Market Overview

Terrafina Announces Second Quarter 2018 Earnings Report

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MEXICO CITY, July 26, 2018 (GLOBE NEWSWIRE) -- Terrafina® ("TERRA" or "the Company") (BMV:TERRA13), a leading Mexican industrial real estate investment trust ("FIBRA"), externally advised by PGIM Real Estate and dedicated to the acquisition, development, leasing and management of industrial real estate properties in Mexico, today announced its second quarter 2018 (2Q18) earnings results.

The figures in this report have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Figures presented in this report are presented in millions of Mexican pesos and millions of U.S. dollars, unless otherwise stated. Additionally, figures may vary due to rounding. Terrafina's financial results included in this report are unaudited. As a result, the mentioned figures in this financial report are preliminary figures and could be adjusted in the future.

This document may include forward-looking statements that may imply risks and uncertainties. Terms such as "estimate", "project", "plan", "believe", "expect", "anticipate", "intend", and other similar expressions could be construed as previsions or estimates. Terrafina warns readers that declarations and estimates mentioned in this document, or realized by Terrafina's management imply risks and uncertainties that could change in function of various factors that are out of Terrafina's control. Future expectations reflect Terrafina's judgment at the date of this document. Terrafina reserves the right or obligation to update the information contained in this document or derived from this document. Past or present performance is not an indicator to anticipate future performance.

Operating and Financial Highlights as of June 30, 2018

Operating

  • As of June 30, 2018, the occupancy rate was 95.5%, a 68 basis point increase compared to the second quarter of 2017 (2Q17). Additionally, considering signed letters of intent (LOI), occupancy for 2Q18 was 96.4%.
     
  • Annualized average leasing rate per square foot at 2Q18 was US$5.07, a US$0.08 increase compared to 2Q17.
     
  • Terrafina reported a total of 40.9 million square feet (msf) of Gross Leasable Area (GLA) comprised of 286 properties and 298 tenants in 2Q18.
     
  • 2Q18 leasing activity totaled 1.4 msf, of which 18.0% corresponded to new leases, 39.0% to lease renewals and 43.0% to early renewals. Leasing activity was mainly concentrated in the Chihuahua, Ciudad Juarez, Tijuana, Ramos Arizpe, Queretaro, Silao, Cuautitlan Izcalli, San Luis Potosi, Guadalajara, Irapuato and Hermosillo markets.

Financial

  • Rental revenues reached US$47.6 million, a 14.2% or US$5.9 million increase compared to 2Q17.
     
  • NOI was US$47.9 million, a 14.6% or US$6.1 million increase compared to 2Q17.
     
  • The NOI margin reached 94.9%, a 82 basis point increase compared to 2Q17.
     
  • EBITDA reached US$43.6 million, an increase of 15.0% or US$5.7 million compared to 2Q17.
     
  • EBITDA margin was 86.4%, a 111 basis point increase compared to 2Q17.
     
  • Adjusted funds for operations (AFFO) reached US$28.8 million, an increase of 18.2% or US$4.4 million compared to 2Q17.
     
  • AFFO margin was 56.7%, a 241 basis point increase compared to 2Q17.
     
  • Distributions totaled US$28.8 million. As a result, Terrafina will distribute Ps.0.7020 per CBFI (US$0.0364 per CBFI) for distributions corresponding to the April 1 to June 30, 2018 period.
     
  • The annualized distribution was US$0.1456; considering the average share price for the 2Q18 of US$1.47 (Ps.28.46), Terrafina's dividend yield for the quarter was 9.9%.

Operating and Financial Highlights

               
Operating Jun18 Jun17 Var.        
Number of Developed Properties 286   260   26          
Gross Leasable Area (GLA) (msf)1 40.9   36.5   4.4          
Land Reserves (msf) 6.17   6.26   -0.09          
Occupancy Rate2 95.5 % 94.9 % 68 bps        
Avg. Leasing Rent / Square Foot (dollars) 5.07   4.99   0.08          
Weighted Average Remaining Lease Term (years) 3.46   3.49   -0.03          
Renewal Rate3 90.4 % 87.9 % 245 bps        
               
Quarterly Financial 2Q18 2Q17 Var.   2Q18 2Q17 Var.
        fx 19.3911   18.5666    
  (millions of pesos unless otherwise stated)   (millions of dollars unless otherwise stated)
Rental Revenues4 921.8   773.6   19.2 %   47.6   41.6   14.2 %
Other Operating Income 50.9   45.8   11.2 %   2.6   2.5   7.8 %
Net Revenues 981.1   825.1   18.9 %   50.6   44.4   14.0 %
Net Operating Income (NOI)* 926.9   776.3   19.4 %   47.9   41.8   14.6 %
NOI Margin 94.9 % 94.1 % 82 bps   94.9 % 94.1 % 82 bps
EBITDA5* 842.0   704.5   19.5 %   43.6   37.9   15.0 %
EBITDA Margin 86.4 % 85.3 % 111 bps   86.4 % 85.3 % 111 bps
Funds from Operations (FFO)* 604.2   500.8   20.6 %   31.3   26.9   16.3 %
FFO Margin 62.0 % 60.6 % 145 bps   62.0 % 60.6 % 145 bps
Adjusted Funds from Operations (AFFO)* 555.3   452.5   22.7 %   28.8   24.3   18.2 %
AFFO Margin 56.7 % 54.3 % 241 bps   56.7 % 54.3 % 241 bps
Distributions 555.3   452.4   22.7 %   28.8   24.3   18.2 %
Distributions per CBFI6 0.7020   0.5720   22.7 %   0.0364   0.0308   18.2 %
               
Balance Sheet Jun18 Mar18 Var. fx Jun18 Mar18 Var.
          19.8633   18.3445    
  (millions of pesos unless otherwise stated)   (millions of dollars unless otherwise stated)
Cash & Cash Equivalents 2,042.4   2,035.7   0.3 %   102.8   111.0   -7.3 %
Investment Properties 46,176.3   42,165.3   9.5 %   2,324.7   2,298.5   1.1 %
Land Reserves 1,032.2   950.8   8.6 %   52.0   51.8   0.3 %
Total Debt 19,826.6   18,623.4   6.5 %   998.2   1,015.2   -1.7 %
Net Debt 17,784.2   16,587.7   7.2 %   895.3   904.2   -1.0 %
                           

Figures in dollars in the Income Statement were converted into pesos using the average exchange rate for the period. (1) Millions of square feet. (2) Occupancy at the end of the period. (3) Indicates the lease renewal rate of the leases, includes early renewals. (4) Excluding accrued income as it is a non-cash item. (5) Earnings before interest, taxes, depreciation and amortization. (6) Certificados Bursátiles Fiduciarios Inmobiliarios - Real Estate Investment Certificates. (*) Revenues and expenses have been adjusted for the calculation of the above mentioned metrics. Figures in dollars in the Balance Sheet were converted using the closing exchange rate of the period. Please refer to the "2Q18 Financial Performance" and "Appendices" section available in this document.
Source: PGIM Real Estate – Asset Management and Fund Accounting

Comment by Alberto Chretin, Chief Executive Officer and Chairman of the Board

During the second quarter of 2018, we continued generating solid results --- integrating the benefits from the acquisitions of industrial assets that were concluded at the beginning of the second quarter. Moreover, the strength of the industrial real estate sector in Mexico was reflected in high leasing levels, which represented a total of 1.4 million square feet for Terrafina. The main leasing activity was concentrated in the markets of Chihuahua, Ciudad Juarez, Tijuana, Ramos Arizpe, Queretaro, Silao, Cuautitlan Izcalli, San Luis Potosi, Guadalajara, Irapuato and Hermosillo markets. 

Renewal activity for Terrafina reached 0.6 million square feet and, in terms of early renewals, these were 0.6 million square feet; early renewals are a key indicator of the importance for our tenants to secure the permanence of their operation in the long-term. As a result of the strong leasing activity experienced in the first half of 2018, Terrafina lowered the remaining portion of the maturity schedule for the year from  8.1% in the first quarter to 5.2% in the second quarter of 2018.

Second quarter 2018 occupancy levels reached 95.5% and same-store occupancy was 95.2%. Including signed letters of intent, occupancy levels for the quarter reached 96.4%. Occupancy rates by region remained stable, reaching 97.2% in the Northern region, 92.2% in the Bajio region and 93.7% in the Central region.

Average annual leasing rent for 2Q18 was US$5.07 per square foot, a US$0.08 increase compared to the second quarter of 2017 and a US$0.01 increase compared to the first quarter of 2018. Average rents by region remained in line, with US$4.99 per square foot in the Northern region, US$5.16 per square foot in the Bajio region and a US$5.27 average rent per square foot in the Central region.

