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Earnings Call Analysis

Fibra Monterrey Reports Strong Growth in Industrial Investments

Fibra Monterrey achieved significant progress in their commitment to invest $700 million in industrial assets, with over 60% already allocated. The company expects lease spreads to increase by 15-20% over the next 18 months. Financially, the firm reported stable high occupancy rates at 96.1% and is on track to meet the high end of its 2024 guidance, projecting over a 9.7% annual return. Fibra Monterrey has also made strategic decisions to divest underperforming office properties, reallocating proceeds to industrial projects or share repurchases. This disciplined approach is expected to enhance the company's valuation and investor returns.

Strong Performance and Growth Strategy

In the recent earnings call, Fibra Monterrey highlighted its robust performance, showcasing a net operating income (NOI) of MXN 561.6 million for the quarter, a 3.7% increase compared to the same quarter last year. This growth is attributed partly to their strategic acquisitions, particularly the recently incorporated Aerotech and Zeus portfolios, which contributed additional revenue. Their NOI margin, reflecting operational efficiency, stood at an impressive 89.7%, exceeding their target of 88%. The company aims to continue capturing positive lease spreads, anticipating increases of 20% in rents across upcoming lease expirations.

Solid Financial Management

Fibra Monterrey's financial health is commendable, with a loan-to-value ratio of only 25%, an increase influenced by a recent MXN 90 million drawdown for acquisitions. The company maintains a prudent capital structure with net debt-to-EBITDA at 1x, well below the 5x limit, providing significant flexibility for future growth opportunities. They recently executed a substantial $200 million beachhead loan, which improves their financial costs, and no material debt maturities loom until late 2027, ensuring stability.

Expanding Investment Pipeline

The company boasts an active acquisition pipeline in the industrial sector, evaluating potential investments worth approximately $755 million, with binding agreements signed for $199.1 million and ongoing negotiations for additional properties. This endeavor is expected to continue bolstering their industrial portfolio, which already commands a significant market share with 112 properties across key Mexican markets. The company remains disciplined, emphasizing only closing accretive acquisitions that align with their valuation standards.

Focus on Market Trends and Lease Dynamics

The real estate sector in Mexico remains promising, especially in industrial markets. Fibra Monterrey reported capturing 5% revenue growth in dollar terms, significantly outperforming U.S. inflation. They project continued demand, particularly from existing tenants expanding their operations. As of mid-2024, around 60% of their leases are open for negotiation, with current rents approximately 20% below market rates. Management emphasizes a likely continued trend in rent increases, consistent with market strength.

Strategic Divestments and Buybacks

Fibra Monterrey has identified underperforming office assets, currently representing 2.9% of total assets, and is actively marketing these properties to streamline their real estate focus. They have received offers for 57% of these assets, with projected proceeds potentially reinvested in their industrial portfolio or allocated towards a share buyback program that seeks to enhance shareholder value, especially given their current trading price does not reflect intrinsic value.

Outlook and Guidance

Looking ahead, Fibra Monterrey is on track to exceed their financial targets for 2024, with management projecting an annualized AFFO per share above $0.93. This positive trajectory translates into a compelling dividend yield exceeding 9.5% at the current market price. Additionally, the firm is committed to improving operational margins, expecting to drive NOI and EBITDA margins to 91% and 84% respectively if recent acquisitions meet targeted returns.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. Welcome to the 2024 Second Quarter Fibra Monterrey's Conference Call. All information presented in this conference is proprietary, and all rights are reserved. The information has been prepared only for information purposes and is not for solicitation of an offer to buy or sell any securities.

It is important to note that the presentation related to this conference is available at www.fibramty.com and recording of the call will be available on the website of the company in the next 2 hours. If you are connected to our webcast tool, you have the option to download the presentation in order to move the slides at your own piece.

Let me remind you that the information discussed in today's call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Additionally, during this call, we may refer to certain non-accounting financial measures. Actual results may differ materially, and the company advises not to rely on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statements.

With us this morning from Fibra Monterrey, we have Mr. Jorge Avalos, CEO; Jaime Martinez, CFO; Javier Llaca, COO; and Eduardo Elizondo, Legal Counsel. They will discuss on the more important strategic, financial and operating aspects of the quarter.

I will now turn the call over to Mr. Jorge Avalos.

[Jorge Avalos Carpinteyro, executive]

Good morning, everyone, and thank you for joining the call. Having completed the first results period following our most recent capital raise, I am pleased to update on the progress towards the 3 objectives we committed during our road show. Beginning with our first and main objective of investing $700 million in industrial assets, we have advanced on more than $400 million in investments, representing almost 60% of the target amount. Furthermore, we are in the process of evaluating and negotiating additional acquisitions and expansions. Therefore, we are confident we'll be able to secure binding agreements for the remaining amount within 6 to 9 months.

Following to our second objective of initiating the investment of office portfolio, as of today, we have received offers exceeding MXN 650 million for our underperforming office properties, representing more than half the value of this low performing portfolio. Depending on market conditions at the time of these transactions, proceeds from these investments will be allocated to industrial properties and/or repurchasing our own certificates given that the current trading price does not reflect the fair value of our CBFI. Considering our cash generation capacity, this remains as the most attractive asset allocation today. I'll let Javier walk about these 2 aspects in further detail in a couple of minutes.

Finally, in regards to our third and last objective of increasing the liquidity of our certificate, our daily volume has almost doubled to $2 million -- 2 million shares -- I'm sorry, $2 million compared to $0.5 million in the fourth quarter. As a result, I am pleased to announce that since May, Fibra Monterrey has achieved the level of high liquidity issuer according to the Mexican Stock Exchange index. Liquidity as well as trading valuation is also linked to market conditions that are outside our reach. However, we will continue implementing strategies to maintain and even increase liquidity moving forward.

