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Edited Transcript of FUNO11.MX earnings conference call or presentation 28-Feb-19 6:00pm GMT

Q4 2018 Fibra Uno Administracion SA de CV Earnings Call

Mexico, D.F. Mar 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Fibra Uno Administracion SA de CV earnings conference call or presentation Thursday, February 28, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André El-Mann Arazi

Fibra UNO - CEO & Director

* Fernando Alvarez Toca

Fibra UNO - CFO

* Gonzalo Pedro Robina Ibarra

Fibra UNO - Deputy CEO

* Jorge Humberto Pigeon Solórzano

Fibra UNO - VP, Markets & IR

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Conference Call Participants

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* Adrian E. Huerta

JP Morgan Chase & Co, Research Division - Senior Analyst

* Alan Macias

BofA Merrill Lynch, Research Division - Analyst

* Armando Rodriguez

Signum Research - Stock Market Analysis Manager

* Daniel McGoey

Citigroup Inc, Research Division - MD and Head of Research of Brazil

* Eugenio Saldaña

GBM Grupo Bursátil Mexicano SA de CV Casa de Bolsa - Analyst

* Francisco Chávez Martínez

BBVA Corporate and Investment Bank, Research Division - Chief Analyst

* Gordon Lee

Banco BTG Pactual S.A., Research Division - Director of Latin America, Country Specialist & Strategist for Mexico

* Marimar Torreblanca

UBS Investment Bank, Research Division - Director & Product Mngr for LatAm

* Pablo Ordóñez

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Vanessa Quiroga

Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil

* Victor Tapia

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Wilfredo Jorel Guilloty

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Jess, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fibra Uno's Fourth Quarter 2018 Earnings Conference Call. Fibra Uno issued its quarterly report on Wednesday, February 27, 2019. If you did not receive a copy via e-mail, please do not hesitate to contact us in New York City, at (646) 284-9435.

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance with the IFRS and are stated in nominal Mexican pesos, unless otherwise noted.

Joining us today from Fibra Uno in Mexico City is Mr. André El-Mann, Chief Executive Officer; Mr. Gonzalo Robina, Deputy CEO; Zury Attie, Executive Vice President of Strategy and Finance; Fernando Alvarez, Vice President of Finance; Mr. Javier Elizalde, Vice President of Treasury; and Mr. Jorge Pigeon, Vice President of Capital Markets and Investor Relations.

I would now like to turn the conference over to Mr. André El-Mann. Sir, please begin.

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André El-Mann Arazi, Fibra UNO - CEO & Director [2]

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Thank you, Jess, for starting the call. Ladies and gentlemen, thank you for joining us for the Fourth Quarter '18 Results Call. I want to start this call by stating that I am extremely pleased with the very strong results posted by our company. You may be getting used to seeing occupancy around 95% and margins of our rents above 85%. It takes a lot of hard work from everyone involved at FUNO to achieve this.

Regarding this no small feat, this fourth quarter of 2018 marks our 32nd consecutive quarter with occupancy close to our target of 95% mark, and NOI margin of the rents above 85%, which were both commitments and goals of FUNO at the time of our IPO.

And having grown 32 consecutive times uninterrupted is a result of the effort of a great team and a reflection of our day-1 design plan.

I am very pleased to -- with the operation of the company, which are reflected in an outstanding financial performance. I would like to highlight that property income grew 22.6%; NOI grew 14.8%; FFO grew 29.3%; and AFFO grew 22.6% when compared to the fourth quarter of 2017.

These figures are remarkable when you consider the size and diversity of our company. To put things in perspective, this quarter led us to finish 2018 with a total income of MXN 17.2 billion; NOI of MXN 13.6 billion; FFO of MXN 8.5 billion; and AFFO of MXN 8.7 billion.

We are approaching a MXN 9 billion of cash flow generated by the operation of our company, which, to me, is an impressive figure and showcases what we have been able to achieve at FUNO.

We understand that we must talk of uncertain metrics on a per-share basis. And in this regard, FUNO delivered distribution growth of 12.7%; NOI growth of 10.3%; FFO growth of 24.3%; and adjusted FFO growth of 21.3% versus fourth quarter of 2017.

Again, I want to highlight and stress emphatically that our FFO growth per share was 2,010 bps over the inflation recorded. I'm sorry, I think I misread. No, it's 2,010 basis points over the inflation recorded during the year.

As we've said in the -- in our last FUNO day, we expected the company to begin to accelerate per share growth starting in 2019, and into 2020, as recent acquisitions stabilize into the portfolio under our management. Apollo II, for example. And development began to deliver cash flows.

I am very pleased to announce that also as we said during the most recent FUNO Day, we managed to deliver a 98% AFFO payout ratio for the year of 2018 without decelerating the rate of growth of our distributions.

