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spk03: Good day and welcome to the Fibro Prologis first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. We ask that you please keep questions to one per person. If you would like to ask further questions, please rejoin the queue by pressing star 1. For operator assistance throughout the call, please press star 0. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Alexandra Valente, Head of Investor Relations, to begin the conference. Alexandra, over to you.
spk01: Thank you, Gavin, and good morning, everyone. Welcome to our first quarter 2024 earnings conference call. Before we begin our prepared remarks, I would like to remind everyone that all the information presented in this conference call is proprietary and all rights are reserved. The information has been prepared only for information purposes. It 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 statements. 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 Hector Ibarzabal, 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 Federico Cantu, our Head of Operations. On February 13, we announced a non-binding proposal in respect of a potential tender offer and exchange transaction for up to 100% of Terafina's certificates. This call will focus on our first quarter results. The company will not provide comments related to this transaction beyond what it is included in our prepared remarks. With that, it is my pleasure to hand that call over to Hector.
spk10: Thank you, Ale, and good morning, everyone. 2024 continues in the right momentum, which is reflected in our outstanding operational and financial results. As a consequence, we are adjusting our guidance upwards, and Jorge will provide more color on this. I would like to present some highlights of the quarter. We continue to see an occupancy of nearly 100%. In addition, we have a strong cash flow generation reflected in the company's same-store cash NOI, mainly due to our rental growth on rollover, which was close to 48%. Regarding the capital markets, in early March, we successfully raised $570 million at 70 pesos per certificate and above NAD. We plan to deploy most of these monies before year end, and we appreciate the extraordinary support received from our shareholders. Now, I'd like to talk about market conditions. Net absorption in our six markets was 8 million square feet. stable versus last quarter. Vacancy increased 20 basis points to 1.7%, still a very adequate level. Furthermore, due to the sharp increase in entitlement periods, lack of energy, and rising replacement costs, we saw a 15% decrease in construction starts to 7.1 million square feet, the lowest level since 2021. We believe vacancy will stay around current levels for the remainder of the year. Because of the tightness we see across all of our markets, as well as an increase in leasing activity in the first quarter, we are convinced that we will achieve a strong rent growth of low double digits during 2024. Our third-party appraised values increased approximately 8%, driven entirely by rent growth. We expect rents to continue growing and cap rates to remain stable. Due to this, we have a positive outlook for our values. Let me provide additional color. Energy and infrastructure availability for new development remains very limited. We believe this condition is preventing customers from having more accelerated expansion plans. As has been the case in recent years, Monterey was a market with the highest net absorption at 3.7 million square feet, with vacancies stable at 1%. We saw an important increase in Monterey leasing activity in the quarter, mainly releasing from Asian customers. As we have anticipated, Mexico City saw a sharp decline in net absorption, mainly due to the lack of suitable product for clients' needs. Vacancy remains at very low levels of 1.6%. For the first time in many years, pre-leasing represented the bulk of leasing activity in the quarter, reflecting clients' strong need to secure space in Mexico City. Tijuana continues with a low level of vacancy at 2%, with limited space under construction and stable demand. Regarding Juarez and Reynosa, while they have seen a slight pickup in vacancy, both remain below 3% and with very limited supply. To summarize, we are optimistic on this year's outlook and its favorable market conditions. Our 49% in-place-to-market provides us pricing power to continue increasing rents and values on our portfolio. On the external front, our current plan is to invest around $400 million this year. Our sponsor currently has 3.7 million square feet under development, and we will continue to evaluate some identified third-party opportunities that are accretive and aligned to our business model. In terms of our balance sheet, we believe it is the strongest in the sector and a very important competitive advantage. Finally, we remain committed to our shareholders and putting their interests first. With that, I will pass the call over to Jorge.