Moving on Fibra Monterrey's recurring results. Our portfolio occupancy remained stable compared to first quarter of 2024, standing at 96.1%. Our industrial portfolio maintains near full occupancy at 98.1%, while our office portfolio remains with a notable upside potential, which will be enhanced once concluding the investment mentioned earlier.

To further improve Fibra Monterrey's financial cost, after the quarter's end, we signed a new bilateral unsecured loan to replace our 2023 syndicated loan. This is our third transaction in the past 12 months aimed at improving our debt financial cost, reflecting our effective capital structure management and organized growth strategy. Following this transaction, our debt remains entirely unsecured, with a single capital payment due at maturity fully dollarized and with the first significant maturity until late 2027.

As of June 30, with the progress made in our strategy, I am proud to report that we are on track to meet the high end of our 2024 guidance. Based on the June 30 closing price, the expected annual return exceeds 9.7% using an average exchange rate of MXN 18 per dollar. As previously mentioned, this trading price does not adequately reflect Fibra Monterrey value and cash flow generation capacity. Hence, we have been actively operating our share repurchase program to permanently benefit investors who continue to show confidence in our strategy.

Lastly, on July 3, 2024, we published our 2023 sustainability report, reaffirming our commitment to surpassing the goals in our 2023, 2025 strategic sustainability plan, achieving 108% of our corporate sustainability objectives for the reporting year. Our vision is to continue this improvement and becoming a benchmark in the real estate sector for ESG matters. If you do not have done so, I encourage you to visit our website and download this material.

We also completed the annual evaluation questionnaire for the GRESB. This investor-driven evaluation supports the global ESG reporting and benchmarking framework for public real estate companies, private real estate funds, developers and real estate investors. According to the GRESB schedule, the evaluation results will be published in October, where we expect a clear improvement over last year's results.

Before handing the call to Javier, I'd like to share our view on how last month's presidential elections in Mexico will influence our sector. President-elect Claudia Sheinbaum and economic team led by Marcelo Ebrard and supported by Altagracia Gomez has been very active with the Mexican Association of Private Industrial Parks, which I chair, and has emphasized their commitment to have the development and growth of industrial parks in Mexico. We expect this trend to continue as the nearshoring development will remain as a significant priority to the national agenda going forward.

Regarding the potential transaction with Terrafina, I would like to emphasize that our offer still stands as publicly announced and considering that it is structured as an M&A transaction, it doesn't have a maturity date. We will continue paying close attention to the progress and outcome of the different ongoing processes.

We remain as the only offer that would bring Terrafina's shareholders an immediate cash flow growth, alongside internalizing their platform and sharing the best-in-class corporate governance, a recognition that we currently hold, without mentioning the increased liquidity and positioning the combined entity as an undisputed leader in the northern markets, while keeping the same real estate fundamentals regarding property use and economic sectors.

As previously announced, alongside our proposal, we provided Terrafina and its advisers with preliminary drafts of the main documents related to the transaction, ensuring that Terrafina has sufficient information to submit the transaction for approval to a stakeholder and the time it deems appropriate. Given the nature of the transaction, we will not be addressing questions related to the Terrafina on this call.

I would also like to mention that regardless of the outcome, this transaction is setting a valuation benchmark for the market as a whole, and it is an example of how the regionalization trend is benefiting the Mexican industrial segment, and it is projected -- and its projected growth, as we are seeing 3 large institutional players participating in this deal in addition to Fibra Monterrey. It is positive to see how the market continues to mature and increases its efficiency as this transaction evolves, highlighting that the decision will be made by the majority of the shareholders and not by a controlling group as it occurs in the more advanced markets.

I will let now Javier walk you through the organic and inorganic performance as well as the market sentiment evolution. Javier, please go ahead.

[Javier Llaca García, executive]

Thank you, Jorge, and good morning, everyone. As Jorge just mentioned, one of the commitments we made to our investors during the last follow-on road show earlier this year was to annually invest around $700 million in acquisitions of industrial income-producing properties, including stabilized assets and expansions or build-to-suits of new buildings. In this regard, after the follow-on, we have executed binding agreements for $346 million, of which $83.3 million of the Aerotech acquisition and $63.6 million of expansions can be fully executed or are in the process of construction for delivery to the tenants later this year.

Moving on, during the second quarter, we signed a binding agreement for the acquisition of the [ Batach ] portfolio for $199.1 million, which is currently underway, and we're just working on the approval from COFECE for its closing, which we expect to occur during the third quarter. Finally, we just recently agreed on the terms for the acquisition of another industrial facility for $21.8 million. As soon as we'll reach a binding agreement on the transaction, we will disclose more details.

All these investments account for a total of $403.2 million on investments and represent more than 57% of our $700 million target that Jorge addressed during his opening remarks. Also during our road show in January and February, we indicated that we would eventually divest our non-industrial portfolio starting with the underperforming properties during the second half of 2024. I am happy to inform that out of the $64.5 million on the performing office portfolio, we have received serious offers for approximately 57% of this portfolio. This is around $36.8 million or the MXN 650 million that Jorge mentioned.

Binding agreements for these first transactions are being negotiated and should be closing before the end of the year. We expect to continue making progress on the rest of the underperforming assets so we can allocate the proceeds on new industrial properties and/or repurchase of Fibra Monterrey shares.

I will hand over the presentation to Jaime to talk about our third commitment on increasing the liquidity of our shares. Jaime?

