Fibra Mty SAPI de CV

BMV:FMTY14

Earnings Call Analysis

Navigating Opportunities in a Changing Landscape

In this earnings call, Fibra Monterrey's leadership emphasized their strategic focus on leveraging recent governmental openness to investment in energy and industrial development in Mexico. The new administration is seen as supportive, creating a positive outlook for growth in industrial parks, with 93 currently in various stages of development. This is a critical moment, as the company aims to capture the demand surge from both new and existing businesses looking to expand in Mexico.

Financial Performance and Debt Management

Jaime Martínez, CFO, reported significant improvements to the company's debt structure, notably a decrease in the weighted average interest rate by approximately 10 basis points to 4.9%. This reduces expenses and enhances cash flow for investors. With a solid balance sheet (gross loan-to-value at around 25% and net debt to EBITDA at 1.4x), Fibra Monterrey showcased its capability for future investments—indicating a firepower of $730 million. The guidance for 2024 anticipates AFFO per share above current expectations, reflecting growing operational efficiencies.

Valuation Insights and Investment Potential

The company’s current market pricing shows a 21% discount to book value and a significant 50% discount when using price AFFO multiples compared to peers. Despite operational challenges, Fibra Monterrey retains the largest EBITDA margin within the Mexican REIT universe, indicating operational efficiency. If peers were to replicate these margins, their AFFO could rise between 13% to 40%, highlighting the competitive advantage of Fibra Monterrey’s structure in retaining higher cash flow. Share buyback programs were approved as part of managing excess cash flow, aimed at enhancing equity value for investors.

Robust Expansion Plans

Fibra Monterrey aims to capitalize on its robust expansion efforts, with ongoing negotiations potentially totaling $131.3 million. The expected yield on these expansions is close to 10%, indicating strong upside potential. The company is well-positioned to finalize agreements for additional expansions and expansions already delivered show promise, contributing to anticipated cash flow enhancements. There are also expectations for further portfolio valuation increases as lease renewals approach.

Market Trends and Sector Insights

The industrial sector remains resilient, with occupancy rates close to 96% reported by the company. The NOI reached MXN 650 million, reflecting a 25.5% increase year-over-year, driven by favorable market dynamics and the company’s strategic tenant relations. Although there are signs of a deceleration in markets like Juarez and Reynosa, demand remains strong from existing tenants. With 83% of leases dollar-denominated, fluctuations in the exchange rate have a pronounced impact on revenue, making the current scenario favorable for Fibra Monterrey.

Conclusion: A Future of Growth and Value Creation

Overall, Fibra Monterrey is navigating a complex environment with strategic initiatives aimed at redefining its market position. The firm is committed to enhancing its operational efficiencies while cautiously expanding its portfolio. With solid fundamentals, robust financial management, and a backdrop of governmental support for industrial growth, the company is positioned to deliver significant value to its investors. The proactive share buyback strategy further points to management's confidence in the long-term growth and intrinsic value of the firm.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the 2024 Third 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 a 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 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. Additionally during this call, we may refer to certain non-accounting financial measures.

Actual results may materially differ 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 statement.

With us this morning from Fibra Monterrey, we have Mr. Jorge Avalos, CEO; Jaime Martinez, CFO; Javier Llaca, COO; and CIO, Eduardo Elizondo, Legal Counsel, and Cesar Rubalcava, Investor Relations. 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. Thank you and over to you.

[Jorge Avalos Carpinteyro, executive]

Thank you, Sekko, and thank you everyone for joining the call. Before I jump to our quarter's results, I would like to give you some color on the different topics we've been discussing with the new government's administration, which are crucial for our industry outlook and the historical opportunity, the nearshoring brings to Mexico.

First of all, I would like to highlight the openness, and interest of the Secretary of Economy, Marcelo Ebrard as his team, and the Mexican association of Private Industrial Parks AMPIP, which I preside, have been working for the past weeks.

We have focused on 2 of the most important issues to attend to capture the excess of demand for industrial space, both from newcomers and companies that already have operations in Mexico, and are expanding.

One of them is energy. The other one is permits. In terms of energy, we propose to ten-fold the distributed generation through solar panels in our rooftops, from 0.5 a megawatt to 5 megawatts, which considering the 80 million square meters that we have within the AMPIP coverage, and the maximum area to install such panels, which we estimate to be 60% of the total surface, it would translate into a generation up to 12 gigawatts. This not only reduces the energy deficit, but also motivates property owners to invest in renewable energy sources.

