CI Banco SA Institucion de Banca Multiple FF/00939

BMV:TERRA13

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Ali, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrafina's Second Quarter Earnings Conference Call. [Operator Instructions]

Thank you for your attention. I will now turn the call over to Francisco Martinez, Terrafina's Investor Relations Officer. Please go ahead.

[Francisco Martinez, executive]

Thank you, Ali, and good morning, everyone. Welcome to our second quarter 2022 conference call. We are very pleased to have with us today from Terrafina, Mr. Alberto Chretin, Chief Executive Officer; and Mr. Carlos Gomez, Chief Financial Officer. Mr. Chretin will take us through the company overview and operations, and Mr. Gomez will discuss our financials.

But before we begin, I would like to refer you to the note on forward-looking statements in this quarterly report where any information expressed or implied during the call may include forward-looking statements, which could involve certain risks and 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 this call or by the company's management may change based on various important factors out of the company's control. These comments represent the company's judgment at the time of this call, and the company has no intent or obligation to update these forward-looking statements. Thank you again for your attention. And at this point, I will turn the call over to Mr. Alberto Chretin for his remarks.

[Alberto Castillo, executive]

Thank you, Paco. Good morning, everyone, and thanks for joining us today. The second quarter of 2022 was filled with exciting news as we continue to make progress on every front. To start, our operating and financial metrics remain solid as we continue to execute our 3-year strategic growth plan. We are convinced that this plan will lead to a stronger portfolio with high-quality multinational tenants. For the current macroeconomic environment, we keep seeing strong industrial markets with healthy supply/demand dynamics. This is true both for manufacturing activity as well as logistics and e-commerce.

Vacancy rates remain at the lowest levels in history and rental rates continue to see increases, especially in the Northern region, which has been a strategic market for Terrafina. On our ESG strategy, we also achieved important milestones as our cost and efforts are being more acknowledged and well received by our stakeholders. Looking ahead, we expect Terrafina will maintain a strong position in the foreseeable future. We are certain that our company presents a defensive investment option as we keep a high exposure to multinational tenants focused on manufacturing for exports as well as logistics and with most of our contracts signed in U.S. dollars.

Even as inflation pressures continue to be present, construction costs are still below other countries, such as the United States. And furthermore, new demand continues to come to the market, partly as new shoring plays to our advantage as Mexico is in a great position, giving access to its skilled labor force in a strategic location. This means our country continues to be very attractive for companies that need to be closer to the U.S. market. One thing worth noting though is that lead times may increase in some projects as supply chain disruptions continue to impact the availability of some essential equipment such as HVACs and roofing materials. As lockdowns in China continue and port congestions and shipping delays are becoming very frequent around the world, it seems unlikely supply chain issues will resolve soon.

Moving on to the highlights for the quarter. Our leasing activity reached 1.9 million square feet during the quarter, 900,000 square feet were renewals, and 1 million square feet were new leases. Out of a total 13 contracts that matured during the quarter, 11 were renewed. This implies a 90% renewal rate.

Lease expirations for the second half of the year covered 9% of our total GLA, which is relatively low. We expect to maintain a renewal rate in the mid-80% level. The Northern region was the most active with 1 million square feet leased. Chihuahua, Ciudad Juarez and Monclova were the most relevant markets during the quarter. Average occupancy rate closed at 99.7%, and the effective rental rate for the quarter was $5.09 per square foot per year. Furthermore, we saw a same-store lease spread of 6.3% over the last 12 months.

The Northern region has been where we see the biggest opportunities for multinationals to establish operations in core markets. Demand for new space from sectors such as aerospace, automotive, logistics and electronics continues to be the most relevant. The Bajio region signed a total of 425,000 square feet in leases. San Luis Potosi, Guadalajara and Queretaro were the most active markets. Occupancy rate closed at 93.2%, and average per square foot effective rental rate was $5.46 per square foot per year. We also saw a 2.4% year-on-year positive lease rent. The logistics and automotive sectors were the most representative in terms of our leasing activity for this region.

