Thank you for standing by. My name is Van, and I will be your conference operator today. At this time, I would like to welcome everyone to the FIBRA Prologis First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Alexandra Violante, Head of IR. Please go ahead.
Thank you, Van, and good morning, everyone. Welcome to our First Quarter 2025 Earnings Conference Call. Before we begin our prepared remarks, please note that all the information disclosed during this call is proprietary and all rights are reserved. This material is provided for informational purposes only and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements made during this call are based on information available as of today. 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 had prepared supplementary materials that we may refer during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologis.com and download this material. On today's call, we will hear from Héctor Ibarzábal, our CEO, who will discuss our strategy and market conditions, and from Jorge Girault, our CFO, who will review results and guidance. Also joining us today is Federico Cantú, our Head of Operations. With that, it is my pleasure to hand the call over to Héctor.
Thank you, Ale, and good morning, everyone. I would like to start today's call talking about the current macro environment that we are seeing. Trade uncertainty is at levels we have rarely experienced in the past. Tariffs ranging between 10%-49% were established by the U.S. on most countries globally, while China received tariffs prohibitive to trade. Mexico and Canada stand out as the only major exporters to the U.S. that retained zero tariffs under the existing USMCA agreement. This shifting trade landscape could affect our business in two important ways. First, the tariffs may impact U.S. economy, and as Mexico depends in great measure on U.S. consumption for its exports, this could affect demand for products manufactured here. In response, customers could slow down investments.
On the other hand, Mexico is well-positioned among exporting countries with important competitive advantages, which could spur a new wave of nearshoring investments. FIBRA Prologis runs its business in a disciplined and resilient way, and this is exactly the kind of moments we are built for. The company delivered solid financial and operational results and a record rent change on rollover. Jorge will talk more about our specific performance. Now, I'd like to describe what we are seeing from customers on the ground, mainly before and after the tariff announcements. Prior to April second, we have seen very cautious customers on the manufacturing segment, not taking decisions in advance of the tariff news. After April second, we have observed increased activity from certain customers across industries such as electronics, medical, and appliances, which are seeking space in the border markets.
Regarding the auto sector, supply chains will have developed over decades, will face complexity in the event of any reconfiguration, and will require important time to do so. Our existing customers in this sector have continued to renew, and the trend that we have observed, not only in this sector, but others as well, as it could have been expected, has been for some companies requesting shorter lease terms, aiming for flexibility on their uncertainty on long-term demand. On the consumption segment, we have not identified a change in customer tone before and after April second. Even though consumption in real terms was practically flat in the quarter, consumption markets are experiencing the lowest vacancy, and e-commerce continues to grow in the double digits, putting Mexico among the top countries in e-commerce growth in the world. As a result, customers continue to renew as well as look for expansion opportunities.
Let me now shift to real estate activity across our markets. New leasing activity reached 7.34 million sq ft, below the 2024 average of 10.6 million sq ft, mainly driven by a sharp slowdown in demand in the border markets. Due to the low net absorption and stable supply, vacancy in our markets increased 50 basis points to 4.1%, which compares to the 7.3% long-term average. So we're still at very healthy levels. During the current environment, market rent growth has leveled out. Weakness in certain manufacturing markets has been offset by the strength of the consumption markets. We would like to highlight that Mexico City and Guadalajara, that represent more than 50% of our operating portfolio by value, experienced declines in vacancy in the first quarter.
It is also important to mention that our Mexico portfolio remains the Prologis region with the lowest vacancy worldwide. In closing, we are built to navigate under any environment, and when the dust settles, with our strong balance sheet, one of the best in our sector, we will be uniquely positioned and ready for any opportunities that may arise. We have a leading franchise in the sector, and as always, we will continue to listen and work closely with our customers in providing them the best service we can. Finally, as you all know, we remain committed to creating long-term value for our shareholders. With that, I will pass the call over to Jorge.
Thank you, Héctor, and good morning, everyone. We're proud to share a strong first quarter, marked by the successful integration of Terrafina, a transformational step that has importantly expanded our core portfolio by 40%, solidifying our leadership in Mexico's industrial real estate sector. Results speak for themselves. FFO reached nearly 98 cents or $0.06 per CBFI, a 25% increase per certificate compared to same period last year. AFFO totaled $88 million, up almost 78%, driven by the acquisition of Terrafina. On the operational side, we leased 3 million sq ft during the quarter, in line with expectations. Occupancy, both period-end and on average, remain above 98%, outperforming our forecast. Tenant retention came in just under 94%, exceeding internal projections. Net effective rent change hit a record 55%, underscoring our team's ability to effectively mark-to-market our rents.