In the case of permits and administrative processes, we have found that there are more than 30 different permits, and most of them are redundant on a federal, state, and municipal level. We propose to centralize all permits in a virtual one-stop flat platform, allowing any developer to speed up development, in order to fulfill the demand surplus.

We're also committed on helping one of President, Claudia Sheinbaum's key promises in her book titled 100 steps to transformation, which highlights her goal to develop 100 new parks during her term.

In this sense, I'm glad to announce that as of today, there are 93 new industrial parks in different stages of development in Mexico, within the AMPIP members. And I'm sure this demand momentum will keep on growing, for at least a decade as the regionalization trend continues to unfold.

Jumping into our numbers, I'm delighted to announce that, based on the cumulative results for the year, we expected AFFO for 2024 to exceed the guidance set by our technical committee. This achievement reflects our strategy of driving both organic, and inorganic growth in our portfolio alongside prudent management of our capital structure, which has constantly enhanced cash distributions for our investors.

As I mentioned on our last call, we're on track to fulfill our commitments made to investors on the latest follow-on, both from the use of proceeds and dispositions in the underperforming office portfolio, which Javier will address later on.

Before handling the call, I would like to emphasize that we still believe that the current trading price of our shares, does not effectively reflect our value relative to our cash generation capacity, especially considering the current exchange rate.

We're convinced that buying back our shares at this price range, represents the most accretive capital allocation for our investors, given that it resembles buying a property with an above 10% cap rate.

As the quarter ends, we have already repurchased approximately 1% of the outstanding CBFIs, and we will continue to do so if this discrepancy persists.

As I mentioned before, considering that our AFFO generated during this year will exceed guidance, our technical committee has approved us to use AFFO surplus above guidance, to repurchase additional shares. This action aims to permanently increase cash flow per share for our investors.

Again, I'd like to thank you, our investors, for the continued invested trust.

Javier, please go on.

[Javier Llaca García, executive]

Thank you, Jorge. Starting with the commitments of the latest follow-on, we have already committed more than $430 million in industrial investments and continue to negotiate additional transactions to reach our $700 million amount before the anniversary of equity raise. All of this in line with our 8% weighted cap rate target and consistent with our current cost of capital.

These transactions include acquisition of satellite assets, and expansions for our existing tenants across 5 Northern and Bajio markets.

Our pipeline for potential acquisitions is fully industrial, located mainly in Northern markets and Bajio with above average lease terms, low vacancy rates and mainly U.S. dollar denominated.

We'll continue to target a portfolio that is oriented towards light manufacturing and without any significant active risk. When comparing the economic sectors of our tenants when compared to Mexico's most active industrial sectors.

I'd like to mention that despite current environment, we haven't seen any significant variation in cap rates as of now. Nonetheless, we wouldn't discard the possibility that sellers would be more flexible in pricing terms, and for some of the new competitors we were seeing to be more cautious.

We've also made significant progress in the sale of 2 properties worth almost 60% of the underperforming office portfolios, both of which we expect to conclude before the year ends.

Moving on to our portfolio KPI's, there wasn't any significant variation against last quarter. However, I would like to address recent market updates, and the fear of a slowdown.

According to CBRE and during the third quarter of this year, the market with the most activity in terms of net absorption continue to be Monterrey, Saltillo, Bajio and Guadalajara, with around 8.5 million square feet combined, and vacancy rates between 0.8% for Saltillo and 3.4% for Bajio.

Activity for these markets is in line with what we experienced during 2023. The absorption in the Bajio markets for the first 3 quarters of 2024, already surpassed the activity during the whole past year. We continue to see a tight market from the tenant standpoint, with an increasing demand for build-to-suit projects in certain markets, with scarcity of speculative buildings.

As to markets like Reynosa and Juarez, we observed negative absorptions during the third quarter, and an increase in its vacancy rates to 5.2% and 7.6% respectively. Our exposure to both markets remains limited.

In the case of the Mexico City area, net absorption for the first 3 quarters of the year, was even lower than that of the first half of 2023.

Despite that, we see industrial fundamentals strong, mainly in the markets that we have heavily invested, opportunities come along with uncertainty. And for those who are more bearish on the economic outlook, this solidifies our thesis on the benefits of having predictable cash flow backed by long average lease terms, rather than betting on new leases and tenant rotation.

Having said that, I would like to mention that the revenue share both from industrial and U.S. denominated leases had an increase mainly, because of FX variations. I would also like to highlight that a small portion of our peso denominated leases is used for both operational and administrative expenses. Therefore, our EBITDA is almost fully dollarized. Keep this in mind, as FX will have a key role in portfolio performance and valuation.

