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spk02: Good morning. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the FIBA Prologis first quarter earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Thank you, Alexandra Violante, Head of Investor Relations. You may begin your conference.
spk01: Thank you, David, and good morning, everyone. Welcome to our first quarter 2023 earnings conference call. Before we begin our prepared remarks, I would like to remind everyone that all information presented in this conference call is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call speak only as of the date of this call. Our actual results, performance, prospects, or opportunities may differ materially from those expressed in or implied by the forward-looking statement. Additionally, during this call, we may refer to certain non-accounting financial measures. The company does not assume any obligations to update or revise any of these forward-looking statements in the future, whether as a result of new information, future events, or otherwise, except as required by law. As is our practice, we have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologist.com and download this material. 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 Ibarzabal, our managing director, and Alejandro Chabelas, our head of valuations and research. With that, it is my pleasure to hand the call over to Luis.
spk14: Thank you, Ale, and good morning, everyone. 2023 has started on a strong note, which is reflected in our operation on the financial results above expectations, providing us confidence in our outlook for the year. We're adjusting our guidance, and Jorge will provide more color. Let me give you some highlights. FFO and AFFO had the highest growth since IPO in 2014, about 20%. Obesity remains above 98% reflecting favorable market conditions and the quality of our portfolio. We had a strong cash flow generation reflected in the same store cash NOI mainly to the record rental growth and rollover of 38.5%. On the ESG front, and one of our milestones, is to provide clean energy to our customers. I would like to announce that we expect to install solar panels in around 120 buildings in the next 12 to 24 months. Industrial real estate fundamentals remain solid. Demand has more than doubled since 2020, and we expect a better year in 2023, mainly due to nearshoring. We think this trend is durable for years to come. This is caused by a structural shift in supply chains as companies are making strategic decisions to relocate their manufacturing operations. Disjunctures come in cycles of 15 to 20 years. Demand differs for its high levels. Net absorption in our sixth market was a record 12.1 million square feet, representing a 44% increase against the first quarter of 2022. This is mainly driven by leasing activity from companies that are growing their presence in the country. On the back of this, our updated forecast points to a similar level of absorption in 2023 to last year's. We believe the main restriction for further growth will be a scarcity of entitled land limited by energy and permitting restrictions. While the construction pipeline has increased materially in some markets, 60% of it is already pre-leased, indicating supply tightness may continue. Vacancy in our markets is one of the lowest at 1.1%, with border markets still solid, sold out. Rents remain an upward trajectory, rising 4% sequentially and 20% year over year. We expect rents to continue increasing throughout the year, as replacement costs are still rising, and also in light of a very low availability of high-quality product. Let me expand on what we're seeing on the ground. B2S projects have reached a record of 60% of all construction. Clients are bidding aggressively for space, with some willing to provide concessions such as advanced payments and earlier pre-leasing to secure it. On the manufacturing side, Monterey has been the major winner by tripling its net absorption in the quarter compared to pre-COVID levels, while border markets have doubled it. Without a doubt, net absorption could be higher, but there are multiple challenges in delivering new space. The main sectors that stand out are First, the auto sector, as OEMs are changing their production lines to electric vehicles, and as a result, we have been seeing the Tesla announcement. And secondly, the electronics sector. We are seeing some major hubs being built in different markets. In the quarter, most of the largest transactions were undertaken by companies doing inventory management services for manufacturers. We believe this capacity additions are leading indicator or further nearshoring activity in the country. Our sponsor has leased four new buildings in Juarez and is in the process of closing an additional one representing 1.7 million square feet of new space. And all of these are related to what I just talked about, inventory management services for manufacturers. On the logistics side, And in addition to the good news on the manufacturing, Mexico City, which is the most consumption-oriented market, saw a significant decline in vacancy, as demand remains elevated and construction levels are insufficient. In this market, demand has outpaid supply for the last six quarters, a trend that we expect to continue during the year, driving rental growth acceleration and development is starting after the toll. In addition, the big e-com companies are working to secure new spaces, and our sponsor has a land bank that is attractive for them. They are currently under discussion. Logistic real estate continues to be a favorite asset class among investors, and Fever Prologis is well positioned to outperform. Despite higher interest rates and margin of cap rate expansions, valuation valuations came flat for the quarter that were upset by rental growth. Mexican real estate remains resilient in comparison to other markets around the world, and the gap between cap rates has narrowed given the local investor interest and market fundamentals in our country. In summary, we're more optimistic of 2023's outlook. On the internal growth side, raising rents to market is the main source of value generation. Our mark to market increased 320 basis points quarter over quarter to 23.7%. We will continue to push rents and term. On the external front, our capital deployment plan is now to invest up to 450 million. This will mainly come from our sponsor development pipeline, which is currently at 5.3 million square feet. These assets are well located and no other competitor has access to anything remotely close to the size and quality. And in addition, we will keep exploring third-party assets that align with our investment strategy. Our balance sheet is the best in the sector and one of our biggest competitive advantages. We have enough firepower to be opportunistic and act quickly. Also, I would like to thank our team which continue proving themselves as the best in class and have been able to deliver outstanding results. Finally, we remain committed to our shareholders and putting their interests first. With that, let me pass the call over to Jorge.
