Good morning, and welcome to FIBRA Macquarie's third quarter 2025 earnings call and webcast. My name is Rob, and I will be your operator for this call. At this time, all participants are in listen-only mode. Later, we will conduct a question- and- answer session. If at any time you require operator assistance, please press star followed by zero and an operator will be happy to assist you. I would now like to turn the conference call over to Nikki Sacks. Please go ahead.
Thank you and good morning, everyone. Thank you for joining FIBRA Macquarie's third quarter 2025 earnings conference call and webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer, and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I would like to remind everyone that this presentation is proprietary and all rights are reserved. The presentation has been prepared solely for informational purposes and is not a solicitation or an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Our actual results, performance, prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation.
We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events, or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S . dollar equivalent amounts unless otherwise specified. As usual, we have prepared supplementary materials that we may reference during the call. If you have not already done so, I would encourage you to visit our website at fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab. With that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon?
Thank you, Nikki, and good morning, everyone. I am excited to share that we delivered another solid quarter of financial and operating performance with record-breaking results across key metrics. At the same time, we executed on both strategic and opportunistic initiatives that create value for our certificate holders and continue to position us for sustainable growth. The third quarter showcases the strength of our business model, starting at the top- line. For the quarter, we achieved record consolidated revenues, up 8.4% in underlying U.S. dollar terms over the prior year. This momentum translated through to our quarterly U.S. dollar AFFO, which increased an impressive 6.6% annually. Best of all, our quarterly distribution reflects a significant 17% increase from last year, all whilst maintaining a comfortable and prudent payout ratio.
Turning to our industrial portfolio, we continue to see strong performance amidst a subdued market backdrop, with average rental rates increasing 6.8% year-over-year. Notably, we achieved another quarter of double-digit renewal spreads, 17% on negotiated leases, with high quarterly retention of almost 90%. Our full- year 2025 performance continues to shape up rather well, perhaps best demonstrated by the 6.1% increase in U.S. dollar same-store NOI year- to- date. In summary, we are very satisfied with the sustained momentum enjoyed from our industrial portfolio through to today, and we expect that momentum to carry through to the fourth quarter, providing for a strong finish to the year. Moving to our capital allocation and asset recycling initiatives, we had an active quarter closing on a number of transactions.
I am excited with the continued growth of our Mexico City footprint with the acquisition of a prime 250,000 sq ft logistics facility. We acquired the property through a sale and leaseback for $35 million, leased to a leading global consumer company under a three-year U.S. dollar denominated contract. It not only provides 2025 NOI and AFFO contribution, but also positions us to capture embedded real rental rate growth. This acquisition exemplifies our thoughtful approach to capital allocation. In this case, we secured a scarce, well-located infill asset that enhances our portfolio quality while providing visible earnings and NAV accretion. We are optimistic about repeating this type of success in other deal opportunities under our review, alongside pursuing additional strategic land investments in our pipeline.
We also continue to selectively pursue asset recycling initiatives, and during the third quarter, we sold a vacant industrial property in Chihuahua City for $14 million, representing a 30% premium to book value. This transaction demonstrates our commitment to active portfolio management, allowing us to accretively recycle capital into attractive opportunities like the Mexico City acquisition I just mentioned. Turning to our retail portfolio, we also delivered strong results and achieved a post-pandemic record occupancy of 93.6%. Rising occupancy and rental rates contributed to annual NOI growth of 4.1%, essentially reaching record levels of operating cash flow. We maintain a cautiously optimistic outlook on the operating performance of our retail portfolio and expect the medium-term growth trends to continue.
Looking at the broader market environment, while we acknowledge the ongoing uncertainty around trade policy, we also remain confident in Mexico's strategic position within North American supply chains. The long-term fundamentals that have driven Mexico's manufacturing growth over past decades remain firmly intact, including high quality labor, proximity to major U.S. markets, and continued trade advantages. Notwithstanding the evolving geopolitical landscape, our high-quality portfolio, internalized platform, and strategic market positioning enables us to continue to deliver strong results and capitalize on growth opportunities. It is also worth mentioning our unique vertically integrated platform gives us, amongst other benefits, privileged access to market intelligence and allows us to respond swiftly to changing conditions. This positioning, combined with our ability to capture embedded rental growth, allows us to continue delivering value to certificate holders while building long-term portfolio resilience.