Given that our portfolio is mostly exposed to light manufacturing -- for light export manufacturing, I would like to take a moment to review relevant recent information on that regard at a macro level in Mexico as presented on Slide 7 of the webcast material.

According to INEGI, Mexico exported manufactured goods for a total of more than $138 billion during the second quarter of 2024. That is more than $1.5 billion per day. If we take a deeper look into these exports by region, state and industrial sectors, the Northern states accounted for more than 60%, followed by Bajio with 23%, a staggering 83% between the 2 regions where we had a stronger presence.

As I mentioned before, this activity reflects in the K-wheel use step metrics for most of the markets in these 2 regions of the country. Transportation equipment, mostly automotive and parts continue to account for close to 40% of total exports, followed by computers and other electronics.

We strongly believe that this industrial activity will continue not only to consolidate primary Northern and Bajio markets, but also to continue creating a spillover effect, which will benefit other markets, even in other regions of Mexico. We continue to closely screen evolution and potential growth to pursue new investments both on acquisitions and expansions.

As you can see on Page 8, most of Mexican exports continue to focus on the U.S. markets. The growth on our trade surplus with the U.S. in NAFTA now USMCA has almost doubled in the past 5 years prior to 2024. Again, vehicles and parts outstand in the trade exchange with the U.S., closely followed by computers and electronics.

Recent announcements from both the U.S. and Mexico governments, as well as the private sector lead us to believe that electronics, particularly microchips and semiconductors, would play an important role on increasing the sector activity and trade in the short and medium-term.

In regards to our same-property NOI, we recorded a nearly 15% increase, compared to the third quarter of '23. This strong performance stems with several factors. For starters, we have already delivered 3 of the industrial expansions. Also, we have captured lease spreads in renewed contracts, and we have kept portfolio occupancy close to 96%.

All of this has been further bolstered, by the appreciation of the U.S. dollar over the past 12 months. Considering the same-property NOI, and the acquisitions held in last year, our third quarter NOI stood above MXN 650 million, almost a 25.5% variation against the same quarter last year, and with an NOI margin of 90%, which is larger than industrial peers, even considering our non-industrial share of the portfolio.

This performance underscores the resilience of our portfolio, and our solid relationships with tenants, who remain satisfied with our relationship and continue to pursue, their growth projects with us. As of the quarter end, we have either signed or delivered $68 million worth on expansions and have almost the same amount on their negotiations. The estimated yield on cost for this expansion is close to 10%.

It's worth noting that we anticipate delivering, a significant portion of the ongoing industrial expansions in the fourth quarter of this year, further enhancing cash flow generation. Also, we continue to observe expansion demand coming from our tenants, and were positive in beginning new expansion negotiations in the upcoming months. As you can see on the screen, we present recent areas of the progress of all expansions that are either under development, or already delivered to the tenants.

The portfolio's performance exceeding appraiser's projections, combined with favorable market conditions, has led to a 4% increase in the overall portfolio value in U.S. dollar terms, compared to the second quarter of this year.

When factoring in the foreign exchange variations, despite the reclassifications of certain assets stacked for sale, the portfolio's value has grown by approximately 10%. We see further potential for evaluation as ongoing expansions are completed, and lease renewals approach. This could be bolstered by the interest rate behavior going forward.

With that, I'll give the floor to Jaime to address the financial performance. Jaime?

[Jaime Martínez Trigueros, executive]

Thank you, Javier and good morning to everyone. I would like to begin my presentation, by highlighting the significant improvement that we made to the terms of the entire debt -- bank debt outstanding during the third quarter. The main benefit was reflected in a reduction of approximately 10 basis points in our weighted average interest rate, compared to the previous quarter, which now stands at 4.9%.

This benefits the cash flow for our investors and improves our marginal cost of debt, for further investments. Additionally, we enhanced the terms related to maturity, increased the available amount and amended other covenants related to the surcharge that will allow us to keep interest rate spreads in the lower grid.

As a result, we kept our balance sheet fundamentally strong, having a gross loan to value of around 25%, almost 4 years in the average debt maturity and 1.4x net debt to EBITDA, which translates in a firepower of $730 million without exceeding our debt internal ceiling.

Considering the organic and inorganic performance of the portfolio, and the financial enhancements driven by better cost of debt. We estimate that this year's AFFO per share will be well above 2024 guidance. As our market price, reflects a relevant discount to book value and price AFFO multiple. Our Board approved the use of the cash flow surplus, to buyback Fibra Monterrey shares.