We are very pleased to see that, indeed, this quarter marks what we expect to be the early stages of acceleration of growth on a per-share basis.

There are several factor contributing to this. First, during 2018, Torre Cuarzo and Midtown Jalisco were delivered. Midtown Jalisco is one of the crown jewels of -- in FUNO's portfolios. I would love for you to see that property, and you will understand why I fall in love with our buildings. This is one such very clear example, additionally.

During 2019, we expect to complete and deliver for operation Mariano Escobedo, La Isla Cancun II, and La Viga, which will also begin contributing to our cash flow generation.

The value of FUNO is in its buildings, and it is these values that drives cash flow generation. Shifting gears a bit, as of today, we expect to continue the combination of asset recycling and share repurchase that we have managed recently. I want to stress once more that, on average, we sold assets at a 30% premium versus our NAV and acquired shares at an average price of MXN 25.84 per share purchased, creating significant accretion for our CBFI holders. We sold assets totaling approximately MXN 1.4 billion and repurchased little over 77 million shares, approximately 2% of reducing the gap between NAV and the share price -- approximately 2% of the total outstanding shares.

On the asset acquisition front, we acquired 21% additional stake in Torre Mayor, one of the crown jewels, not only in FUNO portfolio but in the whole country, consolidating our position as the largest shareholder in the building with a majority stake. We believe that the continued volatility and noise on the financial market we perceive is likely to create additional M&A opportunities as the year goes along.

We will be ready to take advantage of those opportunities as they present themselves.

The quality of our assets is beyond doubt. The primary eligibility criteria is sustainability. Will the acquisition of any potential asset provide us the groundwork to be able to deliver continuous growth for, let's say, 32 continuous quarters without challenge? This strategy has paid off. Our company has no competition and is running alone in this track. The long and continuous efficiency and profitable growth of our portfolio has no contest. We pledge to work very hard to make sure this trend will continue long and steady into the near future.

The exceptional nature of our portfolio is offering us a very solid foundation to rely upon.

Regarding asset disposition, I want to stress that we are not putting assets for sale, rather we are equally willing to listen to offers from interested buyers for properties as small as a plot of land or as large as a significant portion of our portfolio. We are always willing to listen.

Today, we continue to see a very dramatic disconnect between the public and private markets. Just as an example, we are aware of a large private-sector transaction in the industrial segment, where top tier non-Mexican institutional investors bought a portfolio of mainly light manufacturing and logistics operation that closed at a current cap rate in the mid- to low 7% range. And others took place at a below 7% range.

This transaction signals to us that there are others who share our view. Mexico continues to offer excellent investment opportunities in the real-estate sector, whose fundamentals remain solid, and the sector, privately is still far from reaching its full potential value, and even less so if we look at valuations in the public markets.

I want to stress that our business is a long-term business. And as such, we will maintain our focus on the long-term sustainable success of our company.

We understand that life as a public company brings opportunities and challenges, and we must navigate between the shorter-term expectations of being a public company with our experience and know-how of long-term proven success in the real-estate business. As I have stated many times, the best is yet to come.

Now I will ask Jorge Pigeon, our VP of Investor Relations, to continue with the discussion of our results, and then open the floor for our Q&A session.

Jorge, please continue.

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [3]

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Thank you very much, André. Thanks, Jess. Thanks, everyone, for joining our results call. I'll go into the MD&A comparing the fourth quarter of 2018 to the third quarter of 2018.

In terms of revenues, property revenues increased by MXN 169.5 million to MXN 4.51 billion, which is 3.9% above revenues for the third quarter of 2018. This is mainly due to the seasonal growth in variable revenues, which normally happens as an increase in the last quarter of the year. The increase in the additional fiduciary rights we received due to the acquisition of the 21% stake in Torre Mayor. The effect of renewals above inflation, you see our leasing spreads in both, in pesos and in dollars. We are with a healthy spread above inflation, of 300 basis points (sic) [330 basis points] above the annual inflation in pesos, and inflation was 4.9%. And 140 basis points in dollar terms with inflation of 2.4%.

The rental price per square meter in constant properties is 360 basis points above the weighted average inflation of 4.2%. This weighted average inflation considers the mix of revenues that the constant property portfolio has for that comparison. So in many and all metrics that we look at, we see significant growth above inflation of our revenues.

And additionally, we are seeing also the first full quarter of Apollo and Torre acquisitions, which happened during the fourth quarter of 2017. So we are comparing a full quarter of those 2 portfolios that were only in the fourth quarter of '17 for a few days.

