Good afternoon, and welcome to the 2025 First Quarter Fibra Mty Conference Call. All information presented in this conference is proprietary, and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. It is important to note that the presentation related to this conference is available at www.fibramty.com, and recordings of the call will be available on the website of the company in the next two hours. If you are connected using our webcast tool, you will have the option to download the presentation in order to move the slides at your own pace. Let me remind you that the information discussed on today's call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risk and uncertainties.
Additionally, during this call, we may refer to certain non-accounting financial measures. Actual results may materially differ, and the company advises not to rely on these forward-looking statements. Fibra Mty undertakes no obligation to publicly update or revise any forward-looking statement. With us this afternoon from Fibra Mty, we have Mr. Jorge Ávalos, CEO, Jaime Martínez, CFO, Javier Llaca, COO and CIO, and Eduardo Elizondo, Legal Counsel, and César Rubalcava, investor relations. They will discuss the more important strategic, financial, and operating aspects of the quarter. I will now turn the call over to Mr. Jorge Ávalos.
Thank you, Rob, and thank you everyone for joining our first quarter 2025 conference call. Let me start by addressing the recent announcement from the U.S. government regarding reciprocal tariffs and their potential impact on global trade. In this evolving environment, Mexico and Canada continue to benefit from the USMCA, which allows zero tariffs on exports that meet origin requirements. Economists estimate that 90% of Mexico's exports already comply with these rules. That said, uncertainty remains. The current U.S. administration's trade stance has weighed on investment sentiment and contributed to a decline in foreign direct investment compared to previous years. Although the USMCA is set for review in 2026, discussions are expected to start earlier due to the shifting trade environment. This could help reduce uncertainty for manufacturers and investors. Continued tariff-free trade under the agreement supports long-term commitments to Mexico, especially in the industrial real estate sector.
Against this backdrop, our strategy is well-positioned. Most of our leases are long-term and U.S. denominated, and tenants who have operated in Mexico for many years. Also, our recent acquisition in Mercado Libre as a tenant, we have increased an exposure to e-commerce, which have a strong domestic focus and can offer resilience in the face of external trade pressures. Turning to our property performance, same property NOI grew 24% compared to first quarter 2024. This was further supported by nearly 30% year-over-year increase in the fair value of investment properties, excluding acquisitions, reflecting strong asset quality, operational efficiency, and solid lease structures. We believe Mexico industrial market fundamentals remain strong and may continue to offer compelling opportunities. With approximately $100 million in investment capacity, we are ready to act selectively and with discipline. Javier will go into more detail shortly.
Lastly, we've made steady progress in our sustainability agenda. We've exceeded our target in the S&P Global Corporate Sustainability Assessment by 15%, ranking in the top three nationally in our sector. We also improved our GRESB score by 5% and maintained our Green Star rating. In addition, we strengthened our scores under the UN PRI framework and continue to be certified by the Great Place to Work in Mexico, reflecting our commitment to both governance and people. Thank you again for your trust in Fibra Mty. Javier, please go on.
Thank you, Jorge, and good morning to everyone. Before going through the webcast material, I'd like to briefly share some recent insights from our conversations with tenants. Over the past few weeks, we've stayed in close contact to better understand how they're seeing market conditions on the ground. So far, we haven't identified any major concerns related to tariffs. Tenants remain confident in the strength of U.S.-Mexico trade integration. We've also received no requests for early terminations, reductions in space, or delays in signed expansions. Moving up to our commitments made during the March 2024 follow-on, presented on page three of the webcast material. We have committed a total of $477 million, representing the full amount of the offering and about 70% of the $700 million we expected to deploy. The weighted average cap rate and yield on cost of these acquisitions and expansions stands at 7.9%.
One key update is the upcoming second closing of the Batach portfolio for $73.4 million, expected in the second quarter and subject to certain administrative processes from the seller. I'll also provide more detail on the recently announced Mercado Libre transaction. Regarding the divestment of underperforming office properties, there were no changes during the quarter. We continue to expect a full close of the Fortaleza transaction during the second quarter of this year. Separately, we have initiated the marketing of the rest of the remaining non-industrial properties with a pool of institutional brokers, and have already received offers exceeding MXN 1 billion. We are currently negotiating terms of such offers, and when applicable, we'll seek the necessary corporate and regulatory approvals. We will keep the market apprised on the process. Jaime will cover the third commitment on liquidity later in the call. Moving on to page four of the presentation.