[Jaime Martínez Trigueros, executive]

Thanks, Javier, and good morning, everyone. As Jorge mentioned in his initial remarks, our third and last commitment during the last follow-on was to increase our certificate liquidity. Since the recent equity rise and until the end of the quarter, Fibra Monterrey had a remarkable expansion in average daily trading volume of almost USD 3 million, more than 6x the volume traded in the fourth quarter 2023, prior to the follow-on. This achievement is largely attributable to the participation of international investors as well as the addition of new shareholders.

On the next slide, you can see on the left side graph how quarterly marketability has been improving over time, especially during the last 2 quarters. As a result, since May, the Mexican Stock Exchange Liquidity index, which considers, among other variables, the last 6 months trading volume positioned Fibra Monterrey in the high liquidity group. Also liquidity depends on market conditions. We will be looking for new strategies to increase it. We are confident that if we continue executing accretive transactions as we've done in the past, but with a higher marketability, the price of our certificate will reflect higher valuation.

With that said, I'll turn the call to Javier, who can walk you through the real estate performance indicators. Javier, please go ahead.

[Javier Llaca García, executive]

Thank you, Jaime. As you can see on Page 5 of the presentation, we continued to strengthen our presence in the most active industrial primary markets in Mexico. We own and operate now 112 properties and our footprint extends into 15 real estate markets across all 14 states in the northern, central and Bajio areas where we have been focusing our growth, with a total GLA of roughly close to 19 million square feet, out of which around 16.3 million square feet are industrial, 2.2 million square feet are in office buildings and 215,000 square feet belong to our small retail portfolio, in addition to our land bank. Overall occupancy, as Jorge mentioned, in terms of GLA continues above 96%.

On to Page 6, we present a brief overview of our new key performance indicators as of the end of June and moving forward. In terms of percentage of revenues, these indicators have slightly shift from the previous quarter. 73.8% of revenue by asset class come from our industrial properties, while office and retail account for 24.8% and 1.4%, respectively. By location, revenue from our Monterrey-based portfolio represents 39% of total income, followed now by Guadalajara, Queretaro, Guanajuato, Saltillo and Tijuana, which combined represent 39.2% of revenue.

Occupancy rate as a percentage of potential revenue at full capacity increased close to 94%. Our dollar-denominated leases represent now more than 85% of gross revenue. And finally, lease maturity schedule and weighted average lease term continues to be close to 5 years, and almost 45% of revenue will begin expiring in 2029. As we mentioned during our previous earnings call, we believe that during '26 and '27, we would be able to capture some positive lease spreads on industrial renewals and new leases.

On Page 7 of the webcast, we present the same property performance analysis for the first quarter of 2024 compared to the same quarter of the previous year. For purposes of this analysis, we use 103 investment properties in our portfolio prior to Aerotech and the second closing of the Zeus portfolio.

There is a marginal increase on the square footage of these properties and have some expansions as our Filios, Fagor and Catacha properties have been either completed or close to be completed. Compared to the second quarter of 2023, gross revenue increased 2.1% or MXN 12.3 million. Operating expenses grew 23.4%, including increases in property tax expenses and sales property management fees and MXN 4 million from operating expenses and revenue recognition in compliance with IFRS derived from our parking lot sublease in Danfoss. In consequence, NOI remained at the same level than the second quarter of 2023.

Same-property revenue in dollars has increased 5%, almost double U.S. inflation, which stood at 3%. An attractive performance considering we had near 10% of leases expiring in the last 12 months. To put it in another way, we're capturing 2% real revenue growth every 10% renewals. If we had a 3-year WALT or a 30% renewal rate, we would have increased our revenue 10% in gross terms consistent with our peers.

The composition of the NOI variance will be explained in detail in the following slide. Once we incorporated additional revenue from Aerotech and Zeus, the aggregated portfolio generated a total net operating income of MXN 561.6 million compared to MXN 541.6 million in the second quarter of 2022. This is an increase of 3.7%. Our NOI margin for the aggregated portfolio was of 89.7% for the quarter, well above our target of 88%.

Slide 8 of the presentation explains in detail the behavior of our net operating income for the last 12 months. MXN 21.8 million decrease due to a negative FX effect between the second quarter of 2023 and the second quarter of this year. MXN 7.5 million decrease due to vacancies from certain lease expirations. MXN 41.6 million increase due to inflation escalations on lease agreements and new leases. And MXN 12.1 million decrease due to some of the expenses that I previously mentioned. As you can see, once we included additional revenue of about MXN 19.8 million from the Aerotech and Zeus portfolios, we reached the MXN 561.6 million NOI in our aggregated portfolio.

On Page 9 of the presentation, I would like to address the variance in the valuation of our investment properties portfolio, in which we have seen a positive impact of about MXN 4 billion, mostly due to higher FX during the last month of the quarter after the election process in Mexico.

It is important to point out that valuation of assets as of the end of the second quarter of 2023 already included the Aerotech portfolio as this transaction was carried during such quarter which drove an additional MXN 1.9 billion. The total appraisal value of our portfolio stands at MXN 31.1 billion. We believe that the valuation of our properties do not necessarily reflect our NOI growth given the current and projected market conditions in Mexico Class A industrial activity.

There are some inconsistencies between our valuations and those of some of our peers, which we believe are linked to our lower -- longer weighted average listing. However, as we approach to a significant number of renewals in the upcoming 3 years that have rent growth potential, we're confident that we'll capture a stronger valuation in our industrial portfolio.