Before turning the call over to Andrew, I want to highlight our ongoing commitment to sustainability. We are proud of achieving three green stars in our 2025 GRESB assessments, including a score of 94 points for the development benchmark, exceeding our peers on a regional and global basis. We are also taking this opportunity to publish our annual ESG report that is now available on our website, which provides a comprehensive overview of our sustainability initiatives and performance. Andrew, over to you.
Thank you, Simon. I am pleased to report another quarter of strong financial performance that reflects both the quality of our portfolio and the effectiveness of our capital allocation strategy. For the third quarter, we delivered AFFO of $29.7 million, representing a solid 6.6% increase year-over-year, and demonstrating our continued ability to grow earnings on a per certificate basis. Our balance sheet remains exceptionally well-positioned. During the quarter, we successfully completed the refinancing expansion of our sustainability-linked credit facility. This US $375 million facility comprises a $150 million four-year term loan and a $225 million three-year revolving credit facility. The transaction delivered multiple strategic benefits. Firstly, it enhanced our liquidity position to approximately $625 million , providing substantial financial flexibility to fund growth initiatives. Secondly, it reduced our weighted average cost of debt to approximately 5.5% while extending our debt maturities.
Third, the sustainability-linked features align our financing strategy with our ESG objectives through green building certification targets with the sustainability-linked portion of our drawn debt now representing 68%. As of September 30, we maintain a prudent debt profile being 92% fixed rate, with our CNBV regulatory debt- to- total asset ratio standing at 33.2% and a robust debt service coverage ratio of 4.6 x. Embedded firepower stands at approximately $500 million whilst managing to a 35% LTV ratio, including the potential recycling of our retail portfolio. Turning to our guidance, we are reaffirming our FY 2025 AFFO per certificate guidance to a range of MXN 2.8 to MXN 2.85 and our FY 2025 AFFO guidance in underlying U.S. dollar terms to a range of $115 million to $119 million, representing annual growth of up to 5%. We are also reaffirming our cash distribution guidance for FY 2025 of MXN 2.45 per certificate.
This represents a 16.7% increase in peso terms and translates to an expected FY 2025 AFFO payout ratio of approximately 87% based on our guidance midpoint, representing a well-covered distribution. This guidance assumes stable market conditions and no material deterioration of the geopolitical landscape or Mexico's key trading relationships, including the potential implementation of tariffs. Looking ahead, our strong balance sheet, ample liquidity, and disciplined approach to capital allocation position us well to navigate market uncertainties while selectively pursuing growth opportunities that create long-term value for our certificate holders. In closing, I want to recognize the exceptional work of our entire team. Their dedication and expertise continue to drive our operational excellence and strategic execution. With that, I will ask the operator to open the phone lines for your questions.
Thank you. We'll now be conducting a question- and- answer session. If you'd like to ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for our first question. Once again, that's star one. Thank you. Thank you. The first question comes from the line of Andre Mazini with Citigroup. Please proceed with your question.
Yes. Hi, Simon and Andrew. Thanks for the call. My question is around the potential economic deceleration Mexico is supposed to be having now in the second half of 2025. A lot of talk on that among investors and the media. Wanted to understand if you're feeling that, this economic deceleration in your conversation with tenants, maybe splitting between the three tenant types, industrial light manufacturing, industrial logistics, and the retail tenants as well. Thank you so much.
Yeah. Thanks, Andre. Thanks for the question. Yeah. It's a bit of a dynamic backdrop out there. As you can appreciate, really we're much more correlated with U.S. GDP, U.S. economy, more so than Mexico, and that's obviously going to be where most of the activity will basically drive outcomes for us. When we break it down between those three categories. Look, I'd say in general for industrial light manufacturing, fair to say that our volumes production is slightly off compared to where it were last year. When you look at auto parts production, it's off around 7% compared to last year. So I'd say nothing that's fundamentally causing a problem there from a demand perspective, maybe a slightly lower utilization.
But in general, I'd say steady demand backdrop and something which we expect to prevail regardless of that Mexican economy dynamic, more so just to do with how trends continue out of the U.S.. So that would very much then link into the logistics part of industrial, at least for the business-to-business, where we have most of our exposure. It'll be correlated more or less with the trends on the light manufacturing. So again, I'd say for both manufacturing and the B2B logistics going pretty steady, and I think the outlook is steady as well. Obviously, the name of the game there is really USMCA as a real catalyst to change that demand environment, probably heading towards the second half of next year. Retail, yeah, definitely more linked to Mexican economy fundamentals. But I'd say the consumer remains in pretty good health.