In terms of occupancy, the occupancy was basically flat compared to that of the previous quarter, 95.3% versus 95.4%. This variation is minimum, and it's explained by the normal movements of the real-estate market. If we look at the retail segment, stable occupancy of 94.8%, the same as the previous quarter.

In industrial, we have a slight drop of 20 bps. And on the office segment, we have a slight increase of 20 bps.

In addition, the in-service properties, we increased by 108,000 square meters, basically the Midtown Jalisco property that André was alluding to. And I have to agree with him, having visited the property, it's impossible not to fall in love with those buildings. I would like to invite you to all to visit the properties because it's really a one-of-a-kind property. So the in-service properties increased 108,000 square meters, and the total occupancy of in-service properties increased, including the inclusion of Midtown Jalisco, from 38.2% to 48.5%. So we are seeing a very solid performance in the leasing of these properties. And we're very happy with how the properties in development are starting to perform once we've finished construction.

In terms of maintenance, expenses, property taxes and insurance, maintenance expenses increased MXN 36.7 million or almost 9% from the previous quarter. This is a result of basically a lot of accumulated expenses that tend to happen at the end of the year. There's a little bit of seasonality regarding this in the business. People hurry up and put their invoices for services rendered during the year. We end up receiving a lot of those during the fourth quarter. So this is normal to see this type of acceleration of expenditure during the fourth quarter.

In terms of insurance expenses, we have an increase of MXN 8.3 million, 13.3% versus the previous quarter. This is the result of adding new properties to the portfolio. For example, the Midtown Jalisco property is now an operating property and no longer under development. It's part of the operating portfolio. And property taxes increased MXN 4.9 million or 4%. And this is something that's obviously not under our control. And it has to do with some properties, for example, when they're in development, maybe we're paying taxes as land, and once that property becomes operational, the municipality adjusts taxes for an operating building instead of a plot of land. So this is also normal to see a -- this type of increase.

At the end of the day, bottom line is, that our net operating income increased by MXN 138.1 million, or 4% from the third quarter of '18. And the NOI margin calculated over property revenues, that means excluding the effect of maintenance expenses and reimbursements, was 87.8%, which, as André mentioned, is above the target committed at our IPO of being above 85%.

In terms of interest income and expense, net interest expense decreased by MXN 8.7 million or 0.9% compared to the third quarter of '18, mainly derived from 3 factors, the amount of capitalized interest associated with development for the quarter was MXN 574.5 million for a total of about MXN 1.2 billion almost MXN 1,191.7 million for the year, a decrease in interest revenue. And the increase in the total balance of debt as I will explain a little bit further down.

Funds from operation as a result of the above. The funds from operations controlled by FUNO, excluding a minority interest, increased by MXN 150.23 million or 6.8% compared to the third quarter of '18, reaching MXN 2.35 billion. Gains in investment of -- on the sale of investment properties during the quarter, we recorded the close of the penthouse of Reforma 155. You'll recall we announced the sale of this -- of the several floors we owned in this building, which was a condominium. A few months ago, we finalized the sale of the last portion of Reforma 155, and that represented a gain of almost MXN 50 million. It's worth mentioning that, as André said, that we will continue with the asset-recycling policy. We're not putting our portfolio up for sale, but we're open to receiving bids for our assets, be it a small plot of land or a substantial portion of the portfolio.

Adjusted FFO, including the effects of the sale of property, increased MXN 135.2 million or 6%, totaling MXN 2.4 billion. FFO and AFFO per CBFI increased also during the quarter -- during this last fourth quarter, we repurchased 35.2 million CBFIs in the market, which is equivalent to 0.10 of the total outstanding at the time, for a total of MXN 844.26 million, and obviously, this contributes to the positive impact of the per-share metrics, which grew FFO and AFFO 7% -- 7.8% and 7%, respectively.

Importantly, I'd like to highlight, again, as André mentioned, that we reached the 98% AFFO payout, which is in line with one of our important FUNO Day commitments, which was not to decelerate the rate of growth of our dividends and be able to reach a payout that was below our AFFO, which is cash flow generation of the operations.

Now shifting to the balance sheet. Our cash balance stands at MXN 4.4 billion. Accounts receivable in the quarter totaled MXN 1.3 billion, MXN 70 million below those of the third quarter. And it's mainly an increase in our administration efficiencies and collection process.

In terms of investment properties, the value of our investment properties increased by almost MXN 11 billion, MXN 10.6 billion, which is then a result of the net effect of several factors. Investment at existing properties under development. We continue to invest in La Isla II. We continue to invest in La Viga. We continue to invest in Guanajuato, et cetera, and other properties that we have under development. We continue to put more cash into those projects as we finish construction.