Terrafina's main financial indicators for the second quarter of 2018, rental revenues reached US$47.6 million, Net Operating Income reached US$47.9 million with an NOI Margin of 94.9%, as well as generating US$28.8 million in Adjusted Funds from Operations. Finally, Annualized Distributions per CBFI were Ps. 2.81, or US$0.1456, which represented a 9.8% dividend yield, considering the average CBFI price for the second quarter of 2018.

Thank you for your interest in Terrafina.

Sincerely, 

Alberto Chretin
Chief Executive Officer and Chairman of the Board

Operating Highlights

         
Highlights by Region        
(as of June 30, 2018) North Bajio Central Total
# Buildings 201   55   30   286  
# Tenants 203   56   39   298  
GLA (msf) 25.5   9.1   6.3   40.9  
Land Reserves (msf) 2.7   0.2   3.3   6.2  
Occupancy Rate 97.2 % 92.2 % 93.7 % 95.5 %
Average Leasing Rent / Square Foot (dollars) 4.99   5.16   5.27   5.07  
Annualized Rental Base % 62.4 % 22.0 % 15.7 % 100.0 %
Source: PGIM Real Estate - Asset Management        


       
Leasing Activity      
  2Q18 2Q17 Var.
Operating Portfolio (msf):      
Renewals 0.6 0.9 -0.3
Early Renewals 0.6 0.1 0.5
New Leases 0.3 0.5 -0.3
Total Square Feet of Leases Signed 1.4 1.6 -0.1
Source: PGIM Real Estate - Asset Management      


     
Occupancy and Rents  by Region   Maturities and Renewals by Region
          Consolidated
(As of June 30, 2018) Occupancy
Rate
Avg. Leasing
Rent / Square
Foot
(dollars)
  (As of June 30, 2018) Maturities
 
(number of
contracts)
% of Total
Maturities
Renewals
 
(number of
contracts)
% of Total
Renewals
North 97.2 % 4.99   North 7 53.8 % 5 71.4 %
Baja California 100.0 % 4.40   Baja California 1 7.7 % 1 100.0 %
Tijuana 100.0 % 4.40   Tijuana 1 7.7 % 1 100.0 %
Sonora 88.5 % 4.57   Sonora 1 7.7 % 1 100.0 %
Hermosillo 88.5 % 4.57   Hermosillo 1 7.7 % 1 100.0 %
Chihuahua 97.8 % 5.03   Chihuahua 3 23.1 % 3 100.0 %
Chihuahua 98.0 % 5.43   Chihuahua 1 7.7 % 1 100.0 %
Ciudad Juarez 97.8 % 4.70   Ciudad Juarez 2 15.4 % 2 100.0 %
Delicias 100.0 % 5.98   Delicias 0 0.0 % 0 0.0 %
Gomez Farias 100.0 % 3.34   Gomez Farias 0 0.0 % 0 0.0 %
Casas Grandes 100.0 % 4.21   Casas Grandes 0 0.0 % 0 0.0 %
Coahuila 96.4 % 5.05   Coahuila 2 15.4 % 0 0.0 %
Ciudad Acuña 100.0 % 6.11   Ciudad Acuña 0 0.0 % 0 0.0 %
Monclova 100.0 % 5.46   Monclova 0 0.0 % 0 0.0 %
Ramos Arizpe 96.2 % 4.88   Ramos Arizpe 1 7.7 % 0 0.0 %
Saltillo 91.0 % 5.44   Saltillo 1 7.7 % 0 0.0 %
Derramadero 100.0 % 6.64   Derramadero 0 0.0 % 0 0.0 %
San Pedro de las Colinas 89.3 % 2.10   San Pedro de las Colinas 0 0.0 % 0 0.0 %
Torreon 100.0 % 4.26   Torreon 0 0.0 % 0 0.0 %
Nuevo Leon 93.3 % 5.03   Nuevo Leon 0 0.0 % 0 0.0 %
Apodaca 100.0 % 5.51   Apodaca 0 0.0 % 0 0.0 %
Monterrey 91.0 % 4.84   Monterrey 0 0.0 % 0 0.0 %
Tamaulipas 100.0 % 4.65   Tamaulipas 0 0.0 % 0 0.0 %
Reynosa 100.0 % 4.65   Reynosa 0 0.0 % 0 0.0 %
Durango 100.0 % 4.79   Durango 0 0.0 % 0 0.0 %
Durango 100.0 % 4.95   Durango 0 0.0 % 0 0.0 %
Gomez Palacio 100.0 % 3.14   Gomez Palacio 0 0.0 % 0 0.0 %
Bajio 92.2 % 5.16   Bajio 5 38.5 % 5 100.0 %
San Luis Potosi 89.5 % 4.89   San Luis Potosi 0 0.0 % 0 0.0 %
San Luis Potosi 89.5 % 4.89   San Luis Potosi 0 0.0 % 0 0.0 %
Jalisco 100.0 % 6.51   Jalisco 1 7.7 % 1 100.0 %
Guadalajara 100.0 % 6.51   Guadalajara 1 7.7 % 1 100.0 %
Aguascalientes 100.0 % 4.76   Aguascalientes 0 0.0 % 0 0.0 %
Aguascalientes 100.0 % 4.76   Aguascalientes 0 0.0 % 0 0.0 %
Guanajuato 94.4 % 4.80   Guanajuato 3 23.1 % 3 100.0 %
Celaya 100.0 % 5.29   Celaya 0 0.0 % 0 0.0 %
Irapuato 81.8 % 5.24   Irapuato 1 7.7 % 1 100.0 %
Silao 100.0 % 4.55   Silao 2 15.4 % 2 100.0 %
Queretaro 85.8 % 4.78   Queretaro 1 7.7 % 1 100.0 %
Queretaro 85.8 % 4.78   Queretaro 1 7.7 % 1 100.0 %
Central 93.7 % 5.27     Central 1 7.7 % 1 100.0 %
Estado de Mexico 92.7 % 5.49   Estado de Mexico 1 7.7 % 1 100.0 %
Cuautitlan Izcalli 100.0 % 5.51   Cuautitlan Izcalli 1 7.7 % 1 100.0 %
Toluca 81.6 % 5.39   Toluca 0 0.0 % 0 0.0 %
Ciudad de Mexico 100.0 % 9.22   Ciudad de México 0 0.0 % 0 0.0 %
Azcapotzalco 100.0 % 9.22   Azcapotzalco 0 0.0 % 0 0.0 %
Puebla 100.0 % 3.20   Puebla 0 0.0 % 0 0.0 %
Puebla 100.0 % 3.20   Puebla 0 0.0 % 0 0.0 %
Tabasco 100.0 % 3.99   Tabasco 0 0.0 % 0 0.0 %
Villahermosa 100.0 % 3.99   Villahermosa 0 0.0 % 0 0.0 %
Total 95.5 % 5.07   Total 13 100.0 % 11 84.6 %
Source: PGIM Real Estate - Asset Management    Source: PGIM Real Estate - Asset Management
*Over the number of matured leases in the quarter 
           

2Q18 Operational Performance
Composition by Geographical Diversification
The geographic diversification of Terrafina's properties at 2Q18 (based on GLA per square foot) was as follows: the Northern region of Mexico represented 62.4% of GLA, while the Bajio and Central regions represented 22.3% and 15.3% of GLA, respectively.

