Earnings Call Transcript - VTMX Q4 2024

Operator, Operator

Greetings, ladies and gentlemen. Welcome to the Vesta Fourth Quarter 2024 Earnings Conference Call. It is now my pleasure to introduce your host for today Fernanda Bettinger, Vesta's Investor Relations Officer. Please go ahead.

Fernanda Bettinger, Investor Relations Officer

Good morning, everyone, and welcome to our review of Vesta's fourth quarter earnings results. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our fourth quarter 2024 results was released yesterday after the market closed. It is available on Vesta's IR website, along with our supplemental package. It's important to note that on today's call, management's remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, note that all figures included herein were prepared in accordance with IFRS which differ in certain significant respects from U.S. GAAP. All information should be read in conjunction with and is qualified in its entirety by reference to our financial statements, including the notes thereto, and are stated in U.S. dollars unless otherwise noted. I will now turn the call over to Lorenzo Berho.

Lorenzo Berho, CEO

Thank you, Fernanda. Good morning, everyone. Before turning to our results, I would like to provide some perspective on our company as we review the past year. We have grown Vesta into a global leader in premier industrial real estate. In some cases, managing through very turbulent times. In November, we unveiled our Route 2030 strategic plan, a detailed roadmap for the next five years led by a balanced approach to investment, growth profitability, assured access to energy with ambitious Net Zero and ESG objectives. Throughout 2030 builds on the outstanding results we delivered on our 2019, 2024 Level 3 strategy, all related targets, which Vesta not only met but exceeded. With this, we have clearly illustrated our next phase in Vesta's journey. Therefore, we expect 2025 will continue to present its challenges, likely resulting in more muted performance for our industry. Many agree it would be very difficult for uncertainties, either internal or external factors to alter the opportunities that we see in Mexico. In late January, President Sheinbaum launched a $1.4 billion nearshoring incentive package designed to strengthen the country's position in regional supply chains as part of a multi-pronged plan to grow Mexico's economy in part by embracing its role in manufacturing inputs for North America supply chains. President Sheinbaum's administration, through a presidential decree, will offer greater incentives for companies seeking to relocate their manufacturing operations to Mexico to be closer to the U.S. market, including generous tax incentives. What remains clear is that both countries have a vested interest in maintaining and strengthening the trade relationship. With just over 78% of Mexico's exports going to the U.S., and some companies considering expanding their presence in Mexico, the economic interdependence between these nations cannot be overstated. Near-shoring as a strategy for economic growth and supply chain resilience, therefore, remains undeniable. And Vesta is in a particularly advantageous position. We benefit from outstanding LEED-certified assets, a large footprint in Mexico's most resilient and desirable markets, strong relationships with premier clients, and one of our industry's most innovative approaches to procuring energy. We are a landlord to some of the world's most important manufacturers, and not by accident. Strong and lasting client relationships create new avenues for recurring growth. And as I noted, our Board and management team have considerable experience successfully navigating geopolitical and macro headwinds. Therefore, as we begin implementing our 2030 plan this year, we remain vigilant and cautious, fully aware of this year's importance as a foundation for the rest of the road map. Moving forward, we will continue to make strategic investments, prioritizing land acquisition and development only when they provide a clear competitive advantage while also focusing on capturing every potential leasing opportunity. A few other notable highlights for 2024 before I turn to the quarter, leasing activity reached 7.7 million square feet for the full year of which 3.5 million square feet were through new leases, nearly 80% of which were signed with current best-in-class tenants in e-commerce as well as light manufacturing for the North American supply chain. We saw $4.2 million in renewals during the year with an 8.4% increase in rent spreads and a 6-year weighted average lease term. Our focus on dollar-denominated contracts resulted in 89% of our 2024 revenues being in dollars, an important competitive advantage, a non-negotiable stabilizing factor, which will never change at Vesta. Vesta also delivered exceptional financial results for the full year 2024, surpassing revised guidance to reach $152.3 million, a 17.7% increase year-over-year. Full year 2024 adjusted NOI margin and EBITDA margin reached 94.6% and 83.5%, respectively. Vesta FFO ended 2024 at $160.1 million, a 25.2% increase compared to $127.9 million in 2023. And in 2024, we secured a global syndicated sustainability-linked credit facility for $545 million which Juan will discuss shortly. Turning to our fourth quarter 2024 operating results. Leasing activity reached 1.6 million square feet, 739,000 square feet in new contracts mostly in the Bajio region with premier global companies in the electronics, automotive, and logistics sectors and 813,000 square feet in lease renewals. Vesta's fourth quarter 2024 total portfolio occupancy, therefore, reached 93.4%. Stabilized and same-store occupancy reached 95.5% and 97.6%, respectively. We ended the quarter with current construction in progress, which reached 2.8 million square feet and an estimated investment of approximately $214.1 million, with a 10.9% yield on cost in markets, including Mexico City, Puebla, Queretaro, Aguascalientes, and Monterrey. We're pleased to see continued absorption strength in the Bajio region. But during the quarter, we began construction on three new buildings in Queretaro, totaling 560,000 square feet. As a related update on our portfolio, we shifted the delivery timing of two buildings at our Apodaca project from December to April. We chose to upgrade and expand the size of several buildings during the final stage of this project, also seeing an opportunity to reconfigure the layout. These improvements, therefore, slowed down the delivery of certain buildings within the project, but the adjustments enhance the overall quality and functionality of the development, thereby increasing the final value. So while this impacted our near-term timeline, it will not materially delay the expected income during the year, and this overall project remains on track for success. In closing, while we are certainly operating in interesting times, at the end of the day, we control our destiny. Our competitive advantages are clear and compelling, and our solid financial position means we're very comfortable being extremely selective with the tenants to whom we lease. As I have commented in the past, we are focused on consistency and discipline as we navigate through potential headwinds on our Route 2030 plan. In the meantime, we're allocating capital to ensure meaningful shareholder returns through opportunistic land acquisitions, such as our recent purchase in Guadalajara and Ciudad Juarez, aligned with delivering on our 2030 strategy. Investors' 2024 share repurchase program reached $42.3 million by year-end, encompassing 16.5 million shares, which is 1.9% of total outstanding shares. With that, let me now turn it over to Juan to review this quarter's financial results in more detail.

