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spk11: Hello, everyone, and welcome to the February 2nd Quarter Earnings Conference call. Please note that everyone is on listen-only mode to avoid any background noise. You'll have an opportunity to ask a question to our speakers later in the Q&A session. If you'd like to ask a question by that time, please press star followed by one on your telephone keypad. I'd now like to hand over the call to Alexandra Violante, head of IR. Please go ahead.
spk00: Thank you, Ellie, and good morning, everyone. Welcome to our second 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 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 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 this call as well. If you have not already done so, I will encourage you to visit our website at FibroApologist.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 Giro, our Senior Vice President of Finance, who will review results. Also joining us today is Federico Cantu, our head of operations, and Alejandro Chabelas, our head of evaluations and research. With that, it is my pleasure to hand the call over to Hector.
spk13: Thank you, Ale, and good morning, everyone. Early last month, we had presidential elections in Mexico. Setting aside political preferences, we are pleased to see that Claudia Sheinbaum has placed special attention to our sector. As part of the new administration agenda, for the first time, there is a specific focus to enhance industrial parks growth and development. We are having initial conversations where specific plans regarding energy, entitlement, and security have been highlighted. We expect this trend to continue, as nearshoring development will be an important priority on the national agenda going forward. We had strong results continue to demonstrate a well-executed strategy. We remain optimistic for the remainder of the year. Let me provide you some highlights of the quarter. Market demand in the quarter was at record high levels at 11 million square feet, growing 10% year over year. Accelerated e-commerce activity drove this. As a reminder, e-commerce sales in Mexico grew 25% last year, much higher than the 10% global average. E-commerce players in the country are responding proactively, increasing their footprint. Occupancy in our portfolio remains at great levels, above 98%. We reached a new record in our rent change and rollover with 58% and we continue to see a strong same-store cash NOI growth. Additionally, last week we announced an acquisition from our sponsor. It is a facility located in Reynosa in one of our parks, leads to a prologist customer that is expanding its operation in Mexico. Also, as you all know, we made a public tender offer for Terrapina. I believe we can add important value to those assets through customer service and the adequate properties improvement. I am optimistic about the outcome of our plan, and Jorge will provide more color about the process. Talking about market conditions, net absorption in our sixth market was 5.5 million square feet, a strong number, but down versus the exceptional level seen on previous quarters. The strong leasing activity did not translate fully to net absorption due to a high level of pre-leasing and to a lesser extent due to some space consolidations. Net absorption is still well ahead of pre-pandemic levels. Vacancy increased 100 basis points to 2.7%, a very healthy level. As a reference, our underwriting standards always include a 5% vacancy as common practice. Our third-party appraised values increased approximately 1%. This is the sixth quarter in a row where we have experienced appreciation in the value of our portfolio. Let me provide additional color. Mexico City saw practically no net absorption due to the lack of suitable product for clients' needs. Vacancy remains at low levels of 1.6%, and there were no deliveries of space in the quarter. We expect net absorption to ramp up meaningfully in the second half of the year, as we expect substantial deliveries of pre-listed space, particularly for e-commerce. Monterey keeps on being the market with the highest net absorption at 3.7 million square feet, stable versus last quarter. However, we saw significant acceleration in deliveries, leading vacancy to increase slightly. vacancy remains at very healthy levels below 2%. Guadalajara vacancy stands at 2.5%. We believe this market will continue with upward trends as the construction pipeline is low, while tenants are actively looking for additional space. Regarding the border markets, vacancy reached 3.9%, which was led by elevated supply in these markets. However, Space on the construction in these markets has declined by half from its peak, and we expect balanced supply-demand conditions going forward. To summarize, we had a strong operations and all-time record rent change during the first half of the year. We have visibility through our portfolio and remain optimistic on market conditions for the rest of 2024. We have a 51% in-place rent to market, This allows us to continue pushing rents up and be able to create value to our portfolio. On the external front, we ratify our acquisition guidance, and we expect to reach the mid to high end. Our sponsor currently has 4.8 million square feet under development, and we are working as well on sizable third-party acquisitions. Our balance sheet is one of our important competitive advantages. that provides us flexibility and ample firepower going forward. Finally, as you all know, we remain committed to our shareholders and always placing their interests first. With that, I will pass the call over to Jorge.
