CI Banco SA Institucion de Banca Multiple FF/00939

BMV:TERRA13

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Carolina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Terrafina earnings conference call. [Operator Instructions] Thank you for your attention.

I will now turn the call over to Maria Barona of i-advize.

[Maria Barona, executive]

Thank you. Welcome to Terrafina's Second Quarter 2018 Conference Call. We are pleased to have with us today from Terrafina, Mr. Alberto Chretin, Chief Executive Officer; Mr. Carlos Gomez, Chief Financial Officer; and Mr. Francisco Martinez, Investor Relations Officer. Mr. Chretin will be taking us through the company overview and operating review, and Mr. Gomez will review the financials for the quarter.

Before we begin, we'd like to refer you to the forward-looking statements. As to the note in the quarterly report, any information expressed or implied during the call may include forward-looking statements, which could involve certain risks or uncertainties. Terms such as estimate, project, plan, believe, expect, anticipate, intend and similar expressions may identify such statements. Listeners are cautioned that forward-looking statements made during the call or by the company's management could change based on various important factors not under the control of the company. These comments represent the company's judgment at the time of the call. And the company disclaims, however, any intent or obligation to update these forward-looking statements. Thank you for your attention.

At this point, I'll turn the will over to Mr. Alberto Chretin for his remarks. Please begin, sir.

[Alberto Castillo, executive]

Thank you. Good morning to everyone, and thank you for joining us as we review Terrafina's results for the second quarter and the first half of the year periods in which the overall industrial real estate sector experienced positive results, and the company in particular continue to reaffirm its solid operating fundamentals.

Before jumping into the operations, let me begin by saying that Terrafina has completed its M&A activities for the time being. The recent transactions serve to boost Terrafina's profitability, thereby, driving increased quarterly NOI and distributions. More importantly, they strengthened the portfolio's long-term stability, making the company more resilient against potential market volatility.

We want to reiterate, as we've mentioned during the first quarter conference call, that we don't foresee much in the weight of M&A activity for the remainder of the year. Instead, our focus will be on consolidating the existing portfolio and ensuring the continued solidity of the current operations, thus, maximizing shareholder value in the longer term.

On the development front, we are analyzing specific build-to-suit projects and expansions that will bring additional benefit to Terrafina with attractive double-digit development deals in the range of 10% to 12% as well as [ tieing ] new G&A to our already high-quality portfolio.

You may also remember that these development deals compare favorably with the stabilized cap rate, but most importantly, we are able to capture these higher yields within Terrafina and thus, creating additional value for our shareholders.

In the past few months, we have observed an increased demand for new space from existing tenants, particularly in the key manufacturing-for-export sector, which continues to experience sustaining operations growth. These tenants have consistently pursued continuous expansions and more recently, they get even more proactive, indicating that they foresee a macroeconomic environment that remains stable and benefit the long-term operations in Mexico.

With -- thus, we are optimistic, as always, intending on the steady and consistent growth in the real estate demand by the manufacturing-for-export sector.

In terms of the operating highlights. Terrafina reached record occupancy levels of 95.5% and an average leasing rate of $5.07 per square foot per year. This represented an occupancy rate increase of 68 basis points versus the second quarter of 2017, and 38 basis points versus the first quarter of 2018.

Including the signed letters of intent, occupancy for the quarter reached 96.4%. Same-store operating results for the second quarter were also positive compared to the first quarter results, with 95.2% occupancy levels and an average leasing rate of $5.02 per square foot per year. That is $0.03 compared to the second quarter of 2017.

Occupancy and rental rate per region also remained solid, where the Northern region reached 97.2% occupancy at $4.90 -- $4.99 per square foot per year. And Bajio reached 92.2% occupancy at the rate of $5.16 per square foot per year. Occupancy in the Central region reached 97 -- 93.7% with leasing rate of $5.27 per square foot per year.

Additionally, regional same-store occupancy and rental rates continued positive. The Northern region reached 96.9% occupancy at $4.89 per square foot per year. Bajio was 92.2% at $5.16 per square foot per year. And the Central region reached 93.7% occupancy at $5.27 per square foot per year.

