CI Banco SA Institucion de Banca Multiple FF/00939

BMV:TERRA13

Earnings Call Transcript 2020-Q3

[Operator]

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to Terrafina's third quarter earnings conference call. [Operator Instructions]

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

[Francisco Martinez, executive]

Thank you, Melissa, and good morning, everyone. Welcome to our third quarter 2020 conference call. We are pleased, as always, 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 the financials.

And before we begin, we would like to refer you to the forward-looking statements disclaimer as further noted 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 this call 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. The company has no intent or obligation to update these forward-looking statements.

Thank you again for your attention. And at this point, I'll turn the call over to Mr. Alberto Chretin for his remarks. Please, Alberto, go ahead.

[Alberto Castillo, executive]

Thank you, Paco. Good morning, everyone. In the third quarter of 2020, Terrafina continued to deliver positive results, supported by a resilient industrial real estate sector and a solid tenant base with less disrupted operations. Additionally, growth opportunities have arisen as near-shoring activities in Mexico start to materialize.

We believe more multinational companies based in Asia will choose Mexico as a destination to establish some of their manufacturing facilities as these companies are looking to better diversify their production and distribution facilities to better serve the U.S. market. Mexico offers material savings from its low-cost qualified labor as well as an important reduction on transportation, time and costs.

Additionally, we have seen consumption have changed during the pandemic and related lockdown. The e-commerce sector has benefited from this. And in turn, logistic activities have seen an important increase in demand. At Terrafina, we have been analyzing different potential projects to increase our participation in this sector. Some of these projects imply new development through joint venture with our partners and some of them will be done on our own. We believe there is potential demand in primary and secondary industrial markets from different logistics and e-commerce players. The importance of being able to provide last-mile services has grown.

We continue to report only a moderate impact from COVID-19. Rent collections seemed to have stabilized as we did not receive additional rent relief requests in the third quarter. It is worth noting we collected $630,000 on time in the quarter, which represents 27% of the total agreed deferrals. The occupancy level and average rental rate for the quarter both remained stable at 95.5% and $5.18 per square foot per year.

And our total leasing activity was 2.6 million square feet in the third quarter, out of which 2.2 million were renewals and 400,000 square feet were new leases. Lease duration for new leases was in the 5-year range, which we see as a positive indicator of the confidence level our tenants have in their operations and our properties in the long run.

There were 30 leases that matured in the third quarter, only 7 were not renewed for a total of 468,000 square feet. Approximately, 50% of these nonrenewals was related to consolidation strategies while the remaining 50% was driven by different reasons, such as the need to upsize their space. We are already in discussions with new potential tenants for most of these properties.

As regarding our balance sheet liquidity, we closed the second quarter with 87 -- $82 million in cash after paying 80% of the $150 million revolving credit facility, which was granted at the beginning of the second quarter as a precautionary measure. As I mentioned before, we are confident that our current rent collection level will allow us to maintain adequate liquidity levels to cover our operating needs. We will continue monitoring how the situation evolves over the next few quarters.

Finally, I would like to comment on our 2020 guidance now that we have more visibility. We are now expecting an occupancy rate as of year-end of 94% to 95% versus the 95% to 96% before and a distribution per certificate of USD 0.1060 to USD 0.1080 versus the USD 0.1150 to USD 0.1170 before. This implies an 8% cut to our annualized distribution per certificate guidance, which is a result of the following factors.

First, we have seen a slight uptick in vacancy in the third quarter for the reasons I just explained. We are assuming some additional lease terminations in the fourth quarter as some tenants are deciding to consolidate their operations in other properties to save cost. Second, as part of the rent referral payment plan, 30% of the deferred rental income will not be collected until the first quarter of 2021.

Third, as we drew down $150 million from our revolving credit facility, we paid higher interest expenses than we had assumed when we published our original guidance. Where we have paid most of this new debt and the increased interest expenses should be normalized in coming quarters, we need to account for what was already incurred.

