Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- PrologisProperty Mexico SA de CV (FBBPF, Financial) reported a strong second quarter with market demand reaching record-high levels of 11 million square feet, a 10% year-over-year growth.
- The company achieved a new record in rent change on rollover with a 58% increase, demonstrating strong leasing performance.
- Occupancy in the portfolio remains robust at over 98%, indicating high demand and efficient space utilization.
- The company announced a strategic acquisition in Reynosa, expanding its footprint and enhancing its portfolio value.
- PrologisProperty Mexico SA de CV (FBBPF) maintains a strong balance sheet with a total capacity of up to $1.8 billion, providing financial flexibility for future growth.
Negative Points
- Net absorption in key markets was 5.5 million square feet, which, although strong, was down compared to previous exceptional quarters.
- Vacancy rates increased by 100 basis points to 2.7%, which, while still healthy, indicates a slight rise in available space.
- The Ciudad Juárez market experienced a significant hike in vacancy due to a 3PL customer not consolidating as planned.
- There is a potential for pressure on margins due to increased property values and fees, which may take time for revenues to fully reflect.
- The political climate, including upcoming US elections, has introduced some caution among new customers, potentially slowing decision-making processes.
Q & A Highlights
Q: Can you explain the recent increase in vacancy in the Ciudad Juárez market? Is it temporary or due to oversupply?
A: Federico CantĂş, SVP & Head of Operations, explained that the vacancy increase was due to a 3PL customer deciding not to consolidate into a new building. However, there are five active prospects for the building, and they expect to lease it up by year-end.
Q: What loan-to-value assumption do you use for your $1.8 billion balance sheet firepower? Also, has the election affected customer demand for space?
A: Jorge Girault, CFO, stated the loan-to-value limit is 35%, with a net debt to EBITDA ratio below 5 times. Hector Ibarzabal, CEO, noted demand remains strong, with Mexico being a key market. While decision-making speed has slightly reduced, demand from nearshoring and manufacturing remains robust.
Q: What are the supply-demand dynamics in other markets, and should we expect more supply?
A: Federico Cantú highlighted that Juárez had high net absorption but increased vacancy due to new deliveries. Construction has tapered off, and they expect normalization by year-end. The electronics industry, particularly Taiwanese companies, is driving demand.
Q: How do utilization rates in Mexico compare to the US, and what is the difference between in-place and market rents for 2025?
A: Hector Ibarzabal mentioned utilization in Mexico is slightly higher, around 87-90%. The in-place-to-market rent difference for 2025 expirations is 67%, indicating potential for rent growth.
Q: Can you provide more details on your acquisition pipeline and any Chinese clients?
A: Hector Ibarzabal stated Prologis has 4.8 million square feet in development across various markets. They are working on third-party acquisitions, with potential announcements by year-end. Federico CantĂş added they have two Chinese customers, representing 0.7% of the portfolio, with interest from Chinese companies in northern markets.
Q: Will increased property values pressure margins until revenues catch up?
A: Hector Ibarzabal acknowledged that while fees have increased with property values, rent increases will eventually reflect in revenues, maintaining margins. Jorge Girault confirmed there might be short-term pressure, but margins should stabilize as rents rise.
Q: Can you elaborate on customer discussions and retention rates?
A: Hector Ibarzabal explained that retention rates are not a concern given high occupancy and rent changes. Some customers left due to price, but overall sentiment remains positive. New market entrants may be cautious due to US elections, but established customers continue with expansion plans.
Q: How do you view the impact of increased vacancy on rent growth?
A: Hector Ibarzabal clarified they are not expecting increased vacancies. Current occupancy is strong, and while decision-making speed has slowed, demand remains healthy. They anticipate continued strong rent growth through 2025.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