Moving on to Page 10. We will comment about some of the most relevant aspects and state of our pipeline as of the second quarter of 2024. We have currently under evaluation and/or negotiation around $755 million of potential target industrial stabilized portfolios and properties across Mexico.

The reduction in pipeline when compared to the one announced last quarter is explained by the already acquired portfolio of Aerotech and some other portfolios where we didn't reach an agreement in valuation. This situation reflects our discipline in valuation and our commitment in closing accretive acquisitions. In the past, we have experienced sellers trying to search a more aggressive buyer and eventually circle back to us. And we still have an attractive amount of pipeline.

Our current potential acquisitions are layered as follows: $199.1 million on acquisitions already announced and under binding agreements for a total of around 2 million square feet of GLA, specifically the [ Batach ] acquisition. As I mentioned before, this transaction is expected to close before the end of the third quarter of this year as announced in our latest press release on this matter.

$44.6 million on potential acquisitions being negotiated for a total of 0.5 million square feet of GLA. About half of these potential transactions have been agreed to terms and binding agreements are being negotiated. And finally, $510.9 million of identified portfolios available for sale currently being evaluated for a total of another 5.2 million square feet of GLA.

Altogether, the pipeline accounts for more than 40 different properties with a weighted average lease term of close to 9 years, a total of close to 8 million square feet of GLA, and 91% of the revenue under dollar-denominated lease agreements.

On Page 11 of the material, we present more detail on the $63.6 million of expansions we have been conducting during this year. We have already delivered one of the facilities built in San Luis Potosi and a partial delivery on one of the projects in Monterrey. Of the total investment amount, we have invested so far $33.3 million or 52% of the full commitment. All ongoing projects are performing according to schedule and budget and will be delivered to the tenants between the third quarter of 2024 and the first quarter of 2025.

All these expansions in certain properties in San Luis Potosi, Queretaro, Monterrey and Aguascalientes with a total GLA of more than 785,000 square feet. This expansion would generate additional NOI for $6 million. This is a yield on cost of 9.4%, net of investment in tenant improvements, which are amortized throughout the lease term. These expansions also will allow us to extend the lease term in another 10 years with an attractive blend and extend lease rate close to market and above current rates.

The expansions that are either delivered or still under construction will increase the size of our industrial portfolio close to 4.4% in terms of GLA compared to the first quarter. It is also relevant to say that all required tenancy for these projects has been already secured. More expansions on our industrial buildings are well advanced in negotiations and are expected to be executed in the next few weeks. It would drive additional GLA of another 381,000 square feet with an investment of around $35.4 million at a similar cap rate that previously we mentioned.

Finally, I would like to mention that positive lease spreads observed during the first quarter of 2024 was around 10% above inflation. On those renewals scheduled for the second half of the year where rent can be mark-to-market, we estimate that we'll capture lease spreads running 20%. Running the same analysis for the next 18 months, weighted lease spreads remain between 15% and 20%.

I want to take a moment to talk about our view of the industrial market in general and what does that mean for the company in the short and midterm. These fundamentals are highlighted on Page 12 of the presentation. 48% of the existing inventory for Class A industrial buildings are in Monterrey, the Mexico City area and Ciudad Juarez, which maintained the highest recorded market rents. Even though vacancy rates have recently experienced some increases, but still at low 1 digit. Although some investments in Monterrey have been postponed according to recent announcement, other large-scale projects are still advancing. In Monterrey alone, there are at least 4 projects of similar size to the Tesla Gigafactory now put on hold that are currently under construction and will demand new space for first and second-tier suppliers.

We believe that demand remains strong, with companies that have sometimes established in Mexico continue expanding their operations. It is true, though, that new entrants are likely to wait for geopolitical tensions to ease. The current gap between asking rent and closing rent in the 13 main markets in Mexico remains modest at less than 3% of asking rent despite of being the highest rent growth since 2018. This gap compares to 10% or more just a couple of years ago.

According to most recent reports from CBRE, net absorption for 2024 is estimated to be above the 5 million square meters recorded in 2023, consistent to our own estimate based upon actual net absorption levels we've seen in our key markets during the first half of this year. And finally, our main markets maintain an orderly growth with a higher proportion of build-to-suit projects compared to speculative or inventory buildings, representing a clear opportunity for Fibra Monterrey as we continue to pursuing this kind of investments.

To end the piece of -- or my piece of the presentation, I would like to address the state of our office portfolio as well of the divestments of underperforming properties that we announced earlier this year. As of the end of June, underperforming properties represent approximately 2.9% of total assets, with an estimated book value of around $64.5 million. This is the first group of properties that are being actively marketed for a potential sale. As I mentioned at the beginning of the call, we have received serious offers for 57% of these properties and binding agreements are being drafted as we speak. We expect to continue making progress on the other 43% of the portfolio.

On the other hand, the performing and outperforming properties represent 6.8% and 8.8% or $148.8 million and $194 million, respectively, with a combined weighted occupancy level of more than 90%. Although these properties continue to contribute cash flow to our operation, we're working on a value analysis for the sales strategy that will be implemented once we presented an updated approval from our Board. We have experienced a slight increase in the demand for office space in Monterrey, which could represent a higher occupancy and a better perspective for a potential sale. Just a few days ago, we signed a letter of intent for a new 3,000 square meters lease in one of our office buildings in Monterey.

At the end of today's presentation, I'll be more than happy to address any questions you might have regarding operations and investments for our real estate portfolio. But for now, I will hand the presentation again to Jaime. Jaime?

[Jaime Martínez Trigueros, executive]

Thank you, again, Javier. Moving forward to our balance sheet, as seen on Slide 14, loan-to-value stood at 25%, a slight increase from the 21.5% shown in the first quarter, mainly due to a $90 million drawdown to acquire the Aerotech portfolio Javier commented earlier.