Finally, the Central region closed leases for 181,000 square feet of GLA. This was mainly concentrated in the state of Mexico, particularly in Cuautitlan Izcalli. The occupancy rate closed at 97.9% and the per square foot effective rental rate was $6.22 per square foot per year.

The year-on-year leasing spread in this region was minus 3.8%. As we renew a contract with one of the top 3PL carriers, the duration of the contract was signed for a better term, for a 10-year period. It has to negotiate an average rental rate of slightly lower NIM. The logistics sector continues to be the most relevant in this region with a high occupancy level as well as rental rates. The appraisal value of our investment properties led to a 6% increase in our net asset value per certificate compared to the first quarter of 2022. And a 23% increase year-on-year.

This reevaluation also improved our loan-to-value ratio from 34.1% in the first quarter to 34% in the second quarter. On our 3-year growth plan progress, we reached 80% completion for our build-to-suit facility in Ciudad Juárez, which was announced last quarter. We expect to deliver the property by the third quarter of this year, and we start to generate cash flow also by the fourth quarter of this year. For our projects in Apodaca, we have also made substantial progress with a 50% completion.

On the buyback front, we remained active during the quarter. We bought back 5.9 million certificates at a weighted average price of MXN 27.63. We expect to continue to be active with buybacks as we see opportunities ahead. Quarterly distribution for the quarter will be $19 million. This translates into a payment of USD 2.46 per certificate. And considering the average share price in the quarter of MXN 27.09, Terrafina's annualized dividend yield for the quarter was 7.3%.

On the ESG front, we continue to make progress in our strategy. As a result, we had great news to share this quarter. First, Terrafina was the first Mexican REIT to publish the Standard & Poor's ESG evaluation report. This provides an analysis on how ESG factors could affect stakeholders and potentially lead to material or indirect material impact on the company. Terrafina received an overall score of 65 points, above Latam's average score of 53 points. Moreover, the final score includes a 2-point premium based on the adequate preparedness in Terrafina's technical committee and management team. We are proud to say that Terrafina has an experienced and dedicated team, which is always focused on having better ESG practices. Additionally, Terrafina was added to the S&P Total Mexico ESG Index. We believe this demonstrates Terrafina's constant work on having best ESG practices meeting strict sustainability criteria.

Finally, before I pass the call to Carlos, I want also to share that last week, we also released our 2022 integrated annual report. This report discusses our progress on our ESG key performance indicators as well as our action plans to better assess and manage different risks inherent to our operations. It shows how our sustainability efforts have allowed us to identify areas of opportunity to establish strategies and guidelines for our stakeholders, which are now better aligned to the company's sustainability vision. I invite all of you to review more detailed information in our 2021 integrated annual report available in our website.

Thank you, and Carlos, please go ahead with the financial highlights for the quarter.

[Carlos Espinosa, executive]

Thank you, Alberto. And thanks to all the participants for joining us on today's conference call. Please note that all figures discussed in this call are in U.S. dollars, but Mexican peso figures can be found in the earnings report. Additionally, NOI, EBITDA and FFO figures exclude noncash items, as well as non recuring and transaction-related expenses, the latter of which are only included in the AFFO.

We will focus on same-property comparisons for the main financial metrics. Thanks to our net collections in the second quarter of 2022, reached $48.4 million, a 2.9% increase compared to the second quarter of 2021 consolidated results. Rental revenues and NOI reached $48.2 million and $46.3 million, respectively. Both results imply our year-on-year increases of 2.4% and 2.6%, respectively. For the second quarter of 2022, we reported an NOI margin of 93.5%. EBITDA totaled $40.9 million, a 2% increase on an 82.7% margin. Finally, AFFO reached a total of $26.8 million, a 3.4% year-on-year increase.

Moving on to our balance sheet. We closed the quarter with $40 million in cash and investment properties booked at $2.6 billion, a 2.6% quarter-on-quarter increase. Our total debt at the end of the second quarter of 2022 closed at $879.5 million, with an average cost of debt of 4.4%. The average weighted maturity for our debt was 5.7 years. Finally, our LTV improved to 34%, which continues to be slightly lower than our expectations of having an LTV ratio of 35% by 2023.