spk08: Thank you. Thank you, Hector, and good morning to everyone. We started the year with a strong operating and financial results, which are testament of market conditions combined with well-thought strategy. Starting with our financial results, FFO was $64 million, or 4.85 cents per certificate, a 9% increase versus last year. A FFO reached $56 million for the quarter, a 34% increase versus last year, and above our expectations. These results were driven by rent change and rollover and annual bumps. Moving to our operating metrics. Leasing activity for the quarter was 1.3 million square feet, with a period and an average occupancy above 98%. Net effective rent change and rollover was 58% for the quarter and 50% for the last 12 months. In terms of same-store cash and gap NOI for the quarter, we had an increase of 12 and 11% respectively. Moving to our balance sheet, it remains strong. We recently announced an acquisition from Prologis, our sponsor, which was done using available cash. On this note, we will use around $300 million in 2024 in line with our guided acquisitions. Our balance sheet is an important strength and unique feature in the space. We have total capacity of up to $1.8 billion. On the ESG front, we have reached 90% of green certifications for our buildings. Yesterday, we published our ESG report, which shows our progress and commitment on this front. We invite you to look at it as it has some improvements and new information. As Hector mentioned, we want to keep you updated on the tender offer we launched for Terrafina. We see tremendous value by adding Terracina's assets to the FIBRA Prologis portfolio and managing them within the broad scale and capabilities of Prologis overall. On the capital market side, liquidity will increase, our balance sheet will be bigger and stronger, as well as our access to capital going forward will also improve. As a result of the requirements set forth in the authorization granted by FIBRA Prologis to FIBRA Prologis by the Technical Committee of Terafina. Our offer now expires next Monday, July 22nd. Regarding our offer, each Terafina holder has the option to tender certificates for FIBRA Prologis at either an exchange rate of 0.63 or cash at a price of 45 pesos per certificate, provided that a total amount in cash being offered is 3.5 billion pesos or around $195 million, which is the equivalent of 10% of the total amount of the offer. Therefore, if Terrafina holders elect on aggregate to tender for cash in excess of the 3.5 billion pesos, they will be scaled back and receive a pro-rata cash amount and the rest in Fibra Prologis CBSI. We would like to remind investors that our offer will expire end of day July 22nd and would like to reiterate that we have no conditions outstanding beyond the requirement that 50% plus one or more holders tender of the outstanding Terratina CBFIs. No assurance can be made that we will extend the offer period beyond July 22nd unless legally required to do so. that we will conduct any subsequent tender offer similar to the current one once it expires. Furthermore, it should be noted that residual terrapina holders left behind will be unable to accept any other outstanding offer from any third party beyond Fibra Prologis or its affiliates upon the successful closing of our tender. We would like to caution investors of limited liquidity that may potentially persist in terrapina certificates assuming the success of our offer. In compliance with the tender offer process, we won't be addressing questions related to Terratina on this call. Please refer to the public information and feel free to reach out to the Citibank team if you have any questions about the process. Regarding our distribution, Once the tender offer process is concluded, we will make public our dividend payment, which will be in line with our guidance of 14.1 US dollar cents per CBFI for the year, divided by each quarter, to all FIBRA Prologis holders. In summary, we've been unique in our ability to generate leading growth over time, not only through a superior business model, and portfolio, but also from our balance sheet and team. Our commitment and focus is simply to continue to deliver on this industry-leading and durable growth. With that, let me turn the call to our operator to take our questions. Thank you.
