Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra UNO's Q1 2024 Results Conference Call on the 25th of April, 2024. At this time, all participant lines are in listen-only mode. The format of the call today will be a presentation by the management team, followed by a question and answer session. Without further ado, I would like to pass the line to Mr. André El Mann, the CEO of Fibra UNO. Please go ahead, sir.
Thank you, Michael. Thank you, everybody, for being here with our first quarter of 2024 results call. I am very glad to deliver, yet again, very good results, very exciting news from our company. Getting the risk of sounding like a broken record, I am going to tell you that we have broken our own records again for the 50 and something quarter again with the highest numbers of revenues, highest numbers of NOI ever. We are very pleased to deliver these numbers with the current environment in Mexico, in the region. As you know, we have elections this year here in Mexico and also in the U.S., and everything is somehow stressed. But for our company, we continue to regain the position that we were aiming to since the pandemic struck five years ago. We try to get to the pre-pandemic levels.
We reached the pre-pandemic levels in the industrial side, as you already know, way before this call. We reached our occupancy level of the retail space, pre-pandemic retail space occupancy level just last quarter at the end of last year. We are yet about to get to our pre-pandemic levels on the office sector. I think we are very close to achieve that number. We have been seeing the recovery of our economy in our world, our real estate world, diversified real estate world of our company. We are seeing this recovery, and we are seeing it, following it very closely. I think that the good results that we delivered, that we posted yesterday are just the result of the hard work that we have been impregnating to the company in the last quarters.
I think that we are going to be distancing ourselves from the rest of the bunch. I think that our results will continue to improve in the next coming quarters. Of course, we have been feeling the pressure of the high rates, as you can see in our numbers posted yesterday. But I think that we reached the highest level that we will post. Let me expand a little bit on that. I think that we do not have any other expiration coming this year or next year. Everything that we needed to renew, we already done. We are today posting the impact of that renewal, and we will not be posting any other impact in the near future. That is what I am trying to explain, that we already reached the peak in the impact of the high rates.
Of course, we expect, as all the market has discounted, that we expect that the rates at some point late this year or early next year will begin the way down. Having said that, we do not have any expiration this year or next, I think that we are in a very good position to start the recovery in terms of the cost that has been impacted our balance in terms of the interest rates. Having said that, of course, Jorge will talk about the numbers in detail, but before he does that, I would like to say that we are continue to work very hard on two fronts. The first front is on the internalization process that is going very good. We expect to have this finished this very quarter, second quarter this year. We are working also in the separation carve-out of the industrial portfolio.
I just want to repeat, and again, risking to sound like a broken record, that we have the best portfolio whatsoever in the industrial side, and we have the best future ahead of us in the industrial side for a number of reasons. We will get into that world. We will get our carve-out, and we will get the repricing of our properties in due time. We are working in different fronts. Jorge will get into the details of it again. But I just want to stress that we are working in different fronts. We are not limited to any of those. Of course, we will get it done, and we will get the best opportunity for the company, I think, in these coming months.
Having said that, we expect that the company will continue to perform as we have been performing for the last 50 and change quarters. Today, I see a very bright future for our company. It does not really have any impact on this company. We do not expect an impact for this company, neither for the elections in Mexico or the election in the U.S. I think the impact on the interest rates is already capped. We expect all the work that we have been doing in the last couple of years, coming out of the pandemic, it will begin to show in our numbers in the next coming quarters. Thank you very much for being here. I would like to pass the mic to Jorge to go into that with the numbers. Jorge, please.
Thank you very much, André, and thanks everybody for joining our first quarter 2024 call. As usual, I will go into the quarterly MD&A. Starting with our revenues. We reached another milestone of MXN 6.8 billion, 6.6% above revenues for the fourth quarter of 2023, and 7% above year-over-year. This is obviously a combination of rental increases that result from the inflation pass-through in our active leasing contract. The lease renewals that we have had mostly are largely positive spreads that I will discuss briefly in a second. Obviously, we also are showing the offset of the negative effect of the exchange rate appreciation that we had on the dollar portion of our revenues. In terms of occupancy, as André was mentioning, we have had a very clear focus at the company to recover the occupancy that we had pre-pandemic in all the different segments.
As per our strategy to be at a 95% occupancy for the overall of Fibra UNO. Going into the detail, the industrial portfolio, we closed the quarter at 98.4%. That's 10 basis points below the fourth quarter of 2023. This is just a normal course of business operation in an incredibly tight market. Everybody seems very happy when we talk to people about 98% occupancy. It is good, but at the end of the day, it's also inefficient. We'd like to have a little bit more space in order to provide for the growth of our tenants, and we don't have that. The market is very hot, very strong, and it continues to show that in the industrial segment. In the retail portfolio, we closed the quarter at 92.2%. That's 40 basis points above the fourth quarter 2023.