We kept our debt 100% unsecured and U.S. dollar-denominated, with an interest rate below 5% and mostly at a fixed rate. Furthermore, our average debt maturity stands at 4.1 years, with no material maturities until late 2027. It is worth mentioning that current leverage is similar to the one observed prior to the follow-on, making our cash flow results equivalent on a risk-adjusted basis.

Net debt-to-EBITDA as of quarter end was 1x, well below our 5x limit, which provide us enough flexibility to capitalize opportunities. Considering additional debt capacity of roughly 11% of assets and a 20% held in cash, our firepower is around $800 million while keeping a prudent capital structure. As Jorge mentioned, after the quarter ended, we signed a new credit loan to substitute the syndicated loan used a year ago to acquire the Zeus portfolio, improving in its previous conditions. This marks the third transaction in the last 12 months, which helped to reduce Fibra Monterrey's financial costs, reaffirming our commitment to increase cash flow generation in all aspects of the company, not only at the property level.

This new 5-year unsecured bilateral loan was signed with Banorte for almost $0.25 billion, posting the largest bilateral loan we've executed since inception. While keeping the loan bullet unsecured and U.S. dollar-denominated, we managed to reduce immediately the credit spread by 25 basis points, with a possibility to be up to 50 basis points depending on the liabilities-to-asset ratio.

Moving on to Slide 15, talking about bottom line results. The main positive variations year-on-year were the higher financial result due to higher cash investments related with our latest follow-on, as well as the income generated by the second closing of the Zeus portfolio properties and the recently acquired Aerotech portfolio. Nevertheless, these benefits were partially offset by higher administrative expenses caused by the acquisition of Zeus and the follow-on. There was also an increase in CapEx to meet the requirements in the same-property portfolio aligned with Fibra Monterrey's forecasted needs for the year.

It is worth mentioning that current financial income will transform into additional NOI as we continue to carry out our acquisitions, furthermore improving both our NOI and EBITDA margins. To mention an example, if we consider our target expected return on acquisitions, the second quarter NOI and EBITDA margins would have been around 91% and 84%, respectively. These margins will continue to expand as we divest from the office portfolio as well.

As you can see on Slide 16, I'm pleased to announce that due to the estimated organic growth and the progress made on objectives announced during the follow-on, we are on track to meet the high end of our 2024 guidance. As detailed on the right-side chart, the annualized AFFO per share of the first half of the year is above $0.93 at an FX rate of around MXN 17 per U.S. dollar, already positioned on the high end of its corresponding range. I would also like to highlight that at yesterday's closing price, our guidance translates into a dividend yield above 9.5%, which we believe does not adequately reflect the fundamental value of Fibra Monterrey's portfolio as well as its cash flow generation capacity. For that reason, we are going to maintain active our buyback program to take advantage of what we perceive as a market distortion and benefit of our investors.

As of today, buying our own shares is by far the most attractive capital allocation. Therefore, there is a strong possibility that the proceeds from the office divestment will be used in this manner, especially if we continue to trade at such a deep discount and low price AFFO multiple. We ratify our commitment with our investors on improving the cash flow per share in all company fronts, including same-property performance, capturing economies of scale, reducing financial costs and doing accretive acquisitions. This has always been our main goal and we'll keep it as such.

As in previous quarters, on Slide 17, there is select information to compare our main financial indicators over the last 12 months to facilitate your analysis. As you can see, and I already mentioned, in the second quarter, we reached NOI and EBITDA margins of around 89% and 82%, respectively. But as I mentioned a minute earlier, if the follow-on proceeds were invested in properties at around target cap rate of 8%, NOI and EBITDA margins would have been around 91% and 84%, respectively, 60 and 120 basis points higher.

This concludes our quarterly update. Sherry, please proceed with the Q&A section.

[Operator]

[Operator Instructions] Our first question is from Carlos Peyrelongue with Bank of America.

[Carlos Peyrelongue, analyst]

It's regarding positive lease spreads. You've been able to increase rents for contracts that expire by about 10% in real terms. You mentioned something in the call, but if you could provide, again, the color. I missed part of it. What are your expectations for future increases? As you mentioned, the markets are very tight. So just to get a sense of -- you think these type of increases are still achievable this year and next year?

[Javier Llaca García, executive]

Carlos, this is Javier Llaca. Yes, as we mentioned in the report and as I mentioned a few minutes ago, we believe that we're going to be able to capture positive lease spreads in the short -- in the second half of this year on around 20%. We don't have that many expirations for the remaining of the year. As you know, as we've said before, we expect a higher number of expirations between '26 and '27. The remaining -- and'24 and '25 there's a small number of expirations. But we expect to capture in average between now and the end of the next year between 15% and 20% positive lease spreads. We have some expirations on contracts that has a provision of automatic renewals. And if those were renewed, the only increase would be the agreed escalation on the contract, which is commonly CPI.

[Carlos Peyrelongue, analyst]

Great. A follow-up, Javier if I may. How many -- a rough estimate of your existing portfolio, what percentage has agreed escalations when the contracts expire? And the second one would be of your existing portfolio, what percentage -- or by what percentage do you think the rents that are currently in place are below market?

[Javier Llaca García, executive]

Okay. Great. The first question is around 60% of our total lease agreements are subject to mark-to-market -- to negotiation on the renewals. And the second part -- I'm sorry?

[Carlos Peyrelongue, analyst]

What is the level of in place versus market?