     
Geographic Distribution by Region and State    
  2Q18  as a % of Total
GLA 2Q18
2Q17  as a % of Total
GLA 2Q17
North 25.55 62.4 % 21.01 57.5 %
Baja California 0.90 2.2 % 0.90 2.5 %
Tijuana 0.90 2.2 % 0.90 2.5 %
Sonora 0.33 0.8 % 0.33 0.9 %
Hermosillo 0.33 0.8 % 0.33 0.9 %
Chihuahua 14.29 34.9 % 13.66 37.4 %
Chihuahua 5.83 14.2 % 5.44 14.9 %
Ciudad Juarez 7.76 19.0 % 7.74 21.2 %
Delicias 0.52 1.3 % 0.29 0.8 %
Gomez Farias 0.08 0.2 % 0.08 0.2 %
Camargo 0.02 0.1 % 0.02 0.1 %
Casas Grandes 0.09 0.2 % 0.09 0.2 %
Coahuila 6.84 16.7 % 3.49 9.5 %
Ciudad Acuña 0.24 0.6 % 0.24 0.7 %
Monclova 0.35 0.8 % 0.34 0.9 %
Ramos Arizpe 4.54 11.1 % 2.00 5.5 %
Saltillo 0.62 1.5 % 0.62 1.7 %
Derramadero 0.54 1.3 % 0.00 0.0 %
San Pedro de las Colinas 0.15 0.4 % 0.15 0.4 %
Torreon 0.39 1.0 % 0.13 0.4 %
Nuevo Leon 1.94 4.7 % 1.38 3.8 %
Apodaca 0.50 1.2 % 0.50 1.4 %
Monterrey 1.44 3.5 % 0.89 2.4 %
Tamaulipas 0.47 1.1 % 0.47 1.3 %
Reynosa 0.47 1.1 % 0.47 1.3 %
Durango 0.78 1.9 % 0.78 2.1 %
Durango 0.71 1.7 % 0.71 1.9 %
Gomez Palacio 0.07 0.2 % 0.07 0.2 %
Bajio 9.12 22.3 % 9.26 25.4 %
San Luis Potosi 3.31 8.1 % 3.30 9.0 %
San Luis Potosi 3.31 8.1 % 3.30 9.0 %
Jalisco 1.66 4.0 % 1.81 5.0 %
Guadalajara 1.66 4.0 % 1.81 5.0 %
Aguascalientes 0.75 1.8 % 0.75 2.1 %
Aguascalientes 0.75 1.8 % 0.75 2.1 %
Guanajuato 1.42 3.5 % 1.42 3.9 %
Celaya 0.12 0.3 % 0.12 0.3 %
Irapuato 0.44 1.1 % 0.44 1.2 %
Silao 0.87 2.1 % 0.86 2.4 %
Queretaro 1.98 4.8 % 1.98 5.4 %
Queretaro 1.98 4.8 % 1.98 5.4 %
Central 6.25 15.3 % 6.25 17.1 %
Estado de Mexico 5.40 13.2 % 5.40 14.8 %
Cuautitlan Izcalli 4.26 10.4 % 4.26 11.7 %
Toluca 0.91 2.2 % 0.91 2.5 %
Huehuetoca 0.23 0.6 % 0.23 0.6 %
Ciudad de Mexico 0.02 0.1 % 0.02 0.1 %
Azcapotzalco 0.02 0.1 % 0.02 0.1 %
Puebla 0.18 0.5 % 0.18 0.5 %
Puebla 0.18 0.5 % 0.18 0.5 %
Tabasco 0.65 1.6 % 0.65 1.8 %
Villahermosa 0.65 1.6 % 0.65 1.8 %
Total 40.92 100.0 % 36.52 100.0 %
Total Gross Leasable Area / million square feet. Potential leasable area of land reserves are not included. 
Source: PGIM Real Estate - Asset Management
   

Composition by Asset Type
At the end of 2Q18, 73.5% of Terrafina's portfolio consisted of properties dedicated to manufacturing activities while 26.5% were dedicated to distribution and logistics activities.

     
Composition by Asset Type    
  2Q18 2Q17 Var.
Distribution 26.5 % 26.4 % 9 bps
Manufacturing 73.5 % 73.6 % -9 bps
Source: PGIM Real Estate - Asset Management  
   

Composition by Sector
As of June 30, 2018, tenant diversification by industrial sector was as follows:

     
Industrial Sector Diversification    
  2Q18 2Q17 Var.
Automotive 34.5 % 31.9 % 257 bps
Industrial properties 19.8 % 20.0 % -26 bps
Consumer goods 14.5 % 15.2 % -69 bps
Logistics and Trade 9.6 % 9.8 % -21 bps
Aviation 9.8 % 10.4 % -59 bps
Non-durable consumer goods 3.9 % 4.4 % -47 bps
Electronics 8.0 % 8.3 % -35 bps
Total 100.0 % 100.0 %  
Source: PGIM Real Estate - Asset Management 
       

Composition of Top Clients
Terrafina has a widely diversified tenant base that lease industrial properties throughout several of Mexico's main cities. For 2Q18, Terrafina's top client, top 10 clients and top 20 clients, represented 3.3%, 17.1% and 26.8% of total revenues, respectively.

 
Top Clients
(As of June 30, 2018)  Leased Square Feet (millions)  % Total GLA  % Total Revenues
Top Client 1.24 3.2 % 3.3 %
Top 10 Clients 6.75 17.3 % 17.1 %
Top 20 Clients 10.54 27.0 % 26.8 %
Source: PGIM Real Estate - Asset Management 
     

Occupancy
2Q18 occupancy rate was 95.5%, a 68 basis point increase compared to 2Q17. Including signed LOIs for the quarter, the occupancy rate was 96.4% for the quarter. It is important to note that occupancy rate indicators presented in this report reflect the quarterly closing rate.

For 2Q18, Terrafina's leasing activity reached 1.4 msf, of which 18.0% corresponded to new leasing contracts (including expansions), 39.0% for contract renewals and 43.0% for early renewals.

Leasing activity mainly took place in the Chihuahua, Ciudad Juarez, Tijuana, Ramos Arizpe, Queretaro, Silao, Cuautitlan Izcalli, San Luis Potosi, Guadalajara, Irapuato and Hermosillo markets. In addition to this leasing activity, Terrafina signed an additional 348,500 square feet in LOIs.

       
  2Q18 2Q17 Var.
Leased GLA 95.5 % 94.9 % 26 bps
Vacant GLA 3.6 % 4.9 % -129 bps
Signed Letters of Intent 0.9 % 0.2 % 68 bps
Total 100.0 % 100.0 %  
Source: PGIM Real Estate - Asset Management 
   

Lease Maturities
Terrafina had 298 tenants under leasing contracts at the end of 2Q18. The leasing characteristics of these contracts have an average maturity of three to five years for logistics and distribution properties and of five to seven years for manufacturing properties. Annual average maturities (as a percentage of annual base rents) remain at levels of between 5% to 22% for the next five years.

The following table breaks down Terrafina's leasing maturity schedule for the upcoming years:

         
  Annual Base Rent 
 (millions of dollars)
% of Total Occupied Sq.
Ft
(millions)
% of Total
2018 9.5 4.8 % 2.03 5.2 %
2019 34.8 17.6 % 7.12 18.2 %
2020 44.5 22.5 % 8.74 22.4 %
2021 37.0 18.7 % 7.23 18.5 %
2022 16.9 8.5 % 3.62 9.3 %
Thereafter 55.4 28.0 % 10.35 26.5 %
Source: PGIM Real Estate – Asset Management
 

Capital Deployment

Capital Expenditures (CAPEX)
Terrafina's CAPEX is classified as recurring expenses that took place based on upcoming leasing maturities and property improvements. The main goal of these expenses is the renewal of leasing contracts as well as the improvement of property conditions taking into account tenant requirements. Terrafina expects to apply CAPEX towards vacant properties as well as towards the development of new GLA by means of expansions and/or new developments.

Additionally, it is important to consider that CAPEX intended for expansions and new developments are not financed with Terrafina's operating cash flow and therefore do not pass through the income statement.

Capital expenditures accounts are comprised as follows:

  1. Tenant property improvement resources as well as recurring maintenance CAPEX.
  2. Broker and administrator fees.
  3. CAPEX for new developments, which due to their nature, are generally capitalized.

In 2Q18, Terrafina's investments in tenant improvements and recurring CAPEX was US$1.3 million. Total CAPEX for 2Q18 is broken down in the following table:

     
Capital Expenditures    
  2Q18 2Q18
  (millions
of pesos)
(millions
of dollars)
Tenant Improvements & Recurring Capex 25.3 1.3
Leasing Commissions 20.0 1.0
Development Capex1 8.2 0.4
Total Capital Expenditures 53.4 2.7
Maintenance expenses for vacant properties are included in the Tenant Improvements & Recurring Capex figures. (1) Capex for expansions/new developments.  
Source: PGIM Real Estate - Asset Management  
   

Land Reserves
Terrafina's land reserve as of June 30, 2018 was comprised of 12 land reserve properties, equivalent to 6.2 msf of potential GLA for the development of future industrial properties.

As of June 30, 2018, Terrafina's land reserves were distributed as follows:

   
  As of  June 30, 2018
  Square Feet
(millions)
 Land at Cost 
(millions of pesos)
Land at Cost 
 (millions of dollars)
Appraisal Value 
 (millions of pesos)
Market Value 
 (millions of dollars)
North 3.0 514.3 25.9 592.8 29.8
Bajio 0.1 14.2 0.7 14.7 0.7
Central 3.1 737.8 37.1 424.7 21.4
Total Land Portfolio 6.2 1,266.3 63.7 1,032.2 51.9
Source: PGIM Real Estate - Asset Management and Fund Accounting 
   

2Q18 Financial Performance

Financial Results and Calculations
Terrafina's financial results are presented in Mexican pesos and U.S. dollars. Figures on the income statement for each period were converted to dollars using the average exchange rate for 2Q18, while for the balance sheet, the exchange rate at the close of June 30, 2018 was applied.

Terrafina has in place best accounting practices for measuring the FIBRA's (REIT) performance results by providing relevant metrics to the financial community. Throughout the following financial performance section, additional calculations are available. It is important to note that these metrics must not be considered individually to evaluate Terrafina's results. It is recommended to use them in combination with other International Financial Reporting Standards metrics to measure the Company's performance.