spk11: Hello, everyone. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by number one on your telephone keypad. Kindly limit your questions to one item. You can go back on cue if you'd like to do a follow-up question. Our first question comes from Pablo Ricalde from Santander. Your line is now open.
spk04: Hi, thanks. Hello, Jorge Hector. I have one question on the Ciudad Juarez market. We saw a huge hike in vacancy upon 12 percentage points. Can you explain a little bit what happened there? Is it something temporary, or is it something about oversupply in the market, and when do you expect to divert occupancy?
spk10: Hola, Pablo. Thank you for your question. This is Federico. With respect to Juarez, we did have a drop in our occupancy, and it was related to a 3PL customer that intended to consolidate into one of our recently completed buildings, but decided not to. I'd like to highlight that we currently have five active prospects for such building, and we expect to lease it up before the end of the year.
spk14: Thank you. Perfect. Thanks.
spk11: Our next question comes from Gordon Lee from BTG. Your line is now open.
spk05: Hi, good morning. Thank you very much for the call. A couple of questions. The first, I was wondering if you could share if you could give us an update or if you could let us remind us what loan to value assumption you use when you say your firepower is $1.8 billion on a balance sheet. And the second question is, I was wondering whether you've sensed any sort of change in the, let's say approach or the speed or the desire for pay for space from customers following the election. If in general you see a little bit more caution after the, the sort of financial volatility that we saw in the election, or if sort of underlying operating conditions in terms of interest appetite from potential customers remains the same. Thank you.
spk07: Thank you, Gordon.
spk08: This is Jorge. You were cut off a little bit in the first part of the question, but if I heard correctly, you wanted to understand what's the rationale between the $1.8 billion liquidity that we have through the balance sheet The long-term value that we have here as a limit is 35% and being below five times from net debt to EBITDA ratio. Remember, we have $740 million, around $740 million of cash available.
spk13: With the second part of your question, Gordon, we still seeing demand to be pretty strong. On the PLD earnings call that happened just yesterday, we were able to listen from Hamid Moghadam, our CEO, that Mexico was one of the strongest markets within all the global prologist network. And this is right. This year in Mexico, one of the most important opportunities is happening as we speak. We are running election times in the U.S. And I would say the customers were driving, taking decisions probably at 100 miles per hour. They have probably reduced to 75 to 80 miles per hour. It's still a very healthy decision-making process. We see the demand coming strong both from nearshoring and manufacturing. So we think that Mexico is in pretty good shape, and we will keep on performing. above expectations, I guess, for the rest of the year.
spk14: Perfect. Thank you very much.
spk11: Our next question comes from Pablo Montevos. Please go ahead.
spk09: Hi, team. Thanks for taking my question. A little bit of a follow-up to Pablo's question. But talking about other markets, what are you seeing in terms of, like, the supply-demand imbalance? And if we should expect, like, this perhaps a typical move, sometimes having a little bit more supply, what are you seeing in other markets? Thank you.
spk10: Thank you, Pablo, for your question. This is Eriko. I would like to highlight that the Juarez market reached 2.4 million square feet of net absorption year-to-date. And that is actually one of the highest on record. However, vacancy did reach 4.8% due to deliveries of vacant space, vacant buildings. Although we've seen significant construction in this market, it has tapered off year to date to 800,000 square feet. And we foresee a normalization as we approach year end. And that is encouraging. We also see a pipeline, a very strong pipeline of over 2 million square feet that has been tracked and is active. We have ample conversations both for renewals and new customers. As I highlighted on the previous question, we have five active prospects. We're the only vacancy that we have in Juarez. And to mention an example, I'd like to highlight one of the industries that is thriving in Juarez, the electronics industry. industry mainly driven by Taiwanese electronic manufacturing services companies who are building multi-story manufacturing campuses. And we expect those to come online over the next six to nine months, spurring additional demand. So all in all, we feel good about this market going forward.
spk14: Great. Thank you.
