Fibra Mty SAPI de CV

BMV:FMTY14

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, and welcome to the 2022 Fourth Quarter Fibra Mty's Conference Call. With us this morning from Fibra Mty, we have Mr. Jorge Avalos, CEO; Jaime Martinez, 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 statement. I will now turn the call over to Mr. Jorge Avalos, the floor is yours.

[Jorge Avalos Carpinteyro, executive]

Thank you, Kelly, and thank you, everyone, for attending our fourth quarter conference call. I would like to start by highlighting the most important achievements during 2022. I'm very proud with the performance, commitment and passion of our management team as this has been the eighth consecutive year that we've achieved our AFFO guidance and delivering a cash distribution beyond what was promised to our investors.

This distribution was 11% higher than 2021, reflecting the resilience of our business model that has been supported by top quality properties, tenants and lease contracts, even in times of high inflationary pressures and economic uncertainty. Furthermore, our team has done an excellent job in renewals and occupancy across our portfolio that Javier will address during his remarks. I also want to highlight our fifth successful follow-on of MXN 3.45 billion carried out in September 2022, where we committed with our stockholders, acquisitions with 3 main focuses. One, in the industrial sector aiming to capitalize the current unprecedented market condition caused availability, constraints and surging demand for space due to regionalization of global supply chains or nearshoring. Two, stabilized assets with robust and defensive fundamentals, such as high occupancy rates, long maturity contracts and heavily dollarized lease revenues. Three, consistent with investment guidelines, we laid out to the market in our latest offering, striving always for the long-term profitability of our investors. Pursuant to these commitments in November 2022, we announced the agreement to acquire the Zeus portfolio, comprised of 46 industrial buildings located throughout 11 Mexican states with a total gross leasable area of 822,000 square meters for MXN 662 million plus taxes, costs and closing expenses. The portfolio has an occupancy rate of 98.3%, based on GLA; a weighted average remaining lease term revenue of 6.1 years; and 92% of its lease revenue is denominated in U.S. dollars. This acquisition received all the relevant corporate and governmental approvals, including from the [ Fibra stakeholders meeting and the Mexican Antitrust Regulator ]. Upon completion in addition to doubling the gross leasable area of our current portfolio, the transaction will enable Fibra Monterrey to increase the share of the Industrial segment to almost 75% of Fibra Monterrey's total revenue, increase the share of dollarized revenue to over 80%, extend average lease maturity profile by approximately 1 year from 4.5 to 5.5 years, further diversify revenue by market property, tenant and economic sector. Given the scale of this acquisition on February 15 of this year, we started a rights offering in a 3 round process at a price of MXN 12.20 per CBFI. The first 2 rounds results will be announced on Monday, February 27 and the third round will take place during March. With intent to maintain a prudent level of leverage, we aim to rise up to MXN 450 million in equity, considering our current exchange rate. The remaining resources needed to settle the acquisition will come from the proceeds from our 2022 follow-on and additional debt. It is worth mentioning that the new credit facility we're negotiating will feature similar characteristics to our current debt as it will be unsecured in U.S. dollars with a single principal payment at maturity at a term of at least 5 years. Since this acquisition involves certain factors that are highly relevant to determine the estimated distribution for the 2023 such as the number of new CBFIs issued from the rights offering, the exchange rate at the date of purchase, the loan-to-value and the cost of debt, our 2023 guidance will be announced in the first quarter of '23 earnings release once the rights offering is completed. Lastly, in line with our environmental, social and government objectives, I am pleased to mention that last December, we achieved an important milestone by obtaining a lead OM Certification from the U.S. Green Building Council for 9 office buildings and 1 retail building accounting for 129,000 square meters of gross leasable area. We will continue to make the necessary efforts to achieve different certifications in the rest of the portfolio and to fulfill our sustainability commitments with an objective and measurable manner. I will now turn the call to Javier, who will walk you through our portfolio performance. Javier, please go ahead.

