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Edited Transcript of TERRA13.MX earnings conference call or presentation 26-Oct-18 3:00pm GMT

Q3 2018 CI Banco SA Institucion de Banca Multiple FF/00939 Earnings Call

MEXICO, D.F. Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of CI Banco SA Institucion de Banca Multiple FF/00939 earnings conference call or presentation Friday, October 26, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Castillo Chretin

Fibra Terrafina - Chairman & CEO

* Carlos Gomez Espinosa

Fibra Terrafina - CFO

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Conference Call Participants

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* Armando Rodriguez

Signum Research - Stock Market Analysis Manager

* Francisco Chávez Martínez

BBVA Research SA - Research Analyst

* Luis Eugenio Saldaña Flores

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Analyst

* Pablo Ordóñez

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

* Victor Tapia Migliorin

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

* Maria Barona

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Presentation

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Operator [1]

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Good morning. My name is Aaron, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terrafina earnings conference call. (Operator Instructions) Thank you for your attention.

I will now turn the call over to Maria Barona of i-advize. Please go ahead.

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Maria Barona, [2]

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Thank you, and welcome to Terrafina's Third Quarter 2018 Conference Call. We're pleased to have with us today from Terrafina, Mr. Alberto Chretin, Chief Executive Officer; Mr. Carlos Gomez, Chief Financial Officer; and Mr. Francisco Martinez, Investor Relations Officer. Mr. Chretin will be taking us through the company overview and operating review, and Mr. Gomez will review the financials for the quarter.

Before we begin, we would like to refer you to the forward-looking statements as to the note in the quarterly report. Any information expressed or implied during the call may include forward-looking statements, which could involve certain risks and uncertainties. Terms such as estimate, project, plan, believe, expect, anticipate, intend and similar such expressions may identify such statements. Listeners are cautioned that forward-looking statements made during this call or by the company's management may change based on various important factors not under the company's control. These comments represent the company's judgment at the time of the call. The company disclaims, however, any intent or obligation to update these forward-looking statements. Thank you for your attention.

At this point, I will turn the call over to Mr. Alberto Chretin for his remarks. Thank you.

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [3]

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Good day, and thank you for joining us today as we provide a brief overview of Terrafina's results for the third quarter as well as a progress update with regards to the execution of our strategy. After my comments, Carlos will discuss the financial aspects of the business and review some key guidance metrics as we approach the end of 2018, and the beginning of a new year.

Let me begin by saying that the results for the quarter are a clear indicator of the effectiveness of our business model and the success of our strategic initiatives for the year. As we mentioned in previous conversations, we completed our acquisition activity for the time being. And having consolidated the benefits of the acquired portfolios, we are confident that our fundamentals continue to be strong.

In the interim, we continue looking into further operational efficiencies in growth opportunities and new developments. This is a key activity for Terrafina, not only in order to reach higher development yields, but also so that we may continue relationship building with the existing tenant base in the long run as well as the incorporation of new additional square footage into the portfolio.

Our current tenant base has a lot to offer in terms of feeding cost to the pipeline of built-to-suits and expansions, which we consider to be the right strategy for Terrafina at this time. Thus, we should consolidate the benefits of the new properties, thereby strengthening the overall quality of the business.

A clear example of additional efficiencies was the negotiation of a leaner structure with our property managers by reducing the fees from a 2.25% to a 1.9%, which represents annual savings of approximately $500,000.

Additionally, we believe that the industrial real estate sector will continue to benefit from more opportunities going forward, partly due to the lesser uncertainties surrounding trade relations between the U.S. and Mexico with the initial approval of the USMCA or NAFTA 2.0. Already, we have seen indications of a more bullish sentiment from our tenants as they seek additional space and in the store addition material registered for the first 9 months of 2018.

For example, in September, we announced a new build-to-suit in Chihuahua for an existing tenant in the outer part sector. This new announcement is expected to generate a double-digit GLA cost as well as a cash flow stability as the lease was signed for a 10-year term. And this one I just mentioned, the robust number of new developments that are currently in the pipeline helped us to continue to strengthen the portfolio with some operational metrics as well as higher profitability. As we analyze these growth opportunities, we also seek to maintain the quality of the portfolio.

