Fibra UNO

Thank you, Mike. Thank you very much.

Thank you, everybody, for listening to our call. We are very excited to discuss the results of the third quarter of 2024.

Yet again, we posted very interesting results yesterday. We are very excited about another breaking record income line, another breaking record NOI line.

We are very excited and very enthusiastic about these numbers that we provided yesterday. Before I turn the mic to Jorge Pigeon to discuss the numbers, I just want to tell you that I'm very fond of looking at things in perspective.

I like very much to look at what we have done and we have said in the past. And having done that, we've been achieving everything we had set our eyes on since inception.

We've more than 55 quarters with record-breaking income line, which for us means a very proud moment for all of us at the company, being able to deliver these results to all of you, our appreciated investors. I think that in the future, our numbers will only go better and better.

We will strengthen up our position. I think that you will find that the rest of the sectors that were not in the spotlight in the last few quarters are beginning to bring a lot of strength and support to the company.

I am referring to the office sector and to the retail sector that will give us very pleasant surprises in the next coming quarters. We have seen and we have been feeling that the strength of the accounts receivable, the strength of the invoicing of these particular couple of sectors have been giving us a lot of strength.

You will see through the quarters, as time passes by, that the company is indeed very well designed, very defensive design. We have a very defensive design in our company.

And you will see that all of our numbers will only improve through time. So we are very happy about the results that we delivered yesterday.

And I will pass now the mic to Jorge to start with in-depth look at the numbers. Jorge, please?

Thank you very much, André. Thanks, everybody, for joining the call today.

Now I'll start to dig into the quarterly MD&A as usual, starting with the revenue top line. We are very happy to see that year-over-year, we had an increase of 11%, which is obviously material, and we're very happy to see that.

And we're also very happy to see that on a quarter-to-quarter basis, our revenues increased 5.1%, topping the MXN7 billion mark with MXN7160 billion. This is mainly attributable to a combination of an increase in the GLA of the office portfolio, the retail portfolio and the Industrial segment since we are humming on all 8 cylinders.

So we are very pleased to see that. Rent increases resulting on inflation pass-through to our tenants in active contracts.

Rent increases in lease renewals. And also, we started using some of the reserves that we created for the Otis Hurricane a while back.

We started using some of those reserves this quarter. Now in terms of occupancy, the overall occupancy of the portfolio is 95.3%.

Those of you who have been following Fibra UNO since our IPO may recall that we've always said that the target of the company is to be around 95% occupancy. So we're very pleased to see that we are at that 95.3% mark.

That's 10 basis points higher than the previous quarter. On a segment basis, the industrial portfolio is 10 basis points above the previous quarter at 98.4%.

The retail portfolio continues to increase its occupancy. We are now 10 basis points above the previous quarter at 92.7%, almost getting to the 93% level in the retail segment.

The office portfolio continues to have pleasant surprises in terms of occupancy, 70 basis points above that of the second quarter at 83.5%, and the Others portfolio remains stable at 99.2%. So as I was mentioning, from an occupancy point of view, we're humming on all 8 cylinders.

I'm very pleased to see, in particular, with the Office segment, which we have been getting reiterated questions and concerns from investors. I believe we've been saying this for the last, I don't know if it's been 1.5 years or so, that we expected our portfolio to recover from the 75% or so that we were back then to around 80% by year-end '23.

We met that mark. And then we guided the market that this year, we should be somewhere in the neighborhood of 83% to maybe 84% or even 85% by year-end.

Let's see how the portfolio continues to behave. And we also said that we did not expect to see price tension in the Office segment just yet.

We need the market to catch up for that price tension to happen. So we're not there yet.

We continue to expect to see, let's say, flattish rents, and we expect to continue to see occupancy gains in our portfolio. Moving to operating expenses, property taxes, et cetera.

We saw an increase of MXN27.5 million, 3.3% compared to the second quarter. That seasonality of some expenses as well as increases above inflation in some materials and services.

There continues to be some inflation lagging increases in some of the services and materials that we're buying. And obviously, it's lower than what we have seen in previous quarters.

So we are hopeful that, that is going to be something that's going to be contained. At the end of the day, this leads us to a net operating income that increased by almost MXN300 million or 5.7% versus the second quarter, reaching MXN5.412 billion.

NOI margin calculated over rental revenues stood at 83.6% and 75.6% compared to total revenues. Interest income and interest expense, we saw an increase of MXN206.4 million, 8.1% compared to the previous quarter.

