Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra Uno's 4Q 2023 Results Conference Call on the 27th of February, 2024. At this time, all participant lines are in listen-only mode. The format of the call will be a presentation by the management team, followed by a question and answer session. Without further ado, I would now 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 listening to our call. We are very excited about the results posted yesterday, the results of the full year 2023. As usual, I am very excited and very happy about reporting these strong results for a 13th year in a row. Record high breaking 13 year in a row. We are very happy and very excited about our results. We have been building a best-in-class company year after year, and we have been reporting this construction of this best-in-class company year after year. We have been enhancing our reporting and overwhelming in the ESG front. We have been recovering occupancy levels to a new record high. Our strategies continue to be in place. Market environment have improved since November, and we continue to work closely with authorities to get final approvals.
All the activity heard and seen in the market by competitors, only confirms our undisputed leadership and the huge difference between our portfolio and others. These frantic moves will not get anyone near the quality, size, and projection that our portfolio has, especially in the industrial front. We strongly confirm that NEXT, its partnership with Jupiter portfolio, its growth horizon, and its amazing projection to continue the growth and the establishment of the best-in-class and the largest company in the country are untouched. The subsequent capital structure improvement, as well as these projections, are finished and will become operative soon. The only pending item, if so, will be the FIBRA regime and the IPO placement as one. The rest of the company is running smoothly, as you could see in the report.
Our results talk for ourselves, and I think that having said that, I can pass the mic to Jorge in order to go in depth of the numbers. Thank you very much for your attention.
Thank you very much, André. Going into the quarterly MD&A figures, starting with our revenue line. Total revenues for Fibra Uno increased by MXN 335 million to reach almost MXN 6.8 billion for the quarter. That is 5.2% above the third quarter of 2023, which I would like to highlight. It is a very impressive number for that kind of growth on a quarterly basis, mainly attributable to a composition of different factors. 100 basis points increase in the consolidated occupied GLA for the company, and I will describe our occupancy gains for the quarter and obviously the year, which we are very pleased with. Rental increases from inflation passed through in our active contracts. The positive leasing spreads or rental increases in lease renewals. This was obviously partially offset by the exchange rate appreciation, which has a negative effect on our U.S. dollar-denominated contracts.
All in all, we increased revenues by 5% for the quarter. In terms of occupancy, we are very pleased, very happy to share with you that FUNO is once again at the 95% average occupancy for the portfolio as of the fourth quarter of 2023. That is 100 basis points above the occupancy of the third quarter of 2023. The industrial portfolio continues to perform very strongly. We closed the quarter at 98.5%, which is 90 basis points above the third quarter of 2023. The retail portfolio, we are approaching 92% occupancy. We saw 110 basis points increase above the third quarter of 2023.
As we have mentioned, we started seeing a strong recovery of the retail segment, and we are very pleased to share with you that we recorded an occupancy of 81.7% for our office portfolio, which is 200 basis points above the third quarter of 2023, at almost 5% growth year-over-year for this segment. So, very happy actually to share with you that we were able to close the year above 80% occupancy, which was our guidance and our expectation for the office segment. So very happy with the performance of that. Others remains above 99%, 10 basis points compared to the previous quarter. In- service portfolio, 87.4%, 5% below the third quarter. This is mainly due to the exit of the hotel at Galerías Valle Oriente from the in-service category.
So very pleased with the occupancy that we are showing, which was a strong focus of ours post-pandemic to recover occupancy in the portfolio. So, that goal has been achieved. In terms of operating expenses, we still have some work to do to contain the growth of expenses. We have an increase of MXN 132 million or almost 17.5% from the third quarter. There is some seasonality to this figure, as well as some increases in services and providers of services and our suppliers, which are above inflation. Property taxes decreased by 2.9%, and insurance expenses increased by 1.3%, basically, not major change compared to the previous quarter. At the end of the day, this results in a net operating income increase of MXN 81 million or 1.6% compared to the third quarter of 2022, to reach MXN 5.1 billion, with an NOI margin of 83.6%.
Interest expense and interest income, we had a net interest expense decrease of 0.3% or -0.1%, basically flat compared to the previous quarter. This is due to a combination of factors, the exchange rate appreciation from 17.72 to 16.9, so MXN 0.70 or a little over MXN 0.73 per peso, as well as the capitalization of interest expenses for MXN 544 million. As a result, funds from operations controlled by FUNO increased by MXN 89 million, the same MXN 89.5 million almost that we saw on an NOI basis, or 4% compared to the previous quarter. Adjusted FFO, we had the same figure, an increase of MXN 89.5 million or 4% above those of the third quarter, reaching MXN 2.3 billion. On a per CBFI basis, FFO and AFFO did not change the share count that we had during the quarter.