Finally, there are still some tenants with overdue rents, which are currently in payment negotiations. This situation, as we have discussed in the past, happened before COVID-19 and was one of the main drivers for us to move to a more conservative accounting, where we only include in the rental income for AFFO calculations what was actually been collected and not the invoice rent for the period.

Considering all of this, we have estimated an impact of approximately $7 million to $8 million to our top line out of the $198 million of annualized rental revenues. This translates into a 4% impact overall for the year. The rest of our guidance indicators remains unchanged. Our payout ratio should still be 85% and our CapEx per square foot for the total G&A at USD 0.26 to USD 0.29.

Before Carlos runs through the key financial metrics for the third quarter, let me just mention that we continue to move forward with our asset sale program. We expect to have good news soon, which will improve our operating metrics and lead to a more robust portfolio. As we have said before, we intend to use sale proceeds in the short term to pay down debt, thereby improving our leverage. Later on, we could use some of these proceeds to support our growth strategy through new developments.

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 nonrecurring and transaction-related expenses, the latter of which are only included in the AFFO.

During the third quarter, net collections reached USD 50.4 million, a 0.9% decrease compared to the third quarter of 2019. As Alberto mentioned in his comments and has been the case since the first quarter, Terrafina's main metrics are now calculated on the rent collection basis to align our results with the cash generation for each quarter. Therefore, our net collections metric is calculated based on rental revenues minus uncollected revenues for the quarter plus collected revenue from the previous quarter. This way, our distributions are more aligned to real cash generations from operations.

As for our rental revenue, it reached USD 49.9 million, which implies a 2.4% year-on-year increase. In the third quarter, NOI was USD 48 million, a 6.4% year-on-year decrease, which implies a 93.7% NOI margin. EBITDA totaled USD 43.2 million on a 6.8% decrease and an 84.3% margin. Finally, AFFO reached a total of USD 25.9 million, a 15.1% year-on-year decrease. Considering an 85% payout ratio, our distribution this quarter will be USD 22 million or USD 0.0279 per certificate.

Moving on to our balance sheet. We closed the quarter with USD 82 million in cash. As Alberto mentioned, we already paid off 80% of the USD 150 million credit facility. So our leverage level closed the quarter at 42.7%. Also, our debt service coverage ratio stands at a sound level of 3.4x and our average cost of debt was 4.27% and our average weighted maturity of debt was 6 years.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

I have a quick one. The next year, 18% of your portfolio expires. Can you please share with us how are in-place rents of the expiring GLA relative to market rent and how confident you are on the expirations' renewal rate and rent prices of expiring portfolio?

[Alberto Castillo, executive]

Yes. Thank you, Pablo. Yes. As you can see, we have had good success in renewing the expirations throughout the year. And we expect that for the -- for 2021 to continue with this positive trend of renewing the expirations. I think that the fact that we have over 70% of our tenants in logistics and manufacturing for export activities, it's both interest on our part and on their part to anticipate the expiration and able to renew the rent. So we don't expect any change in the positive trend that we have on renewal of the expirations for 2021.

And in addition to that, because of the fact that we have yearly closes on our lease contract for yearly increases based on the U.S. inflation, since 97% of our lease contracts are in U.S. dollars, to continue to maintain or increase the average rent per square foot on our portfolio based on the U.S. inflation.

[Pablo Monsivais, analyst]

And regarding the rent prices, the lease spreads that you might see for next year, would you say that it's going to be probably 200 basis points above inflation? Or any indication of how are you seeing rent prices for that?

[Alberto Castillo, executive]

Yes. The rent prices for 2021, we feel that are going to remain stable and it can be increased basically only at the rate of the U.S. inflation.

[Operator]

Our next question comes from the line of Carlos Peyrelongue with Bank of America.

