Good morning, and welcome to FIBRA Macquarie's Third Quarter 2024 Earnings Call and Webcast. My name is Diego, and I will be your operator for this call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star key followed by zero and an operator will be happy to assist you. I would now like to turn the conference over to Nikki Sacks. Please go ahead.
Thank you, and hello, everyone. Thank you for joining FIBRA Macquarie's third quarter 2024 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. 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 US dollars, which are US dollar equivalent amounts, unless otherwise specified. As usual, we've prepared supplementary materials that we may reference during the call. If you've 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 & 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 hello, everyone. I'm pleased to share that FIBRA MQ delivered another quarter of solid results, highlighted by record NOI and NAV in US dollar terms, along with the contribution of two properties from our industrial development program, resulting in a record level of leased GLA. Our third quarter results underscore the strength and resilience of our business model, centered on the disciplined sourcing and allocation of capital, investor alignment, and proactive asset management. In underlying US dollar terms, we achieved sustained earnings momentum, with revenue up 6.0% year-over-year, contributing to an increase in NOI of 6.8%. Given our robust year-to-date performance, we are upgrading our full-year outlook, as Andrew will shortly discuss.
As we navigate the current political cycles that are taking place on both sides of the border, we are encouraged by the new administration's focus on supporting growth with nearshoring-driven industrial relocation and development positioned as a strategic priority for Mexico. While challenges exist, we believe the long-term fundamentals supporting the Mexican real estate market remain strong. We are confident in our industry-leading position, backed by our well-located, high-quality portfolio, our global institutional capabilities, and our proprietary boots-on-the-ground operations platform. Our industrial development program continues to be a cornerstone of FIBRA MQ's value creation strategy, with our disciplined approach allowing us to consistently deliver within or above our target NOI yield range of between 9%-11%. Construction is progressing well on our Tijuana project, where we look forward to our next scheduled delivery, a 400,000 sq ft development in one of Tijuana's prime industrial corridors.
Our development projects in stabilization or under construction represents a total investment of approximately $90 million, which we expect will contribute to total returns in 2025 and beyond. The Mexico industrial real estate sector continues to navigate challenges related to energy and infrastructure availability. These obstacles are limiting new and truly marketable supply, enhancing the competitiveness of our stabilized properties. With regards to our stabilized industrial portfolio, performance remains robust, with growing average rental rates, strong retention, and a stable outlook for the remainder of the year. For the third quarter, NOI was $48.7 million, an 8.6% increase compared to the prior year. Total leasing activity comprised 1.9 million sq ft of GLA, including 700,000 sq ft of new leases. Renewal leases comprised 13 contracts across 1.2 million sq ft, driving a solid retention rate of 83% over the last 12 months.
We saw continued momentum in lease renewal spreads, achieving a 16.9% increase on commercially negotiated contracts, an acceleration from prior quarters. As I reflect on our industrial performance, I am encouraged to see FIBRA MQ recognized as a landlord of choice, a good example in the quarter being a customer choosing to lease our property in Reynosa as opposed to other available buildings, attributed to our market-leading product and the superior service offered by our internal platform. In our retail portfolio, we delivered solid results with continued positive momentum. Occupancy increased to 93%, and our weighted average rental rates were up 5.4% annually. This resulted in an NOI increase of 7.9% year-over-year. Of note, our retail portfolio benefited from the lease-up of a 6,000 sq m space in one of our Mexico City shopping centers.
Our team was able to deliver an innovative solution for our customer in converting the space to a last mile logistics use at a rental rate meaningfully exceeding that of the previous retail tenant. As we enter the final quarter of the year, we feel constructive about our retail leasing pipeline and the outlook for our properties, which provide a range of mainly essential services in high-density urban areas. FIBRA MQ's mission remains steadfast to be the premier owner of industrial-focused real estate in Mexico. Our well-located and highly occupied portfolio, along with our robust development pipeline and our strong balance sheet, positions us well for sustained growth and value creation. Before handing over to Andrew, I want to thank you all for your continued support and trust in FIBRA Macquarie. Andrew.