This is further explained by the following, the information that you are seeing on screen is as of the second quarter of '24, to keep numbers comparable. When analyzing implied caps at book value, we have 20% discount to peers. As Javier mentioned earlier, this quarter we have already had an almost 5% increase in investment property valuation, isolating FX variations.

We could expect further evaluation as ongoing expansions are completed and lease renewals approach. However, keeping that same book value using price AFFO multiple, the discount versus peers increased to 50%. Such distortion is explained mainly by operational efficiencies and that are exclusive of Fibra Monterrey's structure that are recaptured in the balance sheet as higher NOI EBITDA margins.

Our cost of debt provides additional relative profitability to our investors. To support the statement with some numbers, we currently have the largest EBITDA margin in the Mexican REIT universe. Our efficiencies are so strong that, if our peers were to have the same margin and hold everything else constant, their AFFO will increase between 13% and 40%.

This is the main reason why our discount is more relevant when comparing cash flow generation rather than cap rates. Additionally, our platform structure itself, is the one that has less cash flow leakage when increasing assets under management.

Now to finish up with a webcast. As Javier mentioned earlier, at bottom line, our performance and therefore our evaluation should be adjusted by FX fluctuations. Therefore, we've included different FX scenarios, to facilitate your analysis. As you can see, at MXN 20 per dollar and MXN 10.5 per share, we are trading above 21% discount to book value, and almost at 9x AFFO per share, which also translates into an AFFO yield of almost 11%. This only demonstrates once again why buying back our own shares, will enhance equitiviness to our investors.

I would like to open the floor for Q&A. Again, thank you very much for your time and continuous trust in Fibra Monterrey.

[Operator]

[Operator Instructions] The first question is from the line of Alan Macias with Bank of America.

[Alan Macias, analyst]

Just 2 questions. First, if you can highlight, I guess, if you like the yellow signals or -- the risks to the industrial sector that you see the greatest -- giving the uncertainty in Mexico, new government and new policies, and of course the U.S. elections. And the second question, is regarding if you can share the level of cap rates for the divestitures in the office sector?

[Jorge Avalos Carpinteyro, executive]

Yes. This is Jorge. Definitely, I mean, the way that we see our industry, particularly for developers, is electricity, as long as you don't have electricity. And that's why I was mentioning that, we see a total openness of the Secretary of Economy. If you compare this new government, or this new government team compared to the last, they're pretty open in terms of investing, or letting us invest in generation, in transmission and distribution.

And definitely there are other certain issues like security, infrastructure in highways, railroads and ports. But the most important one would be electricity. That would be the, the main concern for any developer to keep on developing speculative building in Mexico. We see a very positive trend in terms of all the developers and just as a number, in the Mexican association of Industrial Parks we have over 460 industrial parks.

And in development, as I mentioned before, developers are developing 93 industrial parks. So that echoes a lot of the way that developers are thinking, and being very optimistic in terms of what is going to happen for the next years to come.

[Javier Llaca García, executive]

And in regards -- Alan, this is Javier. In regards to your second question asking about the cap rate on the dispositions that we're currently doing more than the cap rate, given the fact that, these properties are either non-productive or underperforming, it's hard to give a cap rate given the fact that, they're not producing any net operating income right now.

Our goal is to execute those dispositions as close as possible to book value. Remember that, our book value, is a mark-to-market valuation by a third appraiser, third-party appraiser. And we are trying to stick as close as possible to book value. I can tell you that, on the 2 transactions that we have already agreements on those values are pretty close to book value.

[Alan Macias, analyst]

Understood. Just a follow-up on any, I guess, fundamentals in the industrial sector remain solid, strong. Any indication of slowdown in any aspect of the industry?

[Jorge Avalos Carpinteyro, executive]

We have seen a slight slowdown and when I say slowdown, I don't mean a change on the curve on the growth. It's a slower growth than the previous quarters. We still see very solid fundamentals, particularly in the markets that I mentioned before. What we believe is that some markets are getting to an equilibrium point.

I did mention the case of markets like Juarez. What we're seeing is lower demand from new companies and an increased demand, for expansions of same companies that already have an operation in Mexico. This we believe it's going to pick up after the U.S. elections, particularly in the first quarter of next year, once the 2 new governments in Mexico and U.S. have already some signs, of how that dynamic is going to go. But we see a slight slowdown, but still very, very strong.

[Alan Macias, analyst]

Congrats on the quarter.

[Operator]

The next question comes from Jordan Hymowitz with Philadelphia Financial.

