Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra UNO's third quarter 2023 results conference call on the 25th of October, 2023. Please note that at this time, all participant lines are on 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 now like to pass the line to Mr. André El-Mann, the CEO of Fibra UNO. Please go ahead, sir.
Thank you, Mike. Thank you, everybody, for your attention to this call. We are now presenting our third quarter of 2023 results, and we are very excited and very happy about all the things that we have going on in the company. First of all, the results, as you saw, are in line with what we expected to be. We have increases all across the board, and we are very happy to have the company very steady and very predictable on what will be our NOI, our FFO, et cetera. We have been very much pressuring on the expenses in order to raise our NOI margin, which we have in a few bps, and we expect to continue the trend in the next coming quarters. As we already disclosed, we just opened our regional mall, Tapachula. We've had in the past various concerns about the location in the Chiapas state.
But finally, we got on with all the permits, we got on with all of our partners there, the grocery store anchors. Finally, we opened to the public, which will be a very successful shopping mall, which is currently leased at close to 90%. We just opened a couple of months ago, and from what we see on the foot traffic, we expect it to be one of the most successful in the country. Aside from that, we are currently under construction on our expansion on La Isla Cancún . We are expanding our high luxury scope there. We already signed the contracts with all the major brands. We already delivered to some of them, and we expect to complete the delivery of all the spaces through this next month of November. We expect them to be open to the public before summer vacation next year.
Aside from that, in the company, we feel very comfortable with the performance of all the different segments of the company. As you know, we reached a very good amount of validation of our initiative to-
Carve out.
carve out the industrial part of the company. This is only to reveal, to lift the veil that is currently covering the real size and the real potential of our industrial portfolio. I know that we have been disclosing and reporting separate industrial sites, and in theory, it should be very visible. But we think that it has not been realized in its entirety, in its real value and real potential. We have, by far, the best portfolio of industrial space. Today, the industrial space is very hot in the world, and especially in Mexico. Jorge will walk you through what we have been experiencing in the last few weeks, and we expect to have a very successful placement of the new company, in which we will contribute with our current properties, current industrial space.
This only will bring good news to our company, and I am very pleased and very excited to share them with you. Aside from that, I would like to pass the mic to Jorge Pigeon in order to go in depth to the numbers. Thank you very much.
Thank you very much, André, and thanks everybody for joining our third quarter results call. I'll go directly into the MD&A as usual. Total revenues for the quarter closed at MXN 6,448,000,000. Basically stable compared to the second quarter of 2023. The main reason why revenues were stable was a combination of factors. Very importantly, a decrease in revenues related to the sale of the Reynosa portfolio, which was finally settled and closed in the second quarter of 2023. We continued to collect rents up to that date when we finally collected. This third quarter, obviously, having collected the money from that sale, we did not have the revenues from the Reynosa property. That's why you saw a drop in that, and obviously that shows in the drop in the industrial sector as well, but it's not because of lack of performance. Quite the opposite.
We'll talk about the leasing spreads in the office sector, but we are very pleased with the performance of that. Also, rent increases resulting from inflation being passed through to our tenants, lease renewals, as well as occupancy gains. We're very happy with the performance of the office portfolio, and we'll discuss that in a second. In terms of occupancy, the overall portfolio, we're at 94% occupancy, so 1% below the target of 95%, which has historically been the target of occupancy that we expect to have at Fibra UNO. Let's say 95% plus or minus 1%. So we're exactly where we want to be in terms of occupancy for our portfolio. Obviously, as André mentioned, the industrial portfolio continues to show very strong performance, stable occupancy at 97.6%. The retail portfolio increased 10 basis points. We're getting close to 91% occupancy.
The office portfolio, we are very happy to report an increase of 170 basis points. As you recall, André mentioning four or five quarters ago that we expected to end 2023 with an 80% occupancy. We are 79.7% occupied in the office sector with stable rents. So we're very pleased with the performance of the portfolio in that regard. The other segment remains stable at 99.1%, and the in-service portfolio recorded an occupancy of 92.6%, an increase of 13.3%, mainly due to the leasing space of the Tapachula shopping mall that André was mentioning. It's going incredibly well. We're very pleased with the performance of this new delivery.
So very happy with the occupancy trends that we're seeing in all of the segments. In terms of operating expenses, the initiatives that we have internally at the company to rein in or control the growth of expenses are starting to work. We saw an increase of MXN 14.4 million, or almost 2% quarter-over-quarter, mainly due to seasonality as well as increases above inflation still by some of our services and suppliers. But as André mentioned, we continue to have this cost control initiative.