spk00: Thank you, Hector, and good morning to everyone. We started the year strong with important initiatives in the first quarter. which is in line with our view of the sector and future of Mexico. Let me turn to our financial results. FFO was $59 million for the quarter, a 23% increase versus last year. AFFO reached $49.5 million for the quarter, a 24% increase versus last year, and above our expectations. These results were driven by rain change and rollover and annual bumps. Moving to our operating metrics. Leasing activity for the quarter was 1.2 million square feet, with an average and end occupancy above 99%, which is testament of the strong market conditions of the sector and exceptional performance of our teams on the ground. Net effective rent change and rollover was approximately 48% for the quarter and 43% for the last 12 months. Our portfolio lease mark-to-market is 49%. What this means is that we could generate more than 70% of additional AFFO at least roll over time, assuming current market levels. In terms of same-store cash and GAAP NOI for the quarter, we had an increase of 12.3% and 9.7% respectively. Moving to our balance sheet. With our recent capital raise, our balance sheet has gotten stronger. You can see our financial metrics in our supplemental. This said, I would like to touch on the following topics. Total investment capacity to get to 35% loan-to-value is $2.5 billion, including cash in hand of $740 million. We will remain prudent in the use of our capacity. You should think about our balance sheet strategy as a BBB plus going forward. Let me move to our updated guidance for the year. Following our strong leasing rent change, we expect same-store cash NOI growth now to range between 8.5 and 10.5%. This is a 220 basis point increase versus previous midpoint. On the capital deployment front, we expect to acquire between $200 and $400 million. This is a $100 million increase versus last midpoint. On other matters, Last March, we announced the reduction of our sponsor management fee from 75 to 60 basis points on the incremental amount above $5 billion for the portfolio. To be clear, and as an example, if our assets under management were $7 billion, Prologis, our sponsor, would receive 75 basis points on $5 billion and 60 basis points on the incremental $2 billion. Turning to ESG. In the effort to strengthening our team, we have added a new ESG dedicated person who will be supporting our different initiatives and will be responsible for reporting. Regarding our solar energy initiative, we currently have 10 buildings under operations with solar panels and 11 more under process. This is in line with our goal to reach 120 buildings by 2025, which will generate 71 megawatts. I want to finish by thanking our people on the ground who have executed our strategy, adding value to our operations and the continuous trust from our stakeholders. As a reminder, we won't be addressing questions related to the Terratina transaction on this call. Let me turn the call to the operator to take your question. Thank you.
spk03: At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We ask that you please keep questions to one per person. And if you would like to ask follow-up questions, please rejoin the queue by pressing star one. Your first question comes from the line of Rodolfo Ramos from Brotesco BBI. Your line is open.
spk07: Good morning, Hector, Jorge, and Alex. Thanks for taking my question and congratulations on the strong results and updated guidance. My question goes along the lines a little bit of understanding your commercial efforts. I mean, Prologis Outlook seems to be going in the opposite direction of the outlook that you set out for or updated for this year. Given your global tenant base, many of these companies probably have operations in both countries. So I just wanted to understand a little bit of how are your commercial discussions with clients evolving and if there are They have logistics costs more as a concern now, and if you see something perhaps more towards 2025, 2026, that could derail either rent growth or GLA growth, especially as more expirations start to come through.
spk10: Thank you. Rodolfo, this is Hector. Thank you for your question. One of the things that differentiate Prologis is that we try to be very close to our customers. For us, it's very important to understand customer sentiment because this sentiment reflects the future of their business. Mexico is somehow a bit disconnected from what is happening in the U.S. because as I mentioned in my opening remarks, The possibility of launching new space into the market is very challenging. The development activity has never been as complex as it is today in this business. So number one, we think our customers, because of the conversations that we have with them, and because of the positive figures that consumption keeps on driving in Mexico, they are not only positive, but they have important expansion plans going forward. Number two, we do not see any important risk to have any oversupply in any of our markets because of the conditions that have been mentioned. And number three, I think that the fact that Fibra Prologis has in Prologis a business partner, you know, Prologis has increased It's firepower, buying land, and anticipating, understanding that the development cycles are taking longer. I think that as of today, to have federal Prologis, the ability to take over of everything that Prologis develops in Mexico is becoming every day more and more a very important competitive advantage. I don't see any important risk going forward. I think that the macro conditions, you know them as well as everyone. They are there, and they eventually could affect our market. But, you know, the conditions of our market or portfolio and the sentiment of our customers is positive.
spk04: Thank you, Hector.
spk03: Your next question comes from the line of Gordon Lee of BTG. Your line is open.
spk11: Hi, good morning. Thank you very much for the call. Just a quick question. There's been recently a lot of headlines both in the U.S. and Mexico in terms of some concerns around the entry of Chinese manufacturers in Mexico, particularly EV manufacturers and whether they could use Mexico as a springboard to enter the U.S., somehow maybe circumventing some of the restrictions around USMCA. And so I just wanted to see what your thoughts are about that. Um, and, and if you could remind us to what your today, like you look at your tenant base, what share of your tenant base would you say are Chinese tenants or suppliers of, of, of Chinese manufacturers? Thank you.