We continue with the trend of recovering the occupancy in the office in the retail sector. The office portfolio closed at 81.6%. That's 10 basis points below the previous quarter. Again, this is part of the normal course of business, but we do expect to finish the year somewhere between 83% and 85% occupancy for the office segment. We are seeing a return of people to the offices. A lot of people that gave back space during the pandemic are coming back to us and asking for some of that space back. We do expect to continue to see recovery in occupancy. I'll talk about the rents in a second. Just to state something that we have been stating specifically in the office sector for a while, we expect to see recovery of the occupancy, but not necessarily improvement in the rent.
Any marginal improvement that we get, we obviously are very pleased and happy to see that happening. The other portfolio recorded a 92.2% occupancy, which is basically stable against the previous quarter. The Tapachula property was removed from the in-service category. One of the criteria that we have for properties coming out of the in-service is once they reach occupancy above 90%, and that is where Tapachula is. We're very pleased with the performance of that shopping center. We now don't have properties in the in-service category. Moving to the operating expenses, property tax, and insurance. We're happy to see a reduction of MXN 50.9 million or 5.7% compared to the previous quarter. Mainly due to the seasonality of some expenses, which usually tend to increase towards year-end. We continue to see an increase in property taxes of 2.4% compared to the previous quarter.
Mainly updates in taxes in some municipality. Insurance expenses increased almost 10% versus the previous quarter, mainly due to updates in our insurance policies. But we continue to have, obviously, a strong focus in containing the growth of the operating expense line at the company. This, at the end of the day, means that our net operating income increased by MXN 75.5 million, or 1.5% compared to the fourth quarter of 2023, to reach almost MXN 5.2 billion. NOI margin calculated over rental revenues was 84.2% and 76% compared to total revenue. We have about a one percentage point recovery in margin compared to the previous quarter. Still not where we want to get, but we're on track in the direction where we want to head.
Going into a little bit more detail to what André was describing in his introduction, the net interest expense line increased by MXN 147.5 million , or 6.1%, compared to the fourth quarter of 2023. If you recall, we issued $600 million of new senior 2034 unsecured notes. There's two elements that impacted the interest expense line. One of them is obviously that we're replacing a bond that had a coupon of 5.250% with a new bond that has a coupon of 7.375%. It's part of the rate increase that we're seeing. The good thing is that we have a very long dated debt, so we don't have to reprice all of our debt immediately. We did the refinancing of the 2024s this year, and as André was saying, we don't have any more refinancings to do this year or the next.
The next one is 2026, so we'll see where rates are in 2026 when we have to deal with the 2026 bond. The other element that also increased interest expense is the fact that we did a make-whole call on the 2024 bonds. The make-whole call called for a 30-day notice period, which required us basically to have the carry of two bonds at the same time. That increased, obviously, the interest expense line. In addition to that, obviously, that increased the average cost of debt for the company. We had capitalized interest for MXN 551 million . Also the impact of the pricing of the derivatives of financial instruments had an effect on the interest expense line. That's partially offset by the exchange rate appreciation from 16.92 to 16.70 per U.S. dollar. So that benefited us a little bit.
Net, basically the issuance of the new 2034s to replace the 2024s had the biggest impact in our interest expense line. Today we stand, as André was mentioning, with a very solid position in an environment where we expect interest rates to have peaked and expect to be more on the downside. Obviously, this is going to benefit us since we have a good portion of our debt with variable rate, and that is going to benefit directly through the FFO once rates start coming down. As a result of all of the above, funds from operations controlled by FUNO decreased by MXN 76 million, or 3.3%, compared to the fourth quarter of 2023, reaching MXN 2.23 billion . Adjusted FFO is the same number, MXN 2.23 billion , and also 3.3% below the previous quarter.
On a per CBFI basis, during the first quarter of 2024, we did not repurchase or issue any additional CBFIs. So the FFO and the FFO per average CBFI was 0.5858, which is a 2% decrease compared to the previous quarter. In terms of the quarterly distribution, the first quarter of 2024, we distributed MXN 1.5 billion , which corresponds 100% to fiscal result, and it's equivalent to an FFO payout of 68%, almost 69%. An amount of almost MXN 370 million of cash flow generated during the first quarter of 2024 was used to pay complement of the 2023 fiscal result. As you recall, the fiscal result has been larger than the funds from operation for the last couple of years, given the high inflation plus high interest rates, plus-
Strong peso.
