Fibra Prologis Reit Ctfs

Ladies and gentlemen, thank you for standing by, and welcome to the FIBA Prologis Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Costa Parmenoulis. Thank you. Please go ahead.

Thank you, Brandy, and good morning, everyone. Thank you for joining us for our third quarter 2020 earnings conference call. Today, we will hear from Luis Gutierrez, our CEO, who will discuss our strategy and market conditions, and from Jorge Giró, our Senior Vice President of Finance, who will review results and guidance. Also joining us today is Hector Ibarzabo, our Managing Director. Before we begin our prepared remarks, I would like to remind everyone that all of the information presented in this conference call is proprietary and all rights are reserved. The information has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call are subject to a number of risks and uncertainties. Our actual results, performance, prospects, or opportunities may differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are current as of the date of this call. We take no obligation to publicly update or revise any forward-looking statements after the completion of this call, whether as a result of new information, future events, or otherwise except as required by law. Additionally, during this call, we may refer to certain non-accounting financial measures. As is our practice, we have 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 fibraprologist.com and download this material. With that, it is my pleasure to hand the call over to Luis.

Thank you, Costa, and good morning, everyone. I hope you and your loved ones are staying healthy and safe. we remain steadfast in doing everything we can to help our employees, customers, and communities through this complicated time. We have been working remotely, our markets have improved, and we have excelled in our customer service and engagement. The combination has resulted in operating a financial performance that exceeded our expectations. Let me highlight the operational results for the third quarter. we had a robust leasing activity that resulted in an increased occupancy. Leasing spread reached an all-time high, and importantly, all six of our markets recorded positive rent change on rollover. As of yesterday, we had collected 99.4% of third-quarter rents and more than 86% of the rent due in October. Today, We have rented rent deferrals totaling 1.8% volume revenues, which is less than we expected at the beginning of the health pandemic. This is a testament to the sector diversification and credit quality of our customer roster. We expect to recover 85% of those rents before year end, with the remainder in early 2021. We had a strong FFO and AFFO growth which exceeded our expectations. Turning to the broader real estate environment, demand exceeded supply by more than 1 million square feet in the third quarter. Development activity remained stable and has been adapting to meet demand. Market vacancy in our six markets tightened 30 basis points to our historical low of 3.1%. Market rental rates increased in the third quarter, rebounding from last quarter a slight drop. Now, let me spend a few moments on what we're seeing on the ground. Customer sentiment continues to be resilient. Despite a weaker economy, there's a lot of demand for modern logistics products in Mexico. We're still engaging our customers on expansions across all of our markets. In Tijuana, where land scarcity has kept supply limited, resulting in low vacancy and higher rents, customers are moving quickly to expand. In other markets, the pace is measured. This quarter, we also started to hear about expansion from our customers in rain also, which is encouraging given the demand there has lacked over the past year. Two key structural drivers of logistic real estate. manufacturing and consumption have advanced significantly this year. While neither is completely decoupled from the broader economy, they have outpaced the economic growth of the country as a whole and have been key factors in the strong performance of the asset class. Starting with manufacturing, nearshoring operations to Mexico continues to be a central theme and one that is building momentum. Proximity to the United States and property quality are paramount in the discussions we have been having with prospective customers. This has been a competitive advantage for us. Notably, two Chinese companies will soon start operations in Mexico, having signed leases in the third quarter. One is a furniture company that will be based in Monterey, The other company is a global leader in adjustable beds and sleep technology, and they will be located in Ciudad Juarez. We're finding nearshoring demand is broad-based across medical, consumer goods, electronics, and digital equipment, among many other industries. I expect greater frequency of companies near shore to Mexico due to the continued trade tensions between the U.S. and China, as well as the ongoing health pandemic, which is forcing customers to hold greater inventory levels closer to the end consumer. On the consumption front, e-commerce continues to accelerate and, in fact, has reached 15% of our portfolio following the acquisition of Prologix Park Grand in April. The lockdown forced many Mexicans to adopt digital consumption sooner. The e-commerce asset percentage of retail sales has doubled over the past six months. However, adoption remains low