Fibra Mty SAPI de CV

BMV:FMTY14

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to the 2022 Third Quarter Fibra Mty Conference Call. With us this morning from Fibra Mty, we have Mr. Jorge Avalos, CEO; Jaime Martínez, CFO; and Javier Llaca, COO. They will discuss on the more important strategic financial and operating aspects of the quarter. It is important to note that the presentation related to this conference is available at www.fibramty.com. And recordings of the call will be available on the website of the company in the next 2 hours. If you are connected using our webcast tool, you have the option to download the presentation in order to move the slides at your own pace. 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. Actual results may materially differ and the company advises not to rely on these forward-looking statements. Fibra Mty undertakes no obligation to publicly update or revise any forward-looking statements.

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

[Jorge Avalos Carpinteyro, executive]

Thank you, and good morning, everyone, and thank you for attending to our third quarter 2022 conference call. As you may be already aware of, in September, we completed our fifth equity issuance of MXN 3.45 billion with an outstanding oversubscription of 1.2x. We're very proud to attest that despite the current turbulent and uncertain markets, our old and new investors showed a strong statement of confidence to our defensive business model and continue to view Fibra Mty as a committed organization that consistently delivers on its promises and has a solid and reliable business structure. As we have mentioned over the past earnings releases, our acquisition approach remains primarily on the industrial sector with the objective of capturing the benefits of unprecedented market trends, mainly fueled by reconfiguration supply chain that has leaned heavily towards nearshoring. We continue to make progress on several acquisitions processes, which will strengthen our portfolio in greater scale, wider geographic footprint, higher proportion of revenues in U.S. dollars and more predictable cash flows, all in the benefit of our investors.

Thanks to the proceeds from our placement, we were also able to organically bring our leverage level below 25%, which grants us greater financial flexibility to continue seizing new market opportunities. On the operating front, our strategy aimed at satisfying the final users of our properties has enabled us to retain and attract new tenants. We continue to see a rebound in office and industrial leasing activity. During third quarter of 2022 alone, we were able to lease approximately 5,000 square meters, a figure that includes deals in the La Perla and [indiscernible] as well as in the Providencia industrial portfolio. This contributed to organically meet the high end of our distribution guidance range of MXN 0.96 per CBFI. On ESG matters, during third quarter 2022, Fibra Mty participated in the early adopter program of the UN Global Compact Communication and progress. And with this, we are among the 5% of Mexican companies ahead to the UN Global Compact with voluntary joined this apport seeking to push forward the implementation of the 10 principles of the UN Global Compact and improve our contribution to the 17 sustainable development goals. I will now turn the call to Javier who will walk you through our portfolio performance and pipeline. Javier?

[Javier Llaca García, executive]

Thank you, Jorge, and good morning, everyone. I'll start my piece of the presentation on Page 3 with the composition and geographical distribution of our portfolio as of the end of September 2020. Unchanged from the previous quarter, it is comprised by 60 properties located in 9 markets with a total gross leasable area of close to 820,000 square meters. Current occupancy is 91.8% of total GLA, 10 basis points higher than the previous quarter. In terms of GLA and rounded numbers, 28,000 square meters correspond to our office component, 592,000 square meters correspond to our industrial component and our small retail component comprises 19,000 square meters. Our footprint spans into 9 markets located in 8 states in the Northern Bajio and Central areas of the country. Moving on to Page 4 of the material. We present a brief overview of our key performance in Karos for the third quarter of 2022. In terms of percentage of revenues, these indicators continue to be consistent with previous quarters. revenue by asset class came from our industrial properties, while office and retail accounted for 47.1% and 2.4%, respectively. Revenue by location and occupancy are in line with our projections for the year. Our dollar-denominated leases represent almost 7% of gross revenue and lease maturity schedule and weighted average lease term is 4.6 years, with more than 45% of revenue start expiring in 2027. It is worth noting that although our revenue by asset class is almost 51% industrial, more than 70% of total revenue comes from companies that are industrial as their core activity regardless of occupying industrial or office space. On Page 5 of the webcast material, we present the same property performance analysis for the second quarter of 2022 compared to the same quarter of the previous year. For purposes of this analysis, we used 58 out of the 6 investment properties currently in our portfolio, which represent a total GLA of 758,000 square meters. We are happy to report that gross revenue increasing 9.6% or MXN 31.6 million with an increase of 6.9% or MXN 20.3 million in our net operating income. The NOI margin dropped 210 basis points to 86.6% due to nonrecurrent expenses, some of them related to our lead certification process and long-term CapEx estimation consultant expenses. We also continued to see some increases on utilities due to an increased attendance of users at our office buildings. However, our year-to-date NOI margin stays at 88.8%, above our target rate of 88%. The composition of NOI variance will be explained in detail in the following slide. We continue to see an inflection point on the negative trend in our rent income with sense of short and midterm recovery as the office markets begin to slowly recover as we will address in more detail in a moment.