[Carlos Peyrelongue, analyst]

My question is related to new demand that you're seeing. If you could provide some color regarding what are the countries or regions that this demand is coming from and also what industries. And are you seeing anything in particular regarding to reshoring? Or is it more of an expectation for the future? Or are you already seeing interest this year?

[Alberto Castillo, executive]

Thank you, Carlos. And actually, that's a pretty interesting question. I can answer you with 2 things. One is that we do see -- we do know of an Asian company that already increased substantially their operations in Juárez because of this effect of this near-shoring. In addition to that, they also opened up a new plant in Chihuahua, where they already announced that they are transferring some of the business that they had in Asia to Mexico to better connect and synchronize the demand of the U.S. market with the manufacturing, which, by the way, the market has higher expectations in terms of the velocity by which they can connect the demand to the manufacturing.

Secondly, we know of an automation company that retained a site selection firm to conduct site selection work throughout the country, in which several states are participating to locate a large Asian company to manufacturing in Mexico, which, by the way, it may be large enough to perhaps not to make an impact on industrial real estate developers. And the states are competing towards for that project. But obviously, as we've seen in the past, there's a consequence of one of those and the many companies to move to Mexico and then they bring suppliers. So the evidence of the near-shoring activities now is evident. It's too early to say that they materialize. But there is evidence that this activity is in motion.

[Carlos Peyrelongue, analyst]

Alberto, just a follow-up, moving from reshoring to the part of logistics, you mentioned that you would like to increase your exposure to logistics. Can you give us an idea over the next 2 to 3 years from what percent today to what percent you would like to get to roughly? Just to get a sense of what is the intent in terms of capital allocation.

[Alberto Castillo, executive]

Certainly. Well, first of all, as you know, about 30% of our portfolio is used by our tenants for logistics and distribution. And in talking to some of our logistics and distribution tenants that are also engaged in supply these services to large companies, also -- they also have initiatives to participate directly on e-commerce activities. So this speaks to some of our current tenants that want to capture some of those opportunities since they're already in the business.

In addition to that, we see that the companies like the -- that are already in e-commerce, we are having some request for space, not only in the main markets, like Mexico, around Mexico City, Monterrey and Guadalajara, but also in some secondary markets. And we are participating in those opportunities. So -- and that's why we see that in order for us to participate in this business, it's going to be very unlikely that we're going to find portfolios that are already in the e-commerce.

So that's why we also announced that we have a put in motion an initiative to do development to capture some of these e-commerce opportunities. And this will be done through some of our property manager partners that are already looking for these opportunities. And some of them, we do it on our own. Because we do have land, we know how to do this, we know the developing yields are much better than the coverage for acquisition. And that -- and I think -- we feel that one very important way to do this is going to be through our own development. [indiscernible] to a percentage, we don't think that at this point, that is going to move the wheel that much in terms of the about 70-30 that we have at this point too dramatically. But indeed, our plan is to participate more actively in the e-commerce.

But in addition to that, as I mentioned, the near-shoring opportunities also continue to be strong and that the -- some of the requests for e-commerce come also from e-commerce companies that want to establish in the northern part of Mexico to supply the e-commerce customers in the U.S. from Mexico and take advantage of the lower cost, not only of the labor because there's a lot of labor involving in doing [indiscernible], in doing packaging, a lot of peripheral operations for e-commerce, but also the cost of the real estate is better in the Mexican side than on the U.S. side. So that's why we -- though we are anticipating that we're going to intensify our operations in e-commerce, the needle, in terms of 70% to 30%, is not going to be significant at least in the short term.

[Operator]

Our next question comes from the line of Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

It is about renewals. We see that the percentage of tenants that have decided to renew as their contracts expire, it has been coming down or was down in the third quarter compared to an average over the last few years. So do you have an expectation of how renewals could be shaved in the coming quarters? What's the lowest renewal rate you have seen in the past -- in past 10 cycles, let's say? And also, do you expect lower rates of renewal to impact and driving to higher tenant improvements?