The closing sale of the penthouse of Reforma 155, the effect of asset revaluation, including investment in associates and properties that were moved from the development to in-service portfolio as well as the acquisition of 21% of Torre Mayor.

In terms of debt, total debt for the company totaled MXN 79.8 billion compared to MXN 75.5 billion recorded the previous quarter. The increase stems from the net effect of several factors. The depreciation of the foreign exchange, which went from MXN 18.81 at the close of September 30 to MXN 19.65 at the close of December. Remember, that we have $1.8 billion of U.S. dollar denominated debt, and we have hedged $450 million of those $1.8 billion. So we have $1.35 billion net U.S. dollar denominated debt. And obviously, the FX fluctuations has an effect on this debt. That made the debt increase.

We also drew down MXN 2 billion short-term revolving credit line used to pay projects under development as well as the acquisition of the additional stake in Torre Mayor. And we started, for the first time, using our line of credit at Mitikah. We drew MXN 600 million for the Mitikah development.

The net effect on the trustor's capital, or equity of the company, was an increase in MXN 4.3 billion or 2.8%.

This includes the controlling and noncontrolling participation in the fourth quarter. This is the result of the increase in the estimates for the employee compensation plan and executive bonus. The net effect of the net results of the net income or net effect of the quarterly results, the repurchase of CBFIs, and obviously, the distributions related to the third quarter of '18 results.

And with this, I conclude the MD&A portion of the quarterly results presentation. Jess, if you could please open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Pablo Ordóñez at Itaú

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Pablo Ordóñez, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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Congratulations on your results. Regarding your buyback activity, will this activity continue to depend on asset sales? Or will you also consider allocating certain funds to maintain the buyback? What I'm trying to get an idea is, what will be your priority this year in terms of your capital allocation? Are you seeing more opportunities in buybacks? In acquisitions? Or in developments?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [3]

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Sure. I would like to tackle this question from a strategic point of view, and then, we'll go to the specifics. Real estate is an opportunistic business. And as such, we have to maintain that focus. We are, as we have always say, real-estate driven. So we'll -- the opportunities that present themselves are going to drive the decisions that we take in terms of capital allocation through the year.

As of today, given where the share price is trading today, we are obviously interested in continuing our buyback program. The way we have managed the buyback program has been to use the proceeds from asset sales, and we expect to continue to do it that way. We are not that keen on the idea of borrowing money to do asset -- share repurchases. We don't mind, for example, borrowing money if I know that I'm going to sell something in the following quarter. That would be okay. But as a strategic decision, borrowing money for a share repurchase is something that we are not going to be doing.

And regarding capital allocation between acquisitions and developments, at the end of the day, it's going to depend on what opportunities we see down the road. Obviously, development normally has a higher yield than stabilized acquisitions. But you have to look at things on a case-by-case basis. As a very good example of this, we saw the opportunity to buy a significant stake that would put us as the majority shareholder in one of the crown jewels of real estate in Mexico, which is Torre Mayor, and obviously, we took advantage of that opportunity, at the same time that we continued with the repurchase of CBFIs with proceeds from asset sales.

So I know it's not a specific answer to that, like you would like to be able to put in your model, that Fibra Uno is going to put this amount of money to each and every one of the categories. That's not how we work. We're opportunistic, and if the remaining of Torre Mayor comes up for sale, we'll be looking at it. If the share price continues to be where it is, and we have someone bidding for assets, we're going to be buying back shares. So it's opportunistic.

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Operator [4]

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We'll go next to Eugenio Saldaña at GBM.

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Eugenio Saldaña, GBM Grupo Bursátil Mexicano SA de CV Casa de Bolsa - Analyst [5]

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In the last FUNO Investor Day, you mentioned that you were analyzing several possibilities to enhance value. Some possibilities were internalization and you mentioned some more. I mean, it would be helpful if you give us some update on this, what are you seeing?

And secondly, I mean, I saw that you acquired a land plot in Matamoros. I just wanted to know, I mean, your -- what are you seeing there? I mean, given the recent environment there? And if you see this as an opportunity? Or sale -- or acquisition? Or something like that?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [6]

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I'll take the second question first. And then I'll tackle the first question. What we're seeing in Matamoros is demand. And that's why we bought the land because we see demand from someone who wants to have a warehouse there, and we're building the warehouse and delivering for a customer that wants a warehouse. We grow, as we've said, since day 1, with the customers. We see the demand there, and we're delivering a building for one of our clients. It's as simple as that.

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André El-Mann Arazi, Fibra UNO - CEO & Director [7]

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Otherwise we would have lost one of our client, instead of growing with one of them.

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [8]

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Exactly. So -- it's nothing -- no rocket science. It's -- our customers want to grow with us. We want to grow with our customers, and that's the business model of Fibra Uno. So what we're seeing in Matamoros is that demand from a customer that wants to have a facility there.

