Ladies and gentlemen, thank you for standing by. I would like to welcome you to Fibra UNO's Third Quarter 2024 Results Conference Call on the 30th October, 2024. At this time, all participant lines are on listen-only mode. The format of the call today will be presentation by the management team, followed by a question-and-answer session. Without further ado, I would like to pass the line to the CEO of Fibra UNO, Mr. André El Mann. You can go ahead, sir.
Thank you, Mike. Thank you very much. Thank you, everybody, for listening to our call. We are very excited to discuss the results of the third quarter of 2024. Yet again, we posted very interesting results yesterday. We are very excited about another breaking record income line, another breaking record NOI line. We are very excited and very enthusiastic about these numbers that we provided yesterday. Before I turn the mic to Jorge Pigeon to discuss the numbers, I just want to tell you that I am very fond of looking at things in perspective. I like very much to look at what we have done and we have said in the past, and having done that, we have been achieving everything we had set our eyes on since inception.
We have more than 55 quarters with record-breaking income line, which for us means a very proud moment for all of us at the company, being able to deliver these results to all of you, our appreciated investors. I think that in the future, our numbers will only go better and better. We will strengthen up our position. I think that you will find that the rest of the sectors that were not in the spotlight in the last few quarters are beginning to bring a lot of strength and support to the company. I am referring to the office sector and to the retail sector. That will give us very pleasant surprises in the next coming quarters.
We have seen and we have been feeling that the strength of the accounts receivable, the strength of the invoicing of this particular couple of sectors, have been giving us a lot of strength. You will see through the quarters, as time passes by, that the company is indeed very well-designed, very defensive design. We have a very defensive design in our company, and you will see that all of our numbers will only improve through time. We are very happy about the result that we delivered yesterday, and I will pass now the mic to Jorge to start with in-depth look at the numbers. Jorge, please.
Thank you very much, André. Thanks, everybody, for joining the call today. Now, I will start to dig into the quarterly MD&A as usual. Starting with the revenue top line. We are very happy to see that year-over-year, we had an increase of 11%, which is obviously material, and we are very happy to see that. We are also very happy to see that on a quarter-to-quarter basis, our revenues increased 5.1%, topping the MXN 7 billion mark with MXN 7.16 billion. This is mainly attributable to a combination of an increase in the GLA of the office portfolio, the retail portfolio, and the industrial segment. We are humming on all eight cylinders, so we are very pleased to see that.
Rent increases resulting on inflation pass-through to our tenants in active contracts, rent increases in lease renewals. Also, we started using some of the reserves that we created for the Hurricane Otis a while back. We started using some of those reserves this quarter. In terms of occupancy, the overall occupancy for the portfolio is 95.3%. Those of you who have been following Fibra UNO since our IPO may recall that we have always said that the target of the company is to be around 95% occupancy. So we are very pleased to see that we are at that 95.3% mark. That is 10 basis points higher than the previous quarter. On a segment basis, the industrial portfolio is 10 basis points above the previous quarter at 98.4%. The retail portfolio continues to increase its occupancy.
We are now 10 basis points above the previous quarter at 92.7%, almost getting to the 93% level in the retail segment. The office portfolio continues to have pleasant surprises in terms of occupancy, 70 basis points above that of the second quarter at 83.5%. The other portfolio remains stable at 99.2%. As I was mentioning from an occupancy point of view, we are humming on all eight cylinders. Very pleased to see, in particular with the office segment, which we have been getting reiterated questions and concerns from investors. I believe we have been saying this for the last, I do not know if it has been a year and a half or so, that we expected our portfolio to recover from the 75% or so that we were back then to around 80% by year end 2023.
We met that mark, and then we guided the market that this year we should be somewhere in the neighborhood of 83% to maybe 84% or even 85% by year end. Let us see how the portfolio continues to behave. We also said that we did not expect to see price tension in the office segment just yet. We need the market to catch up for that price tension to happen, so we are not there yet. We continue to expect to see, let us say, flattish rents, and we expect to continue to see occupancy gains in our portfolio. Moving to operating expenses, property taxes, et cetera. We saw an increase of MXN 27.5 million, 3.3% compared to the second quarter. That seasonality of some expenses as well, and increases above inflation in some materials and services.