[Alberto Castillo, executive]

Yes. Thank you. Thanks, Vanessa, for the question. And yes, I think that's a very good question. Let me just say that we have been consistent on the way we monitor the renewal rate, which is by means of number of contracts. And let me say that these 7 contracts that we did not renew this quarter is really not indicative of the overall renewal rate of the portfolio.

Let me give you an example. One of our tenants in Chihuahua that did not renew one contract, we have, with that tenant, 6 facilities, and this is in a campus. And they were using one of the facilities as a buffer for them to transfer new business. That contract expired and they decided to consolidate. And that facility that expired, they did now renew and they're going to use some of the other facilities that we have, which, by the way, they consolidated on our own facilities. So this is expected. When you have companies that use -- lease space, that gives the flexibility to make a more efficient use of their resources. So that really doesn't bother us very much. It's a good facility. And we already have a potential tenant that is going to take that one.

The other one is a very small facility. There is inquiries also that they have some obsolete technology that they were using there [indiscernible] for illumination. And we already have a neighbor, that's [ CF Electronics ], it's a very good neighbor, that already expressed interest in leasing that facility. So that is not going to be an issue also. The other one is a company that decided that -- that uses a small facility again, again about 20,000 square feet, that decided that they want to go to a higher -- to a larger facility and they went with another of our facilities to rent 53,000 square feet instead of 20,000.

So this movement is positive because one of them is going to be using more spaces that we had with us and they empty one small facility. The other one was in a very small facility that we had in Cuautitlan, which was a more retail tenant that had their business reduced about 5,000 square feet. And they are going to -- they [indiscernible] the facility, and we already are in negotiations to lease that to another tenant. So the fact that we have these dynamics in terms of renewals and new contracts is not negative. I think it's important to follow that parameter.

But let me reassure you that this is in no way an indication that either companies are reducing their operations because of something -- or that they are going to another tenant. It's usual of the business when you have a portfolio of this size that has some dynamics in terms of expirations and renewals. But the fact is that because of the location of our facilities, because of the activities of our market offices, we're very quick to lease all those facilities.

I need to remind you that perhaps when you calculate the financial performance of a certain building, there's always -- they use a 7% vacancy allowance, assuming that a portfolio about this size is going to reach stability around 93%, 94% occupancy. At this point, we do have very high occupancy and that is very good. And I think we maintain that high occupancy. But this is a normal way of business. And it's in no way indication that there's going to be a trend to have less renewal of expirations or if there is going to reduce the business.

And we always anticipate with -- even with [indiscernible] that many times when something is not going to renew. And immediately, we trigger some sales activity in order to do for new tenants for that or perhaps plans for that. I want to tell you that none of these are surprises. Some of these are indications that we have to do something to continue to have the high occupancy. But it's -- it's a normal world business. We think that when you have this, it's above 96% occupancy, it's always going to be something that is going to be -- that there is going to be some dynamics of that. So Vanessa, it's not an indication that is -- there is a negative trend.

And in terms of the CapEx, yes, it's an opportunity at the time that we don't renew a contract to deploy some CapEx to make the building more attractive and to fit some things that need to be done in order to prepare that for a new tenant. But that, we already forecasted that and is anticipated in our expenses. And we don't see an increase in CapEx for this reason.

[Vanessa Quiroga, analyst]

Okay, Alberto. And if I may, I don't know if I missed it, but have you mentioned an updated timing for your asset sales?

[Alberto Castillo, executive]

Yes. The -- no, I think that we are still -- we were very close to finalize the sale. And we think, if I was to ask that, perhaps a little bit before the end of the year, very soon. But again, it doesn't close until it closes. But we think it will be before the end of the year.

[Operator]

Our next question comes from the line of Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

I have two questions. The first one is regarding the collections during October. Any updates or color that you can give us, the rent collections? And the second question is regarding the recovery in occupancy in the Bajio market. What's the reason behind this recovery? And what are your expectations on the Bajio region?