Once we incorporated additional revenue from [ Cienega 2 and Cienega 3 ], the aggregated portfolio generated a total net operating income of MXN 326.2 million compared to MXN 23.1 million in the third quarter of 2021. The -- this is an increase of 11.3%. Our NOI margin for the aggregated portfolio was 87% for the quarter. Slide 6 of the presentation explains in detail the MXN 33 million increase in our same properties net operating income, comprised of the following: MXN 3.6 million increase due to a positive FX effect between the third quarter of 2021 and the third quarter of 2022. MXN17.2 million increase due to inflation, escalation on lease agreements. MXN1.3 million reduction due to increase in certain operating expenses and nonrecurrent expenses, some of which I just mentioned before. As you can see, once we included additional revenue from acquisitions, we reached the MXN 326.2 million NOI in our aggregated portfolio. As you will see on Page 7, during the third quarter of 2022, we reached a same property NOI slightly below the previous quarter in about 2%. Some markets continue to experience an increase in the demand for office space. And as I will explain later, we have secured new leases in both our office and industrial portfolio.

The positive impact from these transactions will start to show in our cash flow in the fourth quarter of this year and the first quarter of 2023 due to some grace periods and rent commencement dates. We continue to believe that we could recover between 20% and 60% in the short term, potentially increasing our annual cash flow in between MXN 8 million to MXN 24 million, translating almost right into a potential addition of MXN 0.02 to MXN 0.06 in our future annual cash distributions. As I mentioned before, we continue to see signs of increase in the demand for office space, particularly in the Guadalajara and Monterrey markets. Page 8 of the material presents a snapshot of current leasing activity in both our office and industrial portfolios.

During the first 9 months of this year, we have secured new leases that will eventually generate an additional MXN 27.4 million of annual income with potential lease transactions in closing process and initiated negotiations for more than 14.6%, HR 28.6 and MXN 44.9 million in potential annual income increase, respectively. All potential transactions identified in the market, including transactions in closing in progress and initiated account potentially for additional annual income of close to MXN 110 million. It is worth to mention that we are close to secure a new industrial lease at one of our buildings in Monterrey that is being vacated. It would be a 30,000 square meters, 10-year triple net lease currently being negotiated at a lease rate 13% higher than the current rate. Let's move on to Page 9 of the presentation. As Jorge mentioned before, and Rami will address later during the presentation, last September, we successfully concluded the MXN 3.45 billion public equity offering that will be used mainly for the acquisition of industrial properties across the country. As we presented during our road show for this issuance and since late last year, we have engaged in negotiations for potential acquisitions for more than MXN 2.2 billion in industrial properties alone. We are making progress on the evaluation and negotiation on some of these potential transactions and are planning to start the deployment of the proceeds of the offering in the following few months. As soon as we begin to reach agreements on new acquisitions, we will communicate more details on the matter. We're also working on the recycling of some of our assets, particularly at 12 property industrial portfolio, and 1 office building that could generate more than MXN 90 million in additional firepower to be invested in new industrial acquisitions. We expect to execute these sales during the first half of 2023. We will be happy to address any specific questions regarding operations and acquisitions and market conditions during the Q&A section of the call.

And with that, I will turn the call to our CFO, Jaime Martínez. Over to you, Jaime.