[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 year-end of 2022. Unchanged from the previous quarter 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 90.9% of total GLA, 90 basis points lower than the previous quarter due to our recent vacancy in one of our industrial properties currently under marketing for a new lease. In terms of GLA and run rate numbers, 208,000 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. Our geographical coverage would soon be reshaped when we integrate Zeus portfolio, which we will address later during the presentation. Moving on to Page 4 of the material. We present a brief overview of our key performance indicators for the last quarter of 2022. In terms of percentage of revenue, these indicators continue to be consistent with previous quarter. 50.4% of revenue by asset class came from our industrial properties, while office and retail accounted for 47.2% and 2.4%, respectively. Revenue by location and occupancy are in line with our projections for the year. Our dollar-denominated leases represent 77% of gross revenue with a small contraction given recent strength in the peso exchange rate and lease maturity schedule and weighted average lease term is 4.5 years, with more than 36% of revenue start expiring in 2028. It is worth noting that although our revenue by asset class is almost 51% industrial, more than 70% of total revenue still comes from companies that are industrial as their core activity regardless of occupying industrial office space. Again, these KPIs would be fortified after the Zeus transaction. On Page 5 of the webcast material, we present the same property performance analysis for the last 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. Gross revenue increasing 5.3% or MXN 18.2 million with a marginal increase of 1.6% or MXN 4.8 million in our net operating income. The NOI margin dropped 310 basis points to 86.3% due to non-recurrent expenses. Some of them related to final expenses from our LEED certification process and consultant expenses for long-term CapEx estimation. We also continue to see some increase on utilities due to an increased attendance of users at our office buildings. However, NOI margin already started to return to target rates in the beginning of this year. The composition of NOI variance will be explained in detail in the following slide. Once we incorporated additional revenue from our Cienega 2 and Cienega 3 buildings, the aggregated portfolio generated a total net operating income of MXN 326.6 million compared to MXN 314.4 million in the fourth quarter of 2021, an increase of 3.9%. Our NOI margin for the aggregated portfolio was close to 87% for the quarter. Slide 6 of the presentation explains in detail the MXN 4.8 million increase on our same property net operating income comprised of the following: MXN 12.1 million decrease due to a negative FX effect between the fourth quarter of 2021 and the fourth quarter of 2022; MXN 20.9 million increase due to inflation escalation on lease agreements; MXN 9.4 million increase due to new leases and expansion; and MXN 13.4 million reduction due to increase in certain operating expenses and non-recurrent expenses, some of which I just mentioned. As you can see, once we included additional revenue of MXN 13.4 million from acquisitions, we reached the MXN 326.6 million NOI in our aggregated portfolio. As we mentioned during our previous conference call, we continue to see signs of increasing the demand for office space, particularly in the Guadalajara and the Monterrey market. Page 7 of the material presents a snapshot of current leasing activity in both our office and industrial portfolio. During the year, we secured new leases that will eventually generate an additional MXN 67.3 million of annual income with potential lease transactions in closing process and initiated negotiations of more than MXN 6 million, MXN 55.7 million and MXN 31.3 million in potential annual income increase, respectively. All potential transactions identified in the market, including transactions in close in progress and initiated account potentially for additional annual income of more than MXN 93 million. Let's move on Page 8 of the presentation. As Jorge mentioned before, during the last quarter of 2022, we were granted with LEED certification for existing buildings, operation and maintenance, version 4.1 for 11 of our office buildings, which represent a total GLA of 117,000 square meters, which is 62% of our total GLA in the office component of our portfolio. Nine of these buildings reached the gold level of LEED certification, while the remaining 2 reached the silver level. We will continue with similar certifications and initiatives across office and industrial properties in our portfolio. It is worth to note that these certifications accounted for more than 55% of total certified LEED O&M projects during 2022 and more than 14% of all certified LEED O&M projects since 2010 in Mexico, having achieved certification 9 months ahead of the original schedule that we announced during 2022. Finally, on Page 9 of the webcast material, we're happy to inform that we have made substantial progress in the installation of close to 2,000 solar panels on 4 of our office buildings in Monterrey and Guadalajara to generate on-site energy for the operation of common areas and equipment. This investment will allow us to reduce about 415 tons of carbon dioxide equivalent per year, which represents 8% and 11% of total emissions generated by our office buildings during 2019 and 2020, respectively. We're in the process of receiving for installation from CFA the required bidirectional mirrors. We will be happy to address any specific questions regarding our operations and market conditions during the Q&A section of the call. And with that, I will turn the call to our CFO, Jaime Martinez. Go ahead, Jaime.