[Javier Llaca García, executive]

Oh, in place versus market. We're roughly about 20% below market. So we have a lot of room to capture positive lease spreads on these mark-to-market renegotiations.

[Carlos Peyrelongue, analyst]

Congratulations on the strong report.

[Operator]

Our next question is from Gordon Lee with BTG.

[Gordon Lee, analyst]

Two quick questions. The first, Javier, you mentioned that you think some of the geopolitical uncertainty could delay some investments or the announcement of investments related to manufacturing. I was also wondering whether you think that could change either the speed or the terms of some of the negotiations in the pipeline that you currently have put together.

And then the second question, just on the office portfolio on the progress that you've made in terms of finding buyers for the underperforming assets. I'm just curious, what type of buyers are you seeing for those types of properties?

[Javier Llaca García, executive]

Yes. We've seen a slowdown on the absorption for new leases starting -- I would say right at the beginning of June. Probably a little bit earlier, probably at the beginning of the second quarter, we started to see some slowdown on the decision-making for new leases. RFPs from brokers continued to flow, but timing has stretched on the decision-making. A lot of both brokers and potential tenants have been very vocal on them wanting to wait not only until October, but until November once the U.S. election is defined.

On the existing tenant base, the companies that are already established in Mexico, they continue to grow. They're driving a lot of demand from first and second-tier suppliers. We're working on a few of those.

In terms of lease terms and what they're looking for, we haven't seen a shift yet. They continue to look for long lease terms. What we have on the pipeline, as you saw in the presentation, the average WALT that we have on everything that we're looking into the pipeline is around 9 years. They're demanding more tenant improvements and they're looking for more investment from the landlord into the building. We are being very careful about how we approach those tenant improvements and how do we reflect amortization or proper capitalization of those improvements into the lease agreement.

On the office buyer side, it's interesting. We're looking -- without disclosing too much information, but I can tell you that the offers that we are entertaining and the agreements that we have right now, they're either family offices or end users. It's kind of amazing to me that companies are looking into an opportunity to acquire an asset that is currently under evaluated and they're trying to take advantage of that on their own balance sheet.

So I would say that moving forward, I would expect some of the same, plus some -- probably some private equity that had talked to us being interested about buying the office buildings and hold to them, waiting for the market to come back eventually.

[Gordon Lee, analyst]

If I could just have a quick follow-up on the first question. Do you expect the sort of same drivers that are producing that slowdown in terms of tenant activity to also impact your negotiations on the M&A pipeline, either in terms of timing or potentially price?

[Javier Llaca García, executive]

I don't think so. I think it's kind of early to say. But we're not seeing that, Gordon. I don't believe it's going to have a direct impact that I could -- I should mention right now.

[Operator]

Our next question is from Jorel Guilloty with Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

I have 2. So the first one is, I wanted to touch upon the comments made about new tenants taking longer to make investment decisions because of U.S. election uncertainties. So specifically, is there a similarity -- or is this in terms of region or in terms of industry of these types of tenants that are delaying the investment issues, like -- so any color you can provide for that is helpful.

And then in general terms, I just wanted to get a sense of the supply-demand balance, because you mentioned it earlier and one of your competitors mentioned in the last week that there is increasing vacancy in some markets, there's more supply coming in some markets. And I just wanted to get a sense if you see the supply-demand balance rearranging itself going forward as in, okay, we have a material amount of developments coming in line, but at the same time, inventory in the construction is going down or permitting is going down, so this should level off going forward. So I guess my main question is, are you concerned or are there any material risk towards oversupply? Or is this just a momentary issue as we've seen new supply come in line in certain markets? Those are my 2 questions.

[Javier Llaca García, executive]

On the first question, there's not a specific industry or sector or region with a particular high slowdown on activity. Obviously, the flavor of the month is Tesla's recent announcement. That's probably more mediatic than something else. But I cannot tell you of a specific sector. The automotive sector continues to be to my mind one of the most dynamic sectors in terms of absorption. We continue to receive RFPs for suppliers. I would say that in terms of scale probably the automotive industry would be the most affected right now in terms of the slowdown of the moment. But we're not seeing any specific sector or market.

In terms of the offer -- the supply and the demand, I think we're pretty close to an equilibrium point. The vacancy rates have increased, but they're still below 5%. Let's remember that most of the activity right now, around 50% to 60% of the activity in all key markets are build-to-suits. So the inventory buildings that are being built, they continue to be built. Some developers are slowing down, but very slightly or taking a little bit longer to start a new development. But we see -- to me, to be around 5% on a vacancy rate on a mature market, it's still a very healthy vacancy rate.

And we have markets like Monterrey, probably Tijuana and some areas in Central Mexico and [indiscernible] with vacancy rates below 5%. We saw an increase and a typical increase of vacancy rate in Ciudad Juarez due to the scarcity of energy. Some buildings that were fully built and were not able to hook up to the energy line.

As Jorge mentioned during his opening remarks, we believe that the new administration understands all the issues surrounding energy permits and license and construction permits and everything. They understand that. They truly believe that they have to work along with the private sector on facilitating this. But I think that we are close to wrap it up. I think we're close an equilibrium point on supply and demand in the industrial market.

[Jaime Martínez Trigueros, executive]

And I would like to add that most of the existing customers or clients have expansions. I mean they are working very, very hard to achieve the demand that they have for new products or new lines or et cetera. But those that are newcomers maybe they are taking more time to decide that, no, Javier?

[Javier Llaca García, executive]

Yes. That's absolutely right.

[Operator]

Our next question is from Jordan Hymowitz with Philadelphia Financial.