spk10: Gordon. Um, thank you very much for your question. When we mention our figures about nearshoring, we assign probably 43 or 44% related companies coming from Asia. Having said this, we do not have important number of new Chinese customers. We have the original big global Chinese companies that have been doing business globally for over a decade. and we have a strong relationship with them. Out of the new Chinese wave, we probably have three or four customers. What we have seen in our portfolio is an important activity expansion of suppliers of these Chinese companies, companies that, you know, are taking advantage of this new tier one coming into Mexico and that are increasing their activity. So there's a relation. It's an indirect relation. What we have seen for these Chinese suppliers is that they are expanding their production lines. And it is a very good sign to see how companies are working in their efficiency. They try to make more efficient the space that they currently have. And I think that we do not have a particularly important risk related to Chinese activity in our portfolio.
spk04: Thank you very much.
spk03: Your next question comes from Gerard from Goldman Sachs. Your line is open.
spk09: Thank you for taking my question. We'll take a similar line to Gordon's question. So we've been seeing some data points that are showing that imports from China into Mexico and West Coast ports have increased materially over the recent past. And the whole idea here would be also to ship things through Mexico to the U.S. And I just wanted to understand in general terms, you know, much of the focus has been on manufacturing as it pertains to nearshoring or as it pertains to recent demand. I'm just curious to know, are you seeing more demand for logistics? Is this something that you are, once again, going to be more focused on? Or do you think going forward, the demand will be mostly focused on manufacturing?
spk10: Thank you very much for your question. Currently, 43% of our portfolio is devoted to manufacturing. And this number has increased gradually, I would say, within the last three to four years. 57% of our portfolio is related to logistics and consumption. We are used to read the newspaper and every other day there is important release about nearshoring. And of course, we have our border strategy complemented by Monterrey, a very important capacity to respond to our customer needs for manufacturing, like manufacturing to export. But, you know, we have a very close relation as well with the big e-commerce players and the logistic companies. And I can tell you that they are not in the newspapers as they used to be, but they are enjoying low-teens growth, which is amazing. which is an important number in their different plans, and that they are moving rapidly in their expansion plans trying to improve the service they provide to their customers. One of the things that I feel very comfortable is with the balance that we have been able to achieve within our portfolio. We have the ability to deal with manufacturing. We have the ability to deal with logistics and consumption. And I think that it's an opportunity because depending on how the demand moves, our reaction is able to be the leader. Something similar happened to the balance between pesos and dollars in our portfolio. I think that it has been a very good asset for Ferropologis to have one-third of our revenues coming from pesos. It's a good balance. We have peso expenses, and it's somehow another analogy between manufacturing, logistics, pesos, and dollars. We are very well complemented.
spk04: Thank you. Your next question comes from the line of Andre Manzini from Citigroup. Your line is open. Yes. Hi, Hector.
spk13: Jorge Ali. Thanks for the call. So my question is on capital deployment. So my impression is that in prior follow-ons, the majority of the capital was deployed purchasing assets from the sponsor, PLD, right? And this time around, it seems to me that the majority will be from third parties. a big change there, if you will. So how does this change the timing of capital deployment, characteristics of what spots, like age of the property, the locations, and ultimately the cap rates of what spots? Thanks.
spk10: Thank you. Thank you, Andre, for your question. You know, we were just last month in our follow-on roadshow And as we were talking with investors, we were very clear on the fact that 100% of the proceeds that were going to be raised were going to be invested in a horizon of 12 to 18 months. Those plans are there. They have not received any modification. We should still see the first acquisitions either by the end of this quarter or the beginning of the following quarter. 100% of the acquisitions that we have in the short pipeline, they are related to our six markets. They are accretive to FIBRA, and there's a combination between, I would say, probably 80% manufacturing and 20% logistics this time. Regarding market gaps, you know, the markets with a lower cap rate under our perspective are Mexico City and Tijuana, depending on the quality of the assets, but you could be in the low sixes in those markets. And, you know, markets like Guadalajara and Monterrey are around 7%. As I mentioned in my opening remarks, we expect cap rates to become or to stay flat in the remainder of the year, but we are very optimistic about market trend conditions because the ratio between supply and demand gave us positive feelings that market trends will keep on increasing.
spk04: Thanks, Hector.
spk03: Your next question comes from Isabella Salazar from GBM. Your line is open.