Thank you for your time and attention. I will now ask the operator to open the line for questions.

[Operator]

[Operator Instructions] Your first question is coming from Juan Ponce.

[Juan Ponce, analyst]

Juan Ponce here from Bradesco BBI. Thank you. Good morning, everyone. Can you comment on the second half outlook for rents in the 3 regions? I mean, considering your leasing or commercialization strategy going forward, should we expect lower lease spreads on better terms like in the Central region?

[Alberto Castillo, executive]

Thank you very much for your question, Juan. Yes, we expect to have a positive lease spreads on the second half of the year. As we -- I see -- we see additional demand in the markets in which we operate, and as we mentioned before, the occupancy levels in these -- in the 3 markets are very high. So to answer your question, and that's why we included now in the report that shows the leasing spread going forward, and we expect for the second half of the year to have positive lease spreads in the markets in which we operate.

[Operator]

Your next question is coming from Valentín Mendoza.

[Valentín Mendoza Balderas, analyst]

Alberto, Carlos and Paco, Valentín Mendoza with Actinver. I have a couple of questions from my side. And thank you very much for taking them. The first one, and I apologize if you already answered this, but I jumped a little bit late. But I wanted to know or get a little color on the dynamics for having a negative lease spread in the Mexico City. That would be my first question, please.

[Alberto Castillo, executive]

Sure. And that's a very good question. Again, what happened on the -- we usually see and we will see positive lease spreads, especially in the Central region. In this case, we have -- we negotiated a lease contract with 1 of the most important 3PL carriers of Mexico, and we signed a 10-year lease contract with them in the negotiation on the last part of last year. And this contract also has automatic bumps based on the U.S. inflation. And on this particular case, we allow a reduction of that rent for signing a 10-year lease contract with this very important carrier, logistic carrier, and that with the expectation that this contract is -- has bumps with the U.S. inflation, effectively, next year, will compensate for the reduction that was granted with the negotiation.

And moving forward, this contract is going to be adjusted on the yearly basis of the U.S. inflation. And this was a one-off. We still have to put it -- to report it, but we don't expect to have any negative lease spreads on any of the renewals going forward, especially in the Central region. That was the reason for this particular negative lease spread is only on this negotiation. I hope I answered your question, Valentín.

[Valentín Mendoza Balderas, analyst]

You did very clearly. Thank you very much. One follow-up and this is if you have any update regarding your asset recycling strategy because I noticed a nearly $1 million inflow on your cash flow from asset sales and also reducing your land bank. I don't know if this has to do with some sort of selling a little bit of land or is just the process of the -- that you're moving on with the development of the new properties as part of your 3-year growth plan.

[Alberto Castillo, executive]

Good questions. No. The reduction on the land is because we contribute that land to a joint venture that we had with one of our property managers in Monterrey. So that is -- we're starting a new development, and we expect to finish that development by the early part of next year. And then that's going -- will still contribute in NOI by the first or second quarter of next year. So that was the reason for that.

In terms of the recycling of capital, we still -- we stand by our guidance that we're going to continue to perform some of those sales in markets in which we want to reduce our exposure. But again, we didn't do anything so far. And we expect that perhaps during the second half of the year that we may continue with the execution of the recycling of capital. I think it's important to note that we really don't need to do these sales. We have to make sure that when we resell these properties even if they are in markets we want to reduce our exposure, these properties may be empty or maybe in secular or tertiary markets, we want still to sell them at a fair market value or above the acquisition cost. So that's that is -- those are the elements that may defer some of the activity on the recycling of capital.

[Operator]

Our next question is coming from André Mazini.

[André Mazini, analyst]

Yes. Hello, André Mazini with Citi here. Thanks for the call. Congrats on the results. So my question is on PGIM Real Estate. So we saw that PGIM Real Estate, they had another listed vehicle which IPO-ed in the BIVA, right, this week, actually, and the listed vehicle can invest in logistics as well in Mexico, in the industrial sector. So I wanted -- if you guys could talk about if there's some type of noncompete agreements between Terra and what this new vehicle is going to be investing, CKD which just IPO-ed in BIVA and governance in general, about the adviser being able to have module vehicle in Mexico, advising module vehicle in Mexico.