spk09: Thank you, Luis. Good morning, and thank you for joining us. During this last quarter, Fibra Prologis delivered higher than expected results, driven by strong rate change and rollover, followed by annual bumps and strong FX. We also have the most competitive cost of debt in the industry and one of the lowest loan-to-values, which gives us an important advantage in this environment. With this, let me turn to the results for the period. SFO and AFFO reached $48 and $40 million, respectively, both representing a 21% increase versus last year and above our expectations. Moving to operating metrics. Leasing activity reached 1.4 million square feet, with a period and average occupancy each at 98.4%, in line with previous quarters. Net effective rent change and rollover increased 38.5%, representing the highest since IPO, a new record. For the last 12 months, it has been above 26%. In terms of same-store cash and gap NOI, We had a positive increase of 10.4% and 9% respectively. Let me now turn to our balance sheet. Since IPO, we have been clear on our goals from a financing perspective, to have a strong and flexible balance sheet. To accomplish this, we have been patient and opportunistic, taking advantage of windows that have benefited the refinancing of our debt. We also have a well-thought strategy. Among other things, we try avoiding large columns of debt maturities that could be hard to refinance in event of a financial crisis, like the GFC or recent volatility. In short, we have learned from the past. Today, we have a balance sheet that gives us a competitive advantage in our sector. It's the difference between having a good company and a great company. providing flexibility that supports our teams in creating value to our holders. For example, the fact that we don't have to refinance in this environment, which will only undermine our cash flow generation, is a result of a well-thought strategy. To give you some perspective, our average debt maturity is 7.3 years, and we don't have any short-term debt terminations. 100% of our debt is fixed at a weighted average cost of 4%. 81% of our debt is unsecured, and more than 58% is green. Loan-to-values below 21%. Our ratios of fixed coverage and debt to adjusted EVDA are at healthy levels of 6 and 3.6, respectively. To be a great real estate company is not only about managing the portfolio with excellence. We also need to excel in our risk and balance sheet management. This combination makes us one of a kind standing out in our sector. Turning to guidance. Given this quarter results, we're updating part of our guidance for the year. Following our strong leasing and record rent change, we expect same-store cash NOI growth to be between 5.5% and 7.5%. On the capital deployment front, we expect to acquire between $250 and $450 million. Putting all this together, we're setting our full year FFO per CBFI range between 18 and 19 U.S. dollar cents. Moving to ESG. We have been upgraded on the MHCI ESG to A from BBB. Our solar initiative pilot program has given good results. And as we've mentioned, we're making progress to expand it. The idea is to allow us to meet our net zero goal by 2040, scope three. We also obtained a gold certification under BOMA best standards. This recognition is the first of its kind in Latin America for an industrial building. I would like to finish thanking our teams on the ground who have made an excellent job and our stakeholders for their constant trust and support. We're committed to deliver sustainable growth, and given our unique position in the sector, we have optionality to capture future value. With this, I turn it back to David for Q&A.