[Jaime Martínez Trigueros, executive]

Good morning to everyone. I would like to start by walking you through some of the highlights of our recent equity issuance. First of all, I would like to thank you -- to thank our investors for placing their trust in our growth. We are fully committed to keep reaching our goals and fulfilling our promises with the main objective in providing an attractive risk-adjusted return. As well, I would like to recognize our bankers and the whole Ferro Monterrey team of the constant effort to carry out our disciplined growth strategy. Our follow-on was the largest transaction in the Mexican capital markets in 17-month period before our issuance despite facing a turbulent and uncertain market.

We have another subscription of 1.2x our targeted amount and an issue price at MXN 12.20 per share. Due to the shared market performance after the transaction, Fibra Mty received all the proceeds, including the full rent option. Jorge and Javier would agree with me that this road show was the most demanding since our inception, but the most gratifying as well. Given our track record, we were able to hold more investor meetings than ever before. And for the first time ever, we write money from international investors from U.S., Brazil and Chile. This is, without a doubt, a key milestone in Fibra Mty's history. I'm personally gratified to see once again a relevant demand coming from individual investors. Since our last follow-on, the allocated amount to these investors has been around 20%. This not only ratifies a higher interest from retailing investors, but we can also expect an increase in marketability. As you can see on the next slide, we've been increasing our position in the marketability index, all the way from above 100 before 2019 to our all-time high reach last month at the position of #55.

This increase was largely improved with a follow-on carry out back in October 2019 and boosted by several strategies carried out by our team, including investor education events, larger marketing efforts, among others. We could expect this to keep improving the cost of this last follow-on, given a larger number of shares outstanding and a larger number of retail investors. Keeping in mind that the excess demand in the issuance had a significant effect in September's trading volume. Following Slide 12 -- to give you a quick view on the main year on your variations in the adjusted funds from operations, excluding the same property NOI variations, which were already mentioned by Javier a few moments ago, as shown in the graph on the right side, first Fibra Mty third quarter adjusted flow from operations increased around 45%, mainly driven by harder cash investment balance due to the equity follow-on and a higher interest rate in cash investments. There's another nonrecurrent amount to stabilize this quarter's AFFO per share due to the 3-month lag in our distribution to keep compliance with fiscal regulation.

And given that the follow-on was carried out in the last 15 days of the quarter, we used an amount below MXN 59 million from the proceeds of the issuance to keep AFFO per share at the same level as if the number of issuance shares outstanding were used as the basis for its calculation. This amount stands for less than 2% of the money raised and keeps our promise with investors to keep predictability in our cash flows. Without this effect, AFFO increase would have stood at around 18%. Other variations remain nonmaterial. On the next slide, you will find the same analysis but compared with the previous quarters. The sequential comparison reflects a smaller increase in AFFO, but still a 28% increase, and the main variations remain the same as the ones I just mentioned, financial result and AFFO per share stabilization. Without the stabilization, AFFO increase would have been above 4%.

Moving on to Slide 14. Our outstanding debt fundamentals remained the same since our last call. We kept our debt 100% unsecured at a peak rate of nearly 4% and U.S. dollar-denominated. As well, the debt maturity stands at 4.9 years with no principal payments until late 2026.

Further on, our balance sheet got stronger due to equity issuance, which organically lower our loan-to-value below 25%. This results in greater financial success in greater financial flexibility to seize market opportunities. This remains true while looking to our net debt to EBITDA. Moving on, we have more than enough gone powder in available credit lines that accounts for almost 15% of our assets. 2 days ago, HR ratings announced a 1 notch increase in our rating to AA+ -- according to the rating agency, Fibra Mty, a defensive profile with stable cash flow generation and a capital structure with low indebtedness levels.

Additionally, we have proven our ability to tap the debt and equity markets, which allow us to keep growing. As always, on Slide 15, the selected information to compare and contrast our main financial indicators of the last 12 months to facilitate your analysis. I would like to end my speech by mentioning that we are in the right path to meet the high end-of-our-year guidance, still considering the additional shares from the follow-on, we estimate to reach a dividend per share of approximately MXN 1. This would represent more than a 10% increase when compared to last year's dividend. As I mentioned in our last call, our rent adjustment in line with inflation on our predominantly dollarized lease revenue and our long-term lease agreements allows our investors to reduce exposure to several market risk.

That being said, I would like to return the floor to the operator to begin our Q&A section. Thank you.

[Operator]

[Operator Instructions]. The first question is coming from Francisco Chávez from BBVA.