-the FX and the strong peso, which is a combination that obviously we did not expect to happen, but we have been able to weather that storm. We think we are in a position now where that is going to change, and we are going to go back to having a fiscal result that is smaller than the FFO that we are generating. In terms of leasing spreads, contracts renewed in pesos were 12.5% or 1,250 basis points higher in the industrial segment. We continue to see that teens and double-digit leasing spread in the industrial segments. Almost 10% or 990 basis points in the other segment. 790 basis points, almost 8% in the retail segment. We managed to get 2.6% or 260 basis points improvement in the office segment, which, as I mentioned, the expectation in this segment is to be flat.
To be able to manage to have a positive leasing spread, even if it is not with inflation, is positive news that we are happy to see. Now, when we look at leasing spreads above the weighted average inflation, which was almost 5%, they were 750 basis points in industrial, 500 in others, 300 in retail, and - 220 for the office segment. Basically, because almost 50% of the square feet that were renewed in the office sector were either at a small discount or flat to the previous rent that we had. Now for dollar-denominated leases, we had almost 10% in the retail segment, 960 basis points, 8.4% or 840 basis points for the industrial segment, and a - 70 basis points or almost flat basically in the office segment as expected.
Leasing spreads compared to the weighted average dollar inflation, 3.5% for the CPI, were +620 in the retail, +490 in industrial, and -420 in the office segment. In terms of constant property, the rental price per square meter in constant properties increased by 2.8% compared to a weighted average inflation of 4.6%. Therefore, a - 1.8% decrease in real terms, mainly due to the appreciation of the FX of the dollar, which was 8.7% for the quarter, and the effect that this has on our dollar-denominated contracts. Obviously, as you know, there is a natural lag in the transfer of inflation of about a year, more or less, in our contracts. Moving to the sub-segment levels, the portfolio's total annual rent per square foot increased from 30 to 13, sorry, to 13.1%, or almost 1% compared to the previous quarter.
Mainly due to increases in current contracts and renewals, which again, was offset by the FX appreciation, which has continued throughout this year, albeit at a slower pace than we saw at the beginning of the year. NOI at the property level for the quarter increased 0.6% compared to the previous quarter, and variations mainly were due to the following. For the industrial segments, logistics NOI increased by 3%, light manufacturing NOI decreased by 4.3%, business parks increased by 2.3%.
The decrease in light manufacturing is mainly due to the exchange rate appreciation of the peso and the negative effect that this has on the U.S. dollar-denominated rents. The office segment NOI decreased by 1.5%, mainly due again to FX appreciation, and the effect this has when you translate the dollar rents to peso terms. In the retail segment, the standalone sub-segment NOI increased by 5.2%.
Regional centers increased by 2.1%. Fashion mall decreased by 1.6%, mainly due to the seasonality of variable income, which usually the Christmas season has a high percentage of variable income, coming to the shopping in the fashion mall segment. The other segment NOI decreased by 1.3%, again, also due to seasonality of the hotel's variable income component that we have towards year-end. With this, we close the discussion of the specific results. I'd just like to touch upon one of the things that André was mentioning, which is the strategy for the carve-out of the industrial segment operations that we have at Fibra UNO. We are obviously very happy to have a very high quality, the best portfolio that's available in Mexico. And the objective that we have is to be able to segregate or carve out this portfolio into a publicly listed vehicle.
There's several alternatives that we have for that. One, obviously, is the IPO of Fibra Next, which we continue to work with the authorities. In parallel, we have made an offer to do a joint venture and combining our assets with those of Fibra Terrafina, which would achieve similar results to what we have in the Fibra Next structure. There's also some additional strategic alternatives that we are pursuing for the company. I'd just like to clarify that that's the objective we have as a goal, and there's several roads that lead to Rome. We'll figure out, at the end of the day, which is the most efficient road that creates the most value for our shareholders, and that's what we're focused on. With that, I would like to open the floor to Q&A.
Thank you very much for the presentation. We'll now be moving to the Q&A part of the call. If you are dialed in via telephone, please press star two on your keypad. That's star two on your keypad to queue a question. You may also ask a voice question if you are dialed in via the web. Our first question comes from Mr. Rodolfo Ramos from Bradesco BBI. Please go ahead, sir, your line is open.
Thank you very much for taking my question. Good afternoon, everybody. Just a couple. The first one is on those roads that you described, Jorge. If you could tell us a little bit about, besides going for another competitor or trying to look for a different shell, so to speak, what other strategic alternatives you would be considering? On this point as well, I do not know if you had any feedback or how competitive you think your bid is, considering that there is some market risk associated with the bid itself, right? You are assuming that your portfolio and Terrafina is going to be priced at 7% equal cap rate. I just wanted to see if there is some concerns on their part as far as the structure goes. I just have a quick follow-up on leasing spreads, if I may.