Regarding the internalization question. I want to say this, the market has focused on internalization as the Holy Grail of something perceived by the market as an issue. We understand that the market has this concern, we've said it many times, and we said it at the Investor Day. And I will reiterate what we said at the Investor Day; we are aware, we are analyzing all of the different alternatives, and internalization is not the only one. There's a lot of other things that we can do to deal with the perceptions that some people may have. And at this time, it's not feasible to take action specifically on the internalization. It's in the pipeline of one of the 20 or 30 different ideas that we may be analyzing. So nothing has changed in terms of the message we have since the Investor Day.

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Operator [9]

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We'll go next to Alan Macias of Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [10]

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Just 2 questions. First, if you can provide an updated FFO per share expectation for this year. And if you can provide us with your expectation for capitalized interest levels for this year. And the second question is concerning of Mexico City government, if it has opened up the permit windows so far? And how do you see the development environment in Mexico City going forward?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [11]

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Thanks, Alan. I will ask Gonzalo and Fernando to tackle questions 2 and 3. Regarding FFO guidance, we have shied away from giving 1-year guidance. I understand that the investors and analyst community love the idea to have yearly and even quarterly guidance. We don't want to go there because what happens if one of my buildings is a little bit late in delivery because the tenant required us, which is the case, for example, to do certain specific TIs in Mariano Escobedo. Mariano Escobedo, probably we should have delivered the building already, but the tenant wants us to do some TIs in the building, and maybe that delays it 2 months. And if I gave you 2 months' difference with that building, then we're going to miss the guidance. So I would stick to the guidance we gave on the Investor Day for the next 3 years. We are very comfortable with meeting or exceeding that number, but we're not specifically giving guidance for 1 year. Now I'll ask Alvar to take the second question regarding capitalized interest.

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Fernando Alvarez Toca, Fibra UNO - CFO [12]

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Sure, Jorge. Well, regarding capitalization of interest, this year, 22% of our total interest were capitalized in our development portfolio. For the -- well, last year, I'm sorry. For this year and the next periods, what we should expect is for us to continue to advance on our developments and therefore, capitalizing interests as we have been doing it for these last quarters. Even though some of the projects are going to gradually become operated, we should remember that there is one very large project that is Mitikah that is entering in a phase of heavy investment. And the rest of the investment that we are expecting to do in that project is going to come from that. So I think that more or less a similar range of capitalized interest is a fair way to estimate what we are seeing for the next periods.

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Gonzalo Pedro Robina Ibarra, Fibra UNO - Deputy CEO [13]

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Okay. In terms of the third question, which is the development in Mexico City, I will probably say that all our constructions are up and running compared with our peers. As you may have read on the news, at least there are 10 large or mega constructions that are at [Gran Turaba]. And as of today, we need -- we are getting the benefit of having all permits and licenses in place since day one. When we start construction, we don't start until we have all permits and licenses in place. And as you may be aware, Mitikah, which is the largest construction going on in Mexico City, it's up and running. We haven't had a single delay due to a closure of the buildings. I will consider that this is a benefit or an advantage that we will have with our competitors or peers since we will be ready on the market with our buildings before they do.

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Operator [14]

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We'll move next to Gordon Lee with BTG.

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Gordon Lee, Banco BTG Pactual S.A., Research Division - Director of Latin America, Country Specialist & Strategist for Mexico [15]

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Two quick questions. The first is you provided some information on leasing spreads for the quarter, which were pretty impressive. I was wondering what you could say, anecdotally, of how leasing spreads are looking in -- at the beginning of the year given that some metrics that we're seeing from an economic standpoint would suggest that things are slowing down a bit. I was wondering whether you were seeing that in the types of contracts you're renewing. And the second question, I guess, related to that and related to some of the, I guess, pessimism that we've seen over the last 2, 3 months with regards to Mexico. Do you think there'll be opportunities from an asset buyer standpoint to the degree that there will be sort of panicky sales or nervous sales of properties? I think we're seeing that a little bit in the residential sector, but I was wondering if you think that might be an opportunity in the commercial or the office sector?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [16]

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I'll take the first question regarding the status of leasing spreads, Gordon, thank you. No. We have not seen a change of course, in the direction of the business. From our point of view, on our weekly leasing committees and that level of demand for space, we continue to see a very steady performance. We continue to see significant increases in our leases, as you have seen, very healthy leasing spreads above inflation. That continues to be the case as of today. If next week things change, we can talk about it next week. But as of today, it's business as usual in terms of how we are seeing the business perform. And then for the second question, the -- do we expect asset sales or panic sales in our sector, I'll ask André or Gonzalo to take a chance at that one.