[Francisco Chávez Martínez, analyst]

Congratulations on the recent the capital expansion. I have 2 questions. The first one is the timing for the capital deployment. When do you expect to deploy the capital that you raised? And are the current macroeconomic conditions and volatility in financial markets making due to retire the timing or the economics of the potential acquisition. And the second question is regarding the NOI and EBITDA margins. In this quarter, margins declined on a sequential basis, and you mentioned some nonrecurring expenses. And can you give us more color on these expenses and when can we expect a recovery in margins...

[Javier Llaca García, executive]

Of course, Francisco. This is Javier Llaca. Regarding the first question on the deployment of the new equity. And as we mentioned during the roadshow, we expect deployment to take roughly 180 to 200 days. We believe that's still the case. We are deep down into negotiations right now. But we believe that we're going to be able to do the deployment accordingly to what we said during the roadshow. In regards to the financial forecast and the environment, let's remember that inflation is tight to -- it's tied to the conditions, and we're going to adjust to inflation. I wouldn't say that inflation is our best friend but close to it. And we also expect the lease spreads to continue expanding because of the cost of new construction and the excess of demand that there is currently in the market. We continue to see that, and we believe that that's going to be the case for the following few years probably. In regards to the second question on the decline on margin, as we explained before, we had some nonrecurrent operating expenses. Most of them related to our ESG initiatives. -- lead certification, investment on solar panels and some additional equipment that account as OpEx instead of CapEx. We continue to see an increase of the cost of some utilities, both on the cost per unit and the consumption as well. But if you take year-to-date for the first 9 months, our -- both our NOI margins and EBITDA margins continue to be in line with our target rates.

[Francisco Chávez Martínez, analyst]

Great. And just a follow-up on the first question. In a on the potential cap rate in your acquisition pipeline?

[Javier Llaca García, executive]

Well, yes, during our road show, we presented a lump sum of the potential pipeline with a range on the cap rates that went between 6.5% to 10.1%. Right now, we're seeing that range a little bit expanded. We're looking at between 7.5% to 10.1% with an average of about 8.5% .

[Operator]

And the next question is coming from Gordon Lee from BTG.

[Gordon Lee, analyst]

Congratulations on the results and the equity raise. 2 quick questions. The first is I know that some of the discussions you've been having have -- at least during the negotiation have contemplated the possibility of using CBFIs as payment, which would obviously provide you with additional firepower on top of the sizable firepower you have already. Is that still something that you're considering? And then the second question, as you take, let's say, the 180 to 200 days to deploy the resources completely, are you holding the cash in vessels or dollars? Because I guess there's a temptation to have it in pesos because of the carry, right? And that reduces the dilutive effect of holding on to the cash -- but on the other hand, the bulk of the assets you'll be acquiring are in dollars. So I was wondering how you're managing that cash.

[Javier Llaca García, executive]

This is Javier again. Regarding your first question, the short answer is yes. We are looking at a couple of potential transactions that would involve at least part of the payment with CBFIs or shares. That would mean an additional issuance of shares close to the closing of those transactions. But yes, we are looking at that type of transactions in the short term. And regarding the second question, I'm going to rely on Jaime for that.

[Jaime Martínez Trigueros, executive]

Nice to hear from you. Yes. We are going to make some transactions in dollar -- in U.S. dollars. But as our dividend -- our dividend is paying in pesos and most of our investors are institutional Mexican investors, which expects to have peso-denominated dividend. We hold the cash on pesos. Of course, the opportunity cost is now high because of the interest rate increase. So if in any case, there's the evaluation of Mexican pesos, we might pay -- I mean we have less dry powder to buy, but the dividend would be the same. So this is in one hand. And what we think is the most important risk that we have holding investments in pesos is that if in any case, we execute a transaction in U.S. dollars, and there's a peak in the -- because of the volatility of the exchange rate, which, let's say, it's at 22 or 23 or something like that, just for 1 month, which is exactly the month in which we execute the transaction, that would be a very -- will affect our dividend or future dividend because the cost of the price of the acquisition would be more expensive than we expect.

[Gordon Lee, analyst]

So what we are doing, we are very careful and have a clause in the transactions that we execute that in case of volatility, we have some provisions. You're not. But are you buying hedges? I mean, forwards on the dollar, assuming that you'll use them over 6 months or no?