Terrafina presents in this earnings report additional metrics such as Net Operating Income (NOI), Earnings Before Interests, Taxes, Depreciation and Amortization (EBITDA), Funds from Operations (FFO), and Adjusted Funds from Operations (AFFO). Each breakdown calculation is available in this document.

 
In addition, Terrafina recommends reviewing the Appendices as a reference of the integration of different items of Terrafina's financial statement. This information is available in the last section of this document.
 
Past performance is not a guarantee or reliable indicator of future results.
 

Same-Store
The following table shows Terrafina's 2Q18 same-store highlights and consolidated information:

           
(as of June 30, 2018) Same-Store1
2Q18
Consolidated2
2Q18
     
Number of Properties 259.0   286.0        
Occupancy Rate 95.2 % 95.5 %      
Gross Leasable Area (GLA) (msf) 36.7   40.9        
Avg. Leasing Rent / Square Foot (dollars) 5.02   5.07        
           
  Same-Store
2Q18
Consolidated
2Q18
Same-Store
2Q18
Consolidated
2Q18
 
  (millions of pesos) (millions of dollars)  
Rental Revenues 816.4   921.8   42.1   47.6    
Net Operating Income 824.2   926.9   42.6   47.9    
NOI Margin 93.8 % 94.9 % 93.8 % 94.9 %  
EBITDA 764.4   842.0   39.5   43.6    
EBITDA Margin 85.2 % 86.4 % 85.2 % 86.4 %  
FFO 530.7   604.2   27.4   31.3    
FFO Margin 60.7 % 62.0 % 60.7 % 62.0 %  
Adjusted Funds from Operations 479.8   555.3   24.8   28.8    
AFFO Margin 54.6 % 56.7 % 54.6 % 56.7 %  
(1) Same properties information evaluates the performance of the industrial properties without including recent acquisitions closed in January, September and December 2017.  (2) Includes acquisitions closed in January, September and December 2017.
Source: PGIM Real Estate - Asset Management and Fund Accounting      
       

Rental Revenues
In 2Q18, Terrafina reported rental revenues of US$47.6 million, a 14.2% or US$5.9 million increase compared to 2Q17.

Rental revenues do not include accrued revenues as these are a non-cash item.

Other Operating Income
In 2Q18, other operating income totaled US$2.6 million, a 7.8% or US$0.2 million decrease compared to 2Q17.

Other operating income mainly stem from tenant refunds from triple-net leases. Expenses reimbursable to Terrafina mainly included electricity, property taxes, insurance costs and maintenance.

Net revenues reached US$50.6 million in 2Q18, an increase of US$6.2 million, or 14.0% compared to 2Q17.

             
Revenues            
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos) (millions of dollars)
Rental Revenue 921.8 773.6 19.2 % 47.6 41.6 14.2 %
Accrued Income1 8.4 5.8 46.5 % 0.4 0.3 36.8 %
Other Operating Revenues 50.9 45.8 11.2 % 2.6 2.5 7.8 %
Reimbursable Expenses as Revenues2 40.7 36.0 13.1 % 2.1 1.9 10.3 %
Reimbursable Tenant Improvements 5.5 7.5 -26.1 % 0.3 0.4 -28.9 %
Other non-cash income 4.7 2.3 102.5 % 0.2 0.1 86.7 %
Net Revenue 981.1 825.1 18.9 % 50.6 44.4 14.0 %
(1) Straight line rent adjustment; non-cash item. (2) Triple net leases expenses reimbursed to Terrafina from its tenants.
Source: PGIM Real Estate - Fund Accounting            


For additional information regarding the revenue breakdown used to calculate additional metrics presented in this earnings report, please refer to Appendix 1 in the last section of this document.


Real Estate Expenses

In 2Q18, real estate expenses totaled US$7.1 million, an increase of 9.1% or US$0.6 million compared to 2Q17.

It is important to differentiate between expenses that are directly related to the operation and those that are for the maintenance of the industrial portfolio; the latter are used in the NOI calculation.

The remainder of the accounts included in real estate expenses are considered non-recurring expenses and are used to calculate EBITDA and AFFO.

For additional information regarding the real estate expenses breakdown, please refer to Appendix 2 in the last section of this document.
 

Net Operating Income (NOI)
In 2Q18, NOI totaled US$47.9 million, a 14.6% or US$6.1 million increase compared with 2Q17. NOI margin increased by 82 basis points reaching 94.9% compared to 94.1% in 2Q17.

The following table displays the NOI calculation for 2Q18:

             
Net Operating Income            
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos unless otherwise stated) (millions of dollars unless otherwise stated)
Rental Revenues1 921.8   773.6   19.2 % 47.6   41.6   14.2 %
Other Operating income2 55.8   51.7   8.0 % 2.9   2.8   3.6 %
Net Revenues for NOI Calculation 977.6   825.2   18.5 % 50.5   44.4   13.6 %
Repair and Maintenance -6.0   -8.2   -26.5 % -0.3   -0.4   -30.4 %
Property Taxes 0.6   -0.4   -280.0 % 0.0   0.0   -266.5 %
Property Management Fees -20.4   -16.6   23.0 % -1.1   -0.9   17.8 %
Electricity -13.1   -12.7   2.9 % -0.7   -0.7   -5.0 %
Property Insurance -2.9   -2.8   3.7 % -0.2   -0.2   -0.4 %
Security -5.0   -3.8   33.8 % -0.3   -0.2   27.3 %
Other Operational Expenses -3.9   -4.6   -14.0 % -0.2   -0.2   -19.9 %
Real Estate Operating Expenses for NOI Calculation -50.7   -48.9   3.6 % -2.6   -2.6   -2.1 %
Net Operating Income3 926.9   776.3   19.4 % 47.9   41.8   14.6 %
NOI Margin 94.9 % 94.1 % 82 bps 94.9 % 94.1 % 82 bps
(1)Excludes accrued income from straight line rent adjustments as it is a non-cash item. (2) Excludes tenant improvements reimbursements which are included in ' AFFO ' (3) The income calculation generated by the operation of the property, independent of external factors such as financing and income taxes.
NOI is the result  of Net Revenues (includes rental income and triple  net leases expenses reimbursements) minus Real Estate Operating Expenses (costs incurred during the operation  and maintenance of the industrial portfolio).
Source: PGIM Real Estate - Fund Accounting  
   

Fees and Administrative Expenses (G&A)

G&A in 2Q18 totaled US$5.6 million, a 13.1% or US$0.6 million increase compared to 2Q17.

The following table breaks down total G&A:

             
G&A            
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos unless otherwise stated) (millions of dollars unless otherwise stated)
External Advisor Fees1 -59.2 -47.7 24.1 % -2.9 -2.6 11.3 %
Professional and Consulting Services -6.1 -8.9 -31.1 % -0.4 -0.5 -22.0 %
Payroll, Admin. Fees and Other Expenses -45.6 -34.4 32.5 % -2.3 -1.9 24.6 %
Total G&A2 -110.9 -91.0 21.9 % -5.6 -4.9 13.1 %
(1) General and Administrative Expenses (2) PLA Administradora Industrial, S. de R.L. de C.V., is a Mexican affiliate of PGIM Real Estate and Advisor as per the Advisory Contract.
Source: PGIM Real Estate - Fund Accounting  
   

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
In 2Q18, EBITDA totaled US$43.6 million, an increase of US$5.7 million, or 15.0%, compared to 2Q17. EBITDA margin for 2Q18 was 86.4%, a 111 basis point increase compared to 2Q17.

The following shows the EBITDA calculation for 2Q18:

EBITDA            
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos unless otherwise stated) (millions of dollars unless otherwise stated)
Rental Revenues1 921.8   773.6   19.2 % 47.6   41.6   14.2 %
Other Operating income2 55.8   51.7   8.0 % 2.9   2.8   3.6 %
Real Estate Expenses for EBITDA Calculation -51.3   -51.1   0.4 % -2.6   -2.8   -4.9 %
Real Estate Operating Expenses for NOI Calculation -50.7   -48.9   3.6 % -2.6   -2.6   -2.1 %
Advertising -0.5   -0.2   109.5 % 0.0   0.0   -  
Admin. Property Insurance Expenses -0.7   -0.8   -14.3 % 0.0   0.0   -17.7 %
Other Admin. Real Estate Expenses 0.6   -1.1   -156.0 % 0.0   -0.1   -144.9 %
Fees and Admin. Expenses -84.4   -69.6   21.2 % -4.3   -3.8   12.3 %
External Advisor Fees -59.2   -47.7   24.1 % -2.9   -2.6   11.3 %
Legal, Admin. and Other Professional Fees -15.0   -12.3   22.1 % -0.8   -0.6   26.7 %
Trustee Fees -0.3   -2.2   -84.9 % 0.0   -0.1   -86.7 %
Payroll -6.8   -5.8   18.6 % -0.4   -0.3   12.9 %
Other Expenses -3.0   -1.7   75.2 % -0.2   -0.1   63.6 %
EBITDA3 842.0   704.5   5.6 % 43.6   37.9   15.0 %
EBITDA Margin 86.4 % 85.3 % 111 bps 86.4 % 85.3 % 111 bps
(1) Excludes accrued income from straight line rent adjustments as it is a non-cash item. (2) Excludes tenant improvements reimbursements which is included in AFFO calculation.  (3) Earnings before interest, taxes, depreciation and amortization.
Source: PGIM Real Estate - Fund Accounting  


For additional information regarding the commissions and administrative expenses breakdown used for the calculation of EBITDA and AFFO, please refer to Appendix 3 located in the last section of this document.
 