This is mainly a combination of factors. First off, the exchange rate depreciation of the peso, which went from MXN18.22 to MXN19.62, basically 7.7% increase in that line.

And this obviously had an effect on the U.S. dollar-denominated interest expense portion of the interest line, lower capitalization of interest of down to MXN400 million.

And obviously, the impact of the pricing of derivatives, which has to do with changes in the value of the peso as well as rates. This leads us to an FFO controlled by FUNO that increased by 93.6% or 4.3% compared to the second quarter to reach MXN2.279 billion, same AFFO.

And on FFO and AFFO per CBFI, since we did not issue or repurchase any CBFIs during the quarter, we ended with 3.8 billion CBFIs outstanding. FFO and AFFO per CBFI were MXN0.5975 per share.

That's an increase of 4.2% compared to the previous quarter for both FFO and AFFO. In terms of the quarterly distribution, we decided to distribute a little over MXN2 billion, basically MXN2.2 billion, which corresponds the distribution, 90% is reimbursement of capital and 10% is fiscal result, and it's equivalent to a quarterly AFFO payout of 87.9% and that's MXN0.5250 per CBFI.

Moving to accounts receivable. We closed the quarter with MXN2.7 billion, marginal increase of MXN19 million or 0.7% from the previous quarter.

Basically, as Andre mentioned, normal course of business, and solid management of our accounts receivable. In terms of investment properties, the value of our properties, including those denominated as financial assets as well as investment in associates increased by MXN3.4 billion or 1% compared to the second quarter of '24, which is a result of a combination of factors.

First off, obviously, the fair value adjustment that includes financial assets and investments in associates. The acquisition of the first portion of the CBFIs of the CKD Helios.

If you recall, we did not buy Mitikah, but we bought the CKD. Normal progress in construction of projects under development, mainly the Satellite project, which is now Samara Satellite as well as CapEx invested in our operating portfolio.

In terms of debt, total debt for the third quarter stood at MXN145 billion compared to MXN138 billion recorded at previous quarter. This variation is mainly or primarily or largely due to the FX depreciation of 7.7%, which went, as I mentioned, from MXN18.22 to MXN19.62 per dollar.

All of the above had an effect in our total equity of a decrease of MXN4 billion, minus 2.1%, for the controlling and non-controlling interest as of the third quarter of '24. As I mentioned, mainly due to the net income, which resulted in a quarterly loss from the FX depreciation, derivatives valuation, shareholders' distribution for the second quarter results and the employee compensation plan.

Moving to the operating results. Leasing spreads for contracts renewed in pesos were 900 basis points or 9% for the Industrial segment, 800 basis points or 8% for the Retail segment and 490 basis points or 4.9% for the Office segment.

So we're happy to see that we are being able to increase some of the rent level in some of the contracts that we have in the Office sector. In terms of dollar-denominated lease renewals, rent increases were 1,560 basis points or 15.6% for the Industrial segment.

So very solid leasing spread for the Industrial segment. And obviously, I'd like to highlight that, in particular, in this segment, as you all know, we are primarily a company that's based in the, I'm going to call it, logistics hub of the country, which is the center of the country, mostly Mexico City, the State of Mexico, Toluca, et cetera.

So this is a market where it's a very tight market. Market rents continue to increase, and we continue to see pent-up demand in this market in particular.

And obviously, it is showing in our ability to increase some of the rents in that segment. In terms of the Retail segment, we had 750 basis points or 7.5% in dollar terms, and we had negative 4.3% in the Office segment.

In terms of constant property performance, the rental price per square meter for constant properties increased by 5.8%, almost 6% compared to a weighted annual inflation of 4.3%. So 1.5% above inflation in real terms for our constant properties.

And again, as André was mentioning, if we look at the performance of the company since the pandemic, our revenues have increased roughly over 40%. Our GLA has only grown about 8%, which means that the growth of the company is coming mainly from obviously, inflation pass-through, but constant property performance.

At the sub-segment level, total portfolio annual rent per square foot increased from $11.4 per square foot to $11.7 or 2.5% compared to the previous quarter, mainly due to increases in contracts and contracts renewals as well as the FX depreciation that we have already mentioned. NOI at the property level for the quarter increased 4.5% compared to the previous quarter.

Variations in the different sectors were mainly the following. For the Industrial segment, logistics NOI increased by 5.5%.

Light manufacturing NOI increased by 8.6%. Business parts increased 1.5% and mainly due -- this is probably mainly due to rent increases, renewals, FX depreciation on the U.S.

dollar-denominated contracts. The Office segment's NOI increased by 0.8%, which is mainly due to the occupancy gains.