[Alberto Castillo, executive]

Thank you, Paco. Thank you. Yes. The collections are doing very well. As Carlos mentioned, we feel that we have a commitment to transparency and to accuracy in our information. And that was the main reason why we changed the way we use the rental income for the AFFO calculations to take into account the collections with the method that Carlos explained. The collections are doing very well. I think that we -- certainly, at the start the pandemic and after the negotiations with some rent relief with our tenants, we do a very close scrutiny of the performance of the collections with the participation of our external adviser, our property managers and in contact with our tenants.

Collections are performing very well. I think that the tenants with whom we reached agreements for some rent deferrals, as I mentioned before, they were basically deferrals. They are making their commitments, even if we had some tenants that although they did sign some agreements for deferred collections, they're paying ahead of time in order to normalize also their [ account ]. So collections continue to do very well. And we feel that this is a very active way and a lot of transparency about what is the performance of the cash of the company.

And so collections continue to be very well. And that is reflected on the way we calculate our AFFO and therefore our distributions and our distribution per certificate. Let me use this also to mention that even that we, with the revision that we did to the guidance, I hope you acknowledge that the DPS for Terrafina continues to be the best in the market, even with the 85% reduction. And certainly, that will [indiscernible] of accuracy about how we're doing this.

In terms of the Bajio, yes, we have -- we will be fortunate to lease recently additional space in Bajio. We think that, that is going to change. We have also, in some of the markets, 100% occupancy in Bajio. San Luis Potosí was an issue perhaps, [indiscernible], the commitment from BMW to make the BMW, the Series 3, the only location in San Luis Potosí has been very good. The volume changed, we had a conversation with one of our -- with the board members, Eduardo Solis, which you probably know. We reviewed a lot of the little details. We think there is a positive rebound in production in the auto industry in that sector. And therefore, also there's going to be an increase on participation of the Tier 2 and Tier 3 suppliers.

There was perhaps an oversupply in the Bajio in the last few months with expectations of higher volume from the auto industry. But that is recovering. And we do have 2 very good property managers with talented market officers in that area participating in opportunities to increase the occupancy. In addition to that, we do have some e-commerce. And especially, Amazon was looking for space in that area, and we're participating in those opportunities.

So I think we have to be a little patient with the fact that we do have some space, we do have opportunities to capture those new opportunities, not only with the automotive but with e-commerce and that -- and we're working closely with the people involved in the leasing to increase the occupancy in Bajio. As you know, it's a smaller market but continues to have a potential in that -- and I think that in the near future, we're going to see increases in occupancy in that market.

[Operator]

Our next question comes from the line of André Mazini with Citigroup.

[André Mazini, analyst]

So my question is on the land bank and the strategy for monetizing the land bank. So of course, you guys mentioned that near-shoring and e-commerce had been big tailwinds for the sector. But another one may be data centers, right, given the whole digital economy. This is something that could have a secular long-term trend in demand. Of course, this is not a core business line for any other [indiscernible]. But is there any way that you guys can use these types of property, data centers, to monetize the land bank, maybe sell land to them or doing a land lease to them or something like that? Does it make any sense to that potential demand as well?

[Alberto Castillo, executive]

Yes. Thank you for the question. Land bank, the land that we have -- we are [indiscernible] land buyers. The land that we have is land that we acquire as part of the portfolio that we acquired. And we have been using a lot of the land that is adjacent to our current facilities for expansions with our current tenants. We do have some tracks of land that have some opportunities to develop. And we -- the use that we have for this land is that when we see an opportunity to develop that land, either ourselves or through a joint venture with one of our property managers, that's what we've been doing.

One example of that was what we did in Monterrey. In one of the markets in Monterrey, we have some land that we have -- we provided as a -- we contributed as a joint venture to one of our property managers. And we've been successful in having some build-to-suits in that area and even some spec with our joint venture partner.