Same-store cash NOI rose by 2%, while GAAP NOI increased 4.6%, reflecting healthy rent growth and annual escalations, partially offset by peso devaluation. Now to our balance sheet. Our financial position remains strong. FIBRA Prologis continues to stand out as the only pure play industrial FIBRA with a BBB+ rating, a clear reflection of our disciplined capital management and sound fundamentals. As shared previously, we've launched a refinancing strategy to replace short-term debt with long-term financing. This will enhance our liquidity and flexibility, improve our maturity profile, and lower our cost of debt on a relative basis. Looking ahead, after stress testing our financial model, we are reaffirming our 2025 guidance. While the macro landscape remains fluid, we maintain a constructive outlook and have strong confidence in our team's ability to deliver.
We're also being proactively proactive in managing lease rollovers. Although 13% of our net effective rent rolls in the remainder of the year, we're already in active negotiations in leasing discussions. In closing, I want to sincerely thank our on-the-ground teams for their exceptional execution this quarter. We remain laser-focused on our long-term strategy and fully prepared to adapt as needed. FIBRA Prologis was built to thrive in times like this, with a high-quality portfolio, a solid financial foundation, and a team that delivers with discipline and agility. Thank you. I will turn it now for Q&A.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We ask you to limit your questions to one. If you have a follow-up question, please press star one again to return to the Q&A queue. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Rodolfo Ramos, from Bradesco BBI. Please go ahead.
Perfect. Thank you. Good morning, Héctor, Jorge, Alex. Thanks for taking my question, and congratulations on the very strong results. On the record rent rollovers that you discussed, Héctor, can you help us reconcile this, you know, this level of rental adjustments with the current environment, where companies are still assimilating all this news flow on the tariff front? And, I mean, I'm not surprised to see this in the logistics market. You know, we've seen it in the past, but it's interesting to see it even in the nearshoring northern markets, so thank you.
Thank you, Rodolfo. As we have mentioned in the past, I think that Prologis is uniquely very well positioned to operate and to get this type of rent changes, keeping a good relation with our customers. We are a customer-oriented company. The way we provide service to our customer, the relation that we have with our customers, we try to solve any specific situation that they might have. This is a unique tool that we have. Whenever we have our negotiation, we already, in most of the cases, have a very close relation with the customers. This is a very important tool to reach these type of figures.
It is important to mention, though, that some of these, high numbers come from vintage contracts that have several years old, and this is why you are seeing a 65% of rollover. It shouldn't be understood that the market is growing this way, but our contracts are the ones that are catching up according to market conditions. We always have the best product and the best service on the field, and this allow us always to take rents, to market. We don't go above market, but we take rents to market.
Your next question comes from the line of Alejandra Obregón from Morgan Stanley. Please go ahead.
Hi, good morning to you, Apologies, and thank you for taking my questions. The first one is on the cost side. You delivered an impressive print, so I was just hoping to hear, I mean, what sort of these, I mean, sort of the savings and efficiencies are expected to be recurring in nature versus perhaps a one time? So that's the first one. And then, Jorge, you mentioned a stress test. I was hoping if you can walk us through perhaps the key assumptions and variables. What are the opportunities and challenges that you see? What are the variables where you see perhaps a wider risk reward with everything that we're seeing, you know, on the macro level? Thank you.
I will start with the second question, and I will ask you to, we have a hard time to listen to the first question. But let me try to explain what we're seeing in the ground. After April second, what we have seen, as I commented in my opening remarks, is a reignition of some of the projects that were placed on hold. Before, I'm referring only to the manufacturing sector. In the manufacturing sector, when all the tariff rhetoric started happening, all every day in the media, all the projects got stopped. And after declaration date in April second, there is some projects that recommends, you know, updating values and understanding new conditions.
I think that this is positive news, because Mexico keeps on having a very important competitive advantage. So we do see customers somehow reconfiguring plans, and in this reconfiguration, Mexico is placing always an important role there. So, uncertainty is not a good ally to keep on growing the business, but I'm pretty optimistic about the potential outcome because of our competitive advantage regarding location and our good relation with the U.S. Could you repeat the first question, Ale?
Yes, of course. My question was on the cost side. I was hoping to perhaps hear how much of what we saw in this quarter in terms of improvements could be recurring, how much of that is one time in nature? I mean, just if you can help us to think of the cost structure as we move further into the latter part of the year. Thank you.
Let me just thank you, Ale, for your question. This is Jorge, and let me try to simplify the answer for your modeling purposes. Most of the costs that were related to one-time expense because of Terrafina integration and acquisitions were in the fourth quarter, as were mentioned, you know, back in February. What you should see on a long-term view for the company, and I'll talk about margins here, is you should see NOI margins anywhere between mid-80s and high 80s, and EBITDA margins around 75%-77%, somewhere in that range. That should give you a stable view of long-term for the company.