[Jaime Martínez Trigueros, executive]

Thank you, Javier, and good morning to everyone. Moving to Slide 10. Our outstanding debt fundamentals remained the same since our last call. We kept our debt 100% unsecured at a fixed rate of nearly 4% and U.S. dollar denominated. As well, the average debt maturity stands at 4.8 years with no principal payment until mid-2027, as we're entering into an amendment agreement in our syndicated loan to extend the maturity date to utilize in the third quarter of 2027 for the main purpose of preserving a sound debt maturity profile. Further on, our balance sheet remains strong with our loan-to-value well below 24%. This results in greater financial flexibility to seize market opportunities. The same remains true when looking to our net debt to EBITDA. Moving on, we have more than enough gun powder in available credit lines that accounts for 15% of our assets. Our solid balance sheet will help us to carry out the sales acquisition, which we will address in a moment. Following to Slide 11, to give you -- on the main year-on-year variations in our 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, Fibra Monterrey's third quarter adjusted funds from operations increased around 35%, mainly driven by a higher cash investment balance due to the equity follow-on and was partially offset by higher administrative expenses, mainly because of certain nonrecurring items related to the potential acquisition of sales and expense increases due to inflation. Other variations remained nonmaterial. On the next slide, you will find the same analysis as compared to the previous quarter. The sequential comparison reflects an almost inexistent change. And the main variations remained the same as the ones I just mentioned, a higher financial result which was almost offset by the AFFO per share stabilization we carried out on the third quarter. Moving on to our full year results shown in Slide 13. I'm thrilled to announce that, as Jorge mentioned earlier in the call, Fibra Monterrey accomplished for the eighth consecutive year in a row its yearly guidance. It is worth remembering that 2022 cash distribution guidance was at 7.2% higher than 2021 distribution and considered several challenging market conditions, mainly on the operational front, particularly in the retention and absorption of vacant space. We are able to reach and surpass our goal mainly because of the inflationary adjustments and its effect on both our rent revenues and short-term investments, which bolstered our NOI and AFFO, respectively. The foregoing had no effect on Fibra Monterrey's financial expenses due to our hedging strategy carried out in the first quarter of 2022 and the issuance of our fixed rate [ SOFR ] back in 2020 and 2021. As you can see on the left side of the Slide 13, the outstanding efforts of Fibra Monterrey's team resulted in a higher-than-expected leasing activity, both in retaining tenants and attracting brand-new leases. The sum of these elements took our AFFO per share to more than MXN 0.99. Furthermore if we consider our equity issuance, the additional cash investment for increased our AFFO to above MXN 1 per share despite the number of shares increased, resulting in a dividend yield above 8%. Even though we didn't make any acquisition or divestment during 2022, in November, we announced that we have reached an agreement to acquire the Zeus portfolio, which I will let Javier explain in detail. Please, Javier, go ahead.

[Javier Llaca García, executive]