[Jordan Hymowitz, analyst]

I know you can't comment on the Terrafina deal, but if it's unsuccessful, you have -- as you mentioned before, you have a very attractive business yourself and are buying back stock. Would you be open or willing to have other people that possibly are bidding on Terrafina look to take an interest in you or partner with you? I mean, some of the larger foreign private equity stocks could also be great partners for you.

[Jorge Avalos Carpinteyro, executive]

Yes. This is Jorge. As you well know, we are the first internally managed REIT in Mexico and our main purpose has been always delivering profitability to our stockholders. To do that, we have to create value by executing and delivering results, and that's what we've been doing for the past 10 years. So we're always exploring different alternatives to achieve these goals as -- but just as we're doing right now with the Terrafina that you mentioned, the Terrafina transaction, a possible merger could also represent an alternative. But as I said, as long as it makes sense to our stockholders, who at the end are the ones that have the last word, just keeping in mind that we don't have a controlling group. So the question is, yes, we're always open to analyze these types of transactions.

[Operator]

Our next question is from Isabela Salazar with GBM.

[Isabela Salazar Leipen, analyst]

I have 2 questions. The first one is regarding the map in your presentation. I noticed there were several dots on the Bajio area, and I was wondering if you are observing any particular strengthening of dynamics in that region. And so could you please share details on that?

And the second question is regarding Chinese tenants. Do you have any? And that would be it.

[Javier Llaca García, executive]

This is Javier. We've always had been very strong deliveries in the Bajio market. We have been very successful on the market. We have seen a 55% increase in demand year-to-year in the last 12 months. So we continue to expand into that area. As you know, we acquired the Aerotech portfolio. Our occupancies remain pretty aligned with the rest of our portfolio in El Bajio.

We have seen an increase on rent lately, particularly in Queretaro. We like Aguascalientes a lot. We consider Aguascalientes part of El Bajio. And Aguascalientes right now has less than 1% vacancy rate. We're looking at some additional investments in that market. We're doing 2 expansions and negotiating one more in that market. So we like the market a lot. It's relation to the automotive sector and the quality and the name of the tenants that we see in El Bajio it's really appealing to us.

And the second question was?

[Jorge Avalos Carpinteyro, executive]

China -- Chinese.

[Javier Llaca García, executive]

Oh, Chinese companies. We do have Chinese tenants. We have, to be exact, 3 tenants from the stabilized -- 2 of them from stabilized purchases that we made, one of them that we did a new lease for them. I want to be very careful on what we're saying about the Chinese companies. A lot of those companies are providers for U.S. companies. We have -- the 3 tenants that we have are second-tier suppliers to U.S. corporations in Mexico. So we believe that the supply chain and their involvement on the process that they're involved in is pretty much strong. But we're very observant of any Chinese tenant just like we are with any U.S. tenant or European tenant. So far we have been very successful, and we're happy with our 3 Chinese tenants.

[Operator]

Our next question is from Edson Murguia with Summa Capital.

[Edson Murguia, analyst]

My question is particularly related to the -- basically, the nonperforming assets in the office buildings. Do you have a specific location that you want to sell those properties? And what will be the time line to get it done?

My second question is on the prepared remarks, that it's in the earnings release about the strategies that you want to perform regarding to the certificate [indiscernible]. What type of strategy -- I mean it's clear that the volume on a daily basis has increased dramatically. So I was curious about what all the strategy you can do even because you have a market maker in order to do that? So if you can give us a little more color about that, that would be super helpful.

[Javier Llaca García, executive]

In regards to your first question on underperforming properties of the portfolio, our strategy -- some of these properties are being marketed as they are. That means for the same use that they have right now. The ones that we have under -- negotiating for binding agreements right now, if they're going to be kept as what they are, being office buildings, and they're going to continue to be used as office buildings. Some other of the underperforming properties are suitable for redevelopment. We're working with a couple of advisory companies and engineering companies in order to establish their marketability as a property to be redeveloped and what's the best and highest use for those properties. And in that sense, our target market is going to be the development community in Mexico.

So right now, I can tell you that we feel confident that the 43% remaining of the underperforming properties that we're marketing. I'm confident that we're going to have a real interest and serious offers in the upcoming quarters. During our follow-on road show, we were very clear that we would start marketing by the second half of this year. We're making more progress than we thought back then in terms of the speed of marketability and natural sales of the portfolio. So I would expect that, hopefully, by some time -- by this time next year, hopefully, we're going to be done with the underperforming properties sale.

[Jaime Martínez Trigueros, executive]

And in terms of the liquidity, for us, it was -- the first point, it was very important to show a solid results of the second quarter, which shows that we have been achieving most of the commitments that we did in the road show, which is important to get the confidence of those investors that came with us for the first time. The second thing is we are already working, and we are going to improve that. Our buyback program is going to be more active because we want investors to feel confident that we like our results that we think our price is too low and that there's a very interesting opportunity in Fibra Monterrey as well.

The third part, we are planning a lot of activity visiting investors in the -- from September to the end of the year through the conferences of the bank and another direct visits. For us, it's very common to visit our investors after a report. So we are going to maintain this activity, and we want to have additional visits of some potential investors, those who we have visited at the road show and others that we haven't, but we know that they are starting to be interested in Mexico.

[Edson Murguia, analyst]

Okay. And a follow-up, if I might. I know that you mentioned that you are not commenting anything about Terrafina. However, my question is related to the internal process at Fibra Monterrey. I remember in one of the calls that we had a couple of weeks ago that you have to do a lot of things of perspectives and the material internally and then request by extraordinary assembly. So regarding specifically on Fibra Monterrey, do you have a time line? Or when we can expect those materials?