Juan Sottil, CFO

Thank you, Lorenzo. Good day, everyone. Vesta closed the year with exceptional financial results as noted. Our total revenue reached $252 million, marking a 17.7% year-on-year increase and surpassing our revised guidance of 17%. NOI margin also exceeded our revised guidance of 94.5%, reaching 94.6%. While EBITDA margin was in line with our guidance at 83.5%. Vesta FFO ended 2024 at $160.1 million, a 25.2% increase compared to $127.9 million in 2023. Turning to our fourth quarter results, beginning with our top line. Total revenues increased 16.5% to $65.2 million, mainly due to higher rental revenue coming from new leases and inflationary adjustments on rental properties during the quarter. In terms of the current mix, 88.7% of our fourth quarter revenue was denominated in U.S. dollars, an increase from 87.8% in the fourth quarter of 2023. Regarding our profitability, adjusted net operating income increased 11.7% to $59.1 million, while the margin contracted 460 basis points to 93.5%. This was mainly due to higher costs related to rental income generated from properties, including real estate taxes, insurance costs, maintenance, and other property-related expenses. Adjusted EBITDA reached $52 million in the fourth quarter, an 18.5% increase compared to the prior year's quarter, and the margin increased 100 basis points to 82.7%, primarily due to lower administrative expenses, which benefited from the peso depreciation relative to the prior year quarter. We closed the quarter with a pretax income of $81.2 million compared to $99.8 million in 2023. This decrease was primarily due to lower gains on revaluation of investment properties, driven by a slower pace of development throughout the year, as well as an increase in discount rates. Vesta FFO, excluding current tax, increased to $41.7 million this quarter from $32.6 million in the fourth quarter of 2023. Moving to our capital structure and balance sheet. As Lorenzo alluded, we ended the year in a very strong financial position. Cash and cash equivalents stood at $484 million, and our total debt remained relatively stable at $847 million as of December 2024. Net debt to EBITDA was 3.2x, and our loan-to-value was 21.4%, well below our guidance for prudent financial management. As we shared on our Investor Day, these are a loan-to-value of less than 30% and a net debt-to-EBITDA lower than 5x. Along these lines, in December, we successfully closed a $545 million global syndicated sustainable credit facility, as Lorenzo noted. This new financing is composed of a $345 million term loan structured in two tranches with terms of 3 and 5 years, with an 18-month availability period, in addition to a $200 million revolving credit facility. This facility replaces our prior $200 million in place and undrawn revolving credit facility. We are very pleased to have secured this new financing, ensuring continued access to strategic liquidity at a competitive cost. This strengthens our financial flexibility as we execute key initiatives aligned with Vesta's Route 2030 strategy, driving sustainable value for our shareholders. Our share repurchase program is also a key pillar of our capital allocation strategy. In 2024, our program reached $42.3 million or 16.5 million shares, which is approximately 2% of total outstanding shares. We will continue to execute opportunistically as we have successfully done in the past to maximize long-term shareholder returns. In addition, and subsequent to the quarter's end, on January 15, 2025, we paid a cash dividend for the fourth quarter, equivalent to MXN 0.38 per ordinary share. This concludes our fourth quarter 2024 review. Operator, would you please open the floor for questions?