Leasing activity for the second quarter reached 1.4 million square feet. With renewal activity in 11 of the 13 contract expirations.

As we can observe, this successful leasing activity continue to support the improvement in the leasing maturity profile from 14.5% at the beginning of the year to 5.2% of the volume portfolio for the second half of 2018. Thus, we have already renewed almost 2/3 of the expirations for the year.

Moreover, combined with early renewals, Terrafina renewed leases for 1.2 million square feet during the second quarter. Half of these were early renewals, which is a clear indicator of the importance for our tenants to secure the permanence of their operations.

New contracts represented 250,000 additional square feet during the period.

All of these positive results translated into solid and consistent cash flow with the generation of $28.8 million in cash distributions or $3.64 per certificate. It is important to highlight that these distributions per certificate levels brings us back to the level of distributions pre-follow-on representing one of the highest dividend yields in the industrial real estate sector at 9.9%. Thereby, sustaining Terrafina as one of the most convenient Fibra investment opportunities in the market with solid fundamentals today and positive perspectives in the future.

Moving along to distribution payments. It is important to mention that with the last 5 years, distribution have been quantified as the return of capital with resulting...

[Maria Barona, executive]

We have a disconnection.

[Operator]

Please standby. We are having technical difficulties. We'll resume just in a moment.

[Technical Difficulty]

[Operator]

Thank you for your patience. You may now continue.

[Maria Barona, executive]

Mr. Chretin?

[Operator]

Please stay on the line.

[Technical Difficulty]

[Operator]

And thank you for your patience, you are now connected.

[Carlos Espinosa, executive]

Okay. Thank you very much. I will -- since I just started, I will begin from -- start from the beginning.

So before I begin this topic, our main financial results, please note that all figures discussed are in U.S. dollars. However, Mexican peso figures have been provided in the report for your convenience.

Additionally, NOI, EBITDA and AFFO figures excludes noncash items as well as more recurring and transactional-related expenses, the latter of which are only included as part of the AFFO.

For the main highlights of the second quarter, we generated an additional profit both at the top and bottom line with the closing of the final acquisition that was part of the growth strategy we presented in 2017. Financed with the follow-on resources obtained in July 2017.

At this point, we have concluded active M&A activity and we'll focus in development of opportunities for the existing tenant base as Alberto just discussed.

Moreover, we recovered USD 23.5 million that were part of the value-added tax, or VAT, from the acquisitions closed during 2017 and 2018.

For the second VAT tranche, we expect reimbursement during the upcoming quarters of 2018.

Once these resources are added to the balance sheet, Terrafina's cash account totaled USD 102 million, thus reflecting a sound liquidity position as well as access to more than USD 240 million in the revolving credit facility.

Moving to same-store second quarter financial highlights. Compared to 2017, rental revenues increased by 1.2% for a total of USD 42.1 million. NOI reached USD 42.6 million with a 93.8% NOI margin.

At the EBITDA level, USD 39.5 million were generated with an 85.2% EBITDA margin. Finally, AFFO reached USD 24.8 million, with a 54.6% AFFO margin.

As for our consolidated number. For the quarter compared to 2017, rental revenues increased by 14.2% to USD 47.6 million. At the NOI level, results reached USD 47.9 million, a 14.6% increase and a 94.9% NOI margin.

EBITDA for the second quarter reached USD 43.6 million, a 15% increase and an 86.4% EBITDA margin.

In terms of the bottom line, FFO levels reached USD 31.3 million, a 16.3% increase and a 62% FFO margin.

AFFO was USD 28.8 million, an 18.2% increase and a 56.7% AFFO margin. Finally, this led to total CapEx distributions of USD 28.8 million or USD 0.0364 per certificate, reaching pre follow-on, on this year's levels with a 6.9% increase compared to the first quarter of 2017.