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André El-Mann Arazi, Fibra UNO - CEO & Director [17]

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Well, actually, we haven't seen it. We are eager to see them and take them. We are ready to take them. And as of today, I haven't seen any of quality product come into the market due to a panic situation of a -- the developer or the owner. So we would like to see them and we are ready to take those opportunities.

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Operator [18]

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We'll go next to Dan McGoey with Citi.

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Daniel McGoey, Citigroup Inc, Research Division - MD and Head of Research of Brazil [19]

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Congratulations on the results. Question, if I may, on the debt. It increased a fair amount in the fourth quarter by about MXN 4 billion. You outlined the reason why on a number of the development projects or the acquisition and stake in Torre Mayor. I'm wondering for 2019, if you have an expectation of how much debt will increase. And the loan-to-value is relatively unchanged, but the debt -- net debt to EBITDA is now slightly above 6x. So I'm wondering if you have any sort of limits or any sort of expectation of where you think that leverage ratio might peak?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [20]

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Thanks. Well, yes, as you just mentioned, loan-to-value -- our loan-to-value right now is running around 33%. We think that that's a very healthy value. Also, the rating agencies -- agrees -- agree with us. How our debt is going to behave throughout the year is going to depend a lot on mainly the opportunities for acquisition that could appear. If business remains as usual, as we are seeing it right now, where we are just focusing on operations and development, I think that we are going to keep our current debt ratios where they are or even improve them. Specifically, the one that you mentioned, debt to EBITDA, we expect to see that ratio going down as our rents grow and as our development projects become operative and begin to produce rents. We expect that ratio to improve. But obviously, if an acquisition appears, this could change. But certainly, we are very focused on these type of ratios. And our investment grade is a top priority for us. So those are the limits that we are going to consider in order to go ahead with any acquisition or a project like that.

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Operator [21]

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We'll go next to Adrian Huerta with JPMorgan.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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Two questions, if I may. And congrats on the results. One on the pipeline for acquisitions. You had on the presentation, MXN 3.9 billion for investments on the commercial side. If -- just if you can give us more details on which portfolios are included here? And the second one is the prospects for HELIOS. What other investments are you seeing, or is there a chance that HELIOS could start a new project soon as well?

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André El-Mann Arazi, Fibra UNO - CEO & Director [23]

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Thanks, Adrian. Regarding the acquisition, it's one that's been in the acquisition pipeline for a while. It's part of the Turbo portfolio. We closed on most of the Turbo portfolio, but we're missing 2 retail properties, prime, fine retail properties in Querétaro, shopping malls that we have in Querétaro that we have other owners in those properties. And those -- and that is the acquisition pipeline that we have pending as part of the Turbo acquisition. And all of you have all the details on that from a lot of the previous presentations.

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Gonzalo Pedro Robina Ibarra, Fibra UNO - Deputy CEO [24]

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And with regards to HELIOS, we are actually analyzing 2 properties that may be contributed into HELIOS to be developed. One of them is a retail, and the other one can be -- actually, it will be the retail with a mixed use. And the other one is an office building that can be repositioned into housing -- residential housing. So those are the 2 that we are analyzing and will be proposed probably in the next 60 days to the HELIOS committee.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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Perfect, Gonzalo. And just on these properties in Querétaro. If I may recall, some of this investment will actually be paid with shares, is that correct? I think it was like 50-50 mix of this MXN 4 billion?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [26]

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No. I think that we expect to pay with cash and assume some debt that's in very favorable terms, given where current debt levels are. Basically, if you recall, the 50-50 you recall, which is right, was for the whole thing.

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Unidentified Company Representative [27]

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For the whole Turbo portfolio.

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [28]

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Turbo was whole, not specifically for these 2.

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Unidentified Company Representative [29]

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Yes.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [30]

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But this that is left, will be with cash then?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [31]

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Cash, and we will assume debt that's at favorable terms. We're probably going to keep the debt that's in the properties because it's at good terms.

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Operator [32]

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We'll go next to Francisco Chávez of BBVA.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Chief Analyst [33]

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Congratulations on the report. My question is regarding the payout. Now that you have achieved a healthy 98%, what can expect for this year?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [34]

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As we mentioned -- Paco, thanks for the call. As we mentioned, our long-term target is to trend towards 95% payout of our AFFO. So this year, we should be more or less where we are. That's the expectation. It depends on how quickly things go. If developments deliver quicker and we can move faster, then we'll -- the payout probably will be a little smaller. If not, it will be a little higher. But somewhere around where we are.

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Operator [35]

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We'll go to Marimar Torreblanca with UBS.