[Jaime Martínez Trigueros, executive]

No, not at this time because we are not certain in exactly the time we are going to execute the transaction, it might represent some losses that is not our business. In the moment that we are ready to execute in a certain date, maybe we can do that or just change the pesos for dollars in order to be ready to execute the transaction.

[Operator]

And the next question is coming from Valentín Mendoza from Actinver.

[Valentín Mendoza Balderas, analyst]

Javier, congratulations on the successful for one... I do have a couple of questions. The first one is related with what the back just asked you. And if you could give us some color on the competitive dynamics that you're seeing in the bidding processes that you are currently involved in? And have you noticed a change on the competitor stance and a challenging economic backdrop? And the follow-up would be also on the expirations that have just guided us with a 13% spread on the vacant property, you're about to close. But how should we think about your lease spreads given the maturities that you have -- the extortion you have in the pipeline?

[Javier Llaca García, executive]

Sure. Valentin, nice talking to you. Regarding the first question on the competitive environment for the bidding. We've seen some changes, and these are the following. Due to the increase on the interest rates both in the U.S. and Mexico, what we're seeing is that leverage, especially from private equity funds is becoming weaker because leverage is not that accretive as it used to be with a lower interest rate. We're starting to see that. That's one change that we've seen recently. Another change is that there's just a few national domestic players that are active because of the trading price and the liquidity or leverage capacity they have. So there's a lot of discount on prices on trading prices. And unlike those, we are pretty close to NAV. So we're on a strong position as well as the ability that we have to execute very diligently on this transaction.

So we're -- I would say that we're getting stronger on negotiations more than the competition is getting weaker, but it's a mix of both of both. And in regard to the second question, the lease spreads. We have some maturities on leases in the next 2 to 4 years between 24% and 26% on industrial, we expect to get some of those positive lease spreads even next year. We're starting to see those right now, as we just mentioned on this particular transaction. And we believe that as we acquire properties that are 2 or 3 years old that are properties that were built before this inflation cycle that we're seeing on construction and components costs and materials costs, we are going to be able to cap more lease spreads. We're not betting on that. We believe that as long as our cash flow keeps growing steadily against inflation, and we continue to have some economies of scale and operating efficiencies. We're going to be able to deliver on our projections. But nevertheless, both lease spreads and a typical high inflations are going to be certainly a potential boost in our cash flow.

[Operator]

The next question is coming from Edson Murguia from SummaCap.

[Edson Murguia, analyst]

Congrats on the follow-on. My first question is regarding -- once -- you mentioned in the press release that this or the close of the third quarter, you are not considering selling or even reconfiguration of that property. So my question is, what are your expectations looking forward on this specific property on Cuauhtemoc? The second question is regarding an office occupancy rate. Could you give us a little bit more color about strategies for new tenants or what type of sales you will look for in order to increase the occupancy rate at office spaces.

[Javier Llaca García, executive]

Of course. Thank you, Edson, for the question. Regarding the first question on Cuauhtemoc, we're actually happy to tell you that we decided to -- we were in this project on doing an evaluation of best and highest use for the property for a potential redevelopment of the property. We stopped that given the fact that we are having a very positive reaction from the market for the use of the property is for office space, particularly for a back office or call center space. We are very, very advanced into negotiations for at least a part of the building, we feel very positive on the remaining of the building in the short term. So we are going to hopefully have great news for you in the next call that we have. So Cuauhtemoc seems to be moving along. Regarding office, we just got the reports from the third quarter from CBRE. And it's -- there are very good signs on -- especially in Guadalajara and Monterrey. Let me start with Mexico City. Mexico City during the third quarter remained steady. It didn't have a negative net absorption, which by itself is a very good news. The market had 2,000 square meters of positive net absorption. Rates continue to drop during the third quarter in Mexico City. So we still believe that Mexico City is going to be the most challenging market of all 3, and we don't see a recovery to start before the next 24 to 36 months. Regarding Monterrey, Monterrey had a very nice increase on net absorption during the third quarter. Prices lease rates remain pretty close the same, pretty much the same. So we continue to see that inflection point that I mentioned before. Vacancy rates in Mexico City are at 24% as of the third quarter. Monterrey are almost 20% flat for the first quarter and continue to drop. And Guadalajara, even though that Guadalajara net absorption for the next quarter was smaller than the previous quarter of the year.