We ended up with 3.8 billion CBFIs outstanding, so the growth in FFO and AFFO per average CBFI was again 4%, reaching MXN 0.6058 per share, a little over MXN 0.60 a share. In terms of annual distribution, as you know, we had, and continue to have a situation where we have a positive effect from FX gains, which is a non-cash item, and it affects the net taxable income calculation. We continue to have a positive effect or a gain, non-cash gain from inflation effect on our monetary position. And the deduction that we are able to do from the depreciation real estate assets. At the end of the day, this has resulted in a higher net taxable income than the funds of operation that the company has generated over the last two periods. Basically 3% above that of the last two periods.
That is why you saw us announce a distribution for the fourth quarter of 2023 in two payments. One that has already been made, the other one will be made before March 15th. Moving to the balance sheet, accounts receivable, total MXN 3.5 billion, an increase of MXN 360 million, 11% against the previous quarter, result of regular business operations. In terms of investment properties, the value of our properties, including what we call the financial assets, which is basically the [Mitikah] project portfolio, increased by MXN 3 billion or 1%, compared to the third quarter of 2023, w hich is a combination of fair value adjustments at this quarter done by an independent third party appraiser. Normal progress in the construction of our projects under development, and CapEx invested in our operating portfolio.
In terms of debt, total debt for the fourth quarter of 2023 closed at MXN 129.5 billion compared to MXN 131.7 billion recorded in the previous quarter. A small reduction of variation mainly due to exchange rate valuation. As I mentioned, the peso went from 17.73 to 16.99 per dollar. We saw the prepayment of the 13-2 bond for MXN 3.1 billion, with the issuance of the 23-3L bond for MXN 1.5 billion in December 1st of last year. Net increase in bilateral lines of credit of MXN 2.5 billion. And the disposition of Portal Norte mortgage loan for MXN 300 million. So all in all, almost a flat quarter in terms of variation with some refinancing activity done during the third quarter.
In this regard, even though it is not part of the quarterly results, I would like to highlight the liability management activities that we carried out recently issuing new 2034 U.S. dollar bonds, the proceeds of which will be used to refinance, doing a make-whole call, the existing 2024 FUNO bonds that mature in December. With this, we eliminate all of the refinancing risk that we had, especially in the dollar market. The next important or relevant maturity we have comes due all the way to 2026. We feel very comfortable in the situation in which we are with this refinancing. In terms of total equity, it increased by MXN 4.3 billion or 2.3%. It is basically the combination of net income generated from results, derivatives valuation, the shareholder distribution, as well as the effects of the employee compensation plan.
I would like to highlight in the leasing spreads, moving to the operation results. Leasing spreads for contracts renewed in pesos for our industrial segment were 16.8%. We continue to see high double-digit leasing spreads in the industrial segment. In the retail segment, we had 660 basis points, 500 basis points in others, and even the office segment recorded an increase of almost 2%. Very comfortable with that. In terms of dollar-denominated contracts, 10% increase in the retail segment, 4.8% in the industrial segment, and a negative 780 basis points in the office segment. Pretty much in line with our expectations, as we have mentioned, of a very solid industrial segment, very strong retail segment, and the office segment with occupancy gains and more or less stable rents in the overall.
In terms of constant property performance, rent per square meter increased by 3% compared to with an annual inflation of 5.1%. This is mainly due to the FX appreciation of almost 10% during the year, and the effect that this has in our dollar-denominated rents, as well as the natural lag that we have in the inflation pass-through of our contracts. At the sub-segment level, rent per square foot decreased from 12.7 to 12.6, compared to last quarter. This is mainly due, again, to the FX appreciation. When you translate the dollars that you generate to a lower exchange, you end up with less pesos. We report in peso terms, so it appears as though we have lower revenues. In terms of NOI at the property level for the quarter, despite the FX effects, we increased 4.3% compared to the previous quarter.
For the logistics segment, we had an NOI increase of 4.7% on a quarter-to-quarter basis. The light manufacturing NOI was almost 9%, 8.8% on a quarter-to-quarter basis. Business park was basically flat at an increase of 0.8%. Obviously, affected by occupancy, the general strong dynamics we have in the industrial sector, and obviously the rent levels that we have. In the office segment, NOI increased, sorry, by 2%, mainly due to the recovery in occupancy. Retail segment, we saw standalones NOI decreased by 1%, regional centers increased by 1.3%, fashion mall increased by 12%, mainly due to rent renewals and occupancy gains. The other segment NOI increased 7.6%, mainly due to an increase in variable rents that we are seeing from our hotel operations. Again, very pleased with the operating performance that we have in the portfolio.
With this, I conclude the presentation of the MD&A section. I would like to open the floor to Q&A.
Thank you very much for the presentation. We will now be moving to the Q&A part of the call. If you have any questions, please press star two on your keypad. That is star two on your keypad for any questions. We acknowledge the questions you have already asked. We will give a few moments for the questions to come in. Thank you. Our first question comes from Mr. Francisco Chávez from BBVA Group. Please go ahead, sir. Your line is open.