Operator, Operator

Yes. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Pablo Monsivais with Barclays.

Pablo Monsivais, Analyst

I was wondering about Monterrey. In your development portfolio, you have Apodaca 6, 7, and 8. And it seems that you don't have at least yet. And we know that Monterrey has been experiencing excess capacity probably in the fourth quarter of last year. So I wanted to pick your brain on how you are seeing leasing activity for these three buildings because, if I see it correctly, it's 1.1 million square feet. So it's quite a lot. I just wanted to hear your thoughts on what the clients are saying, how leasing activity is there.

Lorenzo Berho, CEO

Perfect, hello Pablo, and thank you very much for being on the call and for your question. Monterrey has been a key market for Vesta. We currently have developed two projects, one of them in Guadalupe and the second one in Apodaca. As you might know, we are fully leased in Monterrey, with clients such as Amazon, Mercado Libre, Polaris, OXXO, Walmart, among others. We have been very successful in leasing in the last phase. Now today, what we have is three buildings for construction, which have been part of the development pipeline for the last quarters. And we feel confident that these buildings will be leased accordingly when we finish the projects. Currently, we have an estimated completion date for the second quarter. I was recently in Monterrey, and the progress on the buildings is good. We have some minor delays on the projects, mainly because we upgraded the specifications of the buildings considering better sustainable characteristics for the buildings. Therefore, we think that the best companies will certainly be looking carefully into our project in Apodaca and in our buildings due to the quality of the projects that we are currently developing. I invite all of you to visit Monterrey; it is very well located in the Apodaca main corridor, with good access to infrastructure and a strong labor pool. We have a local dedicated team focusing on the leasing of these projects even before they are completed. So this will be an important year, and we have strong confidence in the Monterrey market and in the capabilities of Vesta to deliver.

Operator, Operator

Your next question comes from the line of Alan Macias with Bank of America Merrill Lynch.

Alan Macias, Analyst

Good morning, and thank you for the call. Just a follow-up question, I guess, on the stabilized portfolio occupancy in the North region decreased. And I guess if Monterrey is stable? What other markets did you see pressure there?

Lorenzo Berho, CEO

Alan, thank you very much for your question. I already explained Monterrey, where we are fully leased and the market is still behaving quite well. We're not focused on all north of Mexico. There are markets where we're not located, but we have a strong focus and a good presence in Tijuana and Ciudad Juarez. Tijuana and Ciudad Juarez have shown some slowdown in the last quarters in terms of demand, which is impacting not only our portfolio but also the rest of the market. Still, we think that vacancy rates are at moderate levels. We believe that as soon as demand picks up there will be interesting opportunities. For the type of buildings that Vesta has, we actually only have a couple of brand-new buildings in Juarez, which are currently in the leasing stage. We are confident that the quality and location will provide us with an advantage over other projects. However, it has taken longer in this new cycle, similar for Tijuana. Nevertheless, we have a good portfolio with good tenants, some of whom are requiring expansions. At the same time, there has been a shift in demand over the last quarters, prompting us to be cautious and patient in leasing to the right tenants with long-term leases, in line with Vesta's existing portfolio.