Thank you, Simon. For the third quarter, we delivered an AFFO result of MXN 527 million , up 13.2% from the prior year. Contributing to this growth was higher same-store income and NOI from our new developments, partly offset by higher interest expense and non-recurring transaction costs. We are also reporting a record NAV of MXN 61.9 per certificate, which represents an 8% sequential increase. Taking into account the prevailing certificate price, we believe this represents an attractive entry point as we continue to execute on our operating and development strategy. Our disciplined capital allocation, coupled with our best-in-class platform, has delivered total returns over the past 12 months of 26% in Mexican pesos or 16% in underlying US dollar terms. Our balance sheet remains well-positioned with prudent leverage metrics and strong liquidity to support our growth strategy.
As of September 30, our real estate net LTV was 33%, and our net debt to EBITDA multiple was 5.2x . Our weighted average cost of debt is 5.6%, and we have no scheduled maturities until 2026. Today, our indebtedness is 100% fixed rate with four years of weighted average tenor remaining. We have available liquidity of more than $400 million, which positions us well to fund our developments and selectively pursue investment opportunities to execute on our growth pipeline. As Simon mentioned earlier in the call, given our strong performance to date and our expectations for the fourth quarter, we are increasing our full-year AFFO per certificate guidance to a range of MXN 2.6-MXN 2.63 from our prior range of between MXN 2.55 and MXN 2.6.
We continue to anticipate full-year cash distributions of MXN 2.10 per certificate, translating to a robust full-year AFFO payout ratio on scheduled distributions of 80%. Our outlook anticipates solid NOI growth in both our industrial and retail portfolios, which will be partially offset by the continued impact of financing costs of near-term investments in our industrial growth CapEx program, which we expect to meaningfully contribute to additional revenue and AFFO growth over time. We believe Mexico is well-positioned over the long term to capture growth opportunities arising from the global and regional trends as nearshoring continues to drive demand for real estate in Mexico. We remain confident in FIBRA Macquarie's position as a leader in the Mexican real estate market and our ability to deliver reliable earnings, disciplined capital allocation, and attractive growth.
Along with Simon, I would like to take this opportunity to recognize the commitment and efforts of the entire FIBRA Macquarie team and thank all our stakeholders for your ongoing support. With that, I will ask the operator to open the phone lines for your questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one on your telephone keypad. All right, and our first question comes from Rodolfo Ramos with Bradesco BBI. Please state your question.
Thanks for taking my question. Good afternoon, Simon, Andrew. I just wanted to get a little bit of sense of how your commercial discussions with clients are evolving. I mean, you had a minor decline, occupancy, very, very minor, but I just wanted to get a sense whether clients are perhaps postponing or taking longer to close deals. I just wanted to get a sense if there's concerns around the Mexico environment or U.S. election or whatnot. My second question is, when you look at your successful development story that we saw in the Mexico City market, and you look at your land bank, do you see the potential of developing something with similar economics, whether again, in the Mexico City market or in other regions within your land bank? Thank you.
Thanks, Rodolfo. Both are great questions. I think the first one regarding, say, demand-supply dynamics. Yeah, we did see a slight drop-off in occupancy sequentially, I'd say, nothing that we're particularly concerned around. I think when we think about what we're seeing on the ground, on the demand side of the equation, I think that there has been a little bit of a drop-off on the new tenant side, and that's attributable, I'd say, largely to a wait-and-see mode, given the political cycle. So we sort of expected that. We'd probably expect a little bit of a pickup in the new year as we get through elections, et cetera. But fair to say, there has been a little bit of a drop-off in that respect. Certainly, in the main, though, existing customers getting on with business. Very good retention rates. We are still picking up some interesting new leasing opportunities.