It continues to be the most resilient one, probably, I would say, vacancy rate is now below 20%. -- lease rates continue to keep steady. I can tell you that Jorge mentioned on his opening statement, a statement that we closed recently a couple of transactions at La Perla. And I can tell you that the lease rates were, first of all, kept dollar-denominated, and we had a positive spread on one of those leases, which is amazing. So we continue to see a slow but steady recovery I feel very optimistic about Guadalajara in the short term, followed by Monterrey and Mexico City is going to continue to be the under dock. But the report for the third quarter from CBRE is -- it's very hopeful.

[Edson Murguia, analyst]

Okay. And last, regarding on this recycling asset that you mentioned in your remarks. I know that probably you are under negotiations or something. But this profit is related to office space, do you have an estimated timeline or what is the reason or the main reason on selling offices -- and despite of the fact that you are considering this alone of the most attractive sector of real estate. But just trying to understand the reason or the reasoning or the rationale of selling this office.

[Javier Llaca García, executive]

Okay. On our disposition horizon, we have a couple of properties well, one industrial portfolio and an office building. The industrial portfolio that we're planning on selling. The rationale behind that is that it is in a great shape lease-wise. We just recently renewed one of the most important leases on that portfolio. We want to deploy and to increase our presence in a premium market across particular in Northern Mexico. And we believe that we have had very good results on that portfolio in terms of cash flow. The acquisition price was a very attractive one for us, and we want to take advantage of the differential on cap rates that we could get for that portfolio. We believe that we can enhance our whole portfolio by offsetting from that portfolio, which is at the best moment probably in time for a good sale.

And the size of the portfolio makes it very attractive to a broader spectrum of investors. And regarding the office building that we have been considering selling, we have been going back and forth it's not going to be easy. We believe that, that particular disposition could end up like Cuauhtemoc, hopefully, for the repositioning of the asset on the lease. It's not easy to find a good buyer in the office arena right now, but we're going to make a final decision probably during the first quarter of next year on that particular office building. Most likely, we're going to go out to the market for the industrial portfolio during the first quarter of next year.

[Operator]

[Operator Instructions] The next question is coming from Francisco Suarez from Scotiabank.

[Francisco Suarez, analyst]

Apologies if my line is a little bit nosy. Congrats on the results on equity follow-on and on the news that you're hearing on the call, Precisely on the news that you are making in today's call, I wanted to understand if I actually got the whole picture, right, in terms of the range of cap rates that you are seeing for your potential acquisitions in the short term, it seems that because of the market conditions that we are seeing, now there's an opportunity for you guys to write properties are relatively cheaper than indicated in the road show. Is that correct? Is that the correct reason that I have to?

[Javier Llaca García, executive]

Francisco, this is Javier. Yes, you got it right. I mean we're looking at a very broad range of potential transactions, all of them industrial right now. We're looking at a range, as I said before, between 7.5% and 10% just above 10%, being the 10% the most opportunistic transactions and the 7.5% the most core transactions, obviously. According to the progress that we're making so far on transactions, I would say that even though our pipeline average is 8.5%, we believe that we're going to be around 8%, slightly above probably. That's our goal. We do not discard the possibility of having some lower caps on individual transactions. But I believe, and I hope that closing ongoing cap rate for the deployment of the proceeds is going to be just around just around 8%.

[Francisco Suarez, analyst]

Got it. And just to understand the rationale and the net correctly. For instance, perhaps some of the buildings that you are targeting a level of, say, 10% that building may require an additional CapEx or something else to reposition the building, while the dose that are expensive, there's no need for incremental CapEx. Is that something that is correct on my end?

[Jorge Avalos Carpinteyro, executive]

Yes. I mean CapEx...

[Francisco Suarez, analyst]

We already considered the incremental CapEx. That may be the question. Sorry, sorry,

[Javier Llaca García, executive]

No, sure. Two things that might be useful for you, Francisco. First of all, let's keep in mind that the way that we underwrite properties is based upon discounted cash flows. And more than a cap rate, let's talk about the RRR. We use an IRR of 8.6% in dollars and whatever the resulting value of that discounted cash flow in relation to NOI, cap rate becomes a resulting number more than a driving number.