spk02: Hello. Thank you for taking my call. I was wondering if you could offer more insights into the market dynamics that contributed to achieving a 7.9% cap rate near Mexico City acquisition this quarter. Were there any tenant improvements involved, or can you elaborate on that specifically? Thank you.
spk12: Thank you, Isabella, for your question. This is Federico. We saw very good dynamics across the six markets with good activity, as Hector mentioned, 8 million square feet of net absorption. And customer sentiment remains positive. So we were able to achieve a very good rent change on rollover, as you saw. We expect these trends to continue into the future and feel very positive.
spk02: Thank you.
spk04: Your next question comes from Pablo Montevilles from Barclays.
spk03: Your line is open.
spk14: Hi. Hi, guys. Thanks for taking my question. Just wanted to hear your thoughts on the new concept that you're renewing. How do you see clients be willing to extend or how extended the lease of a new contract and perhaps you want to shorten it to have more rent price appreciation, how do you see that trade-off between the clients who wanted a longer-term contract and you perhaps you want a shorter one? And kind of a follow-up on that is do you feel more confident that you are able to achieve a higher rent increase through that contract, not just inflation or asset increase on the rents. Thank you.
spk12: Thank you, Pablo, for your question. So, yes, we did see, you probably saw it, Walt, for this quarter was 76 months. We had three leases that started for seven years and one for 10 years. So we're seeing, and these are all manufacturing, so you can expect for manufacturing customers where they typically invest heavily in their spaces, we're seeing longer terms and we're fine with that. You know, we're starting off in leveraging our good locations, our top quality product and best in class service. We're leveraging to get very good rent levels at market. And so yeah, every negotiation is different. The logistics users typically want to match with their contracts, or they tend to be three to five years. But we're seeing with the manufacturing users tending more towards seven to 10 years. I would also comment on, as it relates to retention, where we had in this quarter, we had three move outs two of which were leased up immediately. None of them had to do with rent levels, rather consolidations or growth that we were not able to accommodate. I would encourage you to see retention and talking about this in the context of average and period end occupancy as well as rent change. We have very good pipeline of prospects across our six markets. And just touching on your final part of your question, As you know, we've commented this in the past, all leases that are PESO-denominated are indexed to Mexican inflation. And for U.S. dollars, we have typically they're fixed, and we've been averaging around 4% over deals that we've had over the last few months.
spk04: Perfect. Thank you. Thank you.
spk03: Your next question comes from David Sote from Scotiabank. Your line is open.
spk06: Hi, thanks. Just a quick question regarding the development pipeline. We saw that Prologis reported a cut on its development pipeline. Should we expect some modification on the timeline for acquisitions, or should we expect more third-party acquisition? And the other question is, could you please provide some color about the dynamics, specifically in Reynos Antiguala? Thanks.
spk10: I will answer the first part of your question, and I will let Federico to answer the second one. You know, the difference between acquisitions that FIBA makes from Prolois and acquisitions that FIBA makes from third parties is the visibility. I mean, we have full visibility to what Prolois is developing about the timing, construction progress, lease in progress. And as a reminder, you know, when Fibra Prologis buys any assets from Prologis, you know, all the processes of due diligence are made identically, like if we would be doing a transaction from third parties. So we are very positive. I mentioned my opening remarks. We have 3.7 million square feet on this regard, and the markets that we're going to be buying from is Juarez, Tijuana, Reynosa, Mexico City, and Monterrey. This speaks how Prolois is committed to keep on being active in all of the markets in which we participate. Regarding third parties, we have a very close relation to what is happening in the different fronts. The most frequent seller of portfolios are the CECADES. We have a close and reliable relation with the most of the CECADES sponsors. Today, as we speak, we are currently working in three important opportunities in this regard. One of them, we have a very important progress But, you know, it's a completely different dynamic. You need to enter either into a top-up market transaction or into a bidding process. And as we have visibility of all the costs and values regarding Prologis assets, you know, there's a point in the negotiations where we don't feel comfortable and we do not necessarily close everything that we pursue. I will pass the word to Federico to talk about Reynosa and Tijuana.
spk12: I believe it's Reynosa and Tijuana were your questions, David? The dynamics in those two markets?
spk06: Yes, correct, Reynosa and Tijuana.