[Alberto Castillo, executive]

Well, yes, PGIM has, since a long time ago, several industrial initiatives or [indiscernible] that he's been managing also along with Terrafina's portfolio. There are not any noncompete agreements. However, the markets in which Terrafina operates is the profile of the parks, the Chihuahua was more geared towards development in that they very much try to capture opportunities that has to do with specifically new developments.

In Terrafina, we grew through acquisitions. And now we're doing more developments, and we are doing also expansions as well as the build-to-suits in the spec that we build in a market where we have very high occupancy. We have been very successful. The development that we started as specs and that we finish -- by the time that we finish, facility will already have tenants. We work also with property managers that are exclusive of Terrafina, and that also allow us the opportunity to capture those opportunities and without a substantial conflict with PG.

Having said that, I think that there are some interactions perhaps or there may be some intersection of some interest. But to this point, we have not had any issues with lack of dedication competing to capture the business for Terrafina. I think that as a matter fact, we are in the process of analyzing additional joint venture activities in order to increase the velocity by which we may deploy more investments in the market, specifically in the core markets in which we operate.

[Operator]

Thank you. Our next question is coming from Lucila Gomez.

[Lucila Gomez Palomino, analyst]

I'm from Compass Group, and I have 2 questions. I think the first one you've talked about a little bit. So it is about leasing activity in Bajio. It is not -- I see it is not having as much traction as the North. Could you maybe comment a little bit more of what are your views on the Bajio region? And also my second question will be about energy. Is the current dispute between AMLO and the countries in the USTR a concern that may have a possible impact for you since it could possibly cut development of renewable energy in the country?

[Alberto Castillo, executive]

Thank you. Well, first, on your first question, the Bajio has been a market that has been underperforming for the last couple of years. We begin to see more activity in Bajio as companies in the logistics, specifically, and also some of the automotive tenants continue to increase their operations. So our expectation for the Bajio is to improve.

We do have 2 very effective property management working in Bajio, and we have seen a very good activity in the last quarter, specifically in the auto sector, and we see also some activities that are very much based on the new generation of electric and hybrid cars. And that some of our current -- this was both ways. One is that some of our current tenants in the automotive sector are deploying initiatives in order to participate on the electronics on electric and hybrid cars.

And also, we see new tenants that are servicing the electric car sector. So although it's a small market, and we don't intend to grow in the Bajio, but -- and actually some of the properties that we are in the bucket of properties that we're going to sale in the Bajio, but we also see some good activity in Bajio.

In terms of the energy, yes, of course, it's a concern to not only our tenants, ourselves. We do also monitor very closely what is going to happen and how the legislation is going to affect the current operations of the energy generation companies and their ability to service also as some of our tenants. But I can tell you that so far, we have not seen any effect in any of our tenants. And we haven't heard anything from any of our tenants that may hinder their operations in terms of growth or to access electricity.

In the terms of KBAs, I don't know if you wanted to include that in your question, but for our developments, we make sure that we analyze in every development that we make either in the central market, especially in the North, we do have the -- not only the feasibility reports, but also, we do have the available KBAs for our developments.

[Operator]

Your next question is coming from Alejandra Obregon.

[Alejandra Obregon, analyst]

Hi, good morning everyone. Alejandra Obregon from Morgan Stanley here. Thank you team for the call. I was hoping just to learn about the dynamics in Chihuahua, which I believe is your -- one of your largest exposures in the North. So I was looking at it and hoping to learn a little bit about whether you're more exposed perhaps to aerospace or electronics or any other segment, maybe health care in this state, in particular. And more into the details, how are you feeling about the dynamics in the state in the South around the Camargo area where I believe you could be more exposed to aerospace than any other sector? So anything that could help us understand your view from the ground in Chihuahua and particularly that would be very helpful.