[Jordon Hymowitz, analyst]

Couple of things. So one, a lot of people are fearing that, if Trump wins, the peso blows out. And what you guys, the way that it's mostly dominated on Page 22, even if the peso blows up to MXN 21 or MXN 22, your book value goes up substantially. And that's kind of the opposite of most other Mexican countries. So I guess or companies. So I guess my first question is, is there a limit here? In other words, if the peso would hit MXN 25, I mean it's always, I mean, at some point you'll get less business, and things of that nature. But is a gradually increasing peso exchange rate actually good for you broadly?

[Javier Llaca García, executive]

Jordan, nice talking to you. This is Javier. Well, the short answer is yes. I mean, given the fact that we have 83% of our leases dollar denominated and most if not all of the contracts, do not call for any type of adjustment based upon the exchange rate. But there's almost a perfect relation between the FX and the growth of our income.

Most of appropriate costs are in pesos, and the majority of the operating expenses are in pesos. So yes, I mean, there's no limit here. Obviously, if we would face a big movement on the FX, you could expect some pushback from some of the tenants. However, the way that we have our leases structured, it's pretty elastic to the FX behavior?

[Jaime Martínez Trigueros, executive]

And this is Jaime. Jordan, and also there's no mismatch between the revenues of the companies and, because those rents are dollar denominated. So I mean, it's a natural hedge for them. I'm sorry.

[Jordon Hymowitz, analyst]

Okay. And my second question is, has there been more interest by third-parties given your huge discount to book value and taking an ownership? I mean, there's been lots of talk of multiple bidders for Terrafina. Have any of those approached you, or thought about partnering with you given the huge discount to booking, given that it is internalized at this point?

[Jorge Avalos Carpinteyro, executive]

Jordan, this is Jorge. Well, not yet, Jordan. We're always, as we mentioned during the non-deal road shows, we're always analyzing different alternatives to create value for our shareholders. Those are based on organic and inorganic growth. Others are JVs with different strategic partners.

Other ones have been doing consolidation, like you saw with the Terrafina transaction that we were very interested, and obviously, if it is the case being consolidated. But at this moment, we don't have anything yet to comment.

[Jordon Hymowitz, analyst]

And final question is with the higher NAV, your dividend would also be higher at each peso level as well, correct?

[Jorge Avalos Carpinteyro, executive]

Yes, that's correct.

[Operator]

The next question is from Edson Murguia with Summa Capital.

[Edson Murguia, analyst]

I have a couple of them. The first one is related to the project expansion, because in the earnings release you mentioned that it's USD 131.3 million. But what it said in the earnings release, it's almost USD 77 million that it's already signed and under signing on negotiation. So my question is the rest of those USD 131.3 million is related to what type of properties, or what would be your expectation regarding this?

And my second question is related to the debt, specifically to the bilateral banks. The longer you already have and all the passes that you already have been to during 2024, you already use almost USD 213 million for almost 600 plus between DDA and Nova Scotia. What would be the scenario in order to draw down the rest of the bilateral loans?

[Javier Llaca García, executive]

Edson, this is Javier. Nice talking to you. In regards to your first question, what I can tell you about the new expansions, we already are executing close to USD 70 million as you said. And we have another 4 extensions in different markets like Saltillo, Aguascalientes and Monterrey that account for another close to USD 69 million. So you're talking about USD 130 million, roughly USD 131 million altogether in expansions.

And these 4 new expansions, I can tell you that are well advanced in negotiations. We would expect that before the end of the year, we're going to or we would be signing final agreements for the majority, if not all of them. And that's going to continue to be the dynamic.

As we gain size and as we gain scale on the portfolio. What we have seen is that the more tenants we have. And the more the tenants get to know us, the more we'd also they want to work, so they want to continue the relationship. And all of these companies are growing strongly in Mexico, and are mostly on the automotive and electronics industries.

[Jorge Avalos Carpinteyro, executive]

Okay. Regarding the debt, as we are going to execute some transactions in the next -- in the coming weeks. We are going to prioritize those transactions with the cash that we have in our balance sheet. And then we have enough room to increase our loan to value as we're at 25% at this time. And our internal ceiling is around 35%. So, we have enough room at this point to execute the debt. And we also have those lines authorized by the bank. So, we are pretty comfortable with such situation.