Market-wide occupancy call around sort of 94%, 95% across the board. Not too bad and somewhat of a normalization, if you like, back to more normal levels. So I would say that overall, we feel good. In general, I think the key markets where we're seeing a bit of softness, places like Juarez, Reynosa, Tijuana, sort of getting somewhere between 90%- 94% occupancy. With respect to our own performance there, though, we feel like we have a good outlook. Our average occupancy in those three markets there, it's around 97.3%, so well above, you'd say, the market occupancy for those three. And we like the outlook for the rest of the year and into 2025 for those markets, sitting on some nice mark-to-market spreads in those markets.
Overall, we feel good about the market, but certainly acknowledging that there is some softness, largely attributable to a wait-and-see mode. With regards to the development program, I would say, the returns we have been able to generate in more recent transactions or projects are exceeding our target of 9%-11%. That is fantastic to see. We will take that all day long, particularly stabilizing into a 6.5%-7% area. It is a fantastic value creation model. As we look ahead and look at new opportunities, particularly in markets such as Mexico City, Tijuana, where land prices are a little bit higher on average, I would say that the underwriting range, we are still looking at 9%-11%, but it is fair to say it is probably closer to a 9% area, rather than 11% as a base case.
But I think certainly the general ability to access new opportunities underwrite in that range and deliver quite a healthy, stabilized cap rate spread, it remains there for us, and we actually have quite a healthy pipeline in the works to add to the 4 million sq ft that we have as buildable GLA today.
Thanks, Simon.
Thank you. Our next question comes from Felipe Barragán with BTG Pactual. Please state your question.
Hey, good morning, guys. Simon, Andrew, thanks for the call and for my question. I have a couple. One is on the extra professional, legal, and general expenses. I am guessing that has to do with the whole Terrafina bid and whatnot, that there is extra expenses. Can we expect these expenses to go down, or is this the new norm of having maybe a little bit higher expenses in this account for the following quarters? My other question is on if the 211,000 square foot property in Monterrey that has been delivered, has that been valued already? If yes, could you provide us some details on what cap rate it was valued at? Thank you.
Thanks, Felipe, for those two questions. You are absolutely right on that step up in transaction-related expenses. There were non-recurring expenses with respect to that pursuit of the Terrafina transaction that were fully expensed during the quarter, so we do not have any incremental expenses remaining to come through. Those amount to about $1.1 million, and are about just north of MXN 0.025 So, a meaningful impact for the quarter, but important to understand how those relay into run rate. As you look at the bridges in our supplemental information, you will be able to pro forma adjust for those numbers going forward as we do not expect those to be continuing or ongoing type expenses. On the second point, we have received a valuation for the Monterrey property, and that was revalued into a 7% cap rate.
A very attractive uplift in valuation there again, versus the 11.9% yield on cost based on the investment from a development standpoint. Seeing that continued value creation model is also seeing the balance sheet remain in a healthy position with good liquidity and stable leverage metrics moving forward, which will continue to support the ongoing execution of the development pipeline and program.
Great. That was very clear. Congrats on that. Thank you.
Thank you. Our next question comes from Jorel Guilloty with Goldman Sachs. Please state your question.
Hi, Simon. Hi, Andrew. Thanks for taking my questions. I have two. One is focusing on the northern markets that were spoken about earlier, like Juarez, Tijuana, Reynosa, and the weakness seen there. We have heard, and I think you said this as well, that these markets might be getting to a more normalized level, I guess, in terms of vacancy. I just wanted to get a sense of, and you might have said this already, I apologize if you did, but what does a more normalized level mean in terms of both vacancy and net absorption? Do we see vacancy go higher from here? The other question is on the net absorption. What we have seen as of late, is that more like a normalized level of net absorption? I am talking more at a market level rather than specifically to your portfolio.
The second question is on leasing spreads. We did note that you mentioned that leasing spreads were about 17% for the quarter. It was incrementally better if you compare it to 2Q. I was just wondering, is that the sort of leasing spreads we should expect over the near term, or should they be going higher, lower, and what will be the drivers? Thank you.