Sure. Thanks for the question, Rodolfo. On the strategic alternatives, obviously, those remain strategic for us, and we are not at this point disclosing what other avenues we are thinking about. But you know that we are a creative bunch and can come up with different ideas of how to create value for our shareholders. That is the objective, that is what we are focused on, and that is what we will continue to be working on. Regarding the Terrafina bid, obviously, we think it is a competitive bid, but it is not up to us to decide. I think that the market will decide whether they like our proposal or not. I do not think I have more to add than that regarding those two specific questions.
Okay. Thanks. Just on leasing spreads, when we look at your leasing spreads, they are below some of the numbers that are being reported by peers. I just wanted to see whether this is more of a thing or a matter of vintage of these contracts, or does it have to do something with the structure or location? That would be helpful.
No, I think that what happens, obviously, conceptually, Fibra UNO, as part of our strategy, has always been to have slightly below market rents. We do have a portfolio that is overall, on average, probably mid-20s below the market, or 22% below the market, somewhere around there. There are some quarters in which we have gone closer to 18% or 19%, and this quarter came in at 12.2%.
Nothing specific to the trend. I think that you will continue to see to the extent that the market continues to be constrained on the supply side of the equation, and we continue to see growing demand for industrial real estate, which is the case that we have been seeing in the last few months. We will continue to see rental pressure going up, and obviously, the mark to market of our contracts closer to where the actual rents are is going to continue.
I don't see anything specific in the number that we are posting that is different than the market dynamics that you're seeing.
Okay. Thank you.
Okay. Thank you very much. Our next question comes from Mr. Pablo Monsivais from Barclays. Please go ahead, sir. Your line is open.
Hi, guys. Thanks for taking my question. I was wondering to what extent the internalization process and the carve-out are intertwined. Is there any scenario in which you internalize Fibra UNO first without doing any transaction on the industrial portfolio? That's my first question. I have another question on dividends.
Timing is difficult to define here. Obviously, we'd like to be able to do both sooner rather than later. Both are independent, and they have their own track, so it's impossible to say which is going to happen first.
Okay. On the dividends, you explained already why the payout ratio was lower in the first quarter than in previous quarters. Should we expect that for the next three quarters to be back to 100% or close to that level? The dividend payout?
I think we're going to try to stick to the fiscal result, given the volatility that we've seen in the FX, the fact that we continue to see high rates. Inflation is sort of picking a little bit up again. So we want to remain cautious. The last couple of years, we've had to distribute 100% of what we generated, and even more than what we generated in the year. So we want to remain cautious on that front, and I think that the expectation should be that we should adhere to what we are estimating to be the fiscal result at the time of distribution.
Let's see what that number is at the end of the year, and I think we'll see the final adjustment on the fourth quarter of the year. For the meantime, we'll try to stick to what we think is the fiscal result.
Perfect. Thank you.
Okay. Thank you very much. Our next question comes from Mr. Francisco Chávez Martínez from BBVA Group. Please go ahead, sir.
Hi. Thanks for the call, and congrats on the strong numbers. My question is on Mitikah and the agreement that you reached with AFORE. Can you provide more detail on the rationale of this acquisition, and how do you plan to fund this acquisition? Is it going to be through retained cash or debt? Also, if you can give us any idea on the amounts and the timing. Thank you.
One of the things that we bought, Paco, is time to close that transaction over the next year or so, more or less. Obviously, we have different alternatives to fund the acquisition. Part of the idea of having that flexibility is to be able to have that flexibility in how we're going to end up financing the acquisition, and asset sales continue to be an option for the company. We continue to have a good pipeline of asset sales available to us with very solid indications of interest that we haven't closed because we paid more attention to trying to get the Fibra Next IPO done. But those dispositions remain there. One clarification that I'd like to highlight is we're buying 38% of Mitikah, and we are earning 6% of that in fees. That's how we end up with the 32%. So we're actually buying
38%.
38% of Mitikah. The portfolio is valued at MXN 6 billion and change on the books, and I think we're paying a slight premium to that. We'll be able to disclose it shortly.
Good. Thank you.
Thank you very much. Our next question comes from Mr. André Mazini from Citi. Please go ahead, sir.