spk11: Our next question comes from Francisco Suarez. Your line is now open.
spk12: Hi, good morning. Thanks for the call and congrats on the results. Three very quick questions. The first one is PLD discloses the U.S. space utilization that is currently at levels of 85%. Can you share with us how the overall utilization rates are in Mexico in general? substantially higher or are similar to what we see on that market for PLD. The second question relates more with what is the actual difference between in-place and market range for the vintages for 2025? And if I may, the last question that I have is basically on why you didn't change your guidance considering what we see, what you disclosed on same-store cash and OI. Thank you.
spk13: I will answer your first two questions and let Jorge to answer the last one. Utilization in Mexico, I would say that this is slightly higher than in the U.S. It's difficult to have a very accurate number of these who are working on trying to be more accurate every quarter. But I would say we are probably between 87 to 90% of a space utilization, which is a very healthy, a very healthy number. As I mentioned in my opening remarks, the mark to market, the in place to market trend that we have in Mexico on the overall portfolio is 51%. We have shown in the past that we have the ability to capture this value. So I am positive that we will be able to keep on improving our NOI through taking in the renewals the rents off to market. I think that going forward, market rents will continue to grow. The best estimation that I have for the remainder of the year is for market rents to grow still between 5% to 7%. And for 2025, for sure, market rents will keep on having a positive level, probably between 7% to 9%. So the business is still strong. There are positive trends in infrastructure, as I mentioned as well, but they will take some time to be placed into work. So what we're expecting is a very strong end of the year in 2024 and a very positive year as well in 2025.
spk08: And Paco, regarding your question, our guidance is on sensor cashing is 8.5% to 10.5%. And as we disclosed in our guidance page in the supplemental, we're using a 19 PES as an exchange rate. To be fair, I think we're going to be in the high side of the range at the end of the year. We still have the US elections coming up. You saw what happened last Saturday, unfortunately, had a direct effect on the stock exchange in Mexico and the effects. And as you write in your report, we still need to see what happens in September with the Supreme Court. So with all those uncertainties, if you may, you know me, I try to be very conservative on those matters. We don't have a crystal ball, so I kept the forecast for FX the same, and that's the reason why we didn't change it. But you can expect to be in the high part of the range.
spk12: Very clear. Thank you so much. But if I may, can you disclose the specific difference between market rents and in-place rents only for the 2025 vintage? That is substantially high, by the way, the expirations on 2025.
spk10: Yes, Paco, just to address that question, for the 2025 vintage expirations, we have a 67% in place to market. So we expect to continue to harvest over five and beyond. I don't know if that answers your question.
spk12: Definitely. Thanks so much. Congrats again. Bye-bye. Thanks.
spk11: Our next question comes from Gabriela Salazar from GBM. Your line is now open.
spk06: Hi. Thank you for the call. I was wondering if you could provide more color on your acquisition pipeline as well as give us some information if you have any Chinese clients.
spk13: Regarding It was hard to listen to the second part of your question. Regarding the acquisition pipeline, currently Prologis has 4.8 million square feet. Basically, we are having activity in all of our markets, Mexico City, Juarez, Reynosa, and an important project that Prologis, our sponsor, has in Tijuana. I mentioned in my opening remarks, we are working in important third-party acquisitions And you should expect positive news before year-end in this regard, hopefully next quarter. It is hard to have visibility on third-party acquisitions, but what I can anticipate is that we will be proactively participating and always trying to provide a rational price, taking advantage of our low cost of capital. I will pass the word to Federico for the second part of the question.
spk10: Yes, Gabriela, can you please clarify the question? Because it was hard to listen. Is it related to Chinese prospects or Chinese customers that we have in our portfolio? If you could please.
spk06: Yes, both of those, please. Thank you.