Operator, Operator

Your next question comes from the line of Alejandra Obregon with Morgan Stanley.

Alejandra Obregon, Analyst

I have a few questions on the Bajio. Some KPIs seem to be improving. You're seeing some backing of vacancies, some pre-leasing, and cash rents holding up pretty well. I just wanted to get a sense of what's happening on the ground. If you look at the tenant pool for the available and coming development space in the region, is there an ecosystem forming that is influencing your conversations, especially in Queretaro now that you mentioned bringing four properties into the development pipeline? What is happening in Guadalajara? Any insights would be very helpful.

Lorenzo Berho, CEO

Thank you, Alejandra. I'm glad to share; Guadalajara, as many of you know, has been a very attractive market, particularly for the electronics sector as well as e-commerce. We were fortunate to acquire land adjacent to our park. We will soon start development and leverage the existing infrastructure of the park to expand to the new site. Though not very large, we see it as a significant continuation and opportunity to keep growing in a fantastic location, where we have developed relationships with clients such as Foxconn, BSB Logistics, and Mercado Libre. I am confident that our particular success will expand with the current land that we acquired. In Queretaro, we have seen positive signs; there has been a recovery, and vacancy rates remain low. Demand has picked up, and we are fully leased in the Vesta Queretaro properties. For this reason and based on the pipeline we have seen, we believe it's a great moment to start construction and have available buildings for clients needing space immediately. Some of our clients in Queretaro include FedEx, Home Depot, ESA, and recently, companies in the electric manufacturing sector, focusing on machinery and equipment for both Mexico and export to the U.S. Consequently, we see good demand in the market, which is why we want to prepare for these tenants requiring expansions. The same goes for the aerospace industry. Nevertheless, many of our decisions are made with discipline as we know our markets, and we validate each decision with our investment committee to seize opportunities when we have the upper hand. The other markets in the Bajio region are still improving; however, prudence and patience are essential as we seek to better understand the uncertainties triggered by current trade tensions between the U.S. and Mexico, including effects from tariffs imposed on various goods.

Operator, Operator

Your next question comes from the line of Gordon Lee with BTG.

Gordon Lee, Analyst

Thank you very much for the call. Two quick questions. The first one, Lorenzo, back in November or December, when you unveiled Route 2030, you had already adjusted your view for the medium term to account for the more uncertain scenario. So I'm wondering, three months later, do you think that adjustment was enough, or do you feel a bit more cautious? And the second question is, considering this uncertain environment, as you look to replenish your land bank, are you finding that this uncertainty results in greater availability of land or land on better terms? Or have we not seen that adjustment yet?

Lorenzo Berho, CEO

Thank you for your question. Vesta has always had a strategy to define a long-term plan and execute with the understanding that things might vary during the period. The Level 3 strategy was very successful, and we are pleased to have been able to complete that particular cycle of the company. This has given us the opportunity to present another long-term plan, the Route 2030 plan unveiled in November. We believe that Vesta has a clear vision of its trajectory towards 2030. We have a defined path and feel confident that this plan will be well executed and profitable. The plan incorporates the uncertainties for 2025. So where we stand today in 2025 is not a surprise; we understand our clients' behaviors and the new demand dynamics. It is understandable that uncertainties will persist for a time. Nevertheless, this is not new to us, and we have navigated these situations before. This is an excellent moment to position the company better to be ready for a new economic cycle, which we know will occur. Regarding your second question, Vesta maintains a disciplined approach towards acquiring the best locations with urban infill and high barriers to entry. We have been analyzing various sites and believe we will have the opportunity to close on top sites in the markets where we operate. This should be a fascinating year, where we will be even better positioned for the long-term plan we have set.

Operator, Operator

Your next question comes from the line of Rodolfo Ramos with Bradesco BBI.

Rodolfo Ramos, Analyst

This is a follow-up on previous discussions. We've noticed the weakness in the northern markets. My question here is twofold: how do you see this weakness in the northern markets impacting your Bajio markets? Are these substitutes or just entirely different client bases? On the second point, how does this change your answer to the first question? How does it affect the pace and focus of your development pipeline, given that you have ambitious CapEx plans under your Route 2030 strategy in Monterrey, Tijuana, and Ciudad Juarez?