Hello. I have two questions. The first one is regarding the internalization process. Can you let us know a potential timeline of this process? Any color on the specifics on how is it going will be useful. The other question is regarding the NOI margin. We have not seen this 75% margin since early 2020. How sustainable are the increases in administrative and operating costs? What measures are you taking in order to counter this increase? Thank you.
Thank you, Francisco. We are working very hard on containing the expenses. The expense have suffered a lot of inflation in the last couple of years. I think we have reached a peak, and we will try to improve in the next coming quarters that number. I see a trend to improving those numbers, because we have been putting in place a very strict policy on expenses. As for the internalization process, it is underway. We are working on that. The internalization process was contingent to the NEXT IPO and all the NEXT transaction, as you know it. Nevertheless, we have been working and we have been advancing it a lot in that sense. So it is underway, and we will conclude it in the next coming months.
Okay, thank you very much. Our next question comes from Mr. Anton Mortenkotter from GBM Group. Please go ahead, sir.
Hi, guys. Thank you for taking my question. Just a quick one. Considering the high FX gain on your dollar debt, which was significantly higher than the one in 2022, could you provide some color on how you managed to offset this non-cash gain in order for the fiscal result to not be as high? Or could we expect any additional announcement in terms of distributions?
Well, this year, we had the experience that the affection that we suffered about the currency exchange rate was one affection only. Last year, we had the worst of the two worlds. We had the affection on the currency exchange rate, plus a very high inflation. Today, we did not have the inflation, so this was manageable for us. Nevertheless, we had a higher fiscal result, I mean, than the FFO. So that is why we are about to deliver the last piece of the distribution due to the fiscal result, with resources coming from the first quarter of this year. And we will be getting that done on March 15th. But it was a lesser amount than last year.
Okay, thank you.
Thank you.
Thank you very much. Our next question comes from Mr. Juan Macedo from GBM. Please go ahead, sir. Your line is open.
Hi. Thanks for taking my question. I have a question regarding the disposition pipeline. We saw it decrease when compared to the last quarter. Could you give us some details on this rationale? Were there less sale opportunities, or is there another reason for this?
I think that one's for you, Gonzalo, on the-
Yeah.
-changes on the M&A pipeline.
Yes. Let me go over it. Actually, the main reason in order to change the total amount is that there was a retail portfolio that we got an unsolicited offer for it, that at the end didn't work out in terms of the pricing that we were expecting for it. Right now what we have on the pipeline, still one asset, which is on the others category. We have a retail asset, which are the two mainly, or the two largest one, and three office buildings, and the total amount for it is MXN 4.2 billion. That's what we are working on.
That's appreciate. Thanks for the details.
Okay. Thank you very much. Our next question comes from Mr. Edson Murguia from Summa Capital. Please go ahead, sir. Your line is open.
Hi. Thank you for taking my questions. I have a follow-up regarding on the office. Those three office buildings that Gonzalo mentioned are for sale. It is part of that unsolicited offer that you received last quarter? That will be my first question. The second question is, this full quarter, we saw an upward trend, if I can say, that most of the tenants requested Mexican peso-denominated contracts. Do you consider that will be a trend for the following quarters? Thank you.
No. Actually, on terms of the M&A, the three office buildings are unsolicited offers for local developers that are willing to transform those three office buildings into residential. That is the type of buyer that we have for the three offices buildings. Obviously, they are not the core office buildings that we have. In terms of the trends of switching from dollars to pesos, I would say that probably right now, there is no resistance in order to sign dollars since it is cheap. Always, in the history of the office markets, once the dollar is high, that is when the people have a resistance to sign dollar leases. Right now, we are not seeing that as a trend at all.
Okay. Thank you so much.
Okay. Thank you very much. Just a reminder, star two for any additional questions. The next question comes from Mr. [Jesco] from BJ Inversiones. Please go ahead, sir. Please go ahead, sir. Your line is open. Mr. [Jesco] from BJ Inversiones. Okay. We will come back to that question. In the meantime, we will take the question from Mr. Andrés Castro from SURA Asset Management. Please go ahead, sir.
Thank you for the call. Following up on the offices of occupancy, can you give us a grasp of what is going on in the office market in terms of occupancy and rates? Are you giving some concessions in order to gain occupancy, or what is going on in the market?
What we have been seeing is that people are going back to the offices. There are new companies coming into the market. We are not giving extra concessions on it. Probably what we have been leasing are some of the already furnished offices with TIs in place. So there is no reason to give them any concessions, nothing out of the common ones that we have been seeing. In terms of pricing, obviously, once we get to a certain hurdle in terms of occupancy, we will be able to increase rents. We are about to get there. As you see, there is already lease spreads on the office leases. Obviously, we would like to see huge lease spreads there in order to get back to where we were prior to the pandemic. But first we have to hit the occupancy in order to increase the rents.