spk10: Okay. Yes, so we are, we indeed are seeing, as we've all, as we all know, there has been interest from Chinese companies in establishing, especially in the north markets. So we do have in our pipeline, some Chinese customers. As it relates to our portfolio, we have just two Chinese customers, and that represents less than 1%, to be specific, 0.7% of our portfolio. So we do have, I would like to mention, some of our customers that do supply Chinese companies. So there is that indirect relationship. But that is our current exposure.
spk06: Thank you very much.
spk11: The next question comes from Adrian Huerta from JP Morgan. Your line is now open.
spk03: Thank you. Good morning, everyone. My question has to do with the fees. Even the fees that we have seen on property values over the last six quarters. The fees have been diminishing margins, and I believe it will take time for revenues to recover as quick as the property value does. So does this mean that we should see some pressure on margins in the next couple of quarters until revenues actually reflect what that new property value you have on the balance sheet? Is that a correct assumption?
spk13: Thank you. Thank you, Adriana, for your question. We believe that our fee structure is according to market conditions. I understand the concern about the values have been increasing, and as a consequence, the fees have been increasing as well. We do see this as an alignment of objectives between investors and prorogies, and I think that the performance of the returns have been evident You know, we are fully incentivized to try to increase rents, and as increasing rents, we increase the value of our properties. The rent increase takes some time, you know, to go through the P&L. So eventually the margins, as the rents and the NOI are increasing, the margins will be kept according to the levels that we have been used to. I don't see that the fees is a danger for our margins to be reducing.
spk03: For a few quarters, we should see some pressure on margins on the back of that, that it will take longer for the revenues to reflect those new property values. It will eventually do, but it will be a few quarters where it will be a little bit of a draft on margins, correct?
spk08: Yes, Adrián. That was exactly the point that Hector made.
spk03: Okay, great. Thank you, Hector.
spk11: Hello, everyone. If you'd like to ask a question to our speakers, please press star 1 on your telephone keypad. That's star 1 on your telephone keypad. Our next question comes from Ramos from Brandesco, BBI. Rodolfo Ramos, your line is now open.
spk01: Thank you. Good morning, Hector, Jorge, Ale, Federico. Just to follow up on one of the previous questions, I would like to get a little bit of more color on your commercial discussions with tenants, and perhaps if you can elaborate on your remarks about clients willing to wait to increase their existing footprint. Also caught my attention, you know, the lower customer retention rate. I don't know if it was more particularly to the quarter, but, you know, lower than previous ones. So if you could elaborate on those two points, that would be great. I don't know if record lease rollovers are impacting or just the more challenging global outlook. I'm happy to hear your thoughts there. Thank you.
spk13: Thank you. Thank you for your question. Retention rates shouldn't be a concern when we're presenting these levels of occupancy and these levels of rent change. We had a couple of customers that left the space because of price. All of the other customers that left were some different type of reasons. You know, one of the consequences and the only mechanism that we have to understand where really market trends are is to pushing these rents. And fortunately, as we have all the information regarding the market, we have a very good success on doing this. This is where our results on increasing in NOI and rain growth are presenting. Regarding our customers, I can tell you that the sentiment is still very positive. This is not the first time that we are facing U.S. elections. And what we have identified is that when there's U.S. elections imminent, as we are in 2024, particularly new customers willing to enter into Mexico are the ones that keep very vigilant to what the potential candidates are saying or are not saying or are arguing. I think we have two types of customers, those that for first time are going in the market, and these are the ones that are probably taking slower decisions. For customers that have been in Mexico forever, 20, 25 years, you know, they are used to these cycles, and I think that the impact that they have to take their decisions and to cover their expansion plans is much less than for the first category. We do see the demand to remain strong. There's a lot of talking about nearshoring, But, you know, consumption and e-commerce as well have been important drivers of the demand. And as you know, we're better positioned than no one to take advantage as well of the logistics sector.
spk01: Perfect, thank you. If I may do a follow-up to your initial comments about you hearing a very constructive message from Shane Baum's team on energy. We'd love to hear a little bit more if you can share a little bit of those discussions and where do you see concrete upside there?