As evidenced by our results, the business model continues to demonstrate a positive trend of stronger years in terms of occupancy, rental rates and a leasing activity that reflects a higher renewal rate. Therefore, we believe that focusing on build-to-suits and expansion allow us to leverage upon the solid client relationships we have as well as take advantage of a more active real estate market, resulting from the continued resiliency of the manufacturing operational sector.

Although this can reach double-digit developing yields in delivering new inventory that not only satisfies more needs for the client in the short term, but also fosters a solid partnership with them in the long term.

Now for some details on the key quality metrics for the period. Terrafina reached occupancy levels of 95.2% and an average leasing rate of $5.13 per square foot per year. Same-store operating results for the third quarter were also positive, with 94.8% occupancy levels and an average leasing rate of $5.06 per square foot per year. Occupancy and rental rates by region remains solid as well. The northern region reached 96.7% occupancy at a $5.6 per square foot per year. Bajio reached 91.9% occupancy at the rate of $5.20 per square foot per year. And in the central region, occupancy reached 93.7% with a leasing rate of $5.31 per square foot per year.

Additionally, regional same-store occupancy and rental rates remain strong. The northern region reached 96.4% occupancy at $4.92 per square foot per year. Bajio was 91.9% occupancy at $5.22 per square foot per year. And the central region reached 93.7% occupancy at $5.31 per square foot per year.

Leasing activity for the third quarter reached 2.7 million square feet with renewal activity in 16 out of 18 contract expirations. The successful leasing activity continues to support the improvement in the leasing maturity profile from a 14.5% at the beginning of the year to a 2% of the volume portfolio for the last quarter of 2018.

Terrafina renewed leases for 2.5 million square feet during the third quarter. It is important to note that 1.4 million of these were early renewals, which again indicate the importance to secure investment stakes and reflects the stability of the long-term production plans of our clients for the future.

New contracts represented 260,000 additional square feet during the period. Of these positive results, translated into a solid and consistent cash flow as we generated distributions of $29.1 million for the quarter or USD 3.68 per certificate. As we conclude the first 9 months of the year, I'm sure in our financial figures give us confidence that the -- in the certainty that we will not only end the year strongly, but we will also have the benefit of a solid start to 2019.

Before I turn the call over to Carlos, I would like to comment on the press release announced yesterday related to the changes to the classification of the fourth quarter of 2017, and the second quarter 2018 distributions.

First, as part of our tax analysis of 2018, there was an incorrect classification in the fourth quarter of 2017 distribution. There was a partial difference on what not has been registered as a tax result instead of capital reimbursement. This means that only $3.8 million of the $25.6 million announced in distributions in the fourth quarter of 2017 should have been tax exempt. Therefore, a piece of income taxes were not withheld by the financial intermediaries. To balance the situation an extraordinary distribution will be carried out next month to cover those taxes and related concepts that the financial intermediaries should have detailed. The total amount of extraordinary distributions will be for a maximum amount of up to $7.7 million and is expected to take place on November 19.

With regard to second quarter

(technical difficulty)

but there were no changes to our financial results and that there will be only modifications to the financial notes, which have already been approved by Terrafina's audit and technical committees.

Thank you for your attention. And I will now turn the call over to our CFO, Carlos Gomez, as he takes us through the financials for the quarter.

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Carlos Gomez Espinosa, Fibra Terrafina - CFO [4]

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Thank you, Alberto.

Before I begin discussing our main financial results, please note that all figures discussed are in U.S. dollars. However, Mexican peso figures have been provided in the report for your convenience. Additionally, NOI, EBITDA and FFO figures exclude noncash items as well as nonrecurring and transactional-related expenses, the latter of which are only included as part of the AFFO.

Let me just briefly review the main highlights of quarterly consolidated numbers as compared to 2017. On the top line, rental revenues increased by 16.6% to USD 48 million. At the NOI level, results reached USD 48.1 million, a 16.2% increase and a 94% NOI margin. Also, EBITDA for the third quarter reached USD 43.3 million, a 16.5% increase with an 84.6% EBITDA margin. And in terms of the bottom line, FFO levels reached USD 31.2 million, a 21.7% increase and a 61% FFO margin.