And before moving to our Q&A session, let me just quickly mention some highlights with regards to the balance sheet this period. Terrafina had a cash position of USD 102 million, including USD 23.4 million from VAT reimbursements. Our revolving credit facility has over USD 248 million available, which could be used as an additional source of liquidity. Total debt was USD 998 million and our leverage levels remain stable at a 40.1% loan-to-value and a 4.4x for the debt service coverage ratio.

Thank you for your time and attention. At this point, I will let the...

[Francisco Martinez, executive]

Thank you for all of our audience. We have some trouble with the connections, so we're going to repeat the last section of Alberto Chretin's spiel. Please, Alberto, go ahead.

[Alberto Castillo, executive]

Yes, thank you. And I apologize for the problem. But in reference to distribution payments, it is important to mention that with the last 5 years, distributions were qualified as a return of capital resulting from the accumulated tax losses from transaction expenses, depreciation and amortization as well as foreign exchange movements. However, these accumulated tax losses had been entirely used. Therefore, beginning this quarter, Terrafina will report this as cash distributions.

For 2019 distribution figures, we will have more clarity once the 2018 tax results indicate whether or not we have an accumulated tax gain or we have a tax loss. At that point, we may determine if it will be a return of capital, cash payment or a combination of both.

And to conclude my presentation, I just want to highlight my previous comment. Terrafina remains confident regarding the long-term economic viability and resilience of the manufacturing-for-export sector. Mexico's optimal strategic location and access to a [ still ] labor force is a fact, and we remain confident that we will continue to be a strong manufacturing hub for multi margin and foreign industry leaders in a movement to do business.

As NAFTA negotiations continue in the short term, we believe that all sides understand the importance of the mutually beneficial relationships that exist among the 3 countries, and that the manufacturing-for-export sector will continue to benefit the drive.

Now we can move on to our Q&A and answer questions. Please, operator, go ahead.

[Operator]

[Operator Instructions] And your first question comes from Pablo Ordóñez with Itaú BBA.

[Pablo Ordóñez, analyst]

My first question is regarding your margins. There was a notable improvement in margins at the NOI level and a deeper level in the quarter. Our question is, if these level of margins is sustainable and what to expect ahead? And the second question is regarding your occupancy rates from a regional perspective. The Bajio region keeps lagging the other regions. So can you share with us what type of supply and demand dynamics are you observing in this region? And if we should expect ahead the Bajio region to catch up with the other regions. Those are my questions.

[Carlos Espinosa, executive]

Yes. Hello, Pablo. On regards of the margin, yes, we think that they are sustainable. You see our occupancy levels are very high, and we are really concerned and disciplined on regards of our operations. So we are really not expecting any significant situation already -- situation in those margins in the upcoming quarters. So we are confident that they are going to remain in the same neighborhood.

Pablo, let me just add that for our guidance for the year, we maintain to see NOI levels on the low 90% and EBITDA levels on the low 80%.

[Alberto Castillo, executive]

Yes. In your reference to your question about the occupancy of the Bajio, let me just say that we have in the -- let me talk to you about 2 -- basically, 2 different markets. One is San Luis Potosi. Where we have about 22 buildings for a total of about 3.3 million square feet. And at this point, we have about 346,000 square feet that are vacant within -- in 4 buildings. And we have -- fortunately, we have 1 to 3 prospects that are -- we're evaluating in leasing those facilities. So we do assess the occupancy in the San Luis Potosi market to increase. That is because of the varying -- continue to be demand from high-volume companies that continue to have demand in the market. Also in Queretaro, in Queretaro, we have 13 facilities that we have close to 2 million square feet. We have basically 2 spaces that are considered to be empty. And again, one of them, we have 1 prospect, there is a current tenant of ours in that area that is interested in occupying the rest of the building. And the other is smaller building of about 65,000 square feet. We have a new tenant also with some potential to occupy that market. But that's why -- that's a -- let me say that, yes, the Bajio markets is one. Though it is a smaller market, it has a lot of activity. And there is -- it's a young market and there's still a lot of consolidation. And in some companies, sometimes, they elect to go to a larger building and they vacate a facility, but we have also pipeline of potential new tenants to occupy those facilities.