spk02: Thank you. At this time, I'd like to remind everyone in order to ask a question, Press star then the number one on your telephone keypad. To allow everyone an opportunity to ask a question, we ask that you please limit yourselves to one question. If you'd like to ask another question or follow up, you may reenter the queue. We'll pause for just a moment to compile the Q&A roster. We'll take our first question from Vanessa Quiroga with Credit Suisse. Your line is now open.
spk00: Hi, thank you and congrats on the results. The question that I have is regarding M&A and, yeah, how you are seeing the environment for M&A right now. Is there a match between prices that want to be paid versus prices that sellers want to receive? And if you see that tuberculosis can be
spk14: uh key um player in the india in the current mma opportunities in mexico thank you hi vanessa and uh thank you for being on the call well certainly uh you know fibra is greatly positioned to take care of any opportunities that the uh corner bar may may arise so at this time we have been seeing that uh after a very turbulent end of last year with higher interest rates, we have been seeing a price discovery, and we feel comfortable that the market has reached a level. We have also seen a more active investment market, and we believe that there will be some other portfolios and opportunities may arise before the end of the year. And I think we're very well positioned to take advantage of anything that comes our way, and this is one of the reasons why we have upgraded our acquisition pipeline or acquisition guidance.
spk02: Next, we'll go to Gerard Giotte with Goldman Sachs. Your line is now open.
spk08: Thank you for taking my question. I just wanted to touch on two things, one on your net effective leasing spreads and and your same-store cash and OI guidance. So first off, on your net effective lease spread, so you hit a record level of near 40%. And I've asked this in previous calls, but I'm just curious, how much more do you think this can go? I mean, when you start looking at, for example, Pelagius Reed in the U.S., they hit near 70% in this past quarter. Can we see these net effective leasing spreads going higher? as we see the tightness continue in your key markets. And then the second question is around same-store cash and why. So it hit 10.4% this quarter, but the midpoint of your guidance is 6.5%. So I was wondering if you can comment a little bit about if you expected deceleration from the levels we hit in 1Q, or is this because of tougher comps? If you could provide any comment on that, that would be helpful. Thank you.
spk06: Thank you very much, Gerard. I will answer the first part of your question regarding rent spreads. Actually, the way we have been operating on the field is taking us to a position in which we have been improving our delta and rent change every quarter. This has a bit of friction. This quarter, for example, the marketing which we have the most leasing activity was Mexico City. And it was exactly that market, the one that presented one of the highest rate change with 39.2%. We do expect market trends to keep increasing due to the challenge that supplying new space exists in all of our markets. And we think that by year end, we will have close to the current market change that we're presenting. It's not going to be as high as in the US, but it's going to be a record number for 2023.
spk09: Jorge, this is Jorge. Regarding your question on same-store and the midpoint of our guidance, I mean, same-store cash NOI is affected by basically three things. One is rent change, and Hector just commented on that on the same-store pool. The other one is occupancy, and the other one is FX. You see our occupancy for guidance is between 97% and 98%, midpoint 97.5%, a little bit below what we have today. I mean, we're adjusting to that in our guidance, and also in FX. We have a third of our revenues in pesos, so we do adjust on different FX for that, and that's the reason why you have that... that spread. I mean, we also revise this every quarter, and typically we see the ethics more stable for the two-thirds of the year in the third quarter. We sometimes do some adjustments there, but who knows where ethics will be at the end of the year. Thank you, Gerard.
spk02: Next, we'll go to Juan Ponce with Bradesco BBI. Your line is now open.
spk11: Hi, good morning. Thank you, everyone, for taking my question. What are the biggest constraints on the supply side? I mean, clearly demand is pretty strong, nearshoring, you spoke a lot about it, but what are you seeing more on the ground in terms of the supply? Thanks.