Thanks, Jorel. Appreciate the questions. I think picking up those in terms of the northern markets, yeah, just to cover that off. We are seeing there is a little bit of softness there relative to the rest of the industrial sector. Places like Juarez, Reynosa, we are seeing market occupancy closer to that sort of 91%, 92% area. TJ has come back a little bit as well. We are still seeing 94% occupancy levels there at the market level. When we look at our occupancy in those three markets on a weighted average basis, we are at 97.3%. As I say, I think we feel like we are doing pretty well there. We had some new leasing through the quarter in those markets as well, which was good to see.
I think thinking about what does normal look like, we'd like to tend to think 95% is a good, healthy, stabilized level with, I guess, a growth rate in terms of adding to that inventory of around 5% per year as well. That's been a very noisy period the last couple of years. When you think about the net absorption, we've seen supply coming on, particularly in places like Juarez. We have seen some short-term negative net absorption, particularly in places like Juarez, perhaps even Reynosa. But actually, when you take that step back, look at year to date, we're still seeing good positive net absorption.
We do think that the ability to get to that 95% over the long term is there, just based on where that demand-supply balance is looking like, particularly when you take into account what's truly marketable supply, what's actually coming on, particularly in places like Juarez where you have full utilities. That's always a difficult thing to assess, but we do think that the ability to get to those more normal levels is definitely there, and that should be supported by, I would say, fairly good net absorption figures going forward. With regards to leasing spreads and mark-to-market, yeah, great quarter. 17% is a record. In fact, when we think about the last couple of years of coming out of COVID, et cetera. That's been good momentum heading into the end of the year.
We'd like to think going forward, we'd be very happy still striking double digit, potentially low double digits is how we're thinking about things through to 2025. When we think about that mark-to-market spread based on in place, probably not too dissimilar in the sense that low double digit across the board is where we're seeing it. But that's actually quite a good setup. But particularly when we think about those core northern markets, we are seeing that there's a decent spread versus asking where we'd like to take that opportunity as we go through rollover. Next year, relatively light in terms of rollover. We're looking at around 10%, just attach on to 10%. So it has been a bit lighter than the last couple of years. But as we go through that rollover next year, we are expecting to continue that positive momentum.
Thank you.
Thank you. Our next question comes from Andre Aguirre with GBM. Please state your question.
Hello, guys. Thanks for the call and congrats on the results. Could you provide some color on the current dynamics and pricing trends you're seeing on both industrial and retail segments, please? Thank you.
On that, Andre, I think it's a fairly diverse range. I think if you look at our rental rate growth year-over-year, we're still seeing positive trends, in real terms. Obviously outpacing inflation, so 5.9% up in the industrial portfolio and 5.4% in the retail portfolio. I think that speaks to the high quality and key locations of our both retail and industrial portfolios. I think depending on the underlying market conditions, Simon spoke a little bit earlier as to what we're seeing in some of those different markets. But generally, I think we're continuing to see healthy levels of pricing tension, certainly, and certainly, I guess, represented in what we're seeing on the renewal spreads as well as we come up for those.
We are seeing the impact of a little bit more product being added to inventory in some of those markets, which I think is slowing slightly the rate of growth of rental rates in those markets, but still remaining above historical averages. I think we can expect to see good, healthy levels of rental rate growth continue whilst we move through the next couple of quarters.
Great. Thank you very much.
Thank you. Our next question comes from Kiefer Oliveira with Citibank. Please state your question.
All right. Thank you, guys. Thank you for taking my question. I just would like to get a better assessment on those high-tech companies going to Mexico. Your views on that, how Macquarie can benefit, how those guys can change economics and business environment. Any color on that would be very helpful. Thank you.
Thanks, Kiefer. Yes, certainly a dynamic environment at the moment. I think for all the negativity you could say that we hear regarding political cycle, judicial reform, et cetera, I think it is quite comforting to think about the new investments that are still being announced and made and the demand that will flow over the long term. I think announcements like Foxconn, with the new chip assembly plant that they want to do in Guadalajara, that is fantastic to see in terms of speaking to the capability that Mexico and markets like Guadalajara have for addressing that demand. We are also seeing the CHIPS and Science Act out of the U.S. provide meaningful funding for fab plants that are currently being built in the U.S. As those come online, the downstream supply requirements will definitely have Mexico as a supply chain partner in that.