spk13: Well, we all know that East Public Information that now we have two important allies in our process. The appointment of Marcelo Ebrard as Minister of Economic Development is one of them. Marcelo Ebrard had shown full interest in understanding our needs and trying to facilitate our process. The second liaison that we have is Altagracia Gomez. With Altagracia, we were able to meet several times before before the elections. And after the elections, she shows to be a very efficient manner to provide messages and to move forward with the different difficulties that we have. So we're optimistic. I think that, you know, this program is not a political speech. It's a real desire of facilitating nearshoring and investment in Mexico. And I think that that's a very positive game changer for our industry. I think that customers and potential customers and potential expansions are realizing this situation, and this is why one of the ingredients why we feel that the demand will keep on being very powerful in Mexico.
spk14: Perfect. Very interesting comments, Hector. Thank you.
spk11: Our next question comes from . Gil Loti from Goldman Sachs. Your line is now open.
spk02: Hello. I have two. So first off, I wanted to understand around you increased vacancy expectations for your key markets by 100 basis points of 3%. You kept through your guidance and change for the portfolio. So I'm trying to better understand that dynamic. Is it that you see better performance for your assets because of positioning, because of where we are on the cycle, as it refers to the assets themselves. And then the other question is, you know, it's interesting that you're seeing this increase in vacancy, but your net effective rent growth continues to go forward. So what I'm wondering is, could this vacancy have an impact on these leasing spreads going forward? I mean, could we see a leveling off? Could they drop? Could we see them going higher? So those are my two questions. Thank you.
spk13: If I understood your question, we are not expecting vacancies, and we are not guiding that vacancies will increase. You know, when we reach, in 2023, 99.8% occupancy, it's really very difficult in this business to go beyond 100% occupancy. You know, the occupancy that we have today, 98.4% is an extremely good occupancy. I mentioned in my opening remarks, all of the underwriting considerations that we do, we incorporate a 5% vacancy. So we are way above the vacancy that we use in our models. I think that, you know, what is slowing a little bit but keep on being in a very healthy dynamic is the speed that customers are taking to make their decisions. And I think this is a natural situation due to the political times that we're experiencing. Most of our customers are multinational. So, you know, they are carefully monitoring what is happening and what are the political messages that the different candidates are providing. Our companies, our customers, most of them are global as well. So they understand politics and they have a very clear map regarding geographic and geopolitical risks. And in our conversations that we have with them, Mexico keeps on having a preeminent role on their priorities for investment. So the customer outlook is positive. that everyone in the call ends up with this message, because that's the way it is.
spk02: Because we have been seeing a strong net effective growth, rent growth pace, so the expectations for that to maintain itself for the foreseeable future.
spk07: Can you repeat that part? You were cut off at the beginning.
spk02: Yeah, sure. I was going to my second question because the second question is like you've seen net effective rent growth hitting record levels. And you did mention in your remarks about the market vacancy at the market level, right? And so I was just wondering about the leasing spreads, this net effective rent growth going forward. Is it your expectation for it to remain at an elevated level as we've seen currently?
spk13: Yeah, we don't guide on grain growth, but I can anticipate that before year-end, you will keep on seeing a very strong tier, probably the record tier that we might have. So I don't anticipate any issue different in that regard. And I do expect as well very positive rent growth for 2025.
spk11: Thank you so much. That concludes the Q&A session. I'd now like to hand the call back over to Hector Ibarzabal, CEO of Fibra Prologis.
spk13: Thank you very much. I appreciate everyone's time devoted to this call. and to the information and reports that we presented. 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 operations. And I can assure you that all Prolois team is fully engaged to bring the best value to our investors. Please have in mind that there's always an open invitation to contact for any question or any property tool that you might be interested on doing. Thank you very much and see you in the next one.
spk11: Thank you everyone for attending today's conference call. You may now disconnect. Have a wonderful day.
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