[Operator]

And your next question comes from Marimar Torreblanca with UBS.

[Marimar Torreblanca, analyst]

I have a couple of questions. The first one is, your interest expense increased in the quarter. And I was wondering if you could give us some guidance on what to expect going forward for your effective cost of that. And then the second one is on buybacks. You have a program, I think, approved. And I am not sure if you've used it, but can you tell us what you're thinking about buybacks going forward?

[Carlos Espinosa, executive]

Yes. On regards of the cost of our debt and our -- the composition of our debt is [ 67 ] is a fixed rate. This -- it doesn't have any fluctuation. And the rest, we have a variable cost of debt. And this debt is linked to the line -- the 3-month LIBOR rate. In the first quarter of the year, we have underlined LIBOR 3-month rate of 1.57%. And for the second quarter, it was at 2.36%. So that explains most of the fluctuation of the increment in the expense. So we are not expecting any changes we see although there are many, many comments in the market. We think it's going to be very stable. But also, as we've mentioned in our financial statements in this month, we closed the cap to hedge against any fluctuations with the interest rate. So in the upcoming months and quarters, we are not expecting any relevant fluctuation in that regard.

[Unknown Executive]

In reference -- hello, Marimar, this is Alberto. If you reference to the buyback, indeed, we do have an approved program and we were evaluating the ability -- the option to exercise it. However, as I mentioned during my comments, we do see a robust demand for expansions and for build-to-suit. And we feel that, in a way, this will be better for us to deploy whatever the amount that we were thinking about doing that on development because of the -- as I mentioned before, also the higher development yields and the fact that we can capture those higher development yields within Terrafina. And that's why we still have the program approved and we continue to evaluate. But at this point, the decision we've made was to deploy that chunk of resource, as you know, on developments.

[Operator]

And your next question comes from Dan McGoey with Citigroup.

[Daniel McGoey, analyst]

Question on rents. In the portfolio, occupancy is near maximum, renewal rate was 90% in the quarter, but rents were flat. I'm wondering what conditions you need to see or you'd like to see in order to push more aggressively rents higher? And I'm also curious whether you're seeing a pickup in a speculative development in the North perhaps with a start of -- the start of return of confidence or the market there grinding a bit tighter. And then the second question is on the land bank. You still have about $50 million in land reserves. Wondering if there's any prospects for further monetizing that land bank? Or is that related, Alberto, to some of the expansions and build-to-suits that you're discussing?

[Alberto Castillo, executive]

Thank you, Dan. Well, first of all, in terms of the -- as you mentioned, we've been very successful on the renewals of the expirations. And we do see also a positive lease spread of about 1.5% to 1.6%, 1.7%. I'd like to highlight also the fact that these leases are U.S. dollar denominated. And that's why our guidance has been that -- our bank note is going to be in the level of the U.S. inflation because of what I just mentioned. So that's why we've seen on the Terrafina portfolio a continued increase on rents based on the U.S. inflation. And the main reason for that, if you try to compare that to other markets or other developers that have leases in pesos, where you have more spectacular sometimes in positive lease spreads. But in Terrafina, since the analysis procedure for these contracts are U.S. dollar-denominated, the positive lease spreads are going to be in the range between 1% and 2%. That, to answer the question about the rent growth. Now having said that, I think -- I'd like to highlight also the fact that we were able to renew 11 of the 13 expirations also, which is also an indication of how consistent we are with the renewals. And also, we depend the rent in U.S. dollars. In terms of the spec, yes, in the North, we do see that there are some spec buildings being built by several developers. However, I hate to say that we see a limited amount of the spec buildings being start in the Northern region because I think that the developers are being cautious in order not to have -- in order to buy the -- again, will try to increase the vacancy in some of the markets. We think that, that is healthy. We see a change also in the strategy for the developers. Because usually, if you remember about 60% to 70% of the developments are on starts where it used to be, spec buildings in between 30% and 40% were build-to-suits, and now we see the other way around. We see developer being more cautious about trying to build specifically, more build-to-suits instead of spec buildings. And by the way, we are participating also in those opportunities to build the build-to-suits, and we are gaining some of those build-to-suits opportunities. To combine that, with your question about the land bank, yes, we are using our land to participate in the build-to-suit opportunities. And that's why we have a couple of build-to-suits in the pipeline where we're going to -- [ we want to have it where we want it ] if we wanted to build on our land bank. But also, there is a possibility also that we may sell also land. If it takes a long time for that land to be developed, we will evaluate it also as part of our recycling of capital and perhaps to sell some of the land that we have not used in quite some time.