So we expect to return to the margins that we were seeing, let's say pre-pandemic levels, closer to the 80% level that we were before. So again, happy with the performance of the portfolio. Property taxes decreased by 4.6%, mainly due to the sale of the Reynosa portfolio. Obviously, insurance expenses remain stable at MXN 98.2 million. In terms of NOI, at the end of the day, what this translates to is NOI remains basically almost flat quarter-over-quarter, an increase of 0.1%, MXN 5.03 billion. NOI margin calculator over rental revenues of 86.6%, and 78% of our total revenue.
We're increasing, targeting to return to our pre-pandemic level margins. In terms of net interest expense, we saw a decrease of MXN 32.5 million or -1.3%, compared to the second quarter of 2023. This is excluding a financial expense related to the early termination of some financial instruments that we had in a balance sheet that we sold. Basically, we've had them recorded in the balance sheet as held to maturity. When we sold them, we had to basically mark to market the sale, and that's resulted in a non-cash loss. Basically, an accounting loss of how we had recorded the instrument. An increase in net interest income of MXN 32 million and capitalization of interest expenses of MXN 451 million related to development, basically the final stages of Mitikah, and larely completion of Tapachula and Portal Norte developments primarily.
This was offset in exchange rate depreciation from MXN 17.07- MXN 17.72 per US dollar. The effect of all of the above results in funds from operation controlled by FUNO was an increase of MXN 41.8 million or 2% quarter-over-quarter, reaching MXN 2.216 billion for the quarter. Adjusted FFO is basically the same number, increase of MXN 41.8 million or 2% quarter-over-quarter, MXN 2.2 billion. Mainly, there were no property sales during the quarter, so FFO and AFFO remain the same. During the third quarter of 2023, we did not issue or repurchase any CBFI, so we closed the quarter with 3.8 billion CBFIs outstanding. So the FFO and the AFFO per average CBFI were MXN 0.5823 per CBFI, which represents an increase of 1.5% in both cases versus the previous quarter. Moving on to the balance sheets.
Accounts receivable total MXN 3.1 billion, an increase of MXN 181 million, 6.1% compared to the previous quarter. This is normal, regular business operation activities. In terms of the value of our investment properties, including financial assets and investments in associates, you recall the financial assets is this Mitikah portfolio. Increased by MXN 2.2 billion or 0.7% quarter-over-quarter. Mainly coming from progress in the construction projects under development, largely the Portal Norte is the biggest contributor. We also have still some investments in Tapachula and the final stages of Mitikah. They are still requiring some CapEx to finish stage one. Normal operating CapEx in our portfolio. We had almost zero fair value adjustment in the valuation of our properties, MXN 73.4 million, basically stable quarter-over-quarter. In terms of total debt, we finished the quarter with MXN 131.6 billion compared to MXN 128 billion the previous quarter.
Variation is mainly due to an increase in credit lines of MXN 900 million associated with the development of the Portal Norte projects primarily, as well as minor investments at the tail end of Mitikah. Obviously, the impact of exchange rate variation when the FX went from MXN 17- MXN 17.7 per US dollar. This was slightly offset by the repurchase of bonds that we did for $54.6 million, using the proceeds from asset sales to reduce debt in this way, which we thought was very accretive. Moving to equity. We saw a decrease of 1.6%, including the participation of controlling and non-controlling interests as of the third quarter of 2023. This is a combination of the net income generated by the quarterly results, the valuation of derivatives, shareholders' distribution related to the second quarter results, and the provisions of the employee compensation plan. Moving to the operating results.
As André was mentioning, we are very, very pleased with the performance of our portfolio. As we are now in the process of working to carve out the industrial portfolio, we are very pleased to see that we have a 17.7% leasing spread in peso contracts in the industrial segment. Almost 8% increase in other segment, 7% increase in retail, and 40 basis points decrease or basically flat rents in the office sector. So as you recall, we have always been saying that we expected to see occupancy gains in the office sector without rental increases. This is exactly what is happening. If you recall also, we said that we expected to continue to see an increase in occupancy with strong performance in the retail sector. This is exactly what we are seeing. Again, very solid performance in the industrial sector, which is exactly what we are seeing.
Moving to dollar contracts, we saw an increase of almost 8% in dollar contracts. Very happy with that. 7% in dollar contracts in the retail segment, so very solid performance in the retail segment. 2.3% increase in dollar-denominated rents in the office sector. We are very happy to see that even with a market that is not as solid as the other markets, we are seeing increases in occupancy. At the end of the day, the ability to maintain the average rent of our portfolio stable, which is exactly the prediction that André gave us of what his expectation was for the business about a year ago. We are spot on to what we expected to be by the end of the year, so very happy with that performance as well. Looking at constant properties, the rental price per square meters increased 3.4%.