We're seeing good employment, wage numbers, et cetera. General foot traffic and activity in the shopping centers, we've been happy with that. You would've seen some of the encouraging metrics come through the quarter; record occupancy, rising rental rates, same store. We're up about 5% year-over-year at the NOI level. I'd say generally good conditions there. Cinema's continuing to struggle a little bit more, I'd say, compared to the rest of the tenant mix, to be fair. Gym's doing rather well. Supermarket's doing rather well, restaurants rather well. So that's probably cinema, probably the main weakness that we're still looking for a bit of a pickup. But again, we have a cautiously optimistic outlook as well when it comes to retail, expecting fairly steady demand environment. So overall, that leads us up to a pretty good outlook for heading into 2026.
Thank you, Simon.
Thank you. The next question is from the line of Helena Ruiz with Actinver. Please proceed with your questions.
Hi. Hello, and thank you for taking my questions. I have a couple. The first one is on lease spreads. I was wondering if you could give us any color if you expect them to remain at these levels for last quarter of the year and next year. Also, if you could give us a breakdown if this growth is coming from all regions or especially one market. Then my second question is on occupancy. Looking at each market, most markets seem really strong. The only ones that show a drop in occupancy are Monterrey and Ciudad Juárez. So if you could also give us a bit of color on why the occupancy fell in those markets.
Thanks, Helena, for those questions. Yeah, look, when it comes to lease spreads, firstly taking that one on. Look, pretty good quarter again, around 17%, where we have a last four-month run- rate of around 20%. So that has been tracking, I would say, at a pleasing level for us. When we look ahead, virtually zero rollover on Q4, so it does not really move the needle. So we should be somewhere close to that run- rate level on a full- year basis. Outlook for next year, it is still early. We have about 16% rollover, 17% rollover next year. So you have some opportunity there to continue capturing, I would say, positive momentum when it comes to spreads. A little bit early to say how much, obviously a little bit there dependent on market conditions.
I think we would like to think that we can capture positive momentum in the same way we are seeing through the balance of this year. When it comes to some of those, I would say, market by market dynamics, and I would say it is quite an active market out there, even despite the subdued new leasing conditions. I would say in general, we are seeing that the same dynamic we have today is what we have seen for the last couple of quarters, where steady occupancy and operating trends, with USMCA being the real catalyst to, we think, unlock new demand. But taking that down to, I guess, market level, to answer your question, Monterrey is probably the most active market.
It is also one of the biggest in the country, around 185 million sq ft. So we still see a lot of activity there, a lot under construction.
Supply is still coming through, and that has always been the Monterrey way, to be fair. But there is probably around 8 million sq ft under construction. Amongst all that, though, on a quarterly basis, we are seeing close to 4 million sq ft new leasing to basically offset some move-outs of about 4 million sq ft. So no doubt there is a little bit of vacancy there north of 5%. And you could probably say it is more of a tenant market than a landlord market these days. But when it comes to the type of product that we are delivering in the market, this is in Monterrey, but in other markets as well, I would say that we are at the upper- end of that tier, and that profile of vacancy is not so much of an issue for us.
We are looking at in terms of the best quality buildings in the market, that is who our competition is because that is what we are building in terms of location, quality of building size, utilities, et cetera. So that real competition is much more narrow. So whether you are even talking to someone like Tijuana, where again, you are seeing a lot of vacancy or supply come on, it does not really change the equation for us. We are in the best part of town with some of those flagship developments up against really just a handful of building competitors. And so that noise around sort of 13%- 14% vacancy in Tijuana or 8% in Monterrey, it is not as relevant when you actually just boil it down to what the hard competition is against our class A development product.
And we feel very well positioned to have some activity on that as we get through the year in USMCA in particular. Juarez, I would say, probably remains pretty soft. That one has got a lot more sort of undifferentiated vacancy. It is a bit more of a slower market than Monterrey at the moment, much more USMCA linked as well. I think we expect more activity in that second half of next year or maybe the summer. Reynosa, again, sort of a key northern market. I would say very quiet as well and had a good positive absorption quarter for the quarter, but on a year-to-date basis, it is pretty flat in terms of absorption. Again, you would expect that to be more correlated with USMCA pickup.
Thank you.
The next question is from the line of Jorel Guilloty with Goldman Sachs. Please proceed with your questions.