[Daniel McGoey, analyst]

Do you have a specific target for those, just for sale of that land, either this year or next year or a value amount?

[Alberto Castillo, executive]

Well, I think that we are reaching also the interest for more developers, perhaps, to buy the land with different approaches to -- perhaps to buy those stretch of lands is more of a facility basis. But to answer your question, Dan. We don't have a target in terms of timing. We have identified some properties that we may want to dispose of. But at this time, we don't have anything that is imminent in that field.

[Operator]

And your next question comes from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

The questions that I have in relate with, one, how sustainable your AFFO margin might be? It is impressively high. That's great. But I wonder how sustainable that might be from the CapEx side of the equation. And secondly, considering the huge and frankly, quite underserved discount to your NAV, does it make sense to allocate part of that AFFO to buy back your shares?

[Alberto Castillo, executive]

In terms of the AFFO. So yes, it is sustainable. It is sustainable. And just to the CapEx, I think that -- actually, a good opportunity to mention that we do have the majority of our lease contracts are triple-net. And we enforce the obligation to the tenants to maintain the buildings. In addition to that, we do have a CapEx budget, if you remember, about $0.20 per square foot per year for the entire portfolio that -- and we are -- we standby on our given guidance to do that. Also, the fact that it's sustainable because we're buying -- on the recent acquisitions, we're buying brand new buildings that require very little maintenance and the maintenance being done by the tenant. And that in addition to that, that fact that we have a great high occupancy, those means that we have to do limited amount of maintenance on the vacant facilities. So that's why we standby on our guidance in terms of the CapEx. And also, we think that the AFFO is sustainable.

[Carlos Espinosa, executive]

In fact, with regards to your question on NAV discount. As you know, we have in place this share buyback program, but we have to consider what is our current implant cap rates. So we're trading at a 9.1%, 9.2%. Alberto was mentioning that we have the opportunity to develop projects at a 10% to 12%, which is more accretive rather than you've seen our existing resources to buy our insurance. So we think that there will be more accretiveness if we deploy those resources for building. And also, it's important to strengthen the relationship with our existing tenants. So in this way, we're giving a solution in terms of the expansions and so our new projects that they might need. So that's the way we're thinking -- or the train of thought on insurance of the share buyback compared to using the resources for expansions or new developments.

[Francisco Suarez, analyst]

Understood. But on that one, if I may. So why not cut in a little bit of your payout ratio out of AFFO and using those proceeds to precisely offer your clients the expansions that they need and the development that you guys have seen because the returns are so attractive?

[Alberto Castillo, executive]

Yes, as of today -- let me say that as of today, our policy is to continue to pursue 100% of the AFFO. We have a robust balance sheet and that we have also some proceeds for the last follow-on. So we will see a need to do that. And at this point, we will confirm our policy to distribute 100% of the AFFO.

[Operator]

And your next question comes from Fernando Ulacia with Credit Suisse.

[Fernando Ulacia de Gandiaga, analyst]

Alberto, Carlos, [ Paco ], my question is regarding the e-commerce sector. We have seen that Vesta is also trying to entering into this market. Do you have also plans to be there? Or not yet?