Lorenzo Berho, CEO

Thank you very much for your question. Regarding your first point, I believe that all markets have very different dynamics. We validate the real estate fundamentals in each market and analyze the associated trends, opportunities, and restrictions. I believe that the industrial market in Mexico behaves differently from one region to another; some areas are more closely related to consumption logistics and e-commerce, especially in major metropolitan areas, like Mexico City and even in the Bajio region. Other markets rely more on supply chains, manufacturing, and exports, primarily in border regions. We focus on both segments and believe that as long as there are opportunities in both areas, there will eventually be chances across all the markets we operate in. However, we recognize the presence of cycles, where limited supply and strong demand can shift suddenly. Today, we think that trends are a bit divergent, but we remain confident that vacancy rates are still at low levels. Despite us and other developers being conservative about this, we believe the markets are healthy. Most markets are experiencing vacancy rates around 5%, some even lower than 1% like Mexico City, and the Bajio region ranges below 5%. We will observe closely and remain patient; this is not the first time we've faced a similar situation. As long as we have quality products that meet our clients' needs, we can leverage these situations to our advantage. Developers without the right infrastructure or permits are likely to struggle the most, but since we focus on quality, we see ourselves at an advantage. Regarding Monterrey, one of the best decisions we've made recently was upgrading the specifications of our buildings. While this has caused some delays, we believe we are in an excellent position to deliver top buildings in the Monterrey market.

Operator, Operator

Your next question comes from the line of Francisco Chavez with BBVA.

Francisco Chavez, Analyst

I have a question regarding the position of land in Queretaro this year, considering the softening in activity inquiries. Can you give us an idea of how opportunistic acquisitions occurred? Were they at a lower price than a few months ago? I know that you can let us know if this land has access to electricity and all the necessary infrastructure.

Lorenzo Berho, CEO

Francisco, thank you very much for your question. We're delighted to have found this site in Queretaro. As you pointed out, what is key about this land is that it has access to electricity and is located very close to the Saragosa border crossing, the major commercial entry into Ciudad Juarez. It is adjacent to our current project, providing continuity in what we see as the best submarket in the Ciudad Juarez region. This positions us well, and when we see demand in the market, we will move forward with the project. The site's size is also crucial; we can deliver high-quality industrial compounds where tenants can benefit from shared infrastructure, superior security, and accessibility to the border crossing. We are thrilled with securing this land, and it will be developed over time.

Operator, Operator

Your next question comes from the line of Jorel Guilloty with Goldman Sachs.

Jorel Guilloty, Analyst

It seems that my line just dropped, but I have two straightforward questions. The first one is around your guidance. Would you be able to provide or give some color on occupancy and lease spread expectations within that guidance? The second question is about the development pipeline. Now, going back to the last day back in November, you indicated that there would be a downshift in the development pipeline for at least next year, and we are clearly seeing that now. However, are you also seeing this from your competitors? Are they generally downshifting their development pipelines based on the macro and policy environments as well?

Lorenzo Berho, CEO

Thank you, Jorel. I believe Vesta has different types of peers, some focusing on major mergers, which can keep them occupied. Others may not have significant development capabilities, which makes it difficult to assess the development shifts overall. What I can say is that Vesta has a well-defined strategy towards development. We know when to accelerate projects and when to apply the brakes. There are moments when limited supply and strong demand appear, and we're seeing some differences in current trends. We will proceed carefully and be patient. Regarding our forecast, we anticipate developing over 2 million square feet this year, comparing favorably to previous years when we reached $3 million or more. However, we prioritize profitability and ensuring long-term value through a discipline focused on improved net asset value per share and FFO per share. This has driven value enhancement, and we will continue that discipline. On occupancy, we're in a solid position; adjustments could occur but remain within healthy ranges compared to historical averages, ensuring we hold our averages well moving forward.

Operator, Operator

Your next question comes from the line of Keefer Kennedy with Citi Bank.

Keefer Kennedy, Analyst

Just a follow-up on the previous question regarding projects under construction. You've explained aspects regarding the Apodaca project in Monterrey. I'd like to get more details on Valede in Mexico. Yes, Punta Norte is a small project, but it seems to be delayed as well compared to third quarter expectations. What are the reasons here? Any details would be very helpful.