Thank you for taking my question. My first question is around the recent M&A that you announced or mentioned in the report in Mexico City. You bought an asset, $35 million sale and leaseback. Back of the envelope, this is like $1,500 per square meter. I wanted to get a sense of what cap rates you saw for this asset and also if the idea here is on further capital allocation, if it is Mexico City that you want to focus on. I am sorry if you spoke about this earlier, but wanted to ask about Monterrey and Juarez, where you saw occupancy declines of 300 basis points and 120 basis points each on a sequential basis. I want to get a sense of what drove that, if it is one tenant or multiple, just to understand if this is a one-off or a trend.
Any color would be very helpful. Thank you.
Okay. Thanks, Jorel. Great questions there. The Mexico City acquisition, that was a fantastic one to do. Irreplaceable location around 15 minutes from downtown in the Vallejo submarket. That is a great last mile district to be in for sure. We are able to access that facility really thinking about the stabilized cap rate at around a 10% level, U.S. dollar sort of rental rate as well. That is the way we are looking at it, is sort of seeing that stabilize into a 10% cap. Now it has got an initial three-year lease period there with the user, so sort of coming in at a sort of an 8% area. But that is definitely below where we think the market rates are.
Just thinking about that on a real embedded rental rate growth profile when you actually look at three years down the track, we think that should land around a 10%. If you are able to access Mexico City last mile stabilized 10% dollarized 250,000 sq ft , we take that all day long and we are very excited about that. Yeah, potentially there could be one or two other opportunistic deals like that that could come along. We are currently looking at one deal in particular and would like to think that maybe there is an opportunity to do that opportunistically. Again, let us see. I think that was a great transaction to pull off from a capital allocation point of view and happy to, as I say, repeat that success. Moving to the second question, Monterrey, Juarez.
I think from our own perspective, in line with the market trends, we did see some vacancy there. But when you actually look at what drove that year-over-year, pretty simple story, Jorel, in the sense that we just delivered some class A product that has not been leased up. So it has been added into our inventory. Both fantastic buildings, we think very marketable, and again, something that will probably be more linked to USMCA ultimately, given the type of buildings and locations they are at. So we feel very good about the buildings that have been added to inventory, even though they are unleased in the short- term. We do think they have got great income potential over the medium- term.
And when you actually take the step back there, Jorel, and actually not just at what we have delivered in Monterrey and Juarez, but the other class A product we have that basically has income potential. And you add that up in terms of getting close to 1 million square feet around the country. The exciting thing there is that we actually do have some real embedded growth that I do not think is being properly priced into our valuation or share price and any type of a meaningful lease up there on that sort of class A development product that we have. We are fully invested. It is basically built product ready to be leased up. Mainly subject to USMCA, if you want to say that. That has got a potential ability to add something like, I would say comfortably north of $10 million at the NOI level.
And you can obviously just drop that down to FFO as well, given that we are essentially fully funded and built that. So that is a pretty exciting short-term opportunity, we think, to help drive NOI and earnings, is to basically take advantage of improving market conditions into next year, particularly with USMCA, to trigger that lease up.
And a quick follow-up if I may. The sale and leaseback opportunity, you mentioned there is a few in Mexico City, but are there opportunities such as those in other markets that you are in? And would it be focused on logistics?
Yeah, I think the answer is that there are. Obviously, we're looking at selective opportunities here. We particularly like Mexico City logistics. That's a favored market for us, where we'd like to increase our footprint. There are other opportunities in those other large consumption markets as well, more of a logistic expense, you could say. But as I say, when you look actually see what's in our immediate pipeline and possible opportunities, we're thinking more Mexico City as being executable in the short- term.
All right. Thank you.
The next question is from the line of Alejandra Obregon with Morgan Stanley. Please proceed with your question.
Hi, Simon, Andrew. Thank you for taking my question. Mine is on capital allocation as well. I was just wondering if you can provide some color on how you're thinking of your uses of cash for 2026. I mean, if you split it between dividends, acquisitions, development, how would that look like in 2026, and what are the elements that will get you to any sort of decision on the mix on that front? The second one is on the M&A market. I was just wondering if you're seeing any change in sentiment or acceleration in M&A activity that perhaps could trigger some recycling opportunities for you other than the sale and leaseback that you just mentioned. Thank you.
Sure. Yeah. Thanks, Alejandra. Look, I think in terms of capital allocation, fairly consistent outlook with how we currently have been deploying our capital. I think the main focus in the medium- to long- term is going to be on that industrial development program. We have a land bank there of around 5 million square feet of buildable GLA in core markets. That is something that we can flex up in terms of development activity. As you know, we have been doing zero construction starts the last few quarters. But as we get better visibility on demand fundamentals, that will remain the primary avenue of how we allocate our capital into those development properties, mainly on a spec basis, you could say. We remain also interested in pursuing certain opportunities in the short- term.
