exciting thing there is that we actually do have some some real embedded growth that I don't think is being properly priced into our valuation or share price and any type of meaningful lease up there on that sort of Class A development product that we have. We're fully invested. It's basically built product ready to be leased up. mainly subject to USMCA, if you want to say that. That's got the potential ability to add something like, I'd say, comfortably north of $10 million at the NOI level. And you can obviously just drop that down to AFFO as well, given that we're essentially fully funded and built that. So that's a pretty exciting short-term opportunity, we think, to help drive NOI earnings, is to basically take advantage of... improving market conditions into next year, particularly with USMCA to trigger that lease up.

And a quick follow-up, if I may. So the sale-leaseback opportunity, you mentioned there's a few in Mexico City, but are there opportunities such as those in other markets that you're in? And would it be focused on logistics?

Yeah, I think the answer is there are. Obviously, we're sort of looking at selective opportunities here. We particularly like Mexico City logistics. That's a favoured market for us where we'd like to increase our footprint. There are other opportunities in those other large consumption markets as well, sort of more of a logistics fence, you could say. But as I say, when you look actually to see what's in our immediate pipeline and possible opportunities, we're thinking more Mexico City as being executable in the short term.

Thank you. The next question is from the line of Alejandra Obregon with Morgan Stanley. Please receive your question.

Hi, Simon Andrew. Thank you for taking my question. Mine is on capital allocation as well. So I was just wondering if you can provide some color on how you're thinking of your uses of cash for 2026. I mean, if we split it between dividends, acquisitions, development, How would that look like in 2026, and what are the elements that will get you to any sort of decision on the mix on that front? And then the second one is on the M&A market. So I was just wondering if you're seeing any change in sentiment or acceleration in M&A activity that perhaps could trigger some recycling opportunities for you other than the saline effect that you just mentioned? Thank you.

Sure. I think in terms of capital allocation, fairly consistent outlook with how we currently have been deploying our capital. I think the main focus in the medium to long term is going to be on that industrial development program. We have a land bank there of around 5 million square feet of buildable GOA in core markets. That's something that we can flex up in terms of development activity. As you know, we've been doing zero construction starts the last few quarters. But as we get better visibility on demand fundamentals, that will remain the primary avenue of how we allocate our capital into those development properties, mainly on a spec basis, you could say. We remain also interested in pursuing certain opportunities in the short term. They boil down, as I say, one is too opportunistic acquisitions where we can access those sort of development-like returns, if you want to call it that, something like the 10% cap Mexico City, if we can do that on a more sort of a bite-sized basis to complement what we're doing on the development program, that's great. I would say the other investment portal would be through strategic land, to basically complement and add to the $5 million that we have so that we basically continue that runway for building out, getting back to that sort of 1 to 2 million square feet of velocity on a medium to long-term basis is where you want to be. And adding to that land bank will be an important part of that equation. When it comes to buyback, I guess that's obviously another opportunity. I'm not sure, Andrew, if you wanted to give cover on that.

I think, you know, as we've said previously, you know, we continue to favour allocating capital to development and value-add opportunities where we see obviously you have a much lesser impact on the balance sheet over the long term. You're not impacting liquidity overall and you're setting yourself up for valuation upside and the growth of those underlying assets. And so we'll continue to do that. Historically, we've guided to in the order of 100 to 150 million of development per year. We've obviously been softer this year given the broader macro backdrop, but we continue to work towards some permitting and pre-development works with respect to the recent acquisitions that we made in both Guadalajara and Tijuana. And I think there's a good opportunity for those particular projects to progress over the next 12 months. And I think more to the point, we see a broader opportunity for future growth with the embedded potential recycling opportunity of our retail portfolio, along with the broader liquidity that we have access to through the balance sheet, which really sets us up for in the order of $500 million worth of potential firepower over the median term. Ultimately, from a growth perspective, over the near term, there's a deep sense of embedded value with the development projects that we have delivered to date that are well positioned for lease up once we see the tailwinds return to the markets, which we're positive on with respect to how that looks over the short to medium term. And just with what we have already completed and delivered, that's in the case of $10 million in potential NOI contribution over the coming years. And we think that that will come to fruition and have a good line of sight to lease up on those properties as we go through the USMCA renewal and have more, I think, surety on the tariff and macro backdrop going forward through 2026 and into 2027. So overall, I think, you know, broadly speaking, from the capital allocation standpoint and the growth opportunities, the business is well positioned.

Excellent. Thank you. That was very clear.

Thank you. The next question is from the line of Alan Macias with Bank of America. Please just use your questions.

Hi. Hi. Good morning, Simon and Andrew. My question was answered, but just briefly, Going back to M&A, anything on the table regarding the retail sector? Thank you.

Yeah, thanks, Alan. Good to hear you. So I think retail, we're definitely very satisfied with the general trend of what we're seeing in operating financial metrics. At the risk of repeating myself, but happy to say it, 93.6%. record occupancy on a post-pandemic basis. NOI essentially at record levels up around sort of $7 million, $8 million quarterly run rate. It's been a fantastic contributor to the overall returns. As we think about operational performance, you know, probably a little bit more upside to go, I think, even as good as it's been. We are seeing some interesting opportunities to add to that overall And that will obviously lead into valuation also becoming higher. And as you think about that sort of valuation number, you know, it's not insignificant by any means. You know, sort of we're talking sort of $300 million plus. And so the interesting dynamic that we're seeing just as NOI continues to improve is obviously a more conducive interest rate backdrop with interest rates locally falling from, let's say, 10% to sub-8%. And, you know, you're sort of getting into positive leverage territory and sort of more compelling M&A backdrop. So we like the sound of that in terms of how that's all converging and it's for an ability to start thinking about that sort of medium-term opportunity that Andrew mentioned around recycling. And really that's what we've got to be thinking about in terms of, apart from that short-term opportunity catalyst to grow earnings, which is really simple, which is just to lease up the Class A stuff that we've built and is ready for lease up. The median term opportunity is certainly quite exciting and quite compelling when we think about that embedded firepower of around $500 million. That really allows us to flex up when it comes to building out the land bank and thinking about additional investments. We feel quite excited and more positioned with the ability to do that.

Thank you. At this time, there are no further questions. I'd like to turn the floor back to management for closing remarks.

Yeah, thank you for that, Rob, and thank you for everyone for participating in today's call. Along with Andrew, I would like to thank all of our stakeholders for your ongoing support, and we very much look forward to speaking with you over the coming days and weeks, as well as updating you again at the end of the quarter. So have a great one. Thank you.

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