[Alberto Castillo, executive]

Right. No -- certainly. We'll absolutely participate in there. If you remember, about 30% of our facilities are used for logistics and distribution. And we have several tenants that are very active in the e-commerce and in providing services to e-commerce companies. We do have our industrial park that we have in Propiedades Grande, that we have also in San Martin Obispo, and these are facilities that are being used for logistics and distributions. And that we continue to participate in those opportunities. I have to say also that we are reluctant to go into this contract that are in pesos because some of the e-commerce potential tenants demand that these contracts are used in pesos. And we've seen that one of the strengths that we have in our portfolio is precisely that. We're a dollar as company and the contracts are in U.S. dollars. So we are monitoring also the opportunities. We do have very good property managers that have very good contracts with the profitability in the market where there's a lot of activity in e-commerce. We're evaluating all of those options. We have -- as I've mentioned, we have good traction in many of these areas where there will be an opportunity to participate in build-to-suit opportunities for e-commerce. However, I guess, just to reiterate myself, we have limited participation in the e-commerce when it comes to demand in pesos.

[Operator]

And your next question comes from Jorel Guilloty with Morgan Stanley.

[Wilfredo Guilloty, analyst]

Gentlemen, I have 2 questions. The first one is you mentioned earlier that taxes being provisioned. If reversed, will be paid as a distribution later this year if you deem that they are reversible. So what I wanted to get a sense of is what is the potential percentage of NOI that these tax provisioning reversals can be? And then the second question is following the election, have you seen an increase in dialogue for M&A? I mean, have you seen people who have been -- who were held up previously engaging more in conversations regarding sales and acquisitions?

[Alberto Castillo, executive]

Okay. On regards of the NOI, it's -- mostly, it's an operating expense. I don't know if I am understanding correctly your question. You are asking me if any potential situations in our taxes could affect our NOI. That's the sense of the question?

[Wilfredo Guilloty, analyst]

No, no, no. Earlier, you mentioned that you were provisioning for some taxes and that those provisions, you'll determined later on this year if you're going to reverse them? And if it's a reversion that ends up positive for your income statement, that you'll pay that reversion as a distribution to investors.

[Alberto Castillo, executive]

Yes, let me just -- yes, so I think I can understand you. What I said is that -- so during the last 5 years, all of the distributions that we have were capital reimbursements. And because of the -- and that was -- the reason for that was because we have accumulated losses. And what's happened now is that all the losses have been used. And now -- that's why effective now, we're going to be -- the distribution speaks to result of cash. And what I mean is that -- that it's going to be -- that's what it'll be for 2018. In 2019, we are going to analyze what was the fiscal -- the tax results for 2018. And if we have losses at the end of 2018, then we may decide that for 2019, those distributions that will be categorized as capital returns or as cash or a combination of both. But that is going to happen only until we have the complete tax returns for 2018. I don't know if I made myself clear.

[Wilfredo Guilloty, analyst]

Yes. So what I wanted to understand is are those cash returns, how -- what is the potential percentage of total NOI, like, going to be 5% of NOI? Or any other measure. If you want to focus on AFFO, like, how much more could it add to AFFO? Or it won't be as a percentage of AFFO?

[Carlos Espinosa, executive]

No. Well, what we already made to give as an AFFO for the remaining of the year is going to be cash returns, not capital returns. And as Mr. Chretin just mentioned, once that we have this final and definitive 2018 tax return completed and we know for certain what is the tax result of the year, we will decide whether we're going to have equity reimbursements or cash distributions. But from now on until the end of the year, it's going to be cash distributions.

[Alberto Castillo, executive]

And in reference to the other M&A, I think that we've not established before, we're not evaluating or pursuing any other M&A activities. And I don't see also any idea there, action on what part or any other opportunities for M&A for the rest of the year.

[Operator]

And your next question comes from Francisco Medina with GBM.

[Francisco Medina Flores, analyst]

If you could give us some visibility, if there's any ongoing transaction going on with your sponsor? Or if there is going to be one in the near future?

[Carlos Espinosa, executive]

Well, I think that we don't have any -- or we have -- we have one of the best corporate owners, as I had mentioned before. And that with our sponsor, we have a very good working relationship. And next year, this will be a revision of the external adviser agreement. We're going to analyze any opportunities to enhance the contract for the benefit of the shareholders.