On April 9, we completed the acquisition of the Mercado Libre facility in León, Guanajuato. As you can see on the screen, this is a Class A building of roughly 900,000 sq ft, developed as a built-to-suit project about a year ago. It is fully leased to Mercado Libre, with seven years remaining on the lease and an additional three-year extension option. The lease is dollar-denominated, with scheduled escalations based upon U.S. CPI. The purchase price, excluding taxes and closing costs, was $106 million, including rights to future energy capacity. The asset is expected to generate an NOI of $7.6 million during the 12 months post-transaction. With this addition, Mercado Libre becomes our top tenant by revenue in the industrial portfolio.
Also, the transaction allows us to increase logistics exposure from 18% to nearly 23%, further diversify our footprint while maintaining a large presence in border markets, extend our industrial portfolio's WALT from 5.5- 5.6 years, and lower the average age of our industrial assets from 13.1 to 12.6 years. As Jorge Ávalos mentioned in his opening remarks, this investment also strengthens our presence in sectors more reliant on internal market and consumption, and therefore less exposed to global trade volatility. Slide five summarizes our capital deployment progress and remaining firepower. On one hand, as we mentioned before, we have deployed $477 million out of our $700 million target, leaving $223 million remaining. Reaching this target would bring our loan-to-value to about 30%, excluding asset recycling.
As for the potential acquisition capacity, we estimate up to $200 million in additional capacity to reach our 35% LTV ceiling, bringing total firepower to $417 million without needing to raise any equity. If we include potential proceeds from the office property sales, estimated at about $376 million, our total firepower could reach $793 million, giving us meaningful flexibility to continue reshaping our portfolio. As always, I will be more than happy to address any questions you may have during the Q&A section of the call. I want to take a moment to briefly talk about some of the market highlights as of the end of the first quarter of 2025, taken from the CBRE Commercial Real Estate Market Outlook of March for the 13 primary markets in Mexico, shown on page six. We have seen a slight increase in overall vacancy rates from 3.7% to 4.3%.
Ciudad Juárez remains the most challenging market, with a vacancy above 10%. We currently have no exposure to the Juárez industrial market and expect limited improvements there in the short term. Net absorption remained low at less than 600,000 sq m , signaling continued slowdown. Developers are responding by pulling back on speculative supply on some markets. Construction volume reduced slightly from the previous quarter and now represents six quarters of net absorption. We believe the market remains in a wait-and-see mode for both developers and tenants, and we should expect activity of construction and leasing of new space for most of the remaining of the year to stand around 25%-30% lower than 2024.
As we have mentioned in previous calls, and as vacancy rates continue to increase, our portfolio becomes more resilient, supported by the length of our current WALT, and provides visibility and stable cash flows, allowing us to face a potential turn on the cycle. While this environment has extended our original deployment timeline, it may also present attractive opportunities, which we aim to pursue with a selective and disciplined approach. Based on current marketing dynamics, our strategy, shown on slide seven, focuses on four key areas. One, to maintain close engagement with tenants to proactively support their evolving needs with our facilities, strengthening long-term partnerships. Two, to prioritize stabilized investments in core industrial markets with minimal exposure to current macroeconomics headwinds. Three, to continue to focus on strong fundamentals, including inflation index, U.S. dollar-denominated leases with long WALTs. Lastly, to remain highly selective with new investments.