[Edson Murguia, analyst]

Okay. And last I have. Well, I'm confused a little bit, because in your remarks you mentioned that, it's approved to use surplus of the cash flow to repurchase CBFIs, right. However, you mentioned in the earnings release that you use during the third quarter '24 and golden credit line in order to buy those MXN 19.7 million super cars, right. So my question is, could you give us a little bit more specifics or the rationale, between one type of strategy and the second part of the strategy -- or to the repurchase program?

[Jorge Avalos Carpinteyro, executive]

Okay. Let me put it pretty simple. The price is way below their rational number. We have enough money to acquire some of those services in the market, to make 2 important statements. The first one is that we don't like the price. And the second one is that we're interested in increasing the profitability for investors to buy back our shares. It's a very interesting transaction in order to increase the value for our shareholders. So that's the main strategy. We are using resources from one, or another resource. But I mean, the point is we don't like the price at this time, and we think that it's a very interesting opportunity for our investors to buy back our shares.

[Operator]

The next question is from Igor Machado with Goldman Sachs.

[Igor Machado, analyst]

And I just want to know if -- so at a market level in another -- and what is so negative absorption and decreasing occupancy? Just want to know about your portfolio. I mean, could you please comment? How was your portfolio performance in these regions? They are performing better than the average of the market.

And the second question is about leasing spreads. So, is this a trend you expect to continue running? Year-to-date leasing spreads are currently decreasing, and I just want to know, if you expect this to continue?

[Javier Llaca García, executive]

Igor, this is Javier. Nice talking to you. In regards to those specific markets that we mentioned, Juarez and Reynosa, we currently do not operate any industrial asset in Juarez. We have a small office building in Juarez and we have properties around Chihuahua City that are performing. As a matter of fact we are just renewing and expanding one of the leases in Chihuahua.

In regards to Reynosa, we only have exposure to one tenant which is Corning. It's one of the largest employers in the area, the optical solutions division of Corning and that property is fully stabilized for long-term. If I recall correctly, the wealth for that property is in excess of 5 years, and it's performing just fine. So, we don't have exposure in terms of risks for those 2 specific markets.

In regards to the lease spreads. Considering year-to-date, we have a lease spread of almost 9% above inflation. Regarding current in place rent versus market, we have a potential upside of about 20%.

[Operator]

The next question is from the line of Isabela Salazar with GBM.

[Isabela Salazar Leipen, analyst]

I was wondering if you could give us more details about the investment properties, where they're located in their site? And also, I was wondering if you could share if you have any plans on what you're going to do with the land reserve that you have available at the moment?

[Jorge Avalos Carpinteyro, executive]

Javier?

[Javier Llaca García, executive]

Oh yes, we have on that comment that we have certain properties under reclassification and tag for sale. We are working on the recycling of the non-productive assets right now, and that includes vacant buildings and/or land. We're working specifically on the portion of land that we have in Puebla that was part of used transaction.

And the 2 buildings that we are supposed to close, so to speak, before the end of the year, one is located in Monterrey and the other one is located in the Mexico City area, and those are office buildings.

[Operator]

The next question is from the line of [ Andres Aguilera with Gideon ].

[Unknown Analyst]

Congrats on the results. Based on our estimate there seems to be a $300 million gap to meet your $700 million capital deployment target by March 2025. Could you briefly update us on the state of your own - evaluations and negotiations for industrial portfolios and how current market dynamics are impacting this?

[Javier Llaca García, executive]

Sure. This is Javier. Yes, so far we have secured $430 million on signed acquisitions that were -- in the process or either already closed or closed close. We have a pipeline of close to $900 million, let's say in excess of $500 million that we're evaluating. We're pretty close on reaching an agreement of around $100 million, in excess of $100 million that we could have an agreement before the end of the year hopefully.

And the rest of the roughly $200 million. We expect to continue the evaluation and further negotiation to achieve binding agreements of some sort of agreement before the end of the first quarter of next year, which is the anniversary of our capital, of our deployment for the capital issuance.

In terms of, if you want to look at this in perspective, let's remember that we did liquidation of $470 million gross and from those we're pretty much done in terms of agreements that we have so far.

So what we are pursuing now, is to get to the level of LTV that we feel comfortable with. And we expect to be on schedule, on deploying or securing investments for $700 million before the end of the quarter. And that includes not only acquisition of stabilized assets, but that also includes built-to-suits and expansions for our current tenant base.

[Operator]

The next question is from David Soto with Scotiabank.

[David Soto Soto, analyst]

Just a quick one related to the lease. In fact, could you please provide more detail about how, or what should we expect for leasing spreads for industrial, retail and office sector, please?