[Operator]

And your next question comes from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

Can you give us a sense of the size of the potential GLA from those build-to-suits and from those current tenants' demand for incremental space that you mentioned and how it compares with the size of your historical development pipeline? That's my first question. And secondly, could we see any changes to your dividend payout ratio given the depletion of the tax losses that you mentioned?

[Alberto Castillo, executive]

Froylan, we're having some trouble hearing out. Could you just speak up a little and repeat your question, please?

[Fernando Froylan Mendez Solther, analyst]

Is this better?

[Alberto Castillo, executive]

Yes, it's better.

[Carlos Espinosa, executive]

Much better.

[Fernando Froylan Mendez Solther, analyst]

Great. First question, can you give us a sense of the size of the potential GLA from those build-to-suits and from those current tenants demanding for incremental space that you mentioned and how it compares to the size of your historical development pipeline? That's the first question. The second one, could you give us any -- could there be any changes to your dividend payout ratio given the depletion of the tax losses that you mentioned?

[Alberto Castillo, executive]

Yes. In reference of the GLA, we are alluding at build-to-suits in the neighborhood of 250,000 square feet and expansions in the neighborhood of [ 100,000 ] square feet. And in reference to the...

[Carlos Espinosa, executive]

To the payout policy, it's going to remain as 100% of the AFFO.

[Fernando Froylan Mendez Solther, analyst]

Is there any implication that given that you don't have any tax losses that, that could change or that you -- I don't know, that the fiscal income that you generate is actually higher or lower than the AFFO that you actually generate? Could there be an impact in that sense?

[Carlos Espinosa, executive]

Well, we're evaluating at every moment all the variables that affect our tax result. But at this moment, we do not expect that the tax result is going to affect the dividend policy that is 100% of the AFFO. So for now, our policy is to remain 100% of the AFFO.

[Operator]

And your next question comes from Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

My question is regarding your financial structure. I know that you mentioned that you will be focused in build-to-suits and there is no M&A for the rest of the year. But how comfortable do you feel with your current leverage and also with the structure of your debt and the breakdown between fixed rates and floating rates structure?

[Carlos Espinosa, executive]

On regards of our financial structure, we're really comfortable with it right now. We think that our optimal structure is to have a leverage between 38% and 42%. At the end of this quarter, it's 40.1%, as I've discussed during the presentation. So we really think it's a good level, it's a manageable level, and we're comfortable with it. And on regards to our debt, early this year and on the last quarter of last year, we renegotiated part of our debt. So for the next 3 years, we don't have any principal payments of our debt, so we are comfortable with that. And we think we can manage it that way in the short term.

[Francisco Chávez Martínez, analyst]

Okay. And just a follow-up, in case that you return to the market to raise equity, which NAV level would you see in order to tap the equity market again?

[Alberto Castillo, executive]

Well, we don't have any plans for additional M&As and therefore, we don't have any plans also for additional capital raise events. But let me say that I think we see also an opportunity perhaps to reduce our loan-to-value. We see that one, one of the goals that we may pursue in the future to reduce the loan-to-value in future events. But -- we have opportunities to do that, to go below the 40% and perhaps, even within the high 30s or mid-30s. That will be something that we'll be assuming that we will look for. But again, at this point, we don't have any plans to raise any capital or any goals that we will pursue in order to do that.

[Francisco Martinez, executive]

And also, I would like to mention that in our last meeting with the board, the holders meeting that we have, we made a commitment not to announce any equity deal if we are not at NAV. So that can give you some guidance. But as Mr. Chretin just mentioned, we are not expecting to do anything in the near future.

[Operator]

And at this time, I would like to turn the call back over to Mr. Chretin for any closing remarks.

[Alberto Castillo, executive]

Well, thank you for the attention and the interest in us today, please do not hesitate to contact us again with any questions. Have a good day.

[Operator]

And that concludes today's conference. Thank you for your participation. You may now disconnect.