Your next question comes from the line of Francisco Chávez from BBVA. Please go ahead.
Hi, thanks for the call, and also congrats on the strong numbers. My question is regarding the divesting plans of the Terrafina non-strategic market. What kind of delay can we expect for this divestment? And any colors you can provide on the progress of this divestment? Thank you.
Thank you for your question, Francisco. We're pleased to keep on seeing, in spite of this uncertainty, pretty good interest from investors in this asset class. I think that people is having a similar sentiment that we all have, that once that uncertainty settles, the business will keep on being very favorable. Because of this, we're expecting to launch the first portfolio for divestiture before the end of this quarter....
We have not seen an impact on cap rates because we're still in a market condition where there is more investors than product outside in the market. So we do not anticipate any movement in cap rates. And reviewing the underwriting price that we pay for Terrafina assets and the expected price that we have with preliminary conversations with brokers and investors, I feel very positive that that we will be able to provide positive news on this regard. In other words, and in short, we have no concerns about not reaching the prices or not being successful in our divestiture program.
Your next question comes from the line of Francisco Suárez from Scotiabank. Please go ahead.
Hey, good morning. Thanks for the call, and congrats for the outstanding quarter. Gents, can you help us a little bit on understanding what of this craziness behind tariffs might cause to accelerate further the consolidation that we see in 3PLs? Is it fair to state that Mexico City is a far better market to be resilient upon that consolidation trend behind 3PLs, but perhaps northern markets are not? Anything you can share with us on the ground will be very, very appreciated. Thank you.
Thank you, Francisco. You know, we saw an important consolidation of one of our most important and active customers, which is DSV, buying an important competitor. These consolidations, according to our experience, they do provide some adjustments in the real estate strategy. But in most of the cases, this consolidation bring us an ultimate consequence, the fact that they are expanding their business. In a lot of cases, they are buying customers, and the strong company has the ability to create additional business with the new customers that they are acquiring. That's what we have seen in the past. We have not seen so far any reaccommodation or any request because of these consolidations that are happening.
It is hard to provide new large spaces in the big consumption markets because there's no product of such availability, and this might be transferred in a potential build-to-suit opportunity going forward. But too early, too early to see a real trend on this regard, Paco.
Your next question comes from the line of Gordon Lee from BTG Pactual. Please go ahead.
Hi, good morning. Thank you very much for the call, and thank you very much, Héctor, for the, for the detail you provided, in your remarks on the, on the way that different clients from different segments are reacting. I wanted just to drill down a little bit on that, and particularly the, the comments you made on clients that are related to the automotive sector. When you say that they're looking for greater flexibility on, on lease terms, is that, upon renewal, or are existing tenants seeking to modify existing contracts? And if it's the second, are you seeing requests for either concessions on, on rents, either discounts or deferrals? Thank you.
Thank you, Gordon. And, you know, some people might think that the current situation could start bringing some renegotiations or some customer concerns as it happened in COVID. The confident answer in our case to this is no. We are not experiencing, not a single contract renegotiation, not a single hesitation in payment. Our customers keep on business as usual, and what we are observing is a slightly a marginal decrease on the occupancy of their premises. But this could be probably normal regarding the part of the year that we are facing today.
When I mentioned flexibility, I would say it's probably a natural phenomenon because market trends were increasing importantly, and in the last couple of years, we were seeing customers requesting for longer terms, 5-7 years, you know, trying to keep the rent that they were negotiating in place for a long period of time. Nowadays, we are seeing a change in this trend because customers that in the past were probably requesting 5 years, now they are requesting 3 years. But to be blunt and clear, this is more the run rate, and this is the way the business has been conducted historically.
This uncertainty in the consumption side brings uncertainty on the demand forecast, so we see as a very normal path this situation that the different markets are experiencing on the manufacturing side. On the consumption side, it's a little bit different because the space in Mexico City keeps on being very scarce. So, you know, on new contracts, we can see longer terms, five or potentially more. Thank you.
... Your next question comes from the line of Joel Guilloty from Goldman Sachs. Please go ahead.
Good morning, everyone. Thank you for taking my question. I have two. One is more technical question. So if I look at your cash lease spreads in 4Q 2024, it was 33%. Sorry, in 1Q 2025, it was 33%. In 4Q 2024, it was 44%. And I was just trying to get a sense of the difference in those cash lease spreads. I mean, I did notice that you had much more leasing activity in 1Q 2025 versus 1Q 2024. So I don't know if this is a mixed issue. I don't know if this is due to currency. So I just wanted to get a sense of the difference in cash lease spreads quarter to quarter, and what is the expectation for cash lease spreads going forward?