Evolving market dynamics could present more attractive entry points. Moving to our properties performance, slide eight highlights a 24-year-over-year increase, growing from MXN 552 million in the first quarter of 2024 to MXN 685 million in the first quarter of this year. This MXN 133 million variance is explained by the following. MXN 29.7 million reduction from net vacancies. MXN 22.6 million increase from inflation adjustments and new leases. MXN 21.2 million increase from rent commencement on expansions. MXN 99.2 million increase driven by FX fluctuations, and an increase of MXN 19.3 million from non-recurring revenues. Same property NOI margin increased from 91.2% to 91.7%. After including Aerotec and Batach acquisitions, as well as the sale of the Axtel building, NOI increased by an additional MXN 94.7 million, reaching a total NOI of MXN 779.3 million for the quarter. Portfolio-level NOI margin rose by 110 basis points to 92.3%.
Pages nine through 16 present updates on our expansion projects, including recent site photos. Five projects have been delivered, totaling nearly 580,000 sq ft of GLA, with a total investment of $38.3 million and a yield on cost of 10.2%. Two additional projects are underway for totaling around 260,000 sq ft of GLA, with a total investment of $15.7 million and a yield on cost of 9.3%. One of these projects will be beneficially delivered to the tenant today. All together, the seven expansion projects represented 840,000 sq f t of GLA, a $68 million investment, and a weighted yield on cost of 9.9%. We continue to make progress in the negotiation of an additional $27.1 million. We feel optimistic on being able to close most, if not all, of these projects in the next few months.
Jumping to page 17 of the presentation, we show the variation in our portfolio's appraised value year-to-date. Valuation increased by MXN 700 million, explained by MXN 700 million increase given the performance and enhancement of the same properties portfolio. MXN 100 million from capital expenses, MXN 100 million from completed expansions, and an offset by MXN 200 million due to FX fluctuations adjustments. As of March 31st, our portfolio stands at MXN 38.8 billion. All the things being equal, MeLi León acquisition completed after quarter ends, this figure will most likely exceed MXN 40 billion. On page 18 of the presentation, I would like to address the temporary decline on occupancy of our office portfolio from 75.1% to 73%, driven by certain departures for approximately 100,000 sq ft . The impact is more pronounced on the same property basis as it excludes the Axtel property which was fully vacant.
That said, post-quarter, we signed a new lease for over 72,000 sq f t in one of our office buildings in Monterrey, the largest office transaction after the pandemic in the local market. This deal alone will lift office occupancy to 76.5% with further upside pending current negotiations. As we continue divesting our non-industrial portfolio, this metric is expected to improve over time in relative terms. To end my piece of the presentation, and on page 19 of the material, you can see our KPIs at the end of the first quarter and prior to MeLi León acquisition. Industrial assets now represent over 78% of total revenue. Monterrey leads with 42% of revenue, followed by Guadalajara, Querétaro, and Guanajuato at 26.5% all together. Portfolio occupancy in terms of potential revenue remains above 93%.
84% of rental revenues comes from dollar-denominated leases, and the weighted average lease term for the combined portfolio is 4.9 years, with more than 46% of our income starting to expire in 2030. For the rest of 2025, lease expirations total 5.8% of revenue, with 4.5% from industrial and the remaining 1.3% for office. We expect little turnover and therefore marginal potential lease rents. Higher expiration volumes in 2026 and 2027 begin almost entirely from being entirely from industrial revenue with roughly 21%, offer potential for revenue growth and revaluation potential. With that, I'll hand it over to Jaime for the next section of the call. Go ahead, Jaime.
Thank you, Javier, and thank you all for joining the call. It's been just over a year since our most recent equity issuance. I'm pleased to report that through March 31st, 2025, our shares deliver a total return of 11.1%, outperforming both the Mexican Stock Exchange Index and our peers. Despite the recent rally, our valuation remains attractive, as I'll address in a moment. Average daily trading volume has also increased significantly compared to historical levels, especially after Fibra Mty were included in the FTSE index during March rebalancing. Since then, our certificates have shown a relatively defensive performance despite broader market volatility. We believe this highlights investors' interest in vehicles offering stable inflation-linked cash flows with long-term visibility, mostly in U.S. dollars.