Thank you, Jaime. As Jorge mentioned during his opening statement and moving on to Page 14 of the presentation. During the last quarter of last year, we announced the agreement to acquire the Zeus portfolio. It is very important for us to highlight that the nature of terms and fundamentals of this transaction, the most relevant one in -- the most relevant one since the inception of Fibra Monterrey in 2014 are in line with the investment thesis and commitments that we presented to our investors during the roadshow of our latest equity issuance back in the third quarter of 2022. This slide presents some of the details that Jorge mentioned of the transaction for you to have. Also, we mentioned that the integration of the Zeus portfolio would have a transformational impact in our asset diversification and geographical footprint. As you can see on Page 15 of the presentation, once the transaction is completed, our portfolio would expand into 5 additional markets and will reinforce our presence in the Northern and Mateo markets as well. We will virtually double the size of our portfolio in terms of GLA, would increase the number of properties in more than 75% and the weighted occupancy rate of the aggregated portfolio without considering additional organic occupancy would grow in 330 basis points to more than 95%. Our estimated net operating income would increase in more than 75% annually for the following 12 months after the completion of the transaction. It is instrumental for us to continue diversifying our portfolio and therefore, mitigating risk factors in the generation of cash flow while at the same time enhancing the predictability and visibility of such cash flow. Finally, I would like to point out some of the transformational impact of Zeus in some of our key performance indicators for the aggregated portfolio compared to the fourth quarter results. First, our gross revenue by asset class would switch from 50.4% revenue for industrial to more than 72%. Then the percentage of dollar-denominated gross revenue would increase from 77% to more than 83%, enhancing our ability to properly continue with our capital structure. And finally, our occupancy rate as a percentage of the total potential gross revenue from the portfolio would increase more than 250 basis points from 87.3% to 92%. In terms of revenue concentration, the gross income from our new top 10 tenants would reduce from 45.1% down to 32.6%, providing us with a better grip to handle potential negative impact on rent generation. Our asset value would increase in more than 50% from [ MXN 22.2 billion ] as of the fourth quarter to more than MXN 34 million once the Zeus transaction is completed. Finally, our lease maturity schedule will stretch spanning as long as 2037 with some opportunities to capture additional value in positive lease spreads on repositioning of industrial properties, particularly between 2026 and 2027. We will address any pertinent questions regarding the progress and schedule of the transaction. But for now, I'm going to let Jaime wrap up the presentation with some of the positive impacts from the Zeus transaction in terms of size of the company, balance sheet and debt profile. Jaime?

[Jaime Martínez Trigueros, executive]

Thank you, Javier. Given the size of the acquisition on February 15, we began the rights offering at a price of MXN 12.20 per share. The first issuance results will be announced on Monday, February 27. With an intent to maintain a prudent level of indebtedness, we aim to rise up to USD 450 million in equity. The remaining resources to settle the acquisition will consist of the proceeds from the September 2022 follow-on and additional debt, both from current available credit lines and a new facility currently under negotiation. It is worth mentioning that this new credit facility will feature similar characteristics to current debt, meaning free of any lines, dollar-denominated with a bullet payment and a term of 7 years. As you can see on the graph in the next slide, this comparison as of the end of 2022 between Fibra Monterrey and our peers regarding market cap size and loan-to-value as well as different scenarios given the results of our rights offering. An offer between USD 200 million and USD 400 million will increase our market cap to such size that we'll have more optionality regarding funding sources, particularly international debt and equity issuance, which could translate in a reduction in our weighted average cost of capital and therefore, in additional returns to our current investors. The size of the rights offering will have its effects on our capital structure as detailed in the next slide. If you see that table on the right and continuing with our previous example of issuance in range between USD 200 million and USD 400 million, our loan-to-value would stand between roughly 35% to 25%. This would also determine our debt-driven firepower going forward given our leverage capacity. Nonetheless, our net debt-to-EBITDA in the 3 scenarios remain at reasonable levels, keeping it below 5x. As you can imagine, given the current interest rate environment, the additional debt would increase our current weighted interest rate. But due to the timing in which we fix our debt, it would result in a new interest rate between 5% and 5.5%, well below our current and pro forma implied cap rate as of the fourth quarter and once acquiring Zeus. As previously mentioned, the new credit facility has an interest-only 7-year term, which will stretch our debt maturity even further to a range between 4.9 and 5.7 years. As shown on the left, there are 2 graphs showing the new debt maturity schedule. On the top, you'll see the maturity right after the acquisition and before the VAT reimbursement, again, depending on the rights offering issuance result. As you can see, there is a maturity arising in 2025. This is a revolving facility that we would use to finance the taxes of the portfolio and repay once we receive the reimbursement. It is worth noting that we've had a 100% hit ratio in past reimbursement, and we expect this track record to continue. Once the revolver is repaid, debt maturity will be translated to the graph on the lower part of your left, all in favor on keeping a prudent balance sheet and strong debt fundamentals. As always, on the last slide, there's selected information to compare our financial indicators on the last 12 months to facilitate your analysis. That would be all. Kelly, please proceed with the Q&A section.