spk12: Just first, generally, again, we feel very good about our six markets, and particularly our border markets, where we've seen very good activity from both existing users and new users trying to enter. We had, just talking about this quarter, we have three transactions in Reynosa. We achieved very good rent change in Tijuana. We also are seeing build-a-suit activity in both markets, and we have land to accommodate. So, again, and as far as industries, we see a broad mix across many different sectors. And, again, we feel very good about those two markets in particular.
spk04: Your next question comes from the line of Andres Aguil from GBM.
spk03: Your line is open.
spk04: Hello. Thanks for the call. My question is regarding the trends in U.S.
spk06: dollar and Mexican peso rental rates. Have they remained stable or have you noticed any shifts in demand or contracts at one point here where the other due to exchange rate concerns?
spk12: Thank you, Andres, for your question. So, yeah, we've seen the mix of peso to dollars, which is a third peso, two-thirds dollar, maintained over the last few quarters. In the north, the border markets are 100% dollar-denominated. And on the other side of the spectrum, Mexico City is around 50-50. So we see that mix increasing. Again, it depends. The dollar or the peso denomination depends on the inherent business of the customer. If it's more focused on domestic distribution or domestic market, then they'll command pesos. And again, more on the nearshoring side and the manufacturing side, export-oriented, those tend to be dollars. So we see that mix maintaining for the most part into the future.
spk04: Thank you.
spk03: As a reminder, if you wish to ask a question, please press star followed by 1 on your telephone and wait for your name to be announced. That is star 1 if you wish to ask a question. And your next question comes to the line of Francisco Chavez from BBVA Market. Your line is open.
spk05: Hi. Thanks for the call and congrats on the strong numbers. Just a question regarding the EBITDA margin. You saw a decline. Can we expect a similar level of margin for the rest of the year, or this margin should recover? Thank you.
spk00: Gracias, Paco. It was a little bit hard to hear you, but I think that your question was related to the EBITDA margin versus previous quarters. And this is Jorge, by the way. You're correct. I mean, the EBITDA margin is around 74% this quarter. It's lower. than previous quarters, and the reason why is that the main reason has to do with the asset management fee increase given the increase in the portfolio value. In other words, valuations have been going up faster than the total effect of incremental rents on rollovers. give you an example this quarter alone uh the valuation of the portfolio went up eight percent of 7.5 actually that's the right number and in one quarter and the roll up during this quarter was you know 1.2 million square feet out of 47 million square feet of the total portfolio so i mean it's a catch-up thing no it has gone faster because of the rent increase that said This is one of the reasons why we adjusted on a going forward basis the asset management fee from 75 to 60 basis points on an incremental amount of about $5 billion. So that's the reason why. So this year, I think that given the small rollover of the portfolio, about 8% to 9%, you will expect the same margins. But on the long term, As revenues and rollover catches up, you will start to see previous margins at the EBITDA level as before, I would say.
spk04: Thank you. Thank you. Your next question comes from Alan Macias from Bank of America.
spk03: Your line is open.
spk08: Hi, good morning, and thank you for the call. Just a quick question on just if you can provide some color on the main driver to revise upwards your acquisition guidance range. Is this due to you believe you can complete the transaction, get to a price faster than before? Are market conditions better in that sense? What is the main driver? Thank you.
spk00: Hey, Alan. This is Jorge. And thank you for your question. I would say a couple of things. I mean, one of the reasons that we did a follow-on this last March is because what we have seen in the dynamics in the market sector talked about potential for product positions. As you know, we have the Prologis pipeline. that it's also there. So what we're seeing today is that there are some opportunities on the third parties, and that's the reason why we went to raise the equity. So in line with that, we're increasing our guidance. That's basically the point. We have more clarity than we had, you know, back at the beginning of the year. We start to see some transactions come into place. You have seen more dynamic in the market. We're taking the opportunity today of what we're seeing in the near future, so that's the reason why.
spk04: Thank you.
spk03: As a reminder, if you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. And as there are no further questions at this time, I'd like to turn the call back over to Hector Isbelanz, CEO, for closing remarks.
spk10: Thank you very much. I appreciate everyone's time devoted to this call and the reports related to this call. We are excited about the opportunity that we have for Fibra Prolois in Mexico. Mexico is today one of the strongest prolois markets within its global operation. And I can assure you that all Prologis team is fully engaged to bring the best value to our investors. Please have in mind that there is always an open invitation to contact for any question or any property tool that you may require. Muchas gracias.
spk03: That concludes today's conference. Thank you for participating in Man at Orders Connect.
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