In response to the increased demand for the FTSE rebalance, we issued 3.2 million shares from our buyback program, generating a gain of roughly MXN 6.5 million. These proceeds may be used for additional repurchases depending on market conditions. For the quarter, we buy back a net of total of 8.8 million shares, 12 million repurchases, net of 3.2 million reissues. We'll continue to use this tool to drive value for investors, either through AFFO accretion or to support market liquidity during periods of imbalance. Going back to the valuation, at the quarter end, our certificates were trading at MXN 11.77, reflecting the same 16% discount to book value and above 9% AFFO yield. We remain confident that our disciplined buyback activity adds long-term value. As in previous quarters, we've included a valuation sensitivity analysis under different FX scenarios for reference. Now, turning to results.
AFFO for first quarter 2025 totaled approximately MXN 650 million, marking over 40% year-over-year growth. This was mainly driven by the Aerotec and Batach acquisitions, contributions from expansion projects, and FX tailwinds, as Javier mentioned earlier. Before we move to Q&A, I'd like to note that our capital structure remains stable. We have ample flexibility with around 2.5 years of the nearest material maturity and sufficient credit lines to pursue new investments. Recently, Fitch Ratings reaffirmed our global scale credit rating at BBB- with a stable outlook, maintaining Fibra Mty's investment-grade status, a key factor in keeping a competitive cost of debt. In its report, Fitch highlighted our consistent strategy, asset quality, stable income profile, and prudent leverage, along with the positive impact of recent acquisitions. These factors are particularly important in today's macro environment and reflect our focus on maintaining a competitive cost of capital.
With that, Rob, please open the floor for questions.
Thank you. Ladies and gentlemen, to ask a question, please press star one on your telephone keypad. If you are connected using our webcast tool, please write your questions in the chat section of the platform. Our first audio question comes from Francisco Chavez with BBVA. Please proceed with your question.
Hi. Thanks for the call and congrats on the good report. My question is regarding the office segment. If you can elaborate on the dynamics of the office market, and particularly in Monterrey, and how these dynamics impact or benefit the plans for divestments of the entire office segment. Thank you.
Thank you, Francisco. Nice talking to you. This is Javier. Well, we have seen a slight pickup on demand on the office market in Monterrey. Proof of that is the 72,000 sq ft transaction that we just closed on. We see a slight increase, generally speaking, but there is a lot of gross absorption and less net absorption. That means that there is a lot of lateral movement from some tenants applying to quality on some of their space. We believe that is going to continue to be the trend. But specifically for us, this transaction in particular and this pickup on occupancy that we are going to experience in the short term in our office space are going to allow us to increase our pricing for the disposition of those assets.
Selling a building half empty has a totally different valuation than have a building fully leased with contracts dollar denominated, and by the way, for 10 years term. That is going to impact positive on our divestment program. But in general, we see the office market in general pretty much stable, still recovering with low levels of net absorption.
Thank you, Javier. Just to follow up, you mentioned that you have always received some offers for your office building. Can you comment on how is the valuation? How does it compare with the book value?
Of course, without going into too much detail that we can't, I can tell you that the offers that we are entertaining right now, that MXN 1 billion offers, to be specific. The offers in terms of pricing stand at or above book value, which is our premise, our priority. If we were to reach terms and conditions that are currently being negotiated, we expect the bulk of that probably to be closing before the end of this year. Those offers that we have on the table right now are for performing, but underperforming, mostly office buildings. Obviously, the outperforming and the performing properties are being more tough on pricing, if you allow me the expression. But that MXN 1 billion that we mentioned on the call are at or above book value right now.
Great. Thank you.
Our next question comes from Kiepher Kennedy with Citi. Please proceed with your question. Kiepher, you're live with our speakers. Are you muted?
Can you hear me?
Yeah, I can now.
Yep.
You're live with the speakers.
Okay, great. Thank you. Just regarding the vacants matter, you said that Juarez is the most difficult market right now. The vacants there is 10.7%, and not a good expectation in the short term. I was wondering if you could share with us, how are the conversations with tenants over there? I would like to get a better sense of their, let's say, behavior. Insights here would be very helpful. The other question is regarding capital allocation. You have, as you said, almost MXN 780 million, MXN 793 million actually, total firepower if we include the office divestment. I just want to get a better sense of what we should expect here. Thank you.