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Marimar Torreblanca, UBS Investment Bank, Research Division - Director & Product Mngr for LatAm [36]

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My question is regarding also your strategy to do asset sales and then use that for buybacks. Given that there's no amounts that you can really tell us because it's more opportunistic in nature, can you give us some color on the level of interest you have been getting from potential buyers for your assets? And what kind of assets are these potential buyers looking at?

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Gonzalo Pedro Robina Ibarra, Fibra UNO - Deputy CEO [37]

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Okay. Actually, surprisingly for us, we have interest or we have investors that have shown interest in retail as well as office. I'm definite that the most ambitious one will be the industrial, 4 large institutional investors. But we have seen interest on the 3 sectors.

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Marimar Torreblanca, UBS Investment Bank, Research Division - Director & Product Mngr for LatAm [38]

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And would you say that interest is similar to what you were seeing last year? Or have you seen a change in the level of interest in recent months?

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Gonzalo Pedro Robina Ibarra, Fibra UNO - Deputy CEO [39]

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It has grown dramatically, and I would say that I'm surprised at the interest that we have seen for buying out part of our portfolio.

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Operator [40]

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We'll go next to Jorel Guilloty with Morgan Stanley.

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Wilfredo Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [41]

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I have 2 questions regarding your portfolio performance. So first off, if I look at the retail portfolio, we saw a healthy increase in rent per square meter, particularly for the regional malls and neighborhood centers, which grew about 12% year-on-year, above inflation. So could you comment specifically on what drove these rents higher for these assets? Was it more variable rents? Was it higher rent increases? And also, what type of tenants did you see performing well in these assets? And if it's higher rent increases that drove this upwards, should we see even more of that going into 2019?

And then my second question is about your stand-alone assets. We also saw that rents and NOI grew materially, probably more than we would have expected considering the long-dated nature of these leases. So could you comment also on the drivers for the performance for these assets as well?

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André El-Mann Arazi, Fibra UNO - CEO & Director [42]

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I'll take the first one. Talking about the press on the small retailers, if it comes from variable rent or from fixed rent that is renewed, it is one and the same. If a tenant pays you variable rent and it's very well, they will get the variable rent. But if it's the case that you either don't have a variable rent on the contract, but the contract is renewed, then you apply because he is doing so good business that you can -- you have room to increase the rent more than inflation, which is the case on our (inaudible) tenant. You have the room to increase more than inflation because their retailer is doing a good business in your center. So it's one and the same. If he pays you variable rent, you already get his rent. But if the contract is expired, and you're going to renew and the guy is doing good business in your center, you have room to increase more than inflation for him.

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [43]

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And regarding the second question, the explanation is pretty much the same. And we don't only have long-term or long-dated contracts in the stand-alone category. In the stand-alone category, we have a lot of, obviously, stand-alone Walmarts and stand-alone bank branches and things like that, but there's also other types of stand-alone buildings that are included in there. And we were able to renew contracts significantly higher than inflation for these customers as well because their business is doing very well. And we managed to increase rents significantly above inflation. So the explanation is the same.

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André El-Mann Arazi, Fibra UNO - CEO & Director [44]

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And some of them maybe you have leased in the long-dated contract, you lease across the land. They build their own store. And now that it's expired, 20 years later or 15 years later, you own the store and the land and you charge rent for the store and the land.

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Fernando Alvarez Toca, Fibra UNO - CFO [45]

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You can remember that the first portfolio acquired by FUNO was the Azul portfolio, and that's exactly the case of what André has mentioned. There were a bunch of stand-alones leased by [Altea] that have expired. And right now, we are renewing those.

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [46]

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And that included one plot of land that just has a distribution center, and now we own the building and instead of renting the land, we're renting a fully built warehouse, which -- and the rent of that one obviously is significantly higher.

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Operator [47]

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We'll go next to Vanessa Quiroga with Crédit Suisse.

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Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [48]

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The question that I have is regarding the expiration schedule for each segment. Would it be possible to have, more or less, what percentage of your contracts in retail, industrial and office are due to expiration during 2019?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [49]

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Specifically, we don't have that right now available, Vanessa, but we will be very happy to send you the -- share with you the information. We don't see why it should be so different than what we have at the overall company level.

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Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [50]

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Okay. No, that would be great to follow up. And just another question...

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [51]

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More or less 12% of rents expire this year. So it should be something around there for each sector. But we'll give you the specifics. Sorry, go ahead.

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Gonzalo Pedro Robina Ibarra, Fibra UNO - Deputy CEO [52]

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And just to give you an additional factor is that our existing ratio on the renewal is about 90%. That means that our -- each one of the leases that expire, 90% plus of the cases the same tenant renews with the new rent.