And then the second question is around construction pipelines, particularly in the north. I mean, one of the key issues that we've been seeing in border markets is the delivery of industrial warehouses and the lack of demand, obviously spiking vacancy. So I wanted to get a sense, are you seeing in the pipelines stable? Are you seeing them declining? Construction starts, are you seeing them on a downward trend? Any color you can provide would be helpful. Thank you.
Thank you, Joel. I will, I will answer, your second question, and will let Federico answer the first question. Indeed, we are seeing a slowdown in, development in the border markets. This is the case in, Reynosa, Ciudad Juárez, and Tijuana. Monterrey, which is a high-risk market, is probably, keeping the same pace that we have seen from the previous quarters. But, I think, this is very positive news because, I see it as a, as an evidence that, the market intelligence is growing, and, and that even, the new competitors are understanding what they need to do. So this is, this is good news, I think. And, eventually, we see a slight improvement in the dynamic of Ciudad Juárez, which is a market that was experiencing, largest vacancy.
We need to keep on observing the trends, because for sure, this market is one of the most exposed to the final movements that customers will be doing because of this new rearrangement in tariffs that we're seeing.
Hola, Joel, this is Federico. As it relates to the lease spreads, and again, it's, it's depending on the vintage of the leases that roll every quarter, it's you know, what we, what we observe. You know, our teams are, are always in good communication with our customers, very attuned to what market rents are and very attuned as well to, to any concessions that are out there in the market. And, and you know, we strive to be at market. And so again, it, it, it varies. You know, we, we, we don't guide to, to leasing spreads, so you can look at our lease mark-to-market, which is 45%, across the portfolio.
That could give you some view into what the current situation is as it relates to our leases. But again, our teams leverage the relationships we have with our customers, and again, we do expect going forward good performance there.
Just, one clarification. The 45% is on net, net effective rent, it's not cash, as you asked. But it's a difference there, but it's 45% on net effective basis.
Again, if you would like to ask a question, press star one on your telephone keypad. Your last question comes from the lines of André Mazini from Citigroup. Please go ahead.
Hello, Héctor and Jorge. Thanks for the call. Two questions as well. So the first one is around the tenant base. Would you say that the auto tenants, they are more maybe jittery or concerned because, as of right now, the information at least that we have, is that there are gonna be auto tariffs set to start on May three, right? And all the other USMCA compliance tenants do not have tariffs, so are they also more concerned, would you say? And then the second one, if I heard Héctor correctly, the tariff situation has not impacted price discovery and the fair cap rate that buyers and sellers would agree upon. But even considering that, would you say, is it easier to sell a logistics property at the moment than a light manufacturing one, as logistics is way less impacted by any tariff discussion? Thank you.
André, can you repeat your second question, please?
We had trouble-
Sure.
On his listen.
Yeah, yeah, sure. If it's easier to sell a logistics properties in the current environment than a light manufacturing one, given that tariffs don't impact logistics all that much, or way less than light manufacturing?
Okay. Let me, let me try to answer this one. The answer is no. I think that what we have seen in this preliminary marketing phase for this position program is, you know, it's good to see seeing investors with clear strategies. Some of them are having a regional approach, some others are having a manufacturing approach, some of them, like, the aerospace industry. So, I had a pleasant surprise on understanding how the potential buyers today, they know much better what they are looking for than what they did in the past. And of course, when you have a big logistic facility, brand new, that could represent an additional interest from investors.
But if your question is that it's easier to sell a logistic than a manufacturing facility, the answer is no, in the current disposition program that we have.
Hello, André, this is Federico. As it relates to your first question, I had a hard time listening, but I believe you were asking about automotive, and what the outlook is there. So, 14% of our portfolio is auto-related, and I'd like to highlight that 20% of our leasing activity in the quarter was with auto-related companies. Actually, our largest transaction in Juárez is in this sector. So, of course, there's been a lot of noise, uncertainty around the sector, and there seems to be news coming out almost daily. Let's remember that companies have to plan for the long term and respond to market demand. So, we've been in touch with our auto customers and feel good about the outlook.
Again, we still have to see what comes out of the USMCA renegotiation and all that, but we feel we're constructive in our view.
Again, if you would like to ask a question, press star one on your telephone keypad. I will now turn the call back over to Héctor Ibarzábal, the CEO of FIBRA Prologis, for closing remarks.
Thank you for your attention to our FIBRA Prologis 2025 first quarter call. We appreciate your interest in our project. As you all know, we're always available to provide any additional information or to eventually arrange a visit to any of our markets. Muchas gracias.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.