Sure. Thank you, Kiepher, for the question. First of all, regarding Juarez, we do expect a slight but slow recovery in the following quarters in the market. What happened with Juarez was the combination of three factors. Earlier, scarcity of energy, which we understand. It is our understanding that that has improved a lot in the last few months. There was a drop in demand and an increase on offer. It is a typical case of an oversupplied market right now. Just to clarify, we have no exposure, we have no properties in Juarez. Therefore, that conversation that you ask about our tenants concern wouldn't apply here because we have no tenants in Juarez, and we're looking into some opportunities.
The other was the deployment of the $800 million.
Oh, sorry. The deployment, we're looking at a pipeline of about $600 million right now. We're being extra cautious right now, particularly around pricing and sectors of the tenants. As we mentioned before during the call, the timeline for execution of the $700 million has been delayed because of the current environment. We're not in a hurry. We're looking at very interesting opportunities, and we want to be extra careful with those potential transactions. We could expect, I'm not going to any amount or timeline, but we could expect to be looking at serious transactions, some of them before of the year at least, to reach an agreement with the seller.
Okay. Thank you very much.
Our next question comes from Igor Machado with Goldman Sachs. Please proceed with your question.
Hi. Thanks for taking my question. I would like to understand what drove the 50% premium in lease spreads for the industrial portfolio, and how are you seeing leasing spreads going forward. That is it from my side. Thank you.
Of course, Igor. Nice talking to you. As we said, during this year, we expect none or little positive lease spread because of the small percentage of expirations that we have this year, and there is going to be very little, if no turnover on those. Current in place to market has an upside between 10% and 15% on the leases that are soon to expire. So we can mark to market those. Additional revenue growth could be expected if we do additional tenant or property improvements that amortize throughout the lease. Something that we have been very vocal on is that we try to have a weighted average CapEx rate then deals on cost as a result of the combination of the acquisition of stabilized assets and expansions and build-to-suits. So that is going to continue to be pretty much the dynamic.
Thank you.
Our next question comes from Jorge Vargas with [GBM]. Please proceed with your question.
Hi. Thank you for the call, and congratulations on the results. You mentioned that some expansion projects have been momentarily postponed due to international trade uncertainty. Could you elaborate on how you are reprioritizing development projects and what would signal a green light to resume? A second question, please. SG&As grew over 43% year-over-year. You noted this was due to new hires, salary inflation, and advisory services. Should we expect this trend to persist in the coming quarters, or was this more of a one-off spike? Thank you.
Thank you, Jorge. In regards to your first question on expansions, yes. We have, not shown on the presentation, some expansions that are currently on hold from a large tenant that we expect to have a better light in the next, I would say, three months. We are fairly optimistic about those projects to come alive again. On your question on how we prioritize our development, the answer is pretty simple. We prioritize our development when there is no speculative component on that. Those are the expansion and the build-to-suits. We have done plenty of those, as you saw on the presentation. As turmoil reduces, we expect to continue to have those. We prioritize our existing tenants and those developments that do not include development risk at a high level.
Commercial risk.
Obviously, there's no commercial risk as you have a binding agreement prior to start spending the investment on the development.
Regarding the SG&A, what is important to mention is, I would like to talk about two things. The first one is that expansion in our assets has been significant, so we have to increase our headcount and some expenses related with that. For that, sometimes you can see some slight increases. What is important is that we are below the 0.7% of the value of the asset, which is important. As we have an internally managed structure, as we grow in terms of assets, we are still reducing our percentage of the SG&A. Regarding your question, and being concrete, we don't expect that to grow significantly because of that conditions. What we expect in terms of relative to the assets, it's more a reduction than an increase.
Okay. Thank you very much.
As a final reminder, please press star one at this time for any questions.
We have some questions in our webcast, too. The first one comes from Edson Murguía, and he asked: Regarding the MXN 1 billion office offers that you have received, what is the timeline? Could you give us some more color about the type of properties to be sold?
Thank you. Thank you, Edson. I think we covered that already on one of the previous questions. If there were additional questions, please let us know.
Yes. We have a second question from Edson. Regarding the offices, is the strategy to sell all the office space, including the performing offices?