[Alberto Castillo, executive]

Certainly. Thank you, Alejandra. Well, Chihuahua, the statute of Chihuahua as you know, is very important for Terrafina and specifically in Juárez, we have a dominant position and not only we have almost 100% occupancy on all of our current facilities, but we're developing several properties where we have already signed contract with very good tenants in very good range.

In the city of Chihuahua, we do have a large exposure to aviation, which is very stable. It's very important with very good rents and a very good potential even for growth. We started in Chihuahua with just a couple of the aviation companies like Cessna and Hawker Beechcraft part of Textron. And they later always the [indiscernible] with Safran and other companies in the aviation continues to be very, very important in the city of Chihuahua.

In addition to that, we had the electronics sector continues to be very strong. We recently leased another facility to Jabil and other of the most important ECMs, electronic contract manufacturers. And not only the ECMs or the main companies, but also there is a network of different suppliers that are also making that -- those sectors much more stronger. Not only suppliers, but for example, the fact that the aviation community in Chihuahua has a very attractive collaboration with the academics and with several initiatives to enhance also several educational activities that make that sector very strong.

In terms of the southern part of the state, you mentioned Camargo or Delicias. Yes, we do have a few properties in those markets that are also very stable because some of the companies that were operating in the border or let's say, Chihuahua, city of Chihuahua, we're looking for more stable labor force. I guess one of the issues that right now, some of our tenants are facing in some of the core markets is a turnover for the lack of labor. And some companies elect to go to smaller locations in order to have more stable force and they'll be very successful in doing that. We do have a couple of companies that are operating in the area of Camargo and Delicias that you mentioned. And again, those operations are -- have been there for a long time. They're very successful. They renew very well at higher rents. So we are pleased with those operations. But again, I have to emphasize that our growth strategy now is focusing on the core markets, not only -- not as much on the secondary market like Camargo and Delicias. I hope I answered your question.

[Alejandra Obregon, analyst]

You did. That was very clear. If I may follow up a little bit on that labor issue. Is there any sector where you think this is more common, this labor availability question and stability that can perhaps arise more often in a specific sector?

[Alberto Castillo, executive]

Yes. Well, I think it is generalized. I think that I need to remind you that the maquiladoras or [indiscernible] pay higher wages than the usually than the national industry. So that is very attractive for employees to work at these companies. However, some sector differentiate more than other. For example, the aviation, it's very attractive for some employees depending on the area of the markets in which they operate. So I wouldn't say that there is one specific sector that is having those problems. I think that there are some companies that are more attractive to work for than others. So that is why it's -- but it is an issue, the fact that turnover continues to be a problem with some of the companies. And we see also a good sign because the company is trying to enhance what they offer to employees in order to make them stay longer with them.

[Operator]

Our next question is coming from Francisco Suarez.

[Francisco Suarez, analyst]

Francisco Suarez, Scotiabank. Two quick questions. One relates with the fact that you are already at levels of occupancy well above your guidance. Can you walk us a little bit on what you see ahead in terms of overall lease expirations that hasn't made you comfortable enough to increase your guidance on occupancy for the year? Anything you can share on that front?

And secondly, on the ESG-related transition risk and physical risks. Anything that you can tell us related with potential -- the water stress scenarios that we are seeing in the North? How that is affecting your operations, if anything at all? And secondly, how likely the Saltillo corridor and your exposures to those places might be a good example of a good fit of transitioning on auto industry to electric vehicles?

[Alberto Castillo, executive]

Thank you very much, Francisco. Thank you for your questions. Well, I think that the lease expirations, going forward, we expect those to be renewed and to be renewed at higher rents. The markets, as you know, where we operate, where we had the expiration for next week are -- they have a very high vacancy. And we are already negotiating as you remember, Paco, we start talking to our tenants as much as 6 months ahead of any of the expirations. And so the prognosis for the second half of the year in terms of expiration is very good. We only have about 9% of our GLA that is going to expire on the second half of the year. And we already have information that this is to be good.