spk06: Thank you. Thank you, Juan, for your question. I have expressed several times that if we would have the infrastructure in place to take care of the nearshoring opportunities, Probably the activity that Nearsharing would be presenting could be above 3x what we are experiencing. We have a very strong pipeline, particularly in all of our three markets and Monterrey. And some of these requirements are not in the position to be solved, mainly because of the lack of electricity. Electricity is becoming an issue. that you need to start working in advance, in some cases 24 to 30 months in advance. And we're starting to see in some markets, like Tijuana, some issues regarding water supply in this category. On top of this lack of infrastructure, you know, the process that in the old days used to be smooth and fast, the process is becoming more difficult. I think that, you know, authorities are raising the bar concerning all the infrastructure investments that you need to do in order to be able to launch a new park. And, you know, the main point about this situation is I do not see any of those, any of these two conditions to be solved anytime soon. Infrastructure thing requires... a lot of changes to the current approach that we have, and it requires a lot of time in order to be put in place. And, you know, the entire process is something that we can improve, but, you know, permits are local, so you need to deal with a bunch of different authorities that, in most of the cases, you know, they want higher requirements than what are reasonable for the process.
spk02: Next, we'll go to Pablo Monsevalles with Barclays. Your line's open.
spk12: Hi, guys. Thanks for taking my question. My question is regarding keeping in mind the environment and the very strong demand that you're seeing. Is the current model of Fibra Prologis and Prologis US in Mexico the best way to tackle the opportunities? Do you think there is perhaps in the long term an opportunity to perhaps merge the two companies or to make a single entity capable of developing faster. And I know that the CAPEX plans on the Prologis US in Mexico are longer term, but I think that the demand is strong enough to sustain that. What are your thoughts? Thank you.
spk14: Thank you, Pablo, for your question. So if what you are talking about is that Fibra develops, I think we have been very clear in our strategy, and I think the setup we have is the best one. Through time, you have been seeing that normally the development is not valued in public real estate companies around the world. And And we believe Fibra Prologis is a company that provides a stable cash flow and mainly operating assets and does not participate in the development risk. We like this profile. And I don't think that would be wise to change it. We also think that on the capital that is required to – it's much better to have it in stabilized properties than to have it in the development business. So I think our setup is very well to take advantage of these opportunities.
spk06: Just an additional call-out to this last comment of Luis. Prolois, the sponsor, has currently about $500 million invested on the development pipeline and on the land that Prologis has under control. And this is a year in which Prologis might be increasing this figure probably by $200 or $300 million U.S. So if you load with $800 million of unproductive assets to Zebra, you know the operating K matrix, which is one of the biggest price that we have, are going to be damaged. Are different risks. as Luis mentioned, so do not expect any change in this regard anytime soon.
spk02: Next, we'll go to Alan Macias with Bank of America. Your line's open.
spk05: Good morning, and thank you for the call. Just one question. You haven't completed acquisitions year-to-date. I just wanted to see if you can remind us of the conditions, the market conditions that I guess were not favorable to complete the acquisitions and what has changed and if these conditions have changed and in order for you to complete the acquisitions. Thank you.
spk14: Thank you, Allan, for your question and certainly as you have been seeing And as I have said, we have been increasing our guidance to $450 million. At the beginning of the year, we had a view, but with the increase in interest rates, we saw some value declines in other markets. The Mexican real estate has remained resilient, and mainly our values have come flat. But we needed to see... that the market was stabilizing. I think now after six months, we feel very comfortable, and we've seen price discovery, and we're ready to move forward. Around $350 million of our position will come from the Prolois pipeline, and we will act in the second half of the year. In terms of pricing, I think we will buy at market, and given the differences in rents because of the high rental growth, we always check the IRR of the projects and FEBRA will acquire properties that will at least meet a 9% threshold IRR point forward.
spk06: On the third-party acquisitions, it's very difficult to have a forecast because sometimes we have visibility of portfolios that's going to be out in the market, but sometimes we don't. So we don't want to feel forced if we are not doing the right acquisitions of the right quality real estate at the right price in the right markets. To the current visibility that we have, we feel that we are going to be more active than what is expected on third-party acquisitions, and this is something that is going to be happening as well in the second part of 2023.
spk10: we'll move to our next question gabriel himafar with scotia bank your line's open i think for the call a quick question for modeling purposes on your new guidance and acquisitions um is it fair to assume that an all-in funding cost near the 5.5 percent mark and to model cap rates for the targeted assets at 6.5 percent any color and the timing to deployment
spk09: this investment um this is jorge you you it was hard a little bit to hear you uh one of your questions was modeling cap rate of six percent and the other one the 5.5 percent was for debt is that that's right correct i know only in funding cost is it fair to model in that way On the debt side, I would say yes. Remember that we have a line of credit. We're in the process of recasting the line of credit. We're going through the process right now. Currently, the line of credit is at 200 basis points over SOFR, and we have some cash available. So, I mean, you can do the math. On the modeling cap rate.