We recorded a 2.9% decrease in real terms when we compare to inflation. Basically, this is mainly due to the changes in the peso-MXN FX appreciation of 11%, which obviously had a negative impact on constant property performance. There is a natural lag in higher inflation being reflected in our contracts, and the renewals of some office rents, as we were mentioning, without some increases. Performance of the portfolio, as André mentioned, exactly predictable as we expected. So very pleased with the performance that we have. At the sub-segment level, the portfolio's annual rent per square foot increased from 11.8- 12.1, or almost 2% increase, mainly due to increase in current contracts, new contracts, and some of the renewals with the leasing spreads that you saw described above. NOI at the property level for the quarter increased 1.2% compared to the previous quarters.
The variations were mainly due to the following. The industrial segments logistics decreased 2.8%, and light manufacturing decreased 17%. This is basically the sale of the Reynosa portfolio Business park decreased 0.8%, basically flat quarter-over-quarter. In the office segment, we saw an increase of 7.6%, which is mainly the result of the recovery of 170 basis points in occupancy with sort of flat rents. The retail segment, the standalone NOI sub-segment remains stable. Regional centers increased by 7%. Fashion mall increased by almost 1%, and this is mainly due to the effect of increases in renewals and some occupancy gains that we are seeing. The other segment, NOI increased 1.2%, mainly due to variable rents related to hotels' seasonal effects, and we can have more detail on the sub-segment performance on page 25 of our report.
With this, we close the discussion of MD&A results for the quarter. Again, very pleased with the performance of the portfolio. Very predictable, exactly as we expected. Solid recovery in office, strong performance in retail, and very strong performance of our industrial portfolio. Mike, now, if we can open the floor to Q&A.
Thank you very much, Jorge. We will now be moving to the Q&A part of the call. If you have a question and dialed in via the telephone, please press star two. That is star two on your keypad. If you dialed in via the web, you may also ask a voice or a text question. We acknowledge a text question that came from Alexander already. We will give a few minutes or so for the questions to come in. The first question will be from Juan Ponce from Bradesco BBI. Please go ahead, sir. Your line is open.
Hi. Good afternoon, everybody. Thanks for taking my questions. Congrats on the results. My first question is for André. You mentioned in the CEO comments that this is only the beginning of what we have in mind for FUNO and its future. Can you expand on that? What is the long-term strategy for the company following the listing of Fibra Next and advisor internationalization? Thanks.
Sure. Thank you for the question. We expect to continue to be part of the industrial space through the new company. We do not expect to bail out of the industrial business, and I think that this business will continue to grow. As for the rest of the portfolio, we are expecting to fill up the spaces. We are gaining occupancy quarter on quarter for a while now, and we expect to surpass the pre-pandemic levels in no time. Actually, in the retail space, I think we are over the pre-pandemic level, and we are still missing the pre-pandemic level on the office space, which we intend to reach next year. So in that sense, we will fill up the spaces that we have. We are experiencing, nowadays, very healthy leasing spreads in the ex-industrial spaces.
We expect that this trend will continue, and we will cover up all the missing spaces that the pandemic left us in the company. That is why we expect very good times to come for the company.
Got it. Thank you very much. I have a second question, if I may. The asset disposition pipeline has been delayed a little bit in the past. How confident are you in executing this revised timeline that you put in the report? Thank you so much.
We have been under negotiations with the counterparties. Probably the ones that are closer to be closed during this end of the year will be the hotel as well as the retail part of it. Probably we will be able to close as well one of the office buildings that we have been getting some interest. Actually, we have an LOI on the table. We have to tune up a little bit the prices, but we are still working on the three segments.
Okay. Thank you very much.
Okay. Thank you very much. Our next question comes from Mr. Andres Mendez from Santander Asset Management. Please go ahead, sir.
Hi. This is Alberto Mendez. Sorry the name was incorrect. Good morning to everyone, and congrats on your strong results. I just have a quick question regarding the decrease in the FFO. I do not know if you can tell us the reason of this decrease. It is just a small question.
Sorry, the FFO did not decrease. Actually, it was a slight increase in FFO, if I read my notes correctly.
1.9%.
1.9%, almost 2% growth quarter-over-quarter.
It was not minus almost 3%?
No.
Compared to the last year, to the third quarter of last year, it's -2.6%. The main reason behind it is the increase in interest rates throughout this year. We have been seeing that effect in our FFO. Our NOI actually has been growing healthy every quarter, but because of the growth in interest rates, our FFO was having some decreases, but this is the first quarter where we can show a slight increase because interest rates now are-
Stable.
are stable. I don't know if that was the decrease that you were referring.
Okay. Yeah. Thanks for the clarification.
Okay. Thank you very much. Our next question comes from Mr. Edson Munguía from Summa Capital. Please go ahead, sir.
Hi. Good afternoon. Thank you for taking my questions. The first one is related to the office segment. Did you do something differently to increase the occupancy rate? My second question is regarding, if I understood correctly, there is a LOI in the office segment about recycling or selling on a specific property, if I understood correctly what Gonzalo was saying. Thank you.