AFFO was 21 -- USD 29.1 million, a 26.5% increase and a 56.6% AFFO margin. As a result, Terrafina's total cash distributions were USD 3.68 per certificate. The annualized distribution per certificate was USD 14.73 per certificate and considering the average price for the third quarter of 2018 of USD 1.49 per certificate, Terrafina's dividend yield reached 9.9%.

Also, same-store figures were compared to the third quarter of 2017 as rental revenues increased by 3.4% for a total of USD 42.6 million. NOI reached USD 42.8 million with a 93.8% NOI margin. At the EBITDA level, USD 38.5 million were generated with an 84.2% EBITDA margin. Finally, AFFO increased by 6.4% for a total of USD 24.6 million with a 53.9% AFFO margin.

Lastly, on the balance sheet, the main highlights were held cash position of USD 101.6 million enacted to our revolver facility for a total of USD 248 million, which can tap our need. Our total debt remains stable compared to the second quarter of 2018 at USD 1 billion and a leverage level of 40.9%.

Before moving to the Q&A session, let me mention that with these positive results for the 9 months of the year, we are certain that Terrafina is in track to reach its goal in terms of profitability by the end of the year.

Thank you for your time and attention. At this point, I will ask the operator to open the line for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Eugenio Saldaña with GBM.

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Luis Eugenio Saldaña Flores, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Analyst [2]

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I have 2 questions. I mean, the first one is related to the tax comment that you made. I mean, at this point, I mean, do you have a tax loss? And going forward, distributions are going to be made from return of capital? Or are you going to distribute tax result? That's the first one. The second one, I've noticed that 2 of the tenants that didn't renovate their agreement were in Chihuahua, which I've seen is a very active market, and I just wanted more color on those 2 tenants. I mean, what is the reason that they didn't renovate with you?

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [3]

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Yes. Certainly. Thank you, Eugenio. Yes, the tax distribution -- the distributions for the third quarter of 2018 are going to be tax results. That's for the first question. And then the second question, yes, there was 1 tenant in Ciudad Juarez , which is CEVA, which is a logistic tenant that did not renew 30,000 square feet in Juarez because they consolidated the operation in another facility, and that was one in -- let me see that was one in Chihuahua. The other one was in Ramos Arizpe, which was a tenant that we elected also not to renew the contract because of -- we had some issues on the payment, so we decided that we did not want to renew that contract with them.

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Luis Eugenio Saldaña Flores, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Analyst [4]

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But just clarifying, I mean do you have a tax loss at this point?

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [5]

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No. There's no tax loss. No.

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Operator [6]

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(Operator Instructions) We will now next go to Victor Tapia with Bradesco.

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Victor Tapia Migliorin, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [7]

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So just a quick question. We have been seeing like a very, very positive leasing activity also from other players, and we were trying to see this positive leasing is productive to the side of competition. How are you guys seeing this in terms of increasing competition going forward, in terms of increasing vacancies for pressure on rental revenues? That's it.

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [8]

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Okay. Okay, let's see if I understand. In terms of occupancy, I want to understand because you talk about competition in terms of occupancy or going forward?

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Victor Tapia Migliorin, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [9]

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Sorry. I didn't hear the question.

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [10]

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Was the question in terms of how we compare with the competition in terms of occupancy? Is that the question? Or -- can you please repeat the question? I'm sorry.

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Victor Tapia Migliorin, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [11]

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My question is like, we are seeing this increase in leasing activity, what would be the consequence of higher competition coming from new entrants on the market that Terrafina is like? Should we see vacancies increasing? Should we see some pressure on rental revenues? If there are some new entrants willing to increasing the competition in the markets where Terrafina is, this is my question.

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [12]

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Thank you, Victor, yes. Thank you for participating. In terms of new -- we have had very good success in terms of renewing the expirations. And the fact that we have now more developers with additional space in the market where we operate, we see that as positive, meaning that there is some success on the company that are operating in the manufacturing-for-export. So in terms of competition to us, it is not really significant because our tenants are renewing the lease contracts. The fact that we have developers with additional starts of new floor space, we see that as a positive sign. And at this point, it doesn't mean a competition to our facilities.