[Jorge Avalos Carpinteyro, executive]

Particularly, I'm sorry, Javier. This is Jorge. There are some cases and as we've discussed with you before, that there are some certain 10 contracts that have TIs and those TIs are amortized to a certain period of time. And if you look at specifically at a cap rate or a cash on cash for the first year, you can have distortion of the real return that you're looking for, which as Javier mentioned, is the IRR late -- so in that sense, that's something that everyone always asks us where the caps are, particularly, I hate to talk about caps because that is not our business. Our business is to determine which is the optimal price of a building. And regarding your second question on CapEx, it comes with the valuation because the way that we do discounted cash flow, we go further down from NOI into net cash flow after CapEx. And we do a CapEx reserve according to the status and the shape of the properties. We do a CapEx portion on the cash flow. And then we discount the cash flow. So it comes with valuation of the CapEx. If a building requires more CapEx is going to reflect on valuation and the other way around as well.

[Francisco Suarez, analyst]

Got it. And a follow-up on your IRR, that level of IRR that you will discuss on leverage... We never ever an underwriting considering leverage at a property level. That comes from the corporate model. That's when Jaime does his magic. And, on a corporate level, he uses the leverage in order to do an accretive strategy. And that's something that has worked for us for the past 7 years.

[Jaime Martínez Trigueros, executive]

Yes. That's because, as you know, we manage our balance more as an asset manager than owner of sold properties. I think it's the most efficient way to use the diversification of your portfolio in order to maintain the low-risk profile that we...

[Jorge Avalos Carpinteyro, executive]

And Javier mentioned in Francisco, this is something very important also. As Javier was mentioning, there are certain external funds, institutional external funds that historically have been leveraging the buyouts in Mexico in 70% to 80% LTVs with the past interest rate that we had somewhere between 3% and 4%, you had a significant financial arbitrage. And that's one of the things -- one of the reasons why we saw that cap compression in the private markets and also in the public, not in the public markets because I would say that the FIBRA, even though that you see some people that have 40% to 45% LTVs, most of them are below 45%. So we're limited in that sense, but nothing institutional external resources. So now that the interest rate is somewhere -- somewhere above 6.3% to 6.5% on a 10-year basis in dollars, then you don't have that flexibility to do that financial arbitrage. And that's why we don't see there is going to still be a cap compression -- and the other fact is what I just mentioned that sometimes you see a lot of tenants asking to also finance the TI, but Fibra Mty what we do is that we are more tied those TIs on a certain period basis. And that's what we're obligated to do.

[Francisco Suarez, analyst]

Got it. And just last question very quickly on the magic created by Jamie, precisely. Yes, your overall funding cost now all in is roughly slightly more than 4%. But clearly, the yields have gone up a lot. So the question is that after the proceeds from the follow-on are allocated is your overall expectation or in the cost of funds when you reach that point?

[Javier Llaca García, executive]

Well, that's a very, very, very good question. And I think there are 2 things that we have to evaluate. Maybe -- I mean, let's talk about the first quarter next year, maybe our funding cost in terms of debt might be around 6% and 7%. Fortunately, we have this increase in the rating, which helps in terms of the spread that we will have to pay. But anyway, I mean, between 6% and 7% is the number that we think that we are going to look at to prepare our analysis. The second thing is how long does the interest rates are going to be in that level. And we have this internal discussion as well as the one that you have seen in the press is that maybe the increase in interest rates, it's hurting in a strong way, the economy.

If that's real or if it happens in the next quarter, we're going to see a reduction in the interest rates in the middle of the next year or maybe at the end of the next year. So -- so the thing is maybe we can have a funding cost of around 6% and 7%. The next question, and it's -- I mean, it's difficult to say what they're going to do in terms of fixing the rates or maintain in the floating rate structure. That's -- I think that's going to be the great question for the next year. And at this moment, we don't have enough information to decide about that.

[Operator]

And with no other questions in queue, I would like to turn the conference over to the management of the company.

[Javier Llaca García, executive]

Well, thank you, everyone, for attending this conference call, and I hope we see you soon.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.