There continues to be some inflation lagging increases in some of the services and materials that we're buying. Obviously, it's lower than what we have seen in previous quarters, so we're hopeful that is going to be something that's going to be contained. At the end of the day, this leads us to a net operating income that increased by almost MXN 300 million, or 5.7% versus the second quarter, reaching MXN 5.412 billion. NOI margin calculated over rental revenues stood at 83.6% and 75.6% compared to total revenues. Interest income and interest expense, we saw an increase of MXN 206.4 million, 8.1% compared to the previous quarter. This is mainly a combination of factors. First off, the exchange rate depreciation of the peso, which went from 18.22 to 19.62, basically 7.7% increase in that line.
This obviously had an effect on the U.S. dollar-denominated interest expense portion of the interest line. Lower capitalization of interest of down to MXN 400 million. Obviously, the impact of the pricing of derivatives, which has to do with changes in the value of the peso as well as rates. This leads us to an FFO controlled by FUNO that increased by 93.6%, or 4.3% compared to the second quarter, to reach MXN 2.279 billion. Same FFO, AFFO, sorry. On FFO and AFFO per CBFI. Since we did not issue or repurchase any CBFIs during the quarter, we ended with 3.8 billion CBFIs outstanding. FFO and AFFO per CBFI were MXN 0.5975 per share. That's an increase of 4.2% compared to the previous quarter for both FFO and AFFO.
In terms of the quarterly distribution, we decided to distribute a little over MXN 2 billion, basically MXN 2.002 billion , which corresponds the distribution 90% is reimbursement of capital and 10% is fiscal result. It's equivalent to a quarterly AFFO payout of 87.9%, and that's MXN 0.5250 per CBFI. Moving to accounts receivable, we closed the quarter with MXN 2.7 billion, a marginal increase of MXN 19 million, or 0.7% from the previous quarter.
Basically, as André El Mann mentioned, normal course of business, and a solid management of accounts receivable. In terms of investment properties, the value of our properties, including those denominated as financial assets, as well as investment in associates, increased by MXN 3.4 billion, or 1% compared to the second quarter of 2024, which is a result of a combination of factors. First off, obviously, the fair value adjustment that includes financial assets and investments in associates.
The acquisition of the first portion of the CBFIs of the CKD Helios. If you recall, we did not buy Mítikah, but we bought the CKD. Normal progress in construction of projects under development. Mainly, the Satélite project, which is now Samara Satélite, as well as CapEx invested in our operating portfolio. In terms of debt, total debt for the third quarter stood at MXN 145 billion compared to MXN 138 billion recorded the previous quarter. This variation is mainly or primarily, largely due to the FX depreciation of 7.7%, which went, as I mentioned, from 18.22 to 19.62 per dollar. All of the above had an effect on our total equity of a decrease of MXN 4 billion, - 2.1%, for the controlling non-controlling interests as of the third quarter of 2024.
As I mentioned, mainly due to the net income, which is shorter than a quarterly loss from the FX depreciation during this valuation, shareholders distribution for the second quarter results and the employee compensation plan. Moving to the operating results, leasing spreads for contracts renewed in pesos were 900 basis points or 9% for the industrial segment, 800 basis points or 8% for the retail segment, and 490 basis points or 4.9% for the office segment. We are happy to see that we are being able to increase some of the rent level in some of the contracts that we have in the office sector. In terms of dollar-denominated lease renewals, rent increases were 1,560 basis points or 15.6% for the industrial segment. Very solid leasing spread for the industrial segment.
Obviously, I would like to highlight that, in particular in this segment, as you all know, we are primarily a company that is based in the, I am going to call it, logistics hub of the country, which is the center of the country. Mostly Mexico City, the State of Mexico, Toluca, et cetera. This is a market where it is a very tight market. Market rents continue to increase. We continue to see pent-up demand in this market in particular. Obviously, it is showing in our ability to increase some of the rents in that segment. In terms of the retail segment, we had 750 basis points or 7.5% in dollar terms. We had -4.3% in the office segment. In terms of constant property performance, the rental price per square meter for constant properties increased by 5.3%, almost 6%, compared to an weighted annual inflation of 4.3%.