[Operator]

[Operator Instructions] Your first question is coming from Gordon Lee with BTG Pactual.

[Gordon Lee, analyst]

Two questions. The first is, I guess, that another source of potential funding either for Zeus or for any acquisitions that you may complete after that is asset recycling. So I was wondering if you could give us an update of the type of properties and the potential size of the recycling that we could see and the timing, I guess, as well. And then the second question is with -- if you think of your portfolio pro forma with Zeus should be obviously very heavily tilted towards industrial. And my question is, given how concentrated the portfolio would be towards industrial, do you still see office as strategic? Or do you think it runs a risk of potentially being a distraction, both for you from a management standpoint, but also in terms of how investors look at the stock?

[Jorge Avalos Carpinteyro, executive]

Thank you for the question, Gordon. Regarding the first question, the short answer is yes, we are going to continue with the recycling program. It's going to happen as soon as this year. What we are planning to dispose is some industrial properties that are either on secondary markets or are at the point that we believe we would achieve a good IRR and give some accretive impact to the rest of the portfolio and, of course, those properties that are currently non-income-producing. We believe that we are going to be in the range between, let's say, around $90 million to $100 million on these dispositions that include vacant land, that include nonproductive assets, and that includes secondary located properties. We're going to keep you apprised as this evolves. And regarding the second question on the concentration on industrial and office, we continue to see office as a strategic component of our portfolio. We haven't seen yet clear opportunities of investment like we saw with La Perla 2 years ago. But we believe that the market is starting to slowly picking up. We don't see our office component as a distraction, not either for management or the investors. We are doing very good progress on repositioning our vacant space in our existing office portfolio. We are going to be very attentive of any opportunities that might arise.

Particularly I would say in the Guadalajara office market, we don't see any activity in the capital markets for office in Mexico City. And the level of pricing that you could achieve right now on office, given the reduction of the lease rates but also the expansion on the cap rates that we are looking and the very few potential opportunities that we've seen, make those transactions very attractive in terms of how accretive they can be to our portfolio. So we're going to continue keeping the office market as a strategic part of our business plan. But we are going to be focusing on opportunistic transactions. What I can tell you right now is that we don't see any new office transaction for us in the next few quarters as we are going to be focusing on enhancing the portfolio, the transition from the Zeus portfolio. We have some transactions on the pipeline. Most of them, if not all of them are industrial. But those would be our answer. I hope you've got a clear view.

[Gordon Lee, analyst]

Perfect. That was very clear. If I could just have one follow-up. You mentioned potential recycling amounts of $90 million to $100 million. Do you think that's something that you could realize fully this year? Or is that something that we would see over the next 24 months?

[Jorge Avalos Carpinteyro, executive]

Our target is to achieve a lot, or most of them this year. But we're going to be very careful on how the pricing of those transactions are received in the market. But our idea is to complete these recycling transactions either during the remaining of the year or early next year.

[Operator]

Next question is coming from Edward Murguia (sic) [ Edson Murguia ] with SummaCap.

[Edson Murguia, analyst]

I have a couple of them. The first one is regarding on the pipeline that you mentioned in the road show last year, specifically even in the presentation for the third quarter, you mentioned the active pipeline was MXN 2.2 billion. So looking at here, trying to understand the strategy, how many programs or subscriptions are you going to do because it's on the valuation on the negotiation or you name it, it's almost like USD 1.2 billion, USD 1.3 billion, trying to understand how you want to finance those possible transactions? The second one is regarding on the credit facility or get to run the new batch that you're trying to achieve with different institutions. This will be how much regarding on not only on interest rates, but could you give a little bit more detail about this?