Financing Expenses
In 2Q18, financing expenses totaled US$12.7 million, an increase of 13.9% or US$1.6 million compared to 2Q17.

           
Financial Expenses          
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos unless otherwise stated) (millions of dollars unless otherwise stated)
Interest Paid -240.2 -205.4 17.0 % -12.4 -11.1 12.2 %
Borrowing Expenses -8.6 -3.8 127.2 % -0.4 -0.2 105.9 %
Recurring 0.0 -0.3 -   0.0 0.0 -  
Non Recurring -8.6 -3.4 -   -0.4 -0.2 -  
Interest Income 2.4 2.0 19.7 % 0.1 0.1 13.8 %
Total -246.4 -207.1 18.9 % -12.7 -11.2 13.9 %
Source: PGIM Real Estate - Fund Accounting  
   

Funds from Operations (FFO) / Adjusted Funds from Operations (AFFO) 
In 2Q18, FFO increased by US$4.4 million, or 16.3% compared to 2Q17, reaching US$31.3 million. FFO Margin was 62.0%, a 145 basis point increase compared to 2Q17. Additionally, Terrafina reported an AFFO of US$28.8 million, an increase of US$4.4 million, or 18.2% compared to 2Q17. AFFO margin was 56.7%, an increase of 241 basis points versus 2Q17.

             
Funds from Operations (FFO)            
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos unless otherwise stated) (millions of dollars unless otherwise stated)
EBITDA 842.0   704.5   19.5 % 43.6   37.9   15.0 %
Finance Cost1 -237.8   -203.7   16.7 % -12.3   -11.0   12.0 %
Funds from Operations (FFO) 604.2   500.8   20.6 % 31.3   26.9   16.3 %
FFO Margin 62.0 % 60.6 % 145 bps 62.0 % 60.6 % 145 bps
Tenant Improvements -25.3   -31.1   -18.8 % -1.3   -1.7   -22.8 %
Leasing Commissions -20.0   -13.2   51.6 % -1.0   -0.7   45.7 %
Other Non Recurring Expenses3 -3.7   -4.1   -11.3 % -0.2   -0.2   3.8 %
Adjusted Funds from Operations (AFFO) 555.3   452.5   22.7 % 28.8   24.3   18.2 %
AFFO Margin 56.7 % 54.3 % 241 bps 56.7 % 54.3 % 241 bps
(1) Net Operational Interest Expenses comprised by interest paid, recurring borrowing expenses and  other interest income. (2) Capex reserve for  expenses to acquisitions, dispositions, legal and other expenses.
Source: PGIM Real Estate - Fund Accounting  
   

Comprehensive Income
Comprehensive Income For 2Q18 reached a profit of US$149.4 million, compared to a loss of US$45.3 million in 2Q17. 

The following table presents the calculation of Comprehensive Income for 2Q18:

             
Comprehensive Income            
  2Q18 2Q17 Var. % 2Q18 2Q17 Var. %
  (millions of pesos unless otherwise stated) (millions of dollars unless otherwise stated)
Net Revenues 988.9 825.1 19.8 % 51.0 44.4 14.9 %
Real Estate Expenses -137.4 -120.3 14.2 % -7.1 -6.5 9.4 %
Fees and Other Expenses -110.9 -91.0 21.9 % -5.7 -4.9 15.8 %
Gain (Loss) from Sales of Real Estate Properties 0.0 1.9 -   0.0 0.1 -  
Net Income (Loss) from Fair Value Adjustment on Investment Properties 4.1 -62.7 -   0.2 -3.4 -  
Net Income (Loss) from Fair Value Adjustment on Derivative Financial Instruments 9.4 4.4 112.4 % 0.5 0.2 103.4 %
Net Income (Loss) from Fair Value Adjustment on Borrowings 246.3 -190.2 -   12.7 -10.2 -  
Realized gain (loss) on derivative financial instruments -0.2 - -   0.0 -10.2 -  
Foreign Exchange Gain (loss) -69.0 50.8 -   -3.6 2.7 -  
Operating Profit 931.1 418.1 122.7 % 48.0 22.4 113.9 %
Financial Income 2.4 2.0 19.7 % 0.1 0.1 -  
Financial Expenses -248.8 -209.1 19.0 % -12.8 -11.3 14.0 %
Net Financial Cost -246.4 -207.1 18.9 % -12.7 -11.2 13.9 %
Share of Profit from Equity Accounted Investments 7.4 15.7 -   0.4 0.8 -  
Net Profit (Loss) 692.1 226.6 205.5 % 35.7 12.1 194.1 %
Items Reclassified after Net Profit  (Loss) - Currency Translation Adjustments 2,205.5 -1,066.9 -   113.7 -57.5 -  
Comprehensive Income 2,897.6 -840.3 -   149.4 -45.3 -  
Source: PGIM Real Estate - Fund Accounting            
             

Distributions per CBFIs
In 2Q18, Terrafina generated US$28.8 million of AFFO and therefore will distribute US$0.0364 per CBFI.

             
Distributions            
(millions of pesos unless otherwise stated) 2Q17 3Q17 4Q17 1Q18 2Q18 Var.% 
(2Q18 vs 2Q17)
Total Outstanding CBFIs   (millions of CBFIs) 791.0   791.0   791.0   791.0   791.0   0.0 %
CBFI Price1 32.35   31.29   30.20   28.68   28.46   -12.0 %
Distributions 452.4   410.4   484.9   505.2   555.3   22.7 %
Distributions Per CBFI 0.5720   0.5188   0.6130   0.6386   0.7020   22.7 %
FX Rate USD/MXN (average closing period) 18.57   17.83   18.93   18.78   19.39   4.4 %
Distributions (million dollars) 24.3   23.0   25.6   26.9   28.8   18.2 %
Distributions Per CBFI (dollars) 0.0308   0.0291   0.0324   0.0340   0.0364   18.2 %
Annualized Distribution Yield2 7.1 % 6.6 % 8.1 % 8.9 % 9.9 % 279 bps
(1) Average closing price for the period. (2) Annualized  distribution per share divided by the average CBFI price of the quarter. Quarterly distribution yield calculation has been annualized.  
Source: PGIM Real Estate - Fund Accounting  
   

Debt
As of June 30, 2018, Terrafina's total debt reached US$998.2 million. The average cost of Terrafina's long-term debt was 4.99%. All of Terrafina's debt is denominated in U.S. dollars.

                 
Outstanding Debt                
(as of June 30, 2018) Currency Millions of
pesos
Millions of
dollars
Interest
Rate
Terms Maturity Extension
Option
Derivatives
Long Term Debt                
Citibank1 Dollars 1,032.0 52.0 Libor + 2.45% Interest Only Jan 2023 - US$120M swap4 / US$100M  cap5
Metlife Dollars 2,979.5 150.0 4.75 % Interest Only Jan 2027 - -
Banamex2 Dollars 7,013.5 353.1 Libor + 2.45% Interest Only Oct 2022 - US$105M swap6
Senior Notes3 Dollars 8,489.8 427.4 5.25 % Interest Only Nov 2022 - -
New York Life Dollars 311.9 15.7 5.19 % Interest + Principal Feb 2020 - -
Total Debt   19,826.6 998.2          
Net Cash   2,042.4 102.8          
Net Debt   17,784.2 895.3          
(1) Unsecured syndicated revolving credit facility. (2) Unsecured syndicated term loan facility; interest only for the first three years. (3) Value at Cost: US$425 million / Ps.7,977 million.
(4) Swap fixed rate: 1.286%. (5) Cap strike price: 1.75% (6) Swap fixed rate: 1.768%.          
Source: PGIM Real Estate -  Fund Accounting and Transactions  
   


The following tables show leverage and debt service coverage as of June 30, 2018 as well as Terrafina's projections for the following six quarters:

   
Loan-to-Value (LTV)  
(as of  June 30, 2018) (millions of
pesos)
(millions of
dollars)
Total Assets 49,498.2 2,491.9  
Total Debt 19,826.6 998.2  
     
Loan-to-Value (LTV)1   40.1 %
(1) Total Debt divided by Total Assets as defined by the National Securities and Banking Commission (CNBV)
Source: PGIM Real Estate - Fund Accounting and Capital Markets
 


       
Debt Service Coverage Ratio (DSCR)      
  period (millions of pesos) (millions of dollars)  
Cash & Cash Equivalents June 30, 2018 2,042.4 102.8  
Recoverable Taxes Σ next 6 quarters 296.8 14.9  
EBIT1 after distributions Σ next 6 quarters 1,719.7 86.6  
Available Credit Line June 30, 2018 4,818.7 242.6  
   
  period (millions of pesos) (millions of dollars)  
Interest Payments Σ next 6 quarters 1,500.5 75.5  
Principal Payments Σ next 6 quarters 17.7 0.9  
Recurring CAPEX Σ next 6 quarters 193.9 9.8  
Development Expenses Σ next 6 quarters 290.9 14.6  
         
Debt Service Coverage Ratio (DSCR)2     4.4x  
(1) Earnings Before Interest and Taxes  
(2) (Cash & Cash Equivalents + Recoverable Taxes + EBIT After Distributions + Available Credit Line) / (Interest Payments + Principal Payments + Recurring CAPEX + Development Expenses)
Source: PGIM Real Estate - Fund Accounting and Capital Markets  
   

Moreover, as of June 30, 2018, Terrafina was in full compliance with its debt covenants related to the US$425 million bond issuance (November 2015), as follows:

     
Unsecured Bond Covenants    
(as of June 30, 2018) Terrafina Bond Covenants
Loan-to-Value (LTV)1 40.1 % ≤ 60%
Debt Service Coverage Ratio (DSCR)2 3.2x ≥ 1.5x
Secured Debt to Gross Assets Limitation 6.6 % ≤ 40%
Unencumbered Assets to Unsecured Debt Limitation 238 % ≥ 150%
(1) Total Debt divided by Total Assets.
(2) (Net Income/Loss + Interest on Debt + Unrealized Gain /Loss of fair value changes)/ (all interest and principal payments on Debt)
Source: PGIM Real Estate - Transactions  
   

Analyst Coverage
The following is a list of banks and institutions that regularly publish research reports on Terrafina:

   
- Barclays  - Invex
- BBVA Bancomer - Itaú BBA
- Bradesco    - JPMorgan
- BofA ML  - Monex
- BTG Pactual              - Morgan Stanley
- BX+                      - NAU Securities
- Citi Banamex      - Scotiabank
- Credit Suisse      - Vector
- GBM    - Santander
- HSBC      - UBS
- Interacciones           
   


About Terrafina
Terrafina (BMV:TERRA13) is a Mexican real estate investment trust formed primarily to acquire, develop, lease and manage industrial real estate properties in Mexico. Terrafina's portfolio consists of attractive, strategically located warehouses and other light manufacturing properties throughout the Central, Bajio and Northern regions of Mexico. It is internally managed by highly-qualified industry specialists and externally advised by PGIM Real Estate.

Terrafina owns 298 real estate properties, including 286 developed industrial facilities with a collective GLA of approximately 40.9 million square feet and 12 land reserve parcels, designed to preserve the organic growth capability of the portfolio.

Terrafina's objective is to provide attractive risk-adjusted returns for the holders of its certificates through stable distributions and capital appreciations. Terrafina aims to achieve this objective through a successful performance of its industrial real estate and complementary properties, strategic acquisitions, access to a high level of institutional support, and to its management and corporate governance structure. For more information, please visit www.terrafina.mx

PGIM Real Estate
PGIM Real Estate is the real estate investment business of PGIM Inc., the global investment management business of Prudential Financial, Inc. (NYSE:PRU).  Redefining the real estate investing landscape since 1970, PGIM Real Estate has professionals in 18 cities in the Americas, Europe and Asia Pacific with deep local knowledge and expertise, and gross assets under management of US$69.6 billion (US$50.3 billion net) as of March 31, 2018. PGIM Real Estate's tenured team offers to its global client base a broad range of real estate equity, debt and securities investment strategies that span the risk/return spectrum. For more information, visit www.pgimrealestate.com

About Prudential Financial, Inc.
Prudential Financial, Inc. (NYSE:PRU), a financial services leader with more than US$1 trillion of assets under management as of March 31, 2018, has operations in the United States, Asia, Europe, and Latin America. Prudential's diverse and talented employees are committed to helping individual and institutional customers grow and protect their wealth through a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management. In the U.S., Prudential's iconic Rock symbol has stood for strength, stability, expertise and innovation for more than a century. For more information, please visit www.news.prudential.com

Forward Looking Statements
This document may include forward-looking statements that may imply risks and uncertainties. Terms such as "estimate", "project", "plan", "believe", "expect", "anticipate", "intend", and other similar expressions could be construed as previsions or estimates. Terrafina warns readers that declarations and estimates mentioned in this document, or realized by Terrafina's management imply risks and uncertainties that could change in function of various factors that are out of Terrafina's control. Future expectations reflect Terrafina's judgment at the date of this document. Terrafina reserves the right or obligation to update the information contained in this document or derived from this document. Past or present performance is not an indicator to anticipate future performance.

Conference Call

Terrafina
(BMV: TERRA13)
Cordially invites you to participate in its
Second Quarter 2018 Results

Friday, July 27, 2018
11:00 a.m. Eastern Time
10:00 a.m. Central Time

To access the call, please dial:
from within the U.S. 1-877-830-2576
from outside the U.S. 1-785-424-1726
Conference ID Number: Terrafina

Audio Webcast Link:  https://www.webcaster4.com/Webcast/Page/1111/26311

  Conference Replay
U.S. 1-844-488-7474
International (outside the US) 1-862-902-0129
Passcode: 24061815

Appendix

Appendix 1 – Revenues

Terrafina's revenues are mainly classified as rental revenues and other operating reimbursable revenues.

Additionally, there are accounting revenues that must be registered according with IFRS; however, these are considered as non-cash items and therefore are excluded in some calculations.

Reimbursable tenant improvements are included in the tenant improvement expenses for the AFFO calculation.

               
    Revenues          
      2Q18 2Q17 2Q18 2Q17  
      (millions of pesos) (millions of dollars)  
NOI calculation   Rental Revenue 921.8 773.6 47.6 41.6  
Non Cash   Accrued Income1 8.4 5.8 0.4 0.3  
    Other Operating Revenues 50.9 45.8 2.6 2.5  
NOI calculation   Reimbursable Expenses as Revenues2 40.7 36.0 2.1 1.9  
AFFO calculation   Reimbursable Tenant Improvements 5.5 7.5 0.3 0.4  
Non Cash   Other non-cash income 4.7 2.3 0.2 0.1  
    Net Revenue 981.1 825.1 50.6 44.4  
NOI calculation   Share of Profit from Equity Accounted Investments2 15.1 15.7 0.8 0.9  
    (1) Straight line rent adjustment. (2) Triple net leases expenses reimbursed to Terrafina from its tenants. (2) Profit from joint-venture developments.
 
    Source: PGIM Real Estate - Fund Accounting  
       

Appendix 2 – Real Estate Expenses

Real estate expenses are comprised of recurring figures related with the operation (used for the Net Operating Profit calculation) as well as non-recurring figures used for metric calculations such as Earnings Before Interests, Taxes, Depreciation and Amortization (EBITDA), Funds from Operations (FFO), Adjusted Funds from Operations (AFFO).

The following table presents the real estate expenses breakdown, which are used for the calculation of several metrics.

             
    Real Estate Expenses        
      2Q18 2Q17 2Q18 2Q17
      (million of pesos) (million of dollars)
    Repair and Maintenance -36.8 -46.8 -1.9 -2.5
NOI calculation   Recurring -6.0 -8.2 -0.3 -0.4
AFFO calculation   Non Recurring -30.8 -38.6 -1.6 -2.1
    Property Taxes -4.8 -12.7 -0.3 -0.7
NOI calculation   Operating 0.6 -0.4 0.0 0.0
Non Cash   Non Operating -5.4 -12.4 -0.3 -0.7
NOI calculation   Property Management Fees -20.4 -16.6 -1.1 -0.9
NOI calculation   Electricity -13.1 -12.7 -0.7 -0.7
AFFO calculation   Brokers Fees -20.0 -13.2 -1.0 -0.7
    Property Insurance -3.6 -3.7 -0.2 -0.2
NOI calculation   Operating -2.9 -2.8 -0.2 -0.2
EBITDA calculation   Administrative -0.7 -0.8 0.0 0.0
NOI calculation   Security -5.0 -3.8 -0.3 -0.2
EBITDA calculation   Advertising -0.5 -0.2 0.0 0.0
    Other Expenses -18.6 -6.1 -0.9 -0.3
NOI calculation   Operational  Related -3.9 -4.6 -0.2 -0.2
Non Cash   Non Operational  Related -15.3 -0.5 -0.8 0.0
EBITDA calculation   Administrative 0.6 -1.1 0.0 -0.1
Non Cash   Bad Debt Expense -14.6 -4.7 -0.8 -0.2
    Total Real Estate Expenses -137.4 -120.3 -7.1 -6.5
    Source: PGIM Real Estate - Fund Accounting        
             

Appendix 3 – Fees and Administrative Expenses

Fees and administrative expenses include figures used for metric calculations such as Earnings before Interests, Taxes, Depreciation and Amortization (EBITDA), Funds from Operations (FFO), Adjusted Funds from Operations (AFFO).