[Javier Llaca García, executive]

As we've said, we are very careful when it comes to the Terrafina. I think that we believe that everything that we have made public in the press release is what it is. I mean we wouldn't like to comment any further on the Terrafina. The only thing that I would say is that our offer is structured as an M&A transaction, as Jorge said, and it doesn't have a maturity date. So we will continue, obviously, paying close attention to the progress of the different processes that are ongoing right now.

[Edson Murguia, analyst]

Congrats on the amazing result this quarter.

[Unknown Executive]

We have some questions in our webcast too. The first one comes from Francisco Chavez from BBVA.

What is the implied cap rate on the pipeline of acquisitions currently under negotiations?

[Javier Llaca García, executive]

Yes, of course. Hello, Francisco, wherever you are. Bottom line is our weighted average implied cap rate, goingin cap rate of what we're looking at is around [ 9% ].

[Unknown Executive]

The second question from Francisco Chavez.

What kind of valuations can we expect on their performing office assets if the investment materialized?

[Javier Llaca García, executive]

Okay. Thank you, again, to Francisco Chavez. I said Suarez. I'm sorry, Paco. Well, the valuation that we have is the book value that we have. And let's remember that our appraisals are mark-to-market. I have to say that the underperforming assets, they got already a hit on valuation. As you can see on our previous reports, what we're negotiating is really close to book value. What we're doing is that on the non-performing properties or even on the non-productive properties, the cost of opportunity of selling those properties close to book value and putting that to work, as Jaime said before, on the repurchase program, and it's really, really a credit to cash flow. But we're being very disciplined to be obviously as close to book value as possible. And so far, we are -- what we're negotiating right now, it's pretty close to book value.

[Unknown Executive]

Our next question comes from [ Rodrigo Alonso ].

Is the company planning to issue bonds in the local or international markets or secure loans this year to enhance its liquidity and make more acquisitions?

[Jaime Martínez Trigueros, executive]

Okay. Thank you, Rodrigo. Well, the first thing, as Jaime already mentioned, we have around 20% of our assets in cash. Actually, for the [ Batach ] transaction, we have some resources in pesos because that acquisition is going to be paid in pesos. So the first resource is going to be our cash. And in terms of leverage, it will depend on the price. At this time, we have a very attractive rates and conditions with the banks. So it seems like the best way to go at this time is through banks. But each time that we go all there in order to pay some transactions. We evaluate each case. For me, it seems at this time that the bank loans are the most efficient way to acquire. But let's see once Javier have these transactions on the opening.

[Unknown Executive]

In the same direction, can you explain more in deep how you intend to finance the almost $200 million acquisition of the [ Batach ] industries portfolio?

[Jaime Martínez Trigueros, executive]

Yes. As I mentioned with the cash, most of it is going to be with cash. I don't think we're going to take debt. Maybe just to finance the [ CIT ]. But most of those resources are already separated in our balance sheet.

[Operator]

Our next question is from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Two questions, a follow-up from -- to Rodrigo on the debt side. Now that you have 2 investment credit ratings, it seems that that is making life easier for you to conduct the liability management and it can cut your overall funding costs. So specifically on the 2027 -- I mean, because you issued previously debt without having the 2 credit rating at investment grade. Then my question here is for you is that you may be willing to actually refinance that maturity when that bond expires with another bond in the market?

And the second question relates with overall TIs in the Bajio region. Can you give us an idea if those TIs do have above market or above average considerations that are needed that we need to understand? The question that I ask is because I noticed that you conservatively value the Aerotech transaction without those TIs even though those are giving you lots of money. So it's interesting to me to understand if there is anything on the TIs Bajio region that might be different to other regions.

[Jaime Martínez Trigueros, executive]

Regarding the refinance of the bond, as we have already mentioned in some of this conference call, it was important for us to have around $300 million in that maturity. And the reason is that we doubt we have the flexibility of different resources for the refinance. Of course, one is an international bond. We already have 2 ratings, and we are going to work at the beginning of the next year to another one with an international rating company in order to be more attractive for investors. But as I mentioned before, we will be looking at which opportunities. The rest, of course, we have an international bond. We have a national bond in U.S. dollars. We have this private placement, which sometimes are attractive. And of course, the banking loans that at these times are very, very attractive. So we are looking to have the broader options in order to optimize this refinance process. And we will start at the beginning of the next year, evaluating different strategies because, as you know, it takes time, and we want to have enough maneuver capabilities to optimize this refinance in terms of conditions.

[Javier Llaca García, executive]

This is Javier. Regarding your second question on TIs. Yes, I mean, you're absolutely right. We are very conservative when it comes to the valuation of the TIs. We amortized most of the TIs throughout the lease in order to have at the end a building that is compared to market pretty much corns building. When it comes to above standard TIs we're very careful on what TIs to invest in and whatnot. I mean, we -- most of our TIs comes to HVAC, some reinforce less, additional office space, compressor lines and things like those.

Sometimes, we don't like or we even walk away when a building has too much to have out standard TIs like. But for specific processes that are not going to turn over into the following lease cycle. So we are handling our underwritings that way. The developers and the sellers know us by now. And they realize that by amortizing those TIs sometimes a resulting cap rate turns to be high, typically high, but it's stabilized and it streams line throughout time, and they understand that. So far, that model has worked for us and we -- I don't believe that we're going to change that approach anytime soon.

[Operator]

We have no further questions in the queue, I would like to turn the call back over to management for closing remarks.

[Jorge Avalos Carpinteyro, executive]

So thank you, everyone, for attending the call, and we'll speak to you soon. Good morning.

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.