So, 1.5% above inflation in real terms for our constant properties. Again, as André was mentioning, if we look at the performance of the company since the pandemic, our revenues have increased roughly over 40%. Our GLA has only grown about 8%, which means that the growth of the company is coming mainly from, obviously inflation pass-through, but constant property performance. At the sub-segment level, total portfolio annual rent per square foot increased from $11.40 per sq ft to $11.7 or 2.5% compared to the previous quarter. Mainly due to increases in contracts and contracts renewals, as well as the FX depreciation that we have already mentioned. NOI at the property level for the quarter increased 4.5% compared to the previous quarter. Variations in the different segments were mainly the following. For the industrial segment, logistics NOI increased by 5.5%. Light manufacturing NOI increased by 8.6%.
Business parks increased 1.5%, and this is solely mainly due to rent increases renewals, FX depreciation on the U.S. dollar-denominated contracts. The office segment's NOI increased by 0.8%, which is mainly due to the occupancy gains. As we mentioned, the rent level we have expected to remain flattish, so it is mainly due to occupancy. The retail segment, we had different performances. For the fashion malls, we saw NOI increase by 16.7%. Standalone increased by 1.6%. Regional center remains stable versus the previous quarter. The other segment increased by 2.5% due to seasonality, mainly of the hotel's variable income. With this, I finish the commentary on the MD&A, and Michael, we open the mic for Q&A.
Thank you very much for the presentation. We will now be moving to the Q&A part of the call. If you are dialed in via the telephone and have a question, please press star two on your keypad. That is star two on your keypad and wait for your name to be called. If you are dialed in via the web, you may also ask a voice question. We will now give a minute for questions to come in. The first question comes from Mr. Francisco Chávez from BBVA. Please go ahead, sir. Your line is open.
Hi. Thanks for the call and congrats on the numbers. I have two questions. The first one is regarding the NOI margin. We saw a slight sequential recovery, but margin is still far from where it was a year ago. What can we expect from your cost reduction initiatives and for the NOI margin? The second question is on your cash distribution. I noticed that the bulk of the distribution is capital reimbursement. Wouldn't it be more efficient for you to retain cash and decrease leverage? Thank you.
Thank you, Francisco. First thing first, of course, it would be beneficial to retain the cash, but we have, as you and I have said in the past, different constituencies. We have dedicated investors to return and dedicated investors to growth. We are trying to follow a very predictable path in terms of the distribution. Of course, I would like to diminish the debt. I think that the debt ratios will show a stronger position through time. It has been showing a stronger position because our growth in income and our growth in NOI is running faster than the debt. I think that we will end up at a time where it is easier and easier to have the debt covered, and then we can talk about retaining for the purpose of diminishing the debt.
Of course, it would be nice to have lesser debt, but I do try to take care of all of our different constituencies. About the margin, this is work that we have been doing for more than a year now, in which we are trying to cut the expenses and make thinner the company. I think we are finally seeing some of the results about that. Thank you for the question.
Thank you.
Thank you very much. Next question comes from Mr. Pablo Ricalde from Itaú BBA. Please go ahead, sir. Your line is open.
Hi, good morning, FUNO team. I have two questions. The first one is on the asset sales. I do not know if you can provide an update on what do you think on asset sales for 2025? I saw that the number decreased versus the second quarter, so I do not know why this number changed. That is my first question. The other is on the office occupancy. I do not know if you continue to see achievable reaching an 85% occupancy before year-end.
Well, in terms of the sales, there is a reduction. As you know, we are not actively reselling assets. We are just hearing unsolicited offers. What we have been showing is what we have on the table. What we have promised in the past, it was a few less than the one we had previous to this. What we have on the table right now is MXN 200 million, which I think is achievable, and that is what we consider that we would be able to close in the next two quarters. All of these are above NAV. That is what we are pursuing. Two of them are retail assets. One of them is industrial, which by the way, is almost done. We will be releasing detailed information on this transaction on the Investor Day.