Terrafina's fees and administrative expenses breakdown is available in the following table and indicates the figures used for the calculation of these metrics:

         
    Fees and Administrative Expenses        
      2Q18 2Q17 2Q18 2Q17
      (million of pesos) (million of dollars)
EBITDA calculation   External Advisor Fees -59.2 -47.7 -2.9 -2.6
    Legal Fees -1.4 -3.8 -0.1 -0.2
EBITDA calculation   Recurring 0.0 -0.3 0.0 0.0
AFFO calculation   Non Recurring -1.3 -3.5 -0.1 -0.2
    Other Professional Fees -4.8 -5.1 -0.3 -0.3
EBITDA calculation   Recurring -2.4 -3.3 -0.2 -0.2
AFFO calculation   Non Recurring -2.3 -1.7 -0.1 -0.1
    Administrative Fees -35.4 -24.8 -1.8 -1.3
EBITDA calculation   Recurring -12.5 -8.6 -0.6 -0.5
Non Operational related   Non Recurring1 -22.9 -16.2 -1.1 -0.9
EBITDA calculation   Payroll -6.8 -5.8 -0.4 -0.3
EBITDA calculation   Trustee Fees -0.3 -2.2 0.0 -0.1
EBITDA calculation   Other Expenses -3.0 -1.7 -0.2 -0.1
    Total Fees and Admin. Expenses -110.9 -91.0 -5.6 -4.9
    (1) Non operational related administrative fees. 
    Source: PGIM Real Estate - Fund Accounting 
       

Appendix 4 – Reconciliation

       
Reconciliation of Net Profit (Loss) to FFO, EBITDA and NOI      
  2T18 2T17 2T18 2T17
  (millions of pesos) (millions of dollars)
Comprehensive Income (Loss) 2,897.6 -840.3 149.4 -45.3
Add (deduct) Currency Translation Adjustment:        
Currency Translation Adjustment -2,205.5 1,066.9 -113.7 57.5
Add (deduct) Cost of Financing Adjustment:        
Non Recurring Borrowing Expenses 8.6 3.4 0.4 0.2
Add (deduct) Non-Cash Adjustment:        
Foreign Exchange Adjustments 69.0 -50.8 3.6 -2.7
Gain (Loss) on Derivative Financial Instruments 0.2 - 0.0 -
 Fair Value Adjustment on Borrowings -246.3 190.2 -12.7 10.2
Fair Value Adjustment on Derivative Financial Instruments -9.4 -4.4 -0.5 -0.2
Fair Value Adjustment on Investment Properties -4.1 62.7 -0.2 3.4
Gain (Loss) from Sales of Real Estate Properties 0.0 -1.9 0.0 -0.1
Add (deduct) Expenses Adjustment:        
Non Recurring Repair and Maintenance 30.8 38.6 1.6 2.1
Non Operating Property Taxes 5.4 12.4 0.3 0.7
Brokers Fees 20.0 13.2 1.0 0.7
Bad Debt Expense 14.6 4.7 0.8 0.3
Other Non Operational Related Expenses 15.3 0.5 0.8 0.0
Non Recurring Legal Fees 1.3 3.5 0.1 0.2
 Non Recurring Other Professional Fees 2.3 1.7 0.1 0.1
Add (deduct) Revenues Adjustment:        
Accrued Income -8.4 -5.8 -0.4 -0.3
Other Non-Cash Income -4.7 -2.3 -0.2 -0.1
Reimbursable Tenant Improvements -5.5 -7.5 -0.3 -0.4
Add (deduct) Non Operational Administrative Fees        
Non Operational Administrative Fees 22.9 16.2 1.2 0.9
FFO 604.2 500.8 31.3 26.9
Add (deduct) Cost of Financing Adjustment:        
Interest Paid 240.2 205.4 12.4 11.1
Recurring Borrowing Expenses 0.0 0.3 0.0 0.0
Interest Income -2.4 -2.0 -0.1 -0.1
EBITDA 842.0 704.5 43.6 37.9
Add (deduct) Expenses Adjustment:        
External Advisor Fees 59.2 47.7 3.1 2.6
Recurring Legal Fees 0.0 0.3 0.0 0.0
Recurring Other Professional Fees 2.4 3.3 0.1 0.2
Administrative Fees 12.5 8.6 0.6 0.5
Payroll 6.8 5.8 0.4 0.3
Trustee Fees 0.3 2.2 0.0 0.1
Other Expenses 3.0 1.7 0.2 0.1
Advertising 0.5 0.2 0.0 0.0
Administrative Property insurance 0.7 0.8 0.0 0.0
Other Administrative Expenses -0.6 1.1 0.0 0.1
NOI 926.9 776.3 47.9 41.8
Add (deduct) Expenses Adjustment:        
Recurring Repair and Maintenance 6.0 8.2 0.3 0.4
Operating Property Taxes -0.6 0.4 0.0 0.0
Property Management Fees 20.4 16.6 1.1 0.9
Electricity 13.1 12.7 0.7 0.7
Operating Property Insurance 2.9 2.8 0.2 0.2
Security 5.0 3.8 0.3 0.2
Other Operational Expenses 3.9 4.6 0.2 0.2
Add (deduct) Revenues Adjustment:        
Other Non-Cash Income 4.7 2.3 0.2 0.1
Accrued Income 8.4 5.8 0.4 0.3
Reimbursable Tenant Improvements 5.5 7.5 0.3 0.4
Share of Profit from Equity Accounted Investments -15.1 -15.7 -0.8 -0.8
Net Revenue 981.1 825.1 50.6 44.4
         


         
Reconciliation of Net Profit (Loss) to AFFO        
  2T18 2T17 2T18 2T17
  (millions of pesos) (millions of dollars)
Comprehensive Income (Loss) 2,897.6 -840.3 149.4 -45.3
Add (deduct) Cost of Financing Adjustment:        
Non Recurring Borrowing Expenses -2,205.5 1,066.9 -113.7 57.5
Add (deduct) Cost of Financing Adjustment:        
Non Recurring Borrowing Expenses 8.6 3.4 0.4 0.2
Add (deduct) Non-Cash Adjustment:        
Foreign Exchange Adjustments 69.0 -50.8 3.6 -2.7
Gain (Loss) on Derivative Financial Instruments 0.2 - 0.0 -
Fair Value Adjustment on Borrowings -246.3 190.2 -12.7 10.2
Fair Value Adjustment on Derivative Financial Instruments -9.4 -4.4 -0.5 -0.2
Fair Value Adjustment on Investment Properties -4.1 62.7 -0.2 3.4
Gain (Loss) from Sales of Real Estate Properties 0.0 -0.8 0.0 0.0
Add (deduct) Expenses Adjustment:        
Non Operating Property Taxes 5.4 12.4 0.3 0.7
Bad Debt Expense 14.6 4.7 0.8 0.3
Other Expenses Non Operational  Related 15.3 0.5 0.8 0.0
Add (deduct) Revenues Adjustment:        
Accrued Income -8.4 -5.8 -0.4 -0.3
Other Non-Cash Income -4.7 -2.3 -0.2 -0.1
Add (deduct) Non Operational Administrative Fees        
Non Administrative Fees 22.9 16.2 1.2 0.9
Add (deduct) Capex Adjustment:        
AFFO 555.3 452.4 28.8 24.3
         

Appendix 5 - Cap Rate Calculation

Terrafina subtracts cash and land reserves for the cap rate calculation.