[Jorge Avalos Carpinteyro, executive]

Okay. In terms of the non-industrial, I can tell you that, the lease spread -- it will be flat. I mean, in the small, the very small retail portfolio that have do not have any renewals coming anytime soon. So, we expect that to keep flat.

On office, the leases that we are pushing somebody mentioned that the office market has picked off a little bit. We see it flat to market.

Let's remember that the market is already took the hit on valuation and mark-to-market, because of what happened in 2020. And on industrial, we expect that 9% year-to-date, 9% above inflation on positive lease spread, and we have an upside against market of close to 20%.

It is important to mention that during this past quarter we didn't have almost no expirations. And the few that we had were under automatic renewal provisions on the lease. So, those lease spreads are pretty much are zero, given the fact that those renewals are renewed, based on ongoing rate plus inflation of the previous year.

[Operator]

The next question is from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Congrats on the numbers. The question that I have -- and thank you very much for the disclosure on your overall pipeline, your development pipeline here, is precisely on that. How confident you are that the next stage of the $63 million in potential additional expenses, those might be close. I mean, how confident you are with that number.

And the second follow-up on that is, it seems that this is giving you a better position with several tenants. I mean, for instance, in the case of Saltillo, unless I'm mistaken, I think that the current expansion that the company is doing actually you represent the most important portion of those expansions. And you remain the most important player for Danfoss in Monterrey. So you can expand a little bit more on your overall strategy. How do you think this may take away the potential risk of consolidation behind tenants and other potential risks that will be very appreciated?

[Javier Llaca García, executive]

Nice talking to you as always. In regards to the level of confidence that we have on the new potential expansions that we have on the pipeline, it's hard for me to give you a number. I'm pretty, pretty positive about achieving those. If I would need to throw a number, I could tell you that 80% probability of closing on those.

And all of these in the short-term, those MXN 60 something million that we have are with tenants that we know for a long time. We have a very close relationship. We talk to them on a weekly basis. All of them are multinational companies. We are close to their headquarters and their corporate real estate department, and they feel very confident and very bullish about the Mexican market, mostly or more specifically on the automotive industry. So, we feel pretty confident with that.

And that takes me to your second question. We have been working since always on strengthening our relationships, our long-term relationships with our tenants. The fact of the matter that we are in a very good position to provide to them flexibility on their existing leases.

If they want to grow, or they want to relocate, we are the first on the list to call us, because we can give them more flexibility on a previous lease versus a new lease on a different place. You mentioned Danfoss, Danfoss is a great case study. Danfoss is growing and I don't want to talk for the company. I'm not going to mention anything that hasn't been made public by them.

But they have recently acquired some company that has also strong presence in Mexico. They want to consolidate their space, particularly in Monterey. The building that we're doing for them is a double decker that allowed us to have as double of the GLA on the same footprint on the property. And that was a great solution for them, and obviously for us.

We're talking not only to Danfoss, but to a lot of our tenants on a regular basis on how can we help them on their growth strategy in Mexico. They don't see us as a landlord. They don't see us as counterpart that they have to negotiate every now and then in the terms of the contract. They see us more like a partner. They see us like a capital and an investment partner for them to continue investing on working capital and for us to invest on the real estate. So in short-terms, I would say that the prognosis for our long-term relationship with our tenants looks really, really good.

[Francisco Suarez, analyst]

Fantastic. And if I make just another question, a high level question related to the market conditions. Did you see any correlation between the increasing spec properties that have been in the pipeline, generally speaking on the market as such in Mexico? And the lack of enough energy in those particular buildings that might be explain a little bit about the vacancies that we see in certain markets. Is there any correlation at all?

[Jorge Avalos Carpinteyro, executive]

There is an absolute correlation to that. And the perfect example is Ciudad Juarez. One of the things that made Ciudad Juarez to increase their vacancy rates was, because of, I would say, a slight surplus on speculative buildings. But some, or a lot of those buildings didn't get the energy on time and in the terms that they were saying so.

There's an absolute correlation. We're not a development company, but I can tell you that a lot of developers are being a lot more cautious on new speculative development given the constraints of energy. And that's the reason that a lot of the activity that what we've seen in the past, I would say, few quarters relies more on build-to-suits than on spec development. But there's an absolute correlation between energy scarcity and scarcity of a good buildings for potential tenants performance.

[Operator]

We have a follow up question from Jordan Hymowitz with Philadelphia Financial.

[Jordon Hymowitz, analyst]

You said you're selling your real estate at pretty close to NAV, the office buildings that you're selling, correct?