spk14: Yeah, on the modeling cap rate, as I said, Gabriel, you know, FEBRA acquires at market. And if you see our appraisal, our appraisal is around 7%. And if you look at the markets, some of them will trade below 7%. Some of them will trade above 7%. But the appraisal cap rate just gives you a very good sense of where the market is and the pricing that we will acquire these properties. And the timing is going to be in the second half.
spk02: Okay. Next, we'll move to our next question. Philippe Barragan with BTG Paxual. Your line's open.
spk07: Hi. Good morning, guys. Congrats on the results, and thanks for the call and for taking my question. I have a couple of questions. One is on the balance sheet. So you had noted that you guys have a really strong balance sheet, which is true. And I was just wondering with considering the acquisitions that you might have in the second half of this year, what is a comfortable LTV that you guys feel comfortable in perhaps expanding to take advantage of the opportunities? And my second question is more on a little bit more color on the decreases in occupancy rates for Guadalajara and Tuaquare that we saw sequentially this quarter. Thank you.
spk09: Thank you, Felipe. Thank you for the question. This is Jorge. And just in case Gabriel's question wasn't, the second part of the question wasn't heard, the acquisitions are meant to be in the second half of the year. Luis mentioned that, but I think it was at the end of the conversation. On your question, Felipe, on the balance sheet, yes, we have below 21%. We are comfortable Our internal threshold is 35% loan-to-value. That's about $800 million of additional debt. We don't want to be in those levels. I think that we will be, you know, between 25% and 30% at the most.
spk06: On the termination ratios for customers, we had 429,000 square feet on five different cases. Two of the situations that left our spaces because we didn't have additional space to fit their needs, so I need to go and look for someone else. And the other three ones are related to consolidation or company buyout situations. There's no reason, I don't have any particular concern that any of our markets are experiencing a negative trend on occupancy or rent. On the contrary, We have in our markets 1.1% vacancy on the overall, and the challenge that the markets are facing, as I commented in a previous question, is the lack of ability to supply new space. Because of this, market trends will keep on growing, and we should expect organic growth for fibra in this regard.
spk02: Thank you. And as a reminder, ladies and gentlemen, to ask a question, press star 1 on your telephone keypad. Next, we'll go to Juan Macedo with GBM. Your line's open.
spk04: Hi, guys. Thanks for the call. My question is regarding tenant improvement. We saw less than usual during the quarter, and I was just wondering if you could provide us some color on this. Additionally, if you could share your thoughts on future dynamics, We are trying to understand if new demand from new sharing could bring more specialized tenants that could require higher investments.
spk09: Juan, sorry, this is Jorge. Jorge, Juan, this is Jorge. We didn't hear your first question. Can you repeat it?
spk03: Yeah, can you hear me?
spk09: Yeah, I can hear you.
spk03: Yes. Okay. My first question is regarding lower tenant improvements during the quarter. If you could provide us some color on this. And the second question is regarding future dynamics. We are trying to understand if measuring demand could bring more specialized tenants that could require higher investments in tenant improvements.
spk06: Thank you. Thank you, Juan, for your question. You know, lower TIs, I think that these are reflective of a market trend. The same way you are in a position to increase rents, you can have better negotiations for Fibra pro lois regarding the amount of money that you need to spend in tenant improvements. I think that this is a trend of how markets are getting with very low vacancies. The second part of your question regarding what we should expect from the pipeline from your shoring, Effectively, I would like to mention two highlight points. The first one is that we are seeing an increase on logistic activities in the border markets and in Monterrey. These are logistics regarding business-to-business, which is something that in the past the manufacturing companies used to take care inside their own facilities. As they are expanding their manufacturing footprint, they are using third-party logistics to specialize not to bring the Amazon box to your house, but to bring all the components in the manufacturing lines according to what is expected. We do see as well some customers that are requiring high energy and high energy consumption. And it's in this specific point where not only Prologis, but the market in the overall is facing difficulties because some of these cases you need to take a decision whether to entertain the needs of a high consumer electricity customer or go with some customer that is going to request less energy. And the answer to this question is obvious. So once again, we go back to the point of the lack of infrastructure. That's something that we're working. And Luis mentioned in his opening remarks that by the end of this year, we will have 160 of our buildings already with solar pines which I think is going to be a big step towards improving in these important tasks.