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Operator [13]

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(Operator Instructions) We will go next to Pablo Ordóñez with Itaú.

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Pablo Ordóñez, Itaú Corretora de Valores S.A., Research Division - Research Analyst [14]

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Can you share with us the size of the opportunity that you're expecting on developments and expansions in dollar terms? That's my first question. And second, you mentioned savings of around $500,000. Are there any other opportunities that you could achieve in the future? And what should we expect as the sustainable level for EBITDA margin going ahead?

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [15]

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Okay. Well, first, in terms of development, yes, we do see an opportunity because we do have a finalizing of potential expansions in most of Build-to-Suit opportunities. In that, as I mentioned, we are going to focus the growth opportunity at this time on these -- on developments because of the reason that I explained, because of the double-digit development as well as consolidating relationship with the tenants. We feel that we have approximately about $80 million that we're going to assign to this growth opportunity. And what was the second question, Pablo?

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Pablo Ordóñez, Itaú Corretora de Valores S.A., Research Division - Research Analyst [16]

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The second question is regarding, what should we expect as a sustainable level for EBITDA margins going ahead? You mentioned that you had around $500 in savings, I think, it was in insurance cost. So what should we expect as current level of EBITDA margin ahead?

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Carlos Gomez Espinosa, Fibra Terrafina - CFO [17]

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Well, Pablo, the EBITDA level should be in the same neighborhood as we are currently seeing in the mid-80s percent. So that's what we should be expecting in the near upcoming quarters.

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Pablo Ordóñez, Itaú Corretora de Valores S.A., Research Division - Research Analyst [18]

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Okay. And just to be clear, so the investment opportunity that you're seeing in developments and expansions is around $80 million, so that could be perfectly funded with your current cash position. Correct?

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [19]

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That is correct. That is correct, Pablo.

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Operator [20]

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And we can take our next question from Francisco Chávez with BBVA.

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Francisco Chávez Martínez, BBVA Research SA - Research Analyst [21]

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My question is regarding the rents. In this quarter, we saw an acceleration in the -- in rents. Is this higher level of rents sustainable? And what can we expect going forward?

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [22]

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Yes. Thank you for that. It's a brilliant question. Yes, we have higher rents in the markets in which we operate, and that is due to several factors. One, because of the quality of our portfolios, because of our tenants being -- as you know, more than 70% of our tenants are manufacturing-for-export. And the tenants evaluate very much, value very much their facilities. And that's why every time that we want to renew an expiration with our tenant, even with the early renewals, we see an opportunity for having some enhancements we are building that we have an opportunity to increase the rent. And that because we deploy that capital to enhance the quality of the building, and the tenants appreciate that, and that's why we have those higher rents. And those higher rents are sustainable because, as I mentioned, the tenants are in that facility because of the real estate attributes of the building, but also because of the location and because of the people that they have there. So that's why we have very high expectation that the rents are going to continue in that level or continue to increase at the rate of the U.S. inflation, which is what we have had in the last few years because, as you remember, all of our lease contracts have a clause that provides automatic increases. And since most of our -- 96% of our lease contracts are U.S. dollar denominated, the increases are tied to the U.S. inflation.

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Operator [23]

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And we will take our next question from Armando Rodriguez with Signum.

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Armando Rodriguez, Signum Research - Stock Market Analysis Manager [24]

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Just a quick question about your long-term value levels. What we should expect about this? Or you feel comfortable with the ongoing levels? That's my question.

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Carlos Gomez Espinosa, Fibra Terrafina - CFO [25]

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Yes. Hello. Yes, our current LTV is 40.9%. We are comfortable with this level. We think that the optimal level for Terrafina is between 38% and 42% of leverage. So given that we are in 40.9%, we feel comfortable with it, and we think that this is going to be the level that the company will stay in the short and medium term.

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Operator [26]

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At this time, there are no additional questions. I'd like to turn the program back over to Mr. Alberto Chretin.

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Alberto Castillo Chretin, Fibra Terrafina - Chairman & CEO [27]

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Thank you very much for your interest and attention today. Please do not hesitate to contact us with any questions you may have. Have a great day.

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Operator [28]

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Thank you for your participation. This does conclude today's program. You may disconnect at any time.