But just to give you a sense, it's above 2x what we acquired it for and 1.7x book value.
In terms of your other portion of the question, which was whether we expect to get to 85% in the office sector, obviously that's a goal. That's what we're working on. We make it look easy when André mentioned a few quarters ago that we were going to get to 80% year-end, and we got a lot of skepticism on that, and we got there today. We are above 83%. There's movement in the market. Do we expect to get there? Obviously, we're going to make every effort to get to 85%. Can't guarantee that we're going to close the year at 85%, but I think 83.5% is pretty solid coming from 75%. But one thing that I can assure you is that we're going to work very hard to get there. I don't know if we're going to get to 85%, but we'd love to.
But we're going to try.
Sure, we're going to try.
I think that it's important to address that even we're towards the occupancy, you can get to the occupancy reducing the prices, which is not the game we are playing. Even it's just 20 basis points, we're increasing our rents. So it's both things. We're increasing rents and increasing the occupancy. So if just the target was going to be getting to 85%, we could reduce prices. I'm pretty sure that we will be getting there, but that's not the game.
Actually, when we addressed that we wanted to get to 85% a year or a year and a half ago, everybody thought we were crazy. We were crazy optimistic. I think we were, but I think we are reaching the number that we provided at that point in time. So we're feeling very optimistic about the office sector right now.
I think that the lack of supply during the past few years will make the market better and better, even though that the added to the condition that all of the companies or most of the companies are trying to get their people back to the office five days a week, at least in Mexico, that's the trend. So I think that we are feeling optimistic as we were a year and a half ago when we were crazy.
Perfect. Thanks, André.
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Thank you very much. The next question comes from Mr. David Soto from Scotiabank. Please go ahead, sir.
Hi. Thanks. Congrats on the results. I just have a couple questions regarding the CKD Helios acquisition. The first one is, could you provide some color about the first payment that you did? Was it funded with FUNO's cash or with cash from the CKD? Also, could you walk us through the funding resources that you will be using for the acquisition? And should we expect this acquisition to be fully paid by the second quarter of 2025?
Thanks, [Soto]. Let me take a stab at answering the question. When we bought the CKD, we roughly bought that CKD with about MXN 1.5 billion or MXN 1.8 billion in cash. An account receivable for already sold apartments of about MXN 1.6 billion. More like MXN 2 billion, but thereabout, more or less. And we paid in kind about MXN 750 million. Basically, we do not need cash to fund those portions. Now, we do need the difference between the sum of the numbers I just gave you, about MXN 2.2 billion, MXN 2.4 billion in additional debt to meet the MXN 7 billion target. When you look at the FUNO consolidated level, obviously, the cash is fungible at the treasury level, and there are other needs that we have, like investing in the portfolio, et cetera. So you may see borrowings.
But the first payment that we made is MXN 1.25 billion or MXN 1,250 million for the first payment. And it should be done in the next 12 months.
Perfect. Thanks.
Thank you very much. Next question comes from Felipe Barragán from BTG Pactual Asset Management. Please go ahead, sir, your line is open.
Hey, good afternoon, FUNO team. Thanks for the call, and congrats on the results. My question is on updates on the phase two of Mítikah. I remember that you guys were thinking about either going further into residential or maybe having that split with office. Given the uptick in office, I am not sure what you guys are thinking on, if there is any updates on that. Thank you.
Sure. As you know, we have about 100,000 sq m to be developed on phase two. We haven't made a final decision as to what exactly to do because we had, as you know, an incredibly successful condo operation in the apartment tower. There is an analysis that we have to run to see if it makes sense to use some of those 100,000 sq m for condos. As André mentioned, we are optimistic in the office sector. There has been virtually zero supply since Claudia Sheinbaum entered as a mayor or governor of the City of Mexico. Basically six years with zero new supply.