Lorenzo Berho, CEO

Certainly, and thank you for your question. Punta Norte in Mexico City experienced a minor delay, mainly stemming from our clients. We ended up leasing the larger building to Mercado Libre, and they opted for the second building as well. This project is under construction, and we are handling tenant improvements already. Sometimes, leasing a building before construction can cause adjustments in timing. However, we are pleased that these projects will be delivered next quarter and leased to the largest e-commerce company in Latin America, with a long-term lease and attractive terms, yielding a 10% return. Despite the minor delays, we see no impact on the project's profitability. Additionally, I was there last week and was happy with the progress on these projects, which represent the last buildings on the Apodaca site.

Operator, Operator

Your next question comes from the line of David Soto with Scotia Bank.

David Soto, Analyst

Two quick questions. The first one is related to the development pipeline. Did you see any major risks that could affect your pipeline concerning tariffs, local regulations, energy regulation, or potential increases in construction materials? The second question is could you provide some insights about the marketing efforts you are employing for buildings that are currently available for lease?

Lorenzo Berho, CEO

Thank you. I don't foresee any significant effects from materials, as our development approach relies on third-party construction companies and managers. Mexico is well supplied in terms of construction materials, and we have a process for each building. There may be minor delays due to factors outside our control, but these shouldn't impact the overall timelines significantly. As for commercial efforts, Vesta differentiates itself by being a vertically integrated company, with local presence in each of the markets where we operate. We have a strong team of real estate executives in Ciudad Juarez, Monterrey, and Tijuana who can assist you. Not only can you visit our projects, but you can also meet the team and visit our offices to see firsthand how we approach marketing in each region. Remarkably, over 70% of our leasing activity in the last year came from existing clients, reinforcing the importance of maintaining high-quality tenants. Growth often comes from these existing clients, and that's the opportunities we see.

Operator, Operator

Your next question comes from the line of Armando Rodriguez with Signum Research.

Armando Rodriguez, Analyst

Congratulations on the results. I have to ask the mandatory question specifically about the automotive sector. As you know, we've heard news about major automakers planning to shift production to the United States to avoid tariff issues. I don't know if, for example, Nissan, is considering this scenario and it's an important piece of my question.

Lorenzo Berho, CEO

Thank you for your question, Armando. Yes, there have been several discussions lately, especially concerning the auto sector. Recently, Nissan reaffirmed its commitment to Mexico, particularly in Aguascalientes. While negative news often circulates, sometimes it blocks out reaffirmations of strong commitments to Mexico. I think no major shifts have happened yet; most companies here are already profitable, contributing to both Mexico and North America through their operations. Near-shoring isn't new and has been present since the NAFTA era. Companies tend to prioritize maintaining operations in Mexico as long as they remain profitable. We will need to see how new trade rules shape the environment, but it remains early in the discussion regarding tariffs.

Operator, Operator

Your next question comes from the line of Alan Macias with Bank of America Merrill Lynch.

Alan Macias, Analyst

Just a follow-up question. Your pipeline has an investment of $214 million. Can you provide the amount you have already deployed? Should we expect, I know you do not provide guidance for CapEx, but is $200 million to $250 million a conservative assumption?

Lorenzo Berho, CEO

Thank you, Alan. Currently, we have invested approximately $140 million out of the expected $240 million in our construction projects. In terms of capital deployment, we plan to initiate more buildings throughout the year, procure more land, and invest in improving infrastructure. Our strategic intention is to actively engage in construction and land development as we pursue our mid-to-long term goals.

Operator, Operator

As there are no further questions, I would now like to turn the call back over to Mr. Berho for his concluding remarks. Please go ahead, sir.

Lorenzo Berho, CEO

Thank you, and thank you, everyone, for joining today's call. We're pleased with our financial and operational results in the fourth quarter, including an exceptional year for our company. I want to thank our shareholders for your ongoing support, and our investor colleagues who continue to enable us to outperform in any environment, as well as our many loyal and long-term clients. Our future remains bright, and we look forward to updating you on our progress. Thank you for listening.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.