As we mentioned, the rent level, we have expected to remain flattish. So it's mainly due to occupancy.

The Retail segment, we have different performances. For the fashion malls, we saw NOI increase by 16.7%, standalone increased by 1.6%.

Regional Center remained stable versus the previous quarter. The Others segment increased by 2.5% due to seasonality, mainly of the hotel's variable income.

With this, I finish the commentary on the MD&A, and Michael, we open the mic for Q&A.

Hi. Thanks for the call and congrats on the numbers.

I have two questions. The first one is regarding the NOI margin.

We saw a slight sequential recovery, but margin is still from -- far from where it was a year ago. What can we expect from your cost reduction initiatives for the NOI margin?

And the second question is on your cash distribution. I noticed that the bulk of the distribution is capital reimbursement.

Wouldn't it be more efficient for you to retain cash and decrease leverage? Thank you.

Thank you, Francisco. First thing first.

Of course, it would be beneficial to retain the cash, but we have -- as you -- as I've said in the past, different constituencies. We have dedicated investors to return and dedicated investors to growth.

So we are trying to follow a very predictable path in terms of the distribution. Of course, I would like to diminish the debt.

I think that the debt ratios will show a stronger position through time. It has been showing a stronger position because our growth in income and our growth in NOI is running faster than the debt.

I think that we will end up at a time where it's easier and easier to have the debt covered, and then we can talk about retaining for the purpose of diminishing the debt. Of course, it would be nice to have lesser debt.

But I do try to take care of all of our different constituencies. And about the margin, this is a work that we have been doing for more than a year now in which we are trying to cut the expenses and make cleaner the company.

And I think we are finally seeing some of the results about that. So thank you for the question.

Thank you.

Hi. Good morning, UNO team.

I have two questions. The first one is on the asset sales.

I don't know if you can provide an update on what do you think on asset sales for 2025. I saw that the number decreased versus the second quarter.

So I don't know why this number change? That's my first question.

And the other is on the office occupancy. I don't know if you continue to see achievable reaching an 85% occupancy before year-end?

Well, in terms of the sales, there's a reduction. As you know, we are not actively selling assets.

We are just hearing on solicited offers. And what we've been showing is what we have on the table.

And what we have promised on the past, it was a figure less than the one we had previous to this. What we have on the table right now is MXN200 million, which I think is achievable, and that's what we consider that we would be able to close in the next two quarters.

And all of these are above NAV. So that's what we are pursuing.

Two of them are retail assets, one of them is industrial, which by the way is almost done. And we will be releasing detailed information on this transaction on the Investor Day.

But just to give you a sense, it's above 2x what we acquired it for and 1.7x book value.

And in terms of your other portion of the question, which was whether we expect to get to 85% in the office sector. Obviously, that's the goal.

That's what we are working on. We make it look easy when André mentioned a few quarters ago that we were going to get to 80% year-end, and we got a lot of skeptical and skepticism on that, and we got there.

Today, we are above 83%. There's movement in the market.

Do we expect to get there? Obviously, we're going to make every effort to get to 85%.

I can't guarantee that we're going to close the year at 85%. I think 83.5% is pretty solid coming from 75%.

But one thing that I can assure you is that we're going to work very hard to get there. I don't know if we're going to get to 85%, but we'd love to, but we're going to try.

And I think that it's important to address that even we are towards [ph] the occupancy, you can get to the occupancy reducing the prices, which is not what the game we are playing. Even it's just 20 basis points, we are increasing our rents.

So it's both things. We are increasing rents and increasing the occupancy.

So if just the target was going to be getting to 85%, we can reduce prices, I'm pretty sure that we will be getting there. But it's not that the game.

Actually, when we addressed that we wanted to get to 85% a year or 1.5 years ago, everybody thought we were crazy. We were crazy optimistic.

I think we were, but I think we are reaching the number that we provided at that point in time. So we are feeling very optimistic about the office sector right now.

I think that the lack of supply during the past few years will make the market better and better, even though that -- I mean, added to the condition that all of the companies or most of the companies are trying to get their people back to the office 5 days a week, at least in Mexico, that's the trend. So I think that we are feeling optimistic as we were 1.5 years ago when we were crazy.

Perfect. Thanks, André

Hi. Thanks.

Congrats on the results. I just have a couple of questions regarding to the Helios acquisition.

The first one is, could you provide some color about the first payment that you did? Was it was funded with FUNO's cash or with cash from the CKD.