Implied cap rate and under NAV (Net Asset Value) calculation are shown in the following tables:

     
Implied Cap Rate    
Quarterly Average Price (dollars)¹ 1.47    
(x) CBFIs (million shares) 791.0    
(=) Market Capitalization  1,161.0    
(+) Total Liabilities 1,030.5    
(-) Cash 102.8    
(=) Enterprise Value 2,088.6    
(-) Landbank 51.9    
(=) Implied Operating Real Estate Value 2,036.7    
Net Operating Income (NOI) 2018e 185.0    
Implied Cap Rate 9.1 %  
Figures expressed in millions of dollars unless otherwise stated.  
(1) 2Q18 average share price of Ps.28.46; and average exchange rate of Ps. 19.3911
     
Cap Rate Calculation with NAV    
(+) Investment Properties (excluding landbank) 2,261.0    
(+) Land 51.9    
(+) Cash 102.8    
(-) Total Liabilities 1,030.5    
(=) NAV1 1,385.2    
(/) CBFIs (million shares) 791.0    
(=) NAV per CBFI (dollars) 1.8    
     
CBFI Price (NAV calculation) 1.8    
(x) CBFIs (million shares) 791.0    
(=) Market Cap  1,385.2    
(+) Total Debt and Liabilities 1,030.5    
(-) Cash 102.8    
(=) Enterprise Value 2,312.9    
(-) Landbank 51.9    
(=) Implied Operating Real Estate Value 2,261.0    
Net Operating Income (NOI) 2018e 185.0    
Implied Cap Rate 8.2 %  
       

Financial Statements

       
Income Statement   2Q18 2Q18
    (thousands of pesos) (thousands of dollars)
       
Rental revenues   $  930,232   $  47,972  
Other operating income      58,635      3,024  
Real estate operating expenses      (137,408 )    (7,086 )
Fees and other expenses      (110,920 )    (5,720 )
Realized gain (loss) from disposal of investment properties      -      -  
Net gain (loss) from fair value adjustment on investment properties      4,109      212  
Net gain (loss) from fair value adjustment on borrowings      246,282      12,701  
Net gain (loss) unrealized from fair value on derivative financial instruments      9,358      483  
Realized gain (loss) on derivative financial instruments      (207 )    (11 )
Foreign exchange (loss) gain      (69,004 )    (3,559 )
Operating profit      931,077      48,016  
       
Finance income      2,422      125  
Finance cost      (248,788 )    (12,830 )
Finance cost - net      (246,366 )    (12,705 )
       
Share of profit from equity accounted investments      7,378      380  
Net Profit for the period      692,089      35,691  
       
Items that may be subsequently reclassified to profit or loss- currency translation differences      2,205,470      113,736  
       
Total Comprehensive income for the period      2,897,559      149,427  
               

Financial Statements

       
Balance Sheet Jun-31-18   Jun-31-18
(thousands of pesos) (thousands of pesos) (thousands of pesos)
Assets      
Non-current assets      
Investment properties $  46,176,289   $  2,324,704
(Cost:30/06/2018 - Ps.45,597,200, US$2,351,450; 31/03/2018 - Ps.41,634,186, US$2,269,5735)      
Investments accounted using equity method    449,436      22,626
Derivative financial instruments    70,828      3,566
Deferred charges and accrued income    208,263  -    10,485
Loan receivable    38,613      1,944
(Cost: 30/06/2018 - Ps.38,613, US$1,991;31/03/2018 - Ps.35,660, US$1,944)      
Restricted cash    36,934      1,859
Current assets      
Other assets    34,191      1,721
Loan receivable    632      32
(Cost: 30/06/2018 - 632, US$33; 31/12/2017 - Ps.1,244, US$63)      
Recoverable taxes    296,763      14,940
Prepaid expenses    4,461      225
Deferred charges and accrued income    5,463      275
Accounts receivable    133,905      6,741
(Net of allowance for doubtful accounts: 30/06/2018 - 54,084, US$2,789; 31/03/2018 - Ps.36,454, US$1,987)      
Cash and cash equivalents    2,042,416      102,824
Total assets    49,498,194      2,491,942
Net assets attributable to  Investors      
Contributions, net    19,513,306      982,380
Retained earnings    186,666      -
Currency translation adjustment    9,328,922      469,656
Total net assets (Net Equity)    29,028,894      1,452,036
Liabilities      
Non-current liabilities      
Borrowings    19,686,895      991,119
(Cost: 30/06/2018 - Ps.19,700,401, US$1,015,951; 31/03/2018 - Ps.18,194,058, US$991,799)      
Tenant deposits    297,217      14,963
Accounts payable    4,866      245
Current liabilities      
Trade and other payables    229,704      11,564
Borrowings    139,748      7,035
(Cost: 30/06/2018 - Ps.139,748, US$7,207;31/03/2018 - Ps.219,194, US$11,949)      
Tenant deposits    110,870      5,582
Total liabilities (excluding net assets attributable to the Investors)    20,469,300      1,030,509
Total net assets and liabilities    49,498,194      2,482,545
           

Financial Statements

     
Cash Flow Statement Jun-18 Jun-18
  (thousands of pesos) (thousands of dollars)
Cash flows from operating activities    
(Loss) profit for the period $  798,114   $  40,180  
Adjustments:    
Net loss (gain) unrealized from fair value adjustment on investment properties    558,798      28,132  
Net loss (gain) unrealized from fair value adjustment on borrowings    (398,921 )    (20,083 )
Net loss (gain) unrealized from fair value adjustment on derivative financial instruments    (38,921 )    (1,959 )
Realized gain from disposal of investment properties    17,836      898  
Bad debt expense    22,953      1,156  
Interest expense    458,960      23,106  
Interest income on bank accounts    (3,180 )    (160 )
Share of profit from equity accounted investments    (12,943 )    (652 )
Decrease (increase) deferred rents receivable    (15,548 )    (783 )
Decrease (increase) in accounts receivable    (98,220 )    (4,945 )
Decrease (increase) in recoverable taxes    853,009      42,944  
Decrease (increase) in reimbursed value added tax    (466,237 )    (23,472 )
Decrease (increase) in prepaid expenses    7,311      368  
Decrease (increase) in other assets    (8,359 )    (421 )
Decrease (increase) in tenant deposits    19,318      973  
(Decrease) in accounts payable    22,733      1,144  
Net cash (used in) generated from operating activities    1,716,703      86,426  
Cash flows from investing activities    
Acquisitions s of investment properties    (481,977 )    (24,265 )
Improvements of investment properties    (24,183 )    (1,217 )
Proceeds from dispositions of investment properties    -       -   
Acquisition prepayment    -       -   
Interest income on bank accounts    3,180      160  
Investments in joint venture    390      20  
Loans receivable payment    594      30  
Net cash (used in) generated from investing activities    (501,996 )    (25,273 )
Cash flows from financing activities    
Proceeds from borrowings    -       -   
Principal payments on borrowings    (879,578 )    (44,282 )
Interest expense    (449,479 )    (22,629 )
Distributions to investors    (990,293 )    (49,855 )
Restricted cash    (274 )    (14 )
Net cash (used in) generated from financing activities    (2,319,624 )    (116,779 )
Net (decrease) in cash and cash equivalents    (1,104,917 )    (55,626 )
Cash and cash equivalents at the beginning of the period    3,209,041      161,556  
Exchange effects on cash and cash equivalents    (61,708 )    (3,107 )
Cash and cash equivalents at the end of the period $  2,042,416   $  102,824  
             

Financial Statements

         
Statement of Changes in Equity Net
contributions
Currency
translation
adjustment
Retained
earnings
Net assets
(thousands of pesos)        
Balance at January 1, 2018 $  19,844,088   $  9,169,409 $  48,063   $  29,061,560  
Capital Contribution, Net of Issuing Costs   0      -     -      -   
Distributions to Investors    (330,782 )    -     (659,511 )    (990,293 )
Comprehensive Income        
Net loss of the period    -      -    798,114      798,114  
Other Comprehensive Income        
Currency Translation    -      159,513    -      159,513  
Total Comprehensive (loss) income    -      159,513    798,114      957,627  
Net Assets as of June 30, 2018 $  19,513,306   $  9,328,922 $  186,666   $  29,028,894  
(thousands of dollars)        
Balance at January 1, 2018 $  999,033   $  461,626 $  2,420   $  1,463,078  
Capital Contribution, Net of Issuing Costs   0      -     -      -   
Distributions to Investors    (16,653 )    -     (33,202 )    (49,855 )
Comprehensive Income        
Net loss of the period    -      -    40,180      40,180  
Other Comprehensive Income        
Currency Translation    -      8,031    -      8,431  
Total Comprehensive (loss) income    -      8,031    40,180      48,211  
Net Assets as of June 30, 2018 $  982,380   $  469,656    -   $  1,461,834  
                       

Contacts in Mexico City:
Francisco Martinez
Investor Relations Officer
Tel: +52 (55) 5279-8107
E-mail: francisco.martinez@terrafina.mx

Contacts in New York:
Maria Barona
i-advize Corporate Communications, Inc.
Tel: +(212) 406-3691
E-mail: mbarona@i-advize.com

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