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Vanessa Quiroga, Crédit Suisse AG, Research Division - Head of Mexico Equity Research & Co-Head of the Housing & Infrastructure in LatAm excluding Brazil [53]

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Okay. That is very, very helpful. The other question that I have is regarding the asset sales. Are you providing a guidance of -- a percentage of the portfolio that you would be willing to sell in 2019? Or do you think there is a scenario where you don't sell any assets despite all the interest that you are seeing?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [54]

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If you give me an idea of the type of interest, if you put a bid on this now, I'll tell you exactly how much I'm going to sell if your bid is good enough. No, we -- I can't give you the guidance until things materialize. But we're seeing interest from, as André mentioned at the beginning of the call, plots of land to significant portions of the portfolio. And when I say significant portions, we're talking 5% to 10% of FUNO's portfolio. As something as big as that. If something as big as that, they put the right price, we'll sell. But I cannot give you guidance on specifically how much I expect to do. If you put forward a bid, then I'll tell you.

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Operator [55]

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We'll go to Armando Rodriguez with Signum Research.

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Armando Rodriguez, Signum Research - Stock Market Analysis Manager [56]

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Congratulations on these numbers. Well, my question is regarding the payout ratios and distributions. So considering that in previous quarters, you have paid above FFO in order to stabilize distributions, what we should expect going forward and particularly through 2019?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [57]

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We should expect to remain around 98% payout. I think it's something similar to what Paco Chávez of BBVA asked. The payout should be around 98%, 97%, somewhere around there, depends on -- let me put it this way. How quickly we can trend to 95% depends on how quickly we have -- we can fill some of the developments that are coming online.

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André El-Mann Arazi, Fibra UNO - CEO & Director [58]

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And also the rents starting in January is going up steadily every month, every month. Month in and month out through the year. So maybe you will see a higher percentage of the AFFO distribution in the first quarter, and then a decline on the last quarter of the year as you saw in the past year.

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Operator [59]

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We'll go next to Victor Tapia with Bradesco.

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Victor Tapia, Banco Bradesco BBI S.A., Research Division - Research Analyst [60]

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So my first question. I know that you guys announced the bid acquisition pipeline, mainly in the retail segment. And we also know that you guys are real estate oriented and opportunistic. But theoretically, if you guys have an opportunity to make the same investment with the same cap rate in both of the 2 segments, industrial, retail or office as of today, which one of them would you guys prefer in this opportunistic sense? And why?

And my second question is a follow-up about the rental revenues. Just to check if I got it right. Rental revenues are growing about 23% on a year-over-year basis while the rents -- the rental -- the same-store rent is growing about 10% and occupation is growing 1%. So the reason for this gap is that Apollo II portfolio and the Turbo portfolio, they started the operation in the very end of the fourth quarter of '17, so the contribution of these 2 portfolios for the rental revenues in the fourth quarter of '17 was really low and this is where it's a gap of this growth in 4Q '18?

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Jorge Humberto Pigeon Solórzano, Fibra UNO - VP, Markets & IR [61]

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Yes. Regarding your second question, specifically, yes. Apollo II and Turbo contributed for only a few days in the fourth quarter of '17. And we're comparing a full quarter of contribution of those 2 portfolios a year after with our management, et cetera, et cetera. So obviously, that is one of the reasons. And regarding the first question, I think if I understood correctly, it was, theoretically, if we have the same opportunity to invest with the same profitability, et cetera, et cetera, in which sector we would rather invest? Was that the question?

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Victor Tapia, Banco Bradesco BBI S.A., Research Division - Research Analyst [62]

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That's it.

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Gonzalo Pedro Robina Ibarra, Fibra UNO - Deputy CEO [63]

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Yes. Well, actually, as you may recall, since the IPO, we have been seeking, trying to get a balanced portfolio of 40% retail, 40% industrial and 20% offices. That was the way it was designed -- or it has been designed. But since we have been taking the opportunities in the market, we are 50% retail with the caveat that in retail, we're including the stand-alones, the direct portfolio that was in sale and leaseback with Santander, to the universities that we have. The portfolio that we acquired from (inaudible) as well as the hotels. So considering the retail has this mix and having just 25% of industrial as of today, if it was our choice, we would rather invest in industrial than any of the other 2 sectors, but we are open to hear any opportunities that the market may present to us.

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Operator [64]

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And there are no further questions at this time. I'll turn the conference back over to Mr. El-Mann for any closing remarks.

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André El-Mann Arazi, Fibra UNO - CEO & Director [65]

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Thank you, Jess. Well, I just want to thank you for your attention and for your interest in our results. And I'll hear from you -- you'll hear from us again with the first quarter results in 3 months. Thank you very much.

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Operator [66]

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Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time. And have a great day.