In terms of modifying our guidance, I think at this point, we continue to analyze what is going to happen, but we feel comfortable with the occupancy guidance that we gave. And so far, I think that we're going to stay like that. In terms of the Saltillo corridor, yes, I think that was a very good example of how companies are now starting operations to supply not only the initiatives of the current automotive industry in Mexico in terms of electric and hybrid cars, but also they are supplying Tesla. There is -- I think that Tesla discovered that they can achieve very effective and very efficient and cost convenient in operations with some of the current suppliers that are supplying to the auto industry and also saw new operations for the electric and electronic and hybrid cars.

So yes, we do have a good position in the Derramadero, Saltillo, Ramos Arizpe with a very good automotive tenants that if you remember, Paco, we conducted a survey last year with all of them to find out how many of them have initiatives to participate in this market with very good feedback from them. And now there's evidence of that because not only they continue with the operation, but even doing expansions with them that are labeled specifically for the electric and hybrid cars.

[Francisco Martinez, executive]

Sorry, it's Paco, I'd also like to answer your question in regards to how we see in terms of our stress related with water. During this, and you will find more information -- detailed information on our integrated panel report, I will have to say that water stress is a potential risk that we are seeing in every state that we operate not only for the real estate sector, but for every different sectors that have an active operation.

What we have been working on is, first of all, on how we can measure the amount of water usage. This is by means of the installation of metering systems. This usually takes a little more time, but we're working on that. Second, on how we can incorporate some water saving devices, the traditional devices that are used by our tenants, we're trying to replace them with more modern installations and as well as doing a -- recommendations with them, make some installments, some rainwater harvesting and how they can [ reuse ].

So the first change that we are -- now under discussion is in our drink losses, how we can have a better accessibility to the water usage and second, how we can be working together with them in doing these additional investments, as I was mentioning on having a rainwater harvesting or as well as wastewater treatment plants. So this is a work in progress that will continue showing some results, but you will find more detail as was mentioned in our annual report of last year of 2021.

[Francisco Suarez, analyst]

Thank you. Very much appreciated. I will give it a nice reason over the weekend. Just a final point, if I may and a follow-up on that. You don't have any major exposure to the water-intensive industries or tenants on your end, isn't it? And so the question relates to more...

[Francisco Martinez, executive]

That is correct.

[Francisco Suarez, analyst]

Yes, that is great. So far, you don't have any sort of disruptions because of what is happening in the North?

[Francisco Martinez, executive]

That is correct. That is correct.

[Alberto Castillo, executive]

Thank you for the answer, Paco. And yes, we do not have any tenant that has intensive use of water. And that is something that we're very sensitive also to -- when we assess a new tenant. So thank you for the question. Thank you for the answer, Paco.

[Operator]

Our next question is coming from [ Hugo Becerra ].

[Unknown Analyst]

Good morning. Hugo Becerra from GBM. Congratulations on the report. I just have a couple of questions regarding the current inflationary environment, and how could this affect your future returns on deliveries? My first question.

And my second question would be, are you seeing any resistance with the clients, new contracts or renewals to make your contracts dollar or inflation index?

[Alberto Castillo, executive]

I don't know if I understood correctly. Are you saying about the index about the -- can you repeat the question Hugo please? I'm sorry.

[Unknown Analyst]

Sure. I'm just -- I'm wondering if you have any resistance in new contracts or renewals to index those contracts to inflation or in U.S. dollars?

[Alberto Castillo, executive]

Okay. Yes. Sure. I think that is one issue especially in an environment of high inflation. It is an issue, but we element also by the fact that we do the same very much with [indiscernible], the index. And since our dollar -- our contracts are in U.S. dollars, the index has to be to the U.S. inflation. In the past, also, we have some caps on the amount that could happen and that affected some of our contracts. But to answer your question, yes, that is one issue of negotiation on the renewals. But I can tell you that because the instruction to our market officers and our property managers is that we must include this cost, and it's a subject that is also a very important negotiation. I mentioned also before on another question, that the lease contract that we signed, there was a slight reduction in the sales price. Also, we very much incorporated the index of the rent based on inflation.

[Unknown Analyst]

Thanks so much, and regarding my first question about how can the construction inflation affect your future deliveries. Can you give us any color on that front?