We are yet to see any type of activity in Mexico, just because those plants have not come online. But as they do, we are expecting places, markets such as Juarez, Tijuana, and a few others, particularly in the north, but even Guadalajara, they will go into that supply chain for sure. We are also looking forward to that. As I say, that has not fed into the demand side of the equation at all yet. Complementing high tech, we are also seeing good announcements in other traditional sectors, if you like. Volvo having a groundbreaking in their assembly plant in Monterrey, and we are seeing other OEM or tier 1 type announcements in auto electronics which is being added to that.
High tech, between Foxconn, between the Microsoft announcement, data centers that we are seeing also being built throughout the country, we do feel that the overall depth and breadth of the manufacturing sector has a very good runway to grow.
I think perhaps just commenting to what Simon said, in terms of what that means for portfolios such as ours. When we think about and we talk about OEMs and large plant manufacturers, we really think holistically about the supply chain ecosystem that comes with them and those tier 1, 2, and 3 suppliers that ultimately will be moving alongside and growing to support the growth of those new investments at the OEM level. That is where we see the real opportunity in portfolios such as ours, to continue to grow and benefit from those investments.
Thank you.
All right. Thank you very much. Just a reminder to the audience, to ask a question at this time, press star one on your telephone keypad. To remove yourself from the queue, you can press star two. Once again, to ask a question now, press star one on your telephone keypad. Our next question comes from Alan Macias with Bank of America. Please state your question.
Hi. Thank you for the call. Just two questions. If you can just provide color on the adjusted FFO payout ratio for next year. Any change there? The second question is, at current price levels, should we expect activity in the share repurchase area? Thank you.
Thanks, Alan. I will pick up the first question and have Andrew address the second. The AFFO payout ratio with the upgraded guidance, we are looking at around 80% for the full year, which is actually a touch lower than last year. So that is a good place for us to be. I think outlook for next year, we will establish the guidance as part of our full Q results in the new year. But certainly when we think about the second half trend, relative to last year first half, we are seeing that payout ratio tick down a little bit, which is very good, as I say, because it does actually lay a great basis heading into next year. That retained AFFO is important, north of MXN 400 million this year. You add that to a very strong balance sheet, 33% LTV, the liquidity reserves north of $400 million.
The ability to sustainably finance our growth, CapEx opportunities is certainly there, and that's a very important way for us to deliver on total returns. With regards to buyback, Andrew, if you want to pick that one up.
Yeah, absolutely. Happy to take that question. I think certainly, buyback looks as an attractive option at this point, and cognizant of the meaningful discount to NAV that we're currently trading at, which ultimately we also think provides a very attractive entry point for our investors or new investors to enter the name. But certainly it's a careful balance in how we assess those capital allocation requirements. There's both qualitative and quantitative aspects to it. Juggling that capital allocation priority between what is a very robust and active development pipeline, with, I would say, greater growth potential, from both an earnings and NAV perspective over time, versus the buyback program, which tends to have a more permanent impact on LTV, given that we would be funding that between our retained AFFO and/or the balance sheet.
As well as an important impact potentially on liquidity, which is something that we look to try and increase and bolster as much as we can to the extent that we have the opportunity to do so. You're absolutely right. We do have a buyback program approved through June of next year, with MXN 1 billion in terms of total capacity available under that to be able to execute. We'll continue to make a live assessment with respect to executing on that and the ongoing capital assessment between prioritizing between development and buyback.
Thank you.
Thank you. Ladies and gentlemen, there are no further questions. I would now like to turn the conference back to Simon Hanna for closing remarks.
Thanks, Diego, and thanks everyone for participating in today's call. We very much look forward to speaking with many of you over the coming days and weeks, as well as updating you again soon at the end of the fourth quarter. Thank you, everyone.
The conference is now concluded. Thank you for joining our presentation today. You may now disconnect.