Yes. Hi, André, Gonzalo, Jorge, and Sofia. My first question is around a follow-up on Mitikah, actually. In the documentation, in the earning release, it seems for every guys have the non-controlling participation rights, which now you guys are going to be buying and over there is around MXN 320 million, right? Converting at MXN 17 per dollar rate. Is that the valuation we should be expecting or anything different in what's in the books? This is the first question. The second question would be around nearshoring. If you see that nearshoring happening in Mexico City, it does show space as well, given that Mexico City is mainly logistics and further from the border than, of course, in northern markets or even El Bajío. If nearshoring is coming as south as Mexico City. Thank you.
On the Mitikah, I think what I mentioned to Paco is the same question. It is going to be a slight premium to what we have in the books. More or less, the number that you are describing is about right. Regarding nearshoring, I think that we have always said, as a company, that we believe nearshoring is the whole of Mexico, not just the northern border.
The northern border, clearly, obviously, was the industrial parks. If you produce something in Tijuana and you want to export it to San Diego, fine, you can produce in Tijuana and export it to San Diego. But if you want to produce something, for example, like the aerospace industry or the car industry that are located in the center of the country, those guys did not go to the north because they want to export not just to the U.S., but also to other places.
Even to the U.S., but through other routes. Because if you go through the ports in the Gulf, you can reach the East Coast of the United States or Florida and the whole East Coast of the United States very efficiently. Same happens if you want to go to the West Coast with the Port of Manzanillo, for example, or Lázaro Cárdenas or some of the other ports that we have in the Pacific, if you want to export to the West Coast of the U.S. or even to Asia, where Mexico has a lot of free trade agreements. Nearshoring is not just the northern border. We have seen some tenants set up shop in our logistics parks for light manufacturing.
Not heavy industry, not on the heavy side of light manufacturing, but we have seen some of those move into the parks that we have in Mexico City. Because in Mexico, we do have labor, we have electricity, we have less water scarcity compared to some of the northern markets, where the markets are very tight in terms of vacancy.
Energy is somewhat complicated, not for the country, because as a country, we generate about 10% more energy than what we consume. So energy generation is not an issue. The availability of energy depends on where you are. The availability of energy where we are located is not an issue because you don't need to tend new transmission lines. You may need to tend a new transmission line if you want to set a factory somewhere in the north, but we don't need to do that in the center.
So those things are becoming obviously attractive to tenants that want to start with operations for light manufacturing. So now we have, the way I would put it is that we have sort of resources for demand for our logistics parks, which is a traditional third-party logistics and logistics operators, the e-commerce dedicated guys. Now we also have some light manufacturing tenants looking at our facilities. So, in a nutshell, yes, nearshoring is just not the northern border, it's the whole of Mexico. It's large enough that we are not being able to keep up with the demand for space as a country.
Actually, most of the tenants that Jorge is talking about that are setting up shop in Mexico, in our parks in Mexico City, in the surroundings of Mexico City, in our parks, 100% of their revenues are export. So even though they export everything to the U.S., in a hypothetical case, they're feeling very comfortable producing in Mexico City and exporting to the U.S. because the truck will take 10 hours to be in the border. The raw materials come from elsewhere in the world. They are not coming from the U.S. They receive raw materials from South America or from Africa or from Europe, and everything gathers here in Mexico City. So they receive their raw materials here, they process the product, and they send it up to the U.S.
And makes very little difference for them to have their truck traveling two hours from Monterrey or 10 hours from Mexico City. That is not a decision-making issue for them.
In other words, you want to have the logistics for production on the back end or the front end. But either way, you still have to deal with it. So it is efficient for them to produce in Mexico City or the center of the country, let us say.
Very clear. Thanks, guys.
Thank you.
Okay, thank you. Reminder, for any additional questions, star two. That is star two for any additional questions, please press that. In the meantime, we will take a text question from John Elko. Good afternoon. Could you please share the investment amount that FUNO is considering for the acquisition of the 38% stake in Mitikah, and in how many installments?
Sorry, could you repeat the question, Michael?
Sure. Could you please share the investment amount FUNO is considering for the acquisition of the stake in Mitikah, and in how many installments?
We have the flexibility to do the payment over the next, let us say, 12 months. And it is likely going to be three installments. Final price is slightly above what we have in our books. We have in our books is MXN 6.1 billion, if I recall correctly. So we still have some flexibility to deal with that.
Okay, thank you very much. We will just wait another few seconds in case there are any additional questions that come through. Okay, it looks like we have no further questions at this point. I will pass the line back to the FUNO team for the concluding remarks.
Thank you, Michael. Thank you everybody for your attention for this call, and we expect to continue delivering good results in the next quarter, the second quarter of 2024. Thank you everybody, and have a nice day.
Thank you very much. This concludes today's conference call. We will now be closing all the lines. Thank you, have a good one.