[Alberto Castillo, executive]

Yes. That's a very good question. Thank you. The construction, the new developments that we are building, they already -- we already secured the materials for the new developments. I guess what I was referring to a little bit was about the -- some of the long-term maintenance that we're doing on our current properties. There are some very large lead times, especially for HVACs and for the roofing material and that has affected also some of the long-term not very urgent CapEx that we had to do at CIs on our current facilities.

So that's why we had a deferral of some of the CapEx that we held in the first half of the year because of the lead times of material, but that was [indiscernible] was effecting the CapEx that we spend on our current facilities. As far as the buildings and we're rebuilding those already have a schedule, and we're very much on schedule to the program at time. So I was referring more to, as I mentioned, to develop an activity on our current facilities.

And again, in addition to that, I would have to say that the cost of construction, we are able to pass the increases in construction and our developments to the tenants that we're going to raise the facility. So that has been something that we've successfully been able to pass on those costs to our tenants.

[Operator]

our next question is coming from Alejandro Chavelas.

[Alejandro Chavelas, analyst]

This is Alejandro Chavelas from Credit Suisse. Most of my questions have been answered very clearly. Just one, I noticed that your current same-store occupancy is above 96% or close to 96%. You mentioned in the guidance that you expect end-of-period occupancy to be in -- same-store occupancy to be between 94% to 96% to 95%. So I was wondering if -- why do you expect occupancy to fall in the second half and perhaps there is some upside risk in that forecast?

[Alberto Castillo, executive]

Thank you for the question, Alejandro. Yes, you're correct. I think that we're forecasting higher occupancy during the second half of the year. At this point, we are listing not to change the guidance. But we, on the other hand, we do not expect also to -- the occupancy to drop. So at this side, we listed not to change the guidance. But at the same time, we don't expect the occupancies to drop during the second half of the year.

[Alejandro Chavelas, analyst]

Right. So occupancy guidance is a bit conservative, you expect to actually not lose occupancy, right?

[Alberto Castillo, executive]

That is correct.

[Operator]

our next question is coming from [ Felipe Barragán ].

[Unknown Analyst]

Good morning. This is Felipe from BTG Pactual. The answer to the questions have been great so far. I only have one quick question. So the government has been enforcing much of the Southern region, and we know that you guys have Industrial Park in Tabasco. Do you guys see any potential for investments in the Southern region?

[Alberto Castillo, executive]

No, we are not foreseeing any additional investments in the southeast part of Mexico. We're focusing on the core markets of Tijuana, Ciudad Juarez, Monterrey, Guadalajara, and we don't foresee any additional investments in the Southeast.

[Operator]

Our next question is coming from Pablo Monsivais.

[Pablo Monsivais, analyst]

Just out of curiosity, we have seen that new shoring is driving demand. But can you please provide some color in terms of how much more profitable this new demand is, if at all? Or how different in -- relative to, I don't know, a Mexican manufacturing player or another player that is already here that is not specifically new shoring. Should we expect that this additional demand comes also with a higher, I don't know, IRR or something like that?

[Alberto Castillo, executive]

Thank you, Pablo. Yes, new shoring has been making progress on operations in Mexico. We see some specific examples in Juárez and Monterrey. Companies that are specifically either U.S. companies that have operations in the East -- in the eastern part of the world and that relocated operations to Mexico as well as new companies that are looking to establish operations in Mexico take advantage of NAFTA in the maquiladora program for the Mexico -- I mean, for the U.S. market. We see that happening. And specifically, I'll give you an example. In Monterrey, there is a Chinese broker firm that has been very active in bringing more companies to kick the tires in different markets of Mexico. So it is -- now there is evidence that this has been happening.

In terms of the -- could you repeat the second part of the question in terms of the IRR, Pablo?

[Pablo Monsivais, analyst]

Yes. Just trying to understand like how much beneficial is to have like these new clients relative to the existing clients that they have -- that they are in Mexico already. I don't know if perhaps someone coming from new shoring is willing to have either a longer contract or slightly higher rents or how this new contracts are different to the existing ones that you have basically?