They boil down, as I say, one is two opportunistic acquisitions, where we can access those sort of development-like returns, if you want to call it that. Something like the 10% cap Mexico City. If we can do that on a more sort of a bite-size basis to complement what we are doing on the development program, that is great. I would say the other investment portal would be through strategic land bank investments to basically complement and add to the 5 million square feet that we have, so that we basically continue that runway for building out. Getting back to that sort of 1 million square fee to 2 million square feet of velocity on a medium- to long-term basis is where we want to be. And adding to that land bank will be an important part of that equation.
When it comes to buyback, I guess that is obviously another opportunity, which for Andrew, if you wanted to cover on that.
Yeah. I think, as we have said previously, we continue to favor allocating capital to development and value add opportunities where we see, obviously, you have a much lesser impact on the balance sheet over the long- term. You are not impacting liquidity overall, and you are setting yourself up for valuation upside and the growth of those underlying assets. And so we will continue to do that. I think, historically, we have guided to in the order of $100 million to $150 million of development per year. We have obviously been softer this year given the broader macro backdrop. But we continue to work towards some permitting and pre-development works with respect to the recent acquisitions that we made in both Guadalajara and Tijuana. And I think there is a good opportunity for those particular projects to progress over the next 12 months.
And I think more to the point, we see a broader opportunity for future growth with the embedded potential recycling opportunity in our retail portfolio, along with the broader liquidity that we have access to through the balance sheet, which really sets us up for in the order of $ 500 million worth of potential firepower over the medium- term. Ultimately, from a growth perspective, over the near- term, there's a deep sense of embedded value with the development projects that we have delivered to date, that are well positioned for lease up once we see the tailwinds return to the markets, which we're positive on with respect to how that looks over the short-t o medium- term. And just with what we have already completed and delivered, that's in excess of $10 million in potential NOI contribution over the coming years.
And we think that that will come to fruition and have a good line of sight to lease up on those properties as we go through the USMCA renewal and have more, I think, surety on the tariff and macro backdrop going forward through 2026 and into 2027. Overall, I think, broadly speaking, from the capital allocation standpoint and the growth opportunities, the business is well positioned.
Excellent. Thank you. That was very clear.
Thank you. The next question is in the line of Alan Macias with Bank of America. Please proceed with your questions.
Hi. Good morning, Simon and Andrew. My question was answered, but just going back to M&A, anything on the table regarding the retail sector? Thank you.
Yeah, thanks, Alan. Good to hear you. I think retail, we are definitely very satisfied with the general trend of what we are seeing in operating financial metrics. At the risk of repeating myself, but happy to say it, 93.6% record occupancy on a post-pandemic basis. NOI essentially at record levels, up around $7million-$8 million quarterly run- rate. It has been a fantastic contributor to the overall returns. As we think about operational performance, probably a little bit more upside to go, I think, even as good as it has been, that we are seeing some interesting opportunities to add to that overall NOI performance, and that will obviously lead into valuation also becoming higher. As you think about that valuation number, it is not insignificant by any means. We are talking $300 million +.
The interesting dynamic that we are seeing just as NOI continues to improve is obviously a more conducive interest rate backdrop with interest rates locally falling from, let us say, 10% to sub 8%. You are getting into positive leverage territory and more compelling M&A backdrop. We like the sound of that in terms of how that is all converging and it is for an ability to start thinking about that medium opportunity that Andrew mentioned around recycling. Really, that is what we have got to be thinking about in terms of apart from that short-term catalyst to grow earnings, which is really simple, which is just to lease up the class A stuff that we have built and is ready to lease up. The medium-term opportunity is certainly quite exciting and quite compelling when we think about that embedded firepower of around $500 million.
That really allows us to flex up when it comes to building out the land bank and thinking about additional investments. We feel quite excited and well-positioned with the ability to do that.
Thank you. At this time, there are no further questions. I would like to turn the floor back to management for closing remarks.
Yeah. Thank you for that, Rob, and thank you for everyone for participating in today's call. Along with Andrew, I would like to thank all of our stakeholders for your ongoing support, and we very much look forward to speaking with you over the coming days and weeks, as well as updating you again at the end of the quarter. So have a great one. Thank you.
The conference is now concluded. Thank you for joining our presentation today. You may now disconnect.