Also, could you walk us through the funding resources that you will be using for the acquisition? And should we expect this acquisition to be fully paid by the second quarter of 2025?

Thanks. Let me take a stab at answering the question.

When we bought the CKD, we roughly bought that CKD with about MXN1.5 billion or MXN1.8 billion in cash and accounts receivable for already sold apartments of about MXN1.6 billion, more like MXN2 billion, but thereabouts more or less. And we paid in kind about MXN750 million.

So basically, we don't need cash to fund those portions. Now we do need the difference between the sum of the numbers I just gave you, about MXN2.2 billion, MXN2.4 billion in additional debt to meet the MXN7 billion target.

Now when you look at the FUNO consolidated level, obviously, the cash is fungible at the treasury level, and there's other needs that we have like investing in the portfolio, et cetera, et cetera. So you may see borrowings.

But the first payment that we made is MXN1.25 billion for the first payment, and it should be done in the next 12 months.

Perfect. Thanks.

Hey, good afternoon, FUNO team. Thanks for the call and congrats on the results.

My question is on updates on the Phase 2 of Mitikah. So I remember that you guys were thinking about either going further into residential or maybe having that split with office.

Given the uptick in office, I'm not sure what you guys are thinking on, if there's any updates on that? Thank you.

Sure. As you know, we have about 100,000 square meters to be developed on Phase 2.

We haven't made a final decision as to what exactly to do because we had, as you know, an incredibly successful condo operation in the apartment tower. So there is an analysis that we have to run to see if it makes sense to use some of those 100,000 square meters for condos.

As André mentioned, we are optimistic in the office sector. There's been virtually zero supply since Claudia Sheinbaum entered as a Major or Governor of the City of Mexico, so basically 6 years with zero new supply.

And we believe that as a country of our size, we'll need more office space than what we have today. And as you know, we always look at real estate over the very long-term.

I'm not speaking about next quarter. This is a long-term gain.

But we do think that we're going to need more office space in Mexico as a whole over the next years. So we do think that there is room for additional office space in Mitikah and we need to run our numbers, make a decision whether it's going to be 100,000 square meters of office, whether we're going to do a combination of office and condos or also there is the idea, which has changed over time.

If you recall the first discussions of Mitikah, we had a hotel at some point in time in the early days of Mitikah. There's also the possibility of using some of those 100,000 square meters for a hotel.

So it can be a combination of the three, and we are not at a point yet where we can tell you, okay, we have made the decision of going ahead in this direction. The options are available to us.

We are in the analysis phase of exactly what to do with Phase 2 of Mitikah. Having said that, what I can tell you is that we are extremely pleased, and I cannot stress enough that we're extremely pleased with the performance of Phase 1.

We have almost 100% occupancy in retail, about 90% occupancy in the Torre Mayor. It's doing significantly better than anybody would have expected for a project that was delivered the office tower in March of 2020, the beginning of the pandemic.

So we are very happy with the performance of Phase 1 of Mitikah. We think it's a Grand Slam success for the company.

We'll discuss more on this, obviously, on our Investor Day and give a little bit more detail. But there is basically 100,000 square meters additional available in Phase 2, and we haven't made up our minds yet on which way we're going to proceed.

Got it. That's very helpful.

Thank you, Jorge.

You're welcome.

Hi, guys. Thank you for taking my question.

We know there are different structures on covenants across the public bonds. However, you're getting close to the minimum of 1.5x debt service coverage ratio.

Are there conversations with holders for possible waivers in case, I don't know, any circular shock could cause you to momentarily bridge the metric?

No, we haven't had any such conversations because our projections of the trajectory of where the company is headed is that we are going to go significantly higher with that. We are at 1.6x currently, and we expect to be 1.7x, 1.8x, 1.9x, 2x and further going forward.

Obviously, in this equation, the fact that interest rates are going down is also helping us, and we have a good chunk of variable rate debt. So every time there's a rate cut, that ratio is going to get eased.

So we don't have -- it's a ratio that we have been monitoring, but we are not concerned about it. It's the way I would describe it.

Super clear. Thank you.

Thanks guys. So two questions from my side.

The first one, if there's any update on the internalization process of FUNO. I'm sorry if you mentioned that and I missed it.

And the second one on Industrial segment. It was great to see FUNO actually increasing occupancy quarter-over-quarter and year-over-year when various peers had decreases, right?

So do you think tenants, particularly like manufacturing tenants exposed to the north of the country are on a wait-and-see mode regarding the U.S. elections.