Yes. We have an LOI to buy one of the buildings that is located on Insurgentes, and the guys that are trying to get it are guys that will be converting it into residential. We are still on the negotiation field with them, but that's the use that they will be giving to it. In terms of if we have done something special in the office sector, actually in all sectors, we are doing extraordinary efforts in order to raise our occupancy. Obviously, in the office, it's the toughest one. But at the end, we are trying to capture whatever absorption the market has. It has to pass through us first.
It's only we are doing 20-hour shifts is the only
It's the only secret.
Only seven days a week.
André makes it look easy. But in reality, the prediction of being able to be at 80% occupancy right now comes from 40 years of experience in the market and understanding the trends that we're seeing, et cetera. It is hard work. There's a lot of hard work behind it, but it's not that we're creating any magic. One thing that does work, obviously, in our favor, and it is part of the business model of the company, is that when you have great buildings with great locations, those are the ones that are preferred by the tenants.
Okay. Thank you so much, and congrats on the fantastic results.
Thank you.
Thank you.
Okay. Thank you very much. Our next question before we go to the text questions is from Nicolas Fabiancic from Jefferies. Please go ahead, sir.
Hi. Congratulations on the strong results. I was a little surprised that there was not more discussion about the details of the Next IPO transaction, as we were excited to hear about that after the filings you made to the stock exchange of the prospectus and the roadshow presentation. Just two questions here from the perspective of FUNO bond holders, okay? The first is that the prospectus refers to an offer to exchange on the bonds, where 50% of each bond issuance, except the 2024s, would be moving to identical bonds at Next. I wanted to ask if this transaction structure is already confirmed, or is this just a placeholder in the prospectus?
It is a placeholder. It is the intention of the company to do something along those lines, but we will be able to discuss that once we have a formal offering memorandum, so we can discuss all of the details that I am sure every single one of our bond investors is keen to understand. We appreciate your patience with us to be able to discuss this in detail. At this stage, it's just a placeholder to try to explain what we're trying to do. But the details will come when we have a prospectus. Unfortunately, we cannot comment more than that at this stage. I am sure that you and all of our bondholders are going to have questions along those lines.
Okay. Thank you.
Okay, thank you very much. We will now move to the few text questions. Next one is from Kamal Busari from Barings. What was the cause for the delay in the asset divestment plan?
Cause of the delay in the asset divestment plan? I think it is just part of the normal negotiations when you start getting closer to signing and closing. Gonzalo can give you a little bit more color. We have firm offers for the assets on the table.
In two of the cases that are actually being negotiated, they depend on financing. As you know, rates have been not as stable as everyone was expecting at this stage. That is why it is also taking a little bit more.
Okay. Thank you very much. Our next text question comes from Martin Zetsche from Fundamente Capital, and his question is, regarding the line on anticipated liquidation on financial instrument expense, what is this specifically?
Thank you. Back in 2021, we decided to purchase some Mexican government bonds denominated in UDIs, which is a unit that hedges the inflation. We decided to purchase those bonds in order to hedge the movement of the UDI, because we also have ourselves debt issuances denominated in UDIs.
This quarter, we decided to liquidate that position in order to get ourselves with cash for investing on the advancement in properties, in CapEx, rather than using our short-term lines that right now, the current level of the TIIE, it's very expensive. We decided to liquidate that, and also that all the movement from the UDI, because of the high inflation, as far as we expect and think, is already behind us. We think that the inflation is now more steady, so we thought that was the best use of those investments. At the same time, that investment was registered as held to maturity, so it was not valued at mark to market. That's what you saw that expense on our numbers. But as Jorge explained, it's just an accounting expense. It has nothing to do with an outflow of funds or nothing related to operations.
Before we move on to additional questions, I just wanted to highlight that we're looking at the text questions, and there are a lot of questions from our bond investors. I apologize for not being able to address your questions at this time. We obviously need to have an offering memorandum available to be able to discuss all of the bond questions in detail. We expect to have that available shortly. I appreciate your patience with us in this regard.
Thank you very much. Just a reminder, once again, star two for any additional questions. We'll take a question from Juan Barreto from Macquarie Capital. Please go ahead, sir. Your line is open. Once again, Mr. Juan Barreto, your line is open in case there are any questions. Okay, we'll give another minute or so for any additional questions to come in.
Michael, if there are not any additional questions-
No, it looks like all the questions were nicely answered on the call. I'll pass the line back to you for the concluding remarks.
Well, thank you everybody. Thank you for your attention to this call, and we expect to hear from you and for you to hear from us in the last quarter of the year. In the meantime, thank you very much, and have a good day, everybody.
Thank you very much. This concludes today's conference call. We will now be closing all the lines. Thank you, and goodbye.
Bye.