[Javier Llaca García, executive]

This is Javier. I'll take care of the first part of your question on potential new acquisitions and the pipeline. Obviously, the pipeline that we presented during the road show of our latest equity issuance included, among others, the Zeus portfolio. We continue to see a sizable pipeline in the future. It's hard to answer your question on how are we going to finance those, because it could be either an equity transaction. It could be subscription or rights offering. It could be a public offering or it could be probably a global offering. It's hard to say. We don't know yet. We're going to cross that bridge when we get to that just as we did with the Zeus portfolio. Jaime mentioned before that we -- depending on the amount that we are able to raise on the rights offering, we are going to have additional firepower. And that additional firepower, we believe that could be probably enough to the short-term pipeline that we're looking at. But if we make progress on a transaction of such a size that requires additional funding, we are going to evaluate it at the time along with our investors. But it's hard to answer specifically in which way we're going to fund those because we don't know yet.

[Jorge Avalos Carpinteyro, executive]

A different approach to that answer, Javier and Jaime, if at all would be if the subscription is up to $450 million, the answer to how much firepower we still have in order to maintain a maximum of 35% LTV would be something around $200 million to $250 million. So to what Javier was saying, we don't really know yet what is going to be the amount of that subscription. We believe we're going to be somewhere between $300 million and $400 million. So that is going to be between the range of $100 million to $250 million. And then you have another opportunities as Javier also mentioned that if we look forward, we probably would think of a global follow-ons and probably next -- somewhere next year.

[Javier Llaca García, executive]

And to wrap this up, Edson, let's keep in mind that the filing that we did with the CNBV consider a total of 690 million new shares. Regardless of the rights offering, if those shares are not fulfilled with the rights offer in process, we're going to have shares on the treasury that we could use eventually to new acquisitions using equity of the company.

[Jaime Martínez Trigueros, executive]

And regarding the debt, of course, we have a remaining facility from a former facility that we mentioned several quarters ago. We have $100 million that we will use. And we have a commitment with a new facility. We think that we are going to use around $200 million. Of course, it will depend on the size of the rights offering. But let's think in around $200 million. The spread will be between $225 million and $285 million plus [ SOFR ]. That spread depends on the leverage of the company. The higher the leverage, the higher the spread. So that's pretty much the things about the debt. I don't know if this is clear or you need to...?

[Edson Murguia, analyst]

No, it's clear. Perhaps a follow-up regarding on Zeus portfolio. You mentioned in your presentation that you are excluding land bank, which will give Zeus portfolio 8.31% as a cap rate. So I was trying to understand if that's part of the transaction or it's on land, could you give us a bit more color about this, please?

[Jorge Avalos Carpinteyro, executive]

Yes. The Zeus portfolio has -- comes with a large land reserve for new development that the seller didn't have the time to develop. So if you take into consideration what we are paying for the stabilized assets alone, the cap rate would be around 8.3% cap rate as presented on Slide 14 and 8.11% if you take into account that land reserve. It wasn't an option for us not to buy that land. But we're already working on what to do with a big portion of that land bank. We have a potential buyer for a part of that land bank that we are going to keep pursuing. Depending on how well we can do on starting selling the land, we might either sell the rest. We have some commitments for expansions and extensions as part of the Zeus portfolio. So we need some of the land to honor those obligations on extensions. And we can, even eventually can contribute part of the land to other developer for new development, given that we do not develop and try to make those assets productive. But bottom line is that if you take only stabilized assets, cap rate is 8.3%. If you include the land bank, it's 8.1%.

[Operator]

Your next question is coming from Francisco Chavez with BBVA.

[Francisco Chávez Martínez, analyst]

I have 2 questions. The first one is regarding the slight drop in occupancy in the industrial segment as we saw in fourth quarter. Any color on why that happened? And when do you expect that space to be occupied? And the second question is regarding the operating margin. Also, we saw a slight drop in the margin. I understand that this is due to the -- some extraordinary expenses, but when can we expect margins to come back?