Well, yeah. I think we also covered that. Let me give you more detail. The short answer is yes. We are planning on selling all the office space with exception of those offices that we have within any of the industrial complexes. But the idea is to sell performing and non-performing properties. In regards to the performing and outperforming properties, we already launched a marketing effort with institutional brokers. Those processes are going to probably take longer because it is going to be a lot more competitive process from the investors. I do not have a timeline for that. As we have said in past calls and conferences, we would expect by the end probably of 2026 to be done with the recycling of the non-industrial properties.
Thank you. We have one last question from Edson Murguía. It is regarding the Puebla early lease termination lease. Could you give us more color about it? Is something related to the tariff turmoil?
No, it had nothing to do with the turmoil. It was an early termination that, by the way, the agreed terms was very beneficial for us. That property is about to be leased again. It involved a penalty that covers for potential downtime, which we do not expect to be too long. But no, it had nothing to do with the tariff turmoil.
Thank you. Now we have a question from [Alberto León Santa Cruz], and he is asking, "For future expansions, will you focus on the Northeast, or maybe you would prefer invest in the Bajío areas?
Hello, Alberto. Well, our strategy continues to be northern markets.
Bajío and central markets. We do not have a specific target in terms of areas. Of course, we are active on the Northeast, particularly in the Tijuana market. We are looking at some secondary markets in the area. We like the Chihuahua and Juárez markets. We have not found anything that we like enough, but our strategy is going to continue to focus on those markets that I just mentioned.
Thank you. We have one last question in our webcast. It is from [Luis Fernando Maldonado], and he is asking, "Regarding the industrial segment and the outlier data of Juárez in vacancy rates, do you see tendency for higher vacancy rates in other border cities in the next years?
Well, I wish I could talk for the next few years. I cannot. But at least in the short term, for the remaining of the year, we should expect an increase on overall vacancy rate, not only for border markets, for the all 13 markets. I do not believe that increase is going to be material. I believe that as the turmoil starts to dissipate, it is going to be less aggressive, the increase on the vacancy rate. But I believe that the overall fundamentals of the industrial reset market in Mexico still remains strong. Firstly, nearshoring continues to be a long-term. I am sorry, I heard some noise. Firstly, nearshoring continues to be a long-term structural trend, and while there may be some short-term adjustments, the underlying demand looking is strengthened, the North American supply chain remains intact. Additionally, we believe that vacancy rates are still generally healthy across all markets.
Thank you.
We have an audio question from Francisco Suárez with Scotiabank. Please proceed with your question.
Hi. Thank you for the call, and thank you for the wonderful discussion that you guys are providing. Very appreciated. My question relates with. It is actually an unfair question. Given that chances are that market conditions will continue to deteriorate a bit until all the dust is settled, as you just have said, is it fair to assume that you will be even more diligent on the pricing on the potential targets that you may be looking at, because chances are that valuations are likely to go south in the following quarters?
Hello, Francisco. Nice hearing you. Yes. The short answer is yes. As I said before, we are being extra cautious and more diligent, as you say. I love the expression, and particularly in terms of pricing. I do not see a huge expansion on cap rates from quality investments. There could be some in some specific market. We are very careful on how the entry prices of what we acquire combines with the rest of the strategies that we discussed on investments, including development. But yeah, we are being extra careful. As a matter of fact, we just discarded a small investment in Bajío because we did not like 100% of what we saw on due diligence. So we are being extra careful, and we are going to continue to be extra careful moving forward.
If I may, any changes on your thresholds on IRRs, on targets?
No, any changes because, with the uncertainty of how rates are going to look in the short term, it is hard to tell. We have been talking to our appraiser in terms of discount rates, which are somehow related to. Not somehow. Directly related to our underwriting and our DCF approach. We do not see any changes on discount rates and therefore on the threshold.
Got you. Thank you so much. Congrats.
With no questions in queue, I would like to turn the conference over to the management of the company.
Thank you, Rob, and thank you everyone for this conference call. We will speak to you next quarter. Thank you. Bye-bye.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.