We believe that as a country of our size, we will need more office space than what we have today. As you know, we always look at real estate over the very long term. I am not speaking about next quarter. This is a long-term game. We do think that we are going to need more office space in Mexico as a whole over the next years. We do think that there is room for additional office space in Mítikah, and we need to run our numbers, make a decision whether it is going to be 100,000 sq m of office, whether we are going to do a combination of office and condos. Or also, there is the idea, which has changed over time.
If you recall the first discussions of Mítikah, we had a hotel at some point in time in the early days of Mítikah. There is also the possibility of using some of those 100,000 sq m.
For a hotel. It can be a combination of the three, and we are not at a point yet where we can tell you, okay, we have made the decision of going ahead in this direction. The options are available to us. We are in the analysis phase of exactly what to do with phase two of Mítikah. Having said that, what I can tell you is that we are extremely pleased, and I cannot stress enough that word, extremely pleased with the performance of phase one. We have almost 100% occupancy in retail, above 90% occupancy in the Torre M. It is doing significantly better than anybody would have expected for a project that was delivered, the office tower, in March of 2020, the beginning of the pandemic. We are very happy with the performance of phase one of Mítikah.
We think it is a grand slam success for the company. We will discuss more on this, obviously, on our Investor Day and give a little bit more detail. There is basically 100,000 sq m additional available in phase two, and we have not made up our minds yet on which way we are going to proceed.
Got it. That is very helpful. Thank you, Jorge.
You are welcome.
Okay, thank you very much. Next question is from Mr. Anton Mortenkotter from GBM. Please go ahead, sir. Your line is open.
Hi, guys. Thank you for taking my question. We know there are different structures on covenants across Republic Bonds. However, you are getting close to the minimum of 1.5x debt service coverage ratio. Are there conversations with holders for possible waivers in case, I don't know, any exogenous shock could cause you to momentarily breach the metric?
No, we haven't had any such conversations because our projections of the trajectory of where the company is headed is that we are going to go significantly higher with that. We are at 1.6x currently, and we expect to be 1.7x, 1.8x, 1.92x, and further going forward. Obviously, in this equation, the fact that interest rates are going down is also helping us, and we have a good chunk of variable rate debt. Every time there is a rate cut, that ratio is going to get eased. It is a ratio that we have been monitoring, but we are not concerned about it. It is the way I would describe it.
Super clear. Thank you.
Thank you very much. Next question comes from Mr. André Mazini from Citi. Go ahead.
Sure. Thanks, guys. So two questions on my side. The first one, if there's any update on the internalization process of FUNO. I'm sorry if you mentioned that and I missed it. The second one on industrial segment. It was great to see FUNO actually increasing occupancy quarter-over-quarter and year-over-year when various peers had decreases, right? Do you think tenants, particularly light manufacturing tenants exposed to the north of the country, are on a wait-and-see mode regarding the U.S. elections? Once the elections take place, how long would it take for them to start making important investment decisions again? Is it like one quarter, two quarters, or it depends on more certainty regarding trade ties after the election takes place, or do you think that's sooner than that? Thank you.
Let me take first, in terms of the internalization, I would like all of you to hold your horses. You will hear good news from us on the Investor Day. We are just 15 days away from that. So hold your horses, and you will be grateful with the news we will be giving you during the Investor Day. In terms of the industrial occupancy, we are doing better than the rest. Considering what André has just told you in the last 12 years or 13 years, it's mainly due to the location of our industrial parks, which is completely different, and we don't have any competitors that have the quality and the location of our assets. Obviously, that makes the huge difference with our competitors.
Besides being, as always, a little bit below market rates, which make us be the first ones to be occupied and the last ones to be vacant. I do think that those are the two main reasons why we have higher occupancy than any of our peers.
In terms of volatility with U.S. elections, of course, yes. Everybody is waiting to see what happens in the U.S. election. I think the last two elections have been decided by 77,000 votes and 44,000 votes overall in the Biden-Trump and Trump-Clinton elections. This one is extremely close as well. Obviously, that does create some nervousness in the financial markets, which is more of a short-term view of the world. We, as real estate asset managers, have to have a long-term view because that's the nature of our business and our assets.