[Javier Llaca García, executive]

Francisco, this is Javier. Regarding the first question, the drop on occupancy was due to the vacancy of one of our buildings in the San Luis Potosi area. It is an 11,000 square meter building that is currently on recommissioning. This is -- we are setting up the building for new lease. We already have some prospects for the building. I wish I could tell you that we're going to lease it right away. It looks good. It has a good prospect on leasing. We expect to lease up that building given the activity on the material within probably during the second half of this year. And that's mainly the only vacancy that we have on industrial. The slight drop on NOI margin was because during the third and fourth quarter of last year, we had non-recurrent expenses related to our LEED certification process, related to consultant fees. And we're doing this long-term CapEx requirement analysis for the whole portfolio. And we spend most of second half of last year on that effort and that required some additional expenses. On when we think we're going to get back to our common or typical rate, I can tell you that that's going to happen probably this first quarter. We already saw during January a stabilization on operating expenses. We already saw an increase on NOI margin for the first month. I think it's going to be consistent during the first quarter, so hopefully, this along with the integration of the Zeus portfolio in the second quarter that is going to bring a lot more triple net leases. I feel very confident that we're going to go back above our 88% target between the first and the second quarter of this year.

[Operator]

Your next question is coming from Victor Alarcon with Azteca.

[Victor Alarcon, analyst]

I was basically curious about the line strip. However, you've already talked about it. And Jorge, if you can elaborate about its location and -- what areas do you have this commitment for expansion? That will be all.

[Jorge Avalos Carpinteyro, executive]

Victor, yes, of course, regarding the first question, a large portion of the reserve land that comes with Zeus is located in the Puebla market. It was the same originally to be industrial part for providers, our OEMs for Audi. The expansion of the Audi plant, particularly the production line for the new electric Q5 is on hold right now. And that's the reason that this land hasn't been fully developed so far. The land has already all infrastructure and feasibility, which is a great thing for us. And that's where most of the land is located. As I said before, as a matter of fact, we already had an offer for a small portion of the land that we are entertaining. But we have a good prospect for our build-to-suit project. And we have a very good prospect for some other portion of the land for a new search that is interested in buying the land to build their own building. So hopefully, that's going to keep progressing. In regards to the expansions, I can tell you that we have, I would say, small portions of land adjacent to many of the buildings of the Zeus portfolio. That are being kept because those leases, those existing leases have a provision for expansion. And I can tell you that we're already working on a couple of those. So that's going to happen. On one hand, it's going to happen soon, relatively soon. But on the other hand, those portions of land for expansion account for a small percentage of the price that we're paying for land as part of the portfolio.

[Victor Alarcon, analyst]

Okay. So what percentage of the land would you be selling?

[Jorge Avalos Carpinteyro, executive]

Well, we don't know, yet. But if this particular prospect progresses soon, I could tell you that we could be selling about 1/3 of the land in Puebla.

[Operator]

Your next question is coming from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

The question that I had is just to make sure that I understand correctly. The fact that you haven't closed the syndicated facility is just because you still have to have the contingent information based on what may happen on your rights offering. I mean it is not that any bank is actually walking out of the deal or something, isn't it? And on that note and I think that you addressed this correctly, and is that you were mentioning that, of course, depending on the amount of the capital you can raise on the rights offering, you will be able to negotiate the exact cost of the spreads and everything you can think of related with the loan to values that you may get. So I just wanted to understand if -- how confident you are that you will get the syndicated facilities, my understanding is that you are confident about that? And just to understand, if your overall expectation is to raise between $300 million and up to $400 million, if you think that is something that is possible in this environment?

[Jorge Avalos Carpinteyro, executive]

Thank you, Paco, nice to hear from you. We have the commitment. I mean we don't have any doubt about the support of our banks. You're right. The thing is how much money do we have regarding the development of the rights offering. Yes, we think the $300 million, it sounds reasonable for the rights offering. Of course, I mean, there is still time to know if this is going to happen. But we think that between $250 million and $300 million plus, maybe $350 million, it's very -- I mean, we find very, very possible. We have a very active reception from our current investors. So we think we are positive on this regard.