I think we have been very consistent with the guidance that we gave in the market regarding the performance of the office sector. We expected to recover when we were around 75%. We said that we expected to finish the year around 80%. We ended up with 81.7%, and we did not expect to see movement in the average rent level, and that is more or less what we are seeing, flattish rents and occupancy recovery, as Gonzalo was mentioning. That is what we expect to see for the coming months. Once I think we reach above 85%, 87% occupancy, there may be some price tension. But before that, I think we are focused on continuing with the occupancy gains, and not pressuring the rent.
Thank you. Can you provide some color on the tenants that you are seeing?
Yes, absolutely.
We are seeing every color of tenant, and also many of our own tenants are asking for expansion on the area. But we have seen from all the industries coming back to hire new office space.
Thank you. Congratulations on the results.
Thank you.
Okay. Thank you very much. Our next voice question, and we acknowledge the text as well from Gabriela Chaparro from BCP Securities. Please go ahead, ma'am. Your line is open. Okay, perhaps I will just read out the text question that Gabriela asked. She had a question regarding the IPO. When do you plan to do the IPO?
As soon as practicable. We're going to be ready, as André mentioned. We're continuing with the creation of NEXT Properties and having everything ready on our end, numbers and everything, awaiting just the confirmation criteria from the CNBV. But we're not stopping on the process on our end. We're working obviously closely with the CNBV to answer any questions or anything they may have so that we're ready as soon as possible.
Okay. Thank you very much. We'll give another 30 seconds or so for any additional voice questions to come through. Okay, we have a voice question from Gordon Lee. Please go ahead, sir, your line is open.
Yes. Hi. Thank you very much for the call. Just a quick question on the extraordinary and in particular the form of payment. Some of your peers have decided to or have requested authorization and received authorization to make those extraordinary distributions in the form, at least a portion that doesn't require withholding in the form of CBFIs. Why did you not pursue that? Is that something that you may think about for next year if you have gains such as this one this year? Thank you.
Thank you. Very good question, actually. Obviously, there's a possibility of issuing shares to make the payment of dividends in general, regardless of the fiscal situation that we're going through right now. It has never been the business model of the company. The business model is as André always mentioned, very simple. Imagine that we get together to buy an apartment, we lease it, we collect the rent, we distribute it, and that's it. The business model remains the same. In this case, we had a situation which by the fiscal result requires us to distribute a little bit more than what we generated in one year. So what we did was basically take resources from the cash flow generated in the first quarter of last year to pay the fiscal result.
Compiling 2022 and 2023, we still had a little bit more fiscal result than the operating cash flow generated, only 3% differential, so we're almost level at this point. Looking into the future, obviously, it's impossible to predict what is going to happen. I think that if I were going to poll everybody in the call, nobody would have expected to see the peso below 17 a couple years ago. Yet we reached that number. From what I read, consensus on economists have the peso closer to 18, 18.5 , et cetera. Historically, over the last 50 years, the peso has depreciated versus the U.S. dollar, given our differential in inflation. We have higher inflation than the U.S. So normally speaking, we should have a currency that depreciates.
This is an abnormal situation that we don't expect the situation to remain forever, on the one hand. On the other one, there is an AMEFIBRA initiative to work with the government to find a structure to not have to pay the non-cash portion or not have to distribute the non-cash portion of fiscal result, so that you're not forced to distribute beyond what the company has generated in any given year. But I think, at the end of the day, we'll cross that bridge when we get there. Let's see what the year-end result is, where the peso is, where the inflation is.
And we may have a normal situation where we have a fiscal result that is smaller than the FFO generated by the company. Then we will level off and just have our normal distribution policy, which has had historically a component of fiscal result and a portion of return of capital for the cash flow that we generate in excess of the fiscal result.
Thank you.
Okay, thank you very much. Our final voice question comes from Mr. Martin Zetsche from Fundamenta Capital. He is asking, "Why are we seeing low single-digit spreads in USD in the industrial segment versus other industrial players posting high double-digit numbers? Is it related to the way each one calculates that number?"
No, I think it has to do more with a case-by-case basis on the number of leases that get generated in each quarter, the starting point of those leases, and where you are. But overall, we have an incredibly robust industrial sector like the one we have not seen ever in Mexico. So I think it has more to do with a case-by-case basis of the leases that were renewed in that particular quarter rather than anything specific.
Okay, thank you very much. No further questions at this point. Passing the line back to the management team for their concluding remarks.
Thank you very much, everybody, for your interest in our results call. I hope to see you next quarter with, again, great news from our company. Thank you very much.
Thank you. This concludes today's conference call. We will now be closing all the lines. Thank you and goodbye.