And once the elections take place, how long would it take for them to start making important investment decisions again? Is it like one quarter, two quarters or it depends on more certainty regarding trade ties after the election takes place?

Or do you think that's sooner than that? Thank you.

Let me take first. In terms of the internalization, I would like all of you to hold your horses.

You will hear good news from us on the Investor Day. We are just 15 days away from that.

So hold your horses and you will be grateful with the news we will be giving you during the Investor Day. And in terms of the industrial occupancy, we are doing better than the rest.

And considering what André just told you in the last 12 years or 13 years, it's mainly due to the location of our industrial parks, which is completely different, and we don't have any competitors that have the quality and the location of our assets. And obviously, that makes a huge difference with our competitors.

Besides being, as always, a little bit below market rates, which make us be the first ones to be occupied and the last ones to be vacant. So I do think that those are the two main reasons why we've higher occupancy than any of our peers.

And in terms of volatility with U.S. elections, of course, yes.

I mean, everybody is waiting to see what happens in the U.S. election.

I think the last two elections have been 77,000 -- decided by 77,000 votes and 44,000 votes overall in the Biden-Trump and Trump-Clinton elections. And this one is extremely close as well.

So obviously, that does create some nervousness in the financial markets, which is more of a short-term view of the world. We, as real estate asset managers, have to have a long-term view because that's the nature of our business and our assets.

So we are obviously optimistic on the long-term. On the short-term, not willing to put a bet on who's going to win the election in the U.S., and obviously that creates uncertainty.

Thank you, Gonzalo and Jorge.

You're welcome André.

Sorry, Michael, you broke down completely. We couldn't hear.

Hi and thank you for taking the questions. I just had one follow-up on the debt service coverage ratio, actually, two.

Can you please walk us through how FX impacts the debt service coverage ratio, given you have some of your revenues are dollar denominated, but also a decent portion of your interest expense and CapEx?

Yes. Well, the foreign exchange has an impact in that ratio that is neutralized because the negative impact that it can have on the dollar part of our debt is offset by the positive impact that we have on our dollar rents.

So we have a natural hedge of 1:1 between income and interest cost in U.S. dollars.

So it doesn't have an effect.

Okay. And can you clarify -- I understand that your dollar debt has just incurrence covenants.

But do you have maintenance covenants on any of your local debt?

No, we don't.

Okay. No, maintenance covenants.

On any of our debt [ph]. No maintenance covenants on any of our debt.

And just one more, if I may. Regarding the calculation of DSCR by the CNBV, I think the covenant is a little bit different and includes also CapEx.

That covenant has also been getting tighter. What are the implications if Fibra were to reach one of the levels set by the CNBV?

Sure, Chelsea. There's one other thing, obviously, is that this debt service coverage ratio from CNBV is forward-looking, 12 months forward-looking, which is kind of stricter even than what banks have.

And it's not mandatory anymore. This is a legacy requirement to report where it is.

That's the only thing that we are required to do, report where it stands, but it does not have any effect at all. I can't remember exactly what year regulation was changed for the leverage of Fibra's.

But basically, the regulation was changed so that every Fibra has the right to determine its own leverage policy. You can go above 50% LTV.

If you want, you can go to 60%. You just have to decide what your policy is and communicate it to your investors.

So none of the covenants from the CNBV metrics are covenants in reality. This is just a legacy report that is required, the annex of AA [indiscernible] or AA annex, but it's not a requirement to maintain leverage or coverage or any of the metrics as it was a few years back.

Okay. Understood.

Thank you.

You're welcome.

It's actually $800 million, not $300 million. It's an $800 million bond.

The policy that the company has is that we look at those 12 months in advance. That would be January of next year.

We're obviously opportunistic and have always been opportunistic. And if we do see a window of opportunity in the market that makes sense to pre-refinance a bond, peso or dollar, we would take advantage of that window.

But it's something that we have a policy of looking at 1 year in advance. We obviously are looking at the market constantly as a normal course of business for us.

We are constantly looking at the market to see if there are opportunities out there for us to do things. But we'll start to formally look at that in January of next year.

Sorry, Michael, you broke down and we couldn't hear the question.

I got to read the question. So thank you.

Basically, I think, as Gonzalo mentioned, a little patience for a couple of weeks, and we'll be able to give you a lot more detail on both of the questions you're asking.

Thank you very much. Michael, I'll pass the mic on to André for closing remarks.

Thank you very much everybody for listening to our call. We are very pleased about our results, and we will be very happy to host you and see you on our Investor Day next November 14.

Thank you very much.