spk02: Next, we'll go to Andre Nazini with Citigroup. Your line is open.
spk13: Hi, Tim. Thanks for the call. Two quick ones. The first one on dividends and payouts. A lot of dividends were paid in the first few, even more than Then the FFO. So what's the rationale for kind of front-loading payments in the first half of the year? What you said that acquisitions are going to be in the second part of the year. So more dividends in the first half and then acquisitions on the second half of the year. Does that rationale make sense? And the second one, a quick one on acquisitions. How do you guys feel about maybe fail is back due to suits? I understand the market is very hot. which diminishes a lot the SPAC buildings, right? Because, you know, lease ups are fast, so on and so forth. But is there opportunity as well in the, for instance, the sales to lease back space, which is not something that common, right? I think with three-bench in general. Thank you.
spk09: Thank you, Andre. Good to hear you. This is Jorge. Regarding your question on the dividend, as we disclose on the fourth quarter call and results, given the way that the taxable income is calculated in Mexico because of the tax rules and the rules that FEBRAS have, a low SX and high inflation add up to this taxable income. So we had to distribute, and we did. On March 10th, we distributed $47 million uh given this additional distribution from a tax perspective so that covers 2022 tax taxable income but it's part this 47 million and part of the uh guidance that we give for 2023 so we you won't see another payment dividend payment for the first quarter that has already done march 10 And then you will see second, third, and fourth quarter. We are complying with the local rules. And in all, in an annual basis, what you will see on your dividend payout is 90% ASFO payout rate.
spk14: And Andre, on your second question, on the profile of the acquisitions, I would say that, you know, talking about the Prologis pipeline, a huge percentage of it is built to suit given how tight the market is and the low vacancy. And, of course, you know, Fibra is well positioned to have exclusive on this pipeline. So a lot of built to suits. And, of course, the parent, the sponsor, would also be putting additional space for spec buildings in markets that do make sense so we will have a combination of both as to sale and leasebacks uh they we are seeing some opportunities in this field but uh they're not the majority of it most of them are build suits and spec buildings okay next we'll go to a follow-up question from gabriel humel farb with scotia bank your line's open
spk10: Hi, thank you. Just a quick follow-up question. We noticed that PLD didn't make any deployment starts in this year, in this quarter in Mexico, and yet it still has lots of land reserves. Do you expect development starts to resume in Mexico or in the rest of the year, or in which market in Mexico?
spk14: Thank you, Gabriel, and uh yes of course uh and this is just a timing issue i think you need to analyze uh you know this uh on different quarters uh um so we are are seeing a strong pipeline uh the sponsor will put uh uh you know projects to work uh you know before the the end of the year and we're expecting at least around between 200 and 300 million dollars of new product uh you know during the uh this second quarter and the second half of the year.
spk06: It's important to highlight that PLD has no restrictions to invest in Mexico. And the near-sharing engine, on the contrary, is placed in Mexico as one of the attractive markets that PLD has to include capital. So it's just, you know, sometimes deals take time and could be a product with no activity. So you will see plenty of activity.
spk10: Okay.
spk02: And I'd like to remind everyone, it's star one. If you have a question, we'll pause for just a moment. Okay. Showing no further questions at this time, I'll now turn the call back over to Luis Gutierrez, CEO, for any additional or closing remarks.
spk14: Well, I just want to thank everyone for their interest and their participating in this call. This has been a really great start of the year. We have been seeing a great market, and Fever Apologetics is very well positioned to outperform. So thank you, and looking forward to see you either in a visit or on the next quarter call. Thank you.
spk02: And this does conclude today's conference call. You may now.
spk14: Disconnect.
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