[Jaime Martínez Trigueros, executive]

Yes, that's correct.

[Jordon Hymowitz, analyst]

And so, if you're selling that is close to NAV and you're buying back your stock at 80%, 75% of NAV, that's a pretty accretive transaction?

[Jaime Martínez Trigueros, executive]

That's correct, Jordan. That's exactly our point. We agree with you.

[Jordon Hymowitz, analyst]

And so, I guess do you think you could run a slide unless you have it handy like if you would hypothetically sell your remaining office book at NAV and be buying it back at today's price. That's got to be very accretive to NAV broadly and to shareholders' returns broadly?

[Jorge Avalos Carpinteyro, executive]

Yes, we have been running some numbers on that regard. We can prepare something for you in more detail.

[Jordon Hymowitz, analyst]

Okay. But I'm thinking about it properly, correct?

[Jorge Avalos Carpinteyro, executive]

Yes.

[Jaime Martínez Trigueros, executive]

That's correct.

[Operator]

The next question is from Gordon Lee with BTG Pactual.

[Gordon Lee, analyst]

I have just a quick question in the context of the slide that you showed where you point out that you have the highest NOI and EBITDA margins among Ciudad de México, which I guess I would imagine is primarily or largely due to the internalization, right. And the operating leverage benefits that it provides. And I had a question with regards to that in the context of the deployment of your capital, of the acquisition firepower you have on your balance sheet, how much of that incremental NOI do you think will filter directly to the EBITDA margin? Or put differently, how much permanent OpEx, would you need to add for the deployment of that capital?

[Jorge Avalos Carpinteyro, executive]

Well, there are 2 parts that connect themselves for the answer to that question Gordon, because on one hand you are divesting non-industrial assets, and by that it doesn't only represent that you have proceeds to invest on industrial, but you have a lot of savings. NOI margins on office is lower than on industrial.

The management charge or the management demand for an office building is a lot higher than industrial. And you've save a lot of CapEx on the office buildings. So you have the double positive impact on those dispositions, when you do the alternative investment on industrial.

We do expect that as we move forward, with our business as usual growth on the acquisition of stabilized assets along with expansions that provide us that weighted average cap rate of close to of around 8%.

We expect that not only that, but the additional cash flow that we generate from moving from office to industrial, should increase the NOI margin of the overall portfolio and therefore the EBITDA margins as well.

[Jaime Martínez Trigueros, executive]

Gordon, another thing, of course, the ForEx plays a very important role in this regard. As the Mexican peso lose value, our EBITDA margin has an interesting room to increase. I mean, in addition to what Javier mentioned. So with leaving the ForEx as it is, we should be above or just above 85%, but with an increase in the exchange rate to around MXN 20, or some number around that we are seeing, it might be around 85%. Maybe a little bit above that.

[Operator]

We have 2 questions in our webcast. The first one comes from Francisco Chavez from BBVA.

Congratulations on the results. My questions is regarding to AFFO payout. Can we expect this new strategy to use the excess AFFO for buybacks to be executed in 2025?

[Jaime Martínez Trigueros, executive]

The short answer is no. We are not formally changing the payout ratio. The current cash flow retention is a result of an opportunity that we haven't experienced before. So having a highly discounted trading price, we are achieving higher than expected results, when compared to our guidance.

[Operator]

The next question comes from Stephen Kennedy from Citibank. Are there some vacancies in the office space? My interest is here to understand how the discussion regarding the pricing will take in case of the sale of this part of the portfolio. Will it be a cap rate discussion or NAV discussion? Any color on that will be very helpful?

[Jorge Avalos Carpinteyro, executive]

I noticed that you're on the line. That's a very good question. And the answer is this. We do have some vacancy. And the way that our appraiser computes the book value and therefore an impact with the NAV, is that they take the income producing portion of the asset on a discounted cash flow. And the risk that takes it to pretty close to replacement cost, adjusted replacement cost.

So our NAV or book value on the non-productive or underperforming assets already reflects that. So that's the reason that I said before it's difficult, at least on the first 2 transactions that we're closing. It's difficult to talk about our cap rate. I can tell you that 1 of the buildings on the portion that is leased up, the cap rate is around 9%, 9.5% probably. But it's difficult to put that as a whole, because it relates more to book value and book value reflects the mark-to-market value of the properties.

[Operator]

With no further questions in the queue, I would like to turn the call to the management for the close of this conference us.

[Jorge Avalos Carpinteyro, executive]

Thank you everyone for attending the call. Thank you Cecco for attending us. Have a good day.

[Operator]

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