We are obviously optimistic on the long term. On the short term, not willing to put a bet on who is going to win the election in the U.S., and obviously that creates uncertainty.
Thank you, Gonzalo and Jorge.
You are welcome, André.
Thank you very much. We have one more voice question before next questions. Next comes from.
Sorry, Michael, you broke down completely. We couldn't hear.
Next from Chelsea Colón from Aegon Asset Management. Please go ahead.
Chelsea.
Hi, and thank you for taking the questions. I just had one follow-up on the debt service coverage ratio, actually two. Can you please walk us through how FX impacts the debt service coverage ratio, given you have some of your revenues are dollar-denominated, but also a decent portion of your interest expense and CapEx?
Yes. Well, the foreign exchange has an impact in that ratio that it's now neutralized because the negative impact that it can have on the dollar part of our debt is offset by the positive impact that we have on our dollar rents. We have a natural hedge of one to one between income and interest cost in U.S. dollars. It doesn't have an effect.
Okay. Can you clarify, I understand that your dollar debt has just incurrence covenants, but do you have maintenance covenants on any of your local debt?
No, we don't.
Okay. No maintenance covenants at all.
No maintenance covenants on any of our debt.
Just one more, if I may. Regarding the calculation of DSCR by the CNBV, I think the covenant is a little bit different and includes also CapEx. That covenant has also been getting tighter. What are the implications if a FIBRA were to breach one of the levels set by the CNBV?
Sure, Chelsea. One other thing, obviously, is that this debt service coverage ratio from CNBV is forward-looking, 12 months forward-looking, which is kind of stricter even than what banks have. It is not mandatory anymore. This is a legacy requirement to report where it is. That is the only thing that we are required to do, report where it stands, but it does not have any effect at all. I cannot remember exactly what year regulation was changed for the leverage of FIBRAs, but basically, the regulation was changed so that every FIBRA has the right to determine its own leverage policy. You can go above 50% LTV if you want. You can go to 60%. You just have to decide what your policy is and communicate it to your investors. So none of the covenants from the CNBV metrics are covenants in reality.
This is just a legacy report that is required, the Anexo AA, or Double A annex. But it is not a requirement to maintain leverage or coverage or any of the metrics as it was a few years back.
Okay, understood. Thank you.
You are welcome.
Thank you very much. The next question is from Feike de Jong from Debtwire. Do you plan to refinance the MXN 300 million versus 2026 maturity notes before they become short-term debt?
It is actually 800, not 300. It is an $800 million bond. The policy that the company has is that we look at those 12 months in advance. That would be January of next year. We are obviously opportunistic and have always been opportunistic, and if we do see a window of opportunity in the market that makes sense to pre-refinance a bond, peso or dollar, we will take advantage of that window. But it is something that we have a policy of looking at one year in advance. We obviously are looking at the market constantly as a normal course of business for us. We are constantly looking at the market to see if there are opportunities out there for us to do things. But we will start to formally look at that in January of next year.
Okay, thank you very much. This question comes from Caroline Woods from Bank of America. Can you please provide an update available on the internalization process as well as any developments, updated expectations in the industrial carve-out strategy?
Sorry, Michael, you broke down, and we couldn't hear the question.
Okay. Please stand by one second.
I got to read the question. Sorry. Thank you. Basically, I think, as Gonzalo mentioned, a little patience for a couple of weeks, and we'll be able to give you a lot more detail on both of the questions you're asking.
Okay, thank you very much. I believe that's all the questions at this point. I'll be passing the line back to the management team for the concluding remarks.
Thank you very much, Michael. I will pass the mic on to André for closing remarks.
Thank you very much, everybody, for listening to our call. We are very pleased about our results, and we will be very happy to host you and see you on our Investor Day next November 14th. Thank you very much.
Thank you very much. This concludes our conference call today. Thank you. We will be closing all the lines. Thank you and goodbye.