relative to the rest of the world, signaling that there is more room to grow. Retailers will have to adapt to this trend towards online shopping by carrying more inventory, which will result in more space required. While e-commerce was late coming to Mexico, it is now firmly entrenched, given the space requirements being three times that of a traditional retailer. We expect demand for our product will continue to increase. When we're cautiously optimistic in our outlook, given the pandemic and state of the Mexican economy, we believe Fever for Logistics built to outperform. Due to the logistic asset class has outpaid the other asset classes even more so during the health pandemic. Our portfolio has been resilient during this challenging time, exceeding our performance in recent years. We have a differentiated strategy that focuses on two key drivers of economic growth, along with our stringent guidelines for investing in markets with high barriers to entry. And we are well positioned for the future with low leverage and flexible balance sheet that allows us to be opportunistic when others cannot. The market to deploy capital has become more favorable, and we are in terrific position to take advantage of this opportunity. We expect to become more active in the next few quarters on this front as we strive to create value for certificate holders. With that, let me turn the call over to Paul. Thank you, Luis. Good morning. Thank you for joining us, and I hope everyone is staying healthy. Before commenting on FFO, I would like to remind you that we issued 200 million additional certificates equivalent to 30% increase in the middle of March. Proceeds from these additional certificates were used to acquire Grand Portfolio on April. The NOI associated to this portfolio was not stabilized until September of this year. Therefore, we have not received the full benefit. On a nominal basis, SFO for the quarter totaled almost $37 million, or $4.3 U.S. per certificate, which represents an 8% increase if compared to the same period last year. Excluding the impact from one-time non-operating items on both quarters, such as the relied gain on VAT of $3.6 million, SFO per certificate was basically flat. ASFO was $28.1 million for the water, an increase of more than 26% compared to last year. In the last nine months, we have received around $11 million of additional income derived from non-operating revenues, which are related to withholding tax and VAT reimbursements, as well as reliant income from hedges on ethics. These revenues are not related to the operations of the portfolio. They are, however, related to the risk management of the balance sheet. To this extent, we will continue to protect earnings with best of hedges, which could result in reliant gains in 2021 and beyond. In addition to protecting earnings, they ensure our dollar distribution is unaffected by exchanges in ethics. Moving to operating metrics. Leasing activity was 3.8 million square feet. On a cumulative basis, we have leased 11.5 million square feet during 2020, leaving us with a record low of 2% expiration for the balance of the year. Quarter end occupancy increased 90 basis points from the second quarter to 96.4%. However, it was down 40 basis points year over year. Our leasing teams are doing a phenomenal job. exceeding our expectations from the beginning of the health pandemic. Despite the weaker peso, and in line with our strategy to push rents higher to create value, net effective rent change and rollover increased 16.3% for the quarter and was 12.1% on a trailing four-quarter basis, both of which were above our expectations. Cash, same store NOI, declined 6% and was mainly driven by concessions related to longer lease terms and a weaker peso. I would like to reiterate that increasing free rent is a function of longer term and lease volume and not due to COVID. To this note, free rent is not increasing. The nominal level is higher as a function of longer term and higher volume. To give you some perspective, same-store gap NOI, which moves out the effect of free rent, increased 2.4%. Moving to our balance sheet. As you may have already seen, we have announced that Fibra Prologis has received credit rating from Fridge and HR ratings. On an international scale, each gave us triple B, and HR gave us triple B+. On a Mexican scale, we have also received a triple A rating from both agencies. This is due to the strength of our portfolio, investment strategy, and balance sheet management since IPO. As a consequence, we will have greater flexibility for refinancing alternatives in the near future. Let me go through the balance sheet metrics for the quarter. We ended the quarter with 28% loan-to-value, weighted average debt cost of 4.3%, weighted average maturity of 3.2 years, debt to adjusted EBITDA of 4.0, fixed charge coverage ratio of 5.1, and we have $341 million of total liquidity through our unsecured and committed credit facility. Wrapping up, in this period, we have further improved the credit quality of our portfolio and balance sheet. Our teams have done an excellent job on lowering the leasing risk in operations in 2020 and below average growth through 2021. Also, as you can see, we have actively working on having a more flexible balance sheet. All these together make CIDRA Prologis an attractive investment from a risk and growth perspective. With that, I will turn it to Brandy for Q&A. Thank you.