[Francisco Suarez, analyst]

And also on your Slide 7 on your presentation, just to understand the overall organic growth going forward and the potential leases on your office portfolio. First of all, anything -- I mean it seems that the overall conditions in the Guadalajara market are quite different compared to what we see in Monterrey and Mexico City. Can you give us a little bit of color or what your overall expectations are in Guadalajara, particularly? And secondly, you have stated that you don't expect negative pressures on overall leases in your office portfolio. Nevertheless, we have seen that -- I mean conditions, seems to be very tough. And I mean, if you can elaborate a little bit more on why you're so confident that you will not have negative lease spreads on your office portfolios?

[Javier Llaca García, executive]

Paco, this is Javier again. We expect prices to stabilize. I think that the hit that the market could have get, already got it. I mean, there was a big drop on lease rates as high as 20%, 25%, I would say, closer to 30% in some markets in Mexico City. So we are going to -- we might see some negative lease spreads in terms of the office that could be vacated that were leased prior to the pandemic. But also I think by now, those might be marginal. The increase on demand that we're looking in Guadalajara, it's very punctual and very specific, because what is happening in Guadalajara is that given the size of the market and how fragmented the market is in Guadalajara and the pickup on demand of bigger blocks of office is hard for some tenants or prospective tenants to find in one block the site that they're looking. As a matter of fact, I can tell you that the demand that we have in Guadalajara is more than the offer that we have in our portfolio there right now. In other words, we are over demanded for our office inventory in Guadalajara. And that makes us believe that there's an opportunity there to foster new tenants on new buildings and to try to accommodate those tenants in this type of fragmented space. In Guadalajara, also what is happening is that the dollars are still dollarized. What we're seeing is a lot of tech companies are growing, given the fact that they grew on headcount during the pandemic. These companies are going back to the office. They're looking for new more bigger, larger space. And we're looking at some opportunities in Guadalajara to provide space to this already existing demand in the market. Monterrey is a little bit different than Guadalajara, because the vacancy rates in Monterrey, given the fact that Monterrey is a larger market than Guadalajara and a lot of services companies that are based in Monterrey, they did reduce their space. We're looking at an increase on demand from -- for back office, engineering, call centers, those types of spaces. We're starting to look at a slight increase on demand from the financial sector and the services sector in Monterrey. But it's going to take a longer time than Guadalajara, because you don't have that fragmentation thing in the Monterrey market. So Monterrey is going to start picking up at a slower pace than Guadalajara. And the problem with Mexico City is that you have the opposite case at Guadalajara. You don't have that fragmentation. You have very big buildings with a long -- a lot of big chunks of vacant space. The drop in the lease that a lot of those leases migrated from dollars to pesos, have created a huge negative impact in the market in Mexico City that is going to take a long time to recover. Let me be clear. I don't believe that we're going to see at least in the midterm, we are not going to see the same lease rates that we saw prior to -- even in 2019. There was a hit in the market, as I said before. We're not going to recover from that. And we have to live with the new lease rates that we're looking at the market. We see our vacancy right now as an upside, because the hit that we got from the pandemic was already discounted from our results. And we are positive that we're going to see a pickup in the demand for office, especially in Guadalajara, the Monterrey and lastly, Mexico City.

[Unknown Executive]

We have a question from our webcast. The question comes from Dario Flores. Can you please explain in simple terms how we won't be diluted after the rights offering announced on February 3?

[Javier Llaca García, executive]

Yes. Good question. As you saw in our follow-on in September, as we invest the resources in fixed income and the interest rate is at quite high levels, you don't see the dilution. The next part, we are going to invest the resources in the properties. We are almost ready to execute the transaction. So the resources that we get from the rights offering will be invested really fast in property. So that's the first answer. There might be a small dilution because of the VAT, which is the value-added tax or IVA in Espanol. These resources will be with the government for around 3 months. And then we'll give those resources back with an additional amount, which is the adjustment from within -- because of the inflation of the period. So we think that that dilution is going to be offset once we receive the reimbursement with this adjustment because of inflation. So that's the reason. I don't know if that's clear enough.

[Operator]

With no questions in queue, I'd like to turn the conference back over to the management of the company.

[Jorge Avalos Carpinteyro, executive]

Thank you, everyone, for attending this call and we hope to see you in the next call. Thank you. Bye-bye.

[Operator]

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