[Alberto Castillo, executive]

Well, yes. No, I'm sorry. I understand now. No, I think that the expectations are about the same. I don't think that, that is -- that they're going to be additional profit opportunity with those companies. As I mentioned, they are being well -- they have good consultants that are working with them. I think I can tell you that some of them are elected to go with the shelter programs. Some of these companies started that they do want to test the water before really making a long-term decision. So a lot of the requests that we are having from some of these companies come from shelter providers that are going to be giving services to these new companies, including those services are the real estate. So that's why some of our lease contracts for this type of business is being done through the shelter providers.

[Pablo Monsivais, analyst]

Right. And just -- sorry, one more question on my side. And it's kind of a follow-up to Pablo's question on the water and also a previous question on the investment in the South. If we believe that the water stress situation in Mexico will persist for the next few years, and this can affect your ability to get perhaps new different tenants, would you consider moving at some point in the medium term or long term to other regions in Mexico, maybe in Bajio, I think they don't have such an issue, and you already have presence there? Or maybe rethinking your strategy in other parts of Mexico Central or maybe even South? [indiscernible] states likes this.

[Alberto Castillo, executive]

Yes, right. No, I think that water -- as I mentioned before, we do not have any tenants and will be reluctant to lease facility to a water-intensive use tenant. So water is being used in our facility for the basic services. And that has not been an issue now, you remember that some of the partners which we operate, we have water recycling plants, and we're encouraging also some of our tenants to recycle also water what Paco mentioned.

So we feel that water is very important, but it's not relevant by means of which we're going to make investment decisions. So far, it has not been one issue that has [indiscernible] the ability of the company to perform. Of course, it's a very important aspect not only because of the availability, but because of the ESG concerns, but we -- at this point, we're not considering moving operational or restarting investment base on the availability of water.

[Operator]

Our next question is coming from Alan Macias.

[Alan Macias, analyst]

This is Alan Macias from Bank of America. I just had a follow-up question on your guidance. Here, I think the upside risk is in occupancy, but where do you see downside risk? Is it in ability to increase rents in line with inflation or do you see pressures in your debt cost? Or is there any pressure you're seeing in tenant improvement costs or CapEx or in leasing commissions? Thank you.

[Alberto Castillo, executive]

Thank you. No, I think that we -- the fact that we didn't change the guidance in term of occupancy has to do also with the fact that we just stand by our overall guidance. In terms of the pressure that we have for price, as I said before, we anticipate the renewals of the expiration to happen in the second half of the year to be done with a positive lease spread and that in the CapEx that we're going to be expanding in the second half of the year, it may be higher than what we had during the first half of the year. And that's why although we had a lower than projected CapEx during the first half of the year, we think that it's very likely that we're going to increase that CapEx during the second half of the year, and it will be within the limit of our guidance.

Those are the reasons why we maintain the guidance as it is now. But having said that, I think we're going to monitor this, and we'll take a look at what's going to happen and there may be an opportunity to change our guidance during the third quarter of this year. But so far, we have no concern.

[Carlos Espinosa, executive]

Yes, Alan. And this is Carlos Gomez. I just want to complement Alberto's answer. On regards of the cost of the debt, we just hired a cap option to hedge any possible volatility in the cost of the interest that our variable portion of the debt that we'll have. So we are not seeing any really relevant risk on regards of an increment in the financial cost of our debt in the rest of the year.

[Alan Macias, analyst]

Great. Great. Just a follow-up question on your buyback program. If you can just remind us what is the total amount you have still to be able to buy back. Thank you.

[Carlos Espinosa, executive]

Yes. We have an approved program today of $20 million, and we are evaluating any possible increments in the near future. So we are -- we still think that it's a good alternative, and we may continue performing it.

[Operator]

[Operator Instructions] Sirs, there appear to be no further questions in the queue, so I'll hand it back to you for any closing comments.

[Alberto Castillo, executive]

Thank you. And thank you all for attending today. I would like to finish the call by thanking everyone in Terrafina, as well as PGIM Real Estate and all of our partners for helping us to deliver again solid results during this quarter. I would also like to thank all of our stakeholders for your trust. Thank you for your time, and have a great day.

[Operator]

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