The other land that we think that it was perhaps time was not for that land to be attractive to do something, but now the time is coming. I'll give you an example. We have a tract of land in Huehuetoca in which there was a large distribution center that was one of the Mexican large retail operations. And that is attracting also some interest to that one. So that's -- so we are waiting for that opportunity.

And indeed, we have sold some land. And that land, we can sell to a developer that is willing perhaps to invest some money in some infrastructure, not only to bring infrastructure to land, that perhaps also need an infrastructure close by in terms of roads or bridges or something, but perhaps Terrafina will be reluctant to deploy investment assuming that this will take a long time to provide benefits. And sometimes also, we sell -- we're willing to sell land to some of our property managers. So we use our land as flexibility.

Now when I mentioned about e-commerce. E-commerce, this opportunity with e-commerce means that we may have to buy land in order to capture one of these last-mile opportunities and we entertain that. Of course, we are -- just real estate developers, the team that we have, we know how to do it. We like to do it. The developing yields are very good. And we may do some of that. But as far as the use of our land that we have today, we have all those options that I just mentioned. And we continue to explore those opportunities and use that land to -- for those purposes. I don't know if I answered your question, André.

[André Mazini, analyst]

That's very clear.

[Operator]

Our next question comes from the line of Anton Mortenkotter with GBM.

[Ernst Anton Mortenkotter;GBM;Analyst, analyst]

My first question is related to investment property, if you could provide some color on why the revaluation down in quarter-over-quarter. And my second question is related to debt. I mean if you've paid back your debt, do you plan to continuing on doing this? Do you feel comfortable in your -- at your current LTV levels?

[Alberto Castillo, executive]

Carlos, do you want to mention about the changes in valuation in land?

[Carlos Espinosa, executive]

Yes. In the second quarter of the year, we had a decrease in the value of the land of 2.8%. On this quarter, we had a recovery of 1.56% on the value of our land, and we are expecting this to fully recover in the next quarters. It's mainly due to the recovery on the valuation of the properties and on the leases as we have been discussed. So mainly, we are expecting a full recovery very soon.

[Operator]

Our next question comes from the line of Jorel Guilloty with Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have two questions. I wanted to talk a little bit about your guidance change there. You mentioned 4 reasons for the reason driving this lower distribution guidance. And I apologies if you explained this earlier, I got cut off the call. But how would you split the percentages. Is the 8% decline mostly due to occupancy? Is it because of the deferred rents? Is it because of increased cost and interest expense [indiscernible] the line? So that's my first question.

And then the second question is around your payout ratio. It remained unchanged in this guidance change. But I was wondering, how are you thinking about this payout ratio going forward? Is 85% the right amount? Could we see that going up or down? That's it.

[Alberto Castillo, executive]

Yes. Thank you. Well, the 85% payout ratio reduction, I think, is going to stay there. We don't foresee any additional change on the payout ratio. And so that's stays the same. In terms of the reasons for the reduction on the guidance, as I mentioned, I think at this point, it's -- I don't want to speculate on the percentage. I think that these are the reasons that there were all of them. Certainly, the change in policy from the actual invoicing of the rent to the actual collections has some implications that go beyond the actual collections.

We feel that is more accurate. We think that it's better. But also, we had to account also for some tenants of their overdue rents from the last year. So we had to include -- and that had a negative impact on the calculation of the collections for the year. That was one of them. I think it was important. Of course, what I mentioned in terms of the interest that we had to acknowledge that we pay more interest.

And the fact of the deferrals, I can tell you that the deferrals of -- the 30% deferral that is going to be paid on 2021 also is going to be only 30%. We don't -- the tenants that complied -- that had committed to pay the deferral during 2020 are complying with that. But again, I think we also had to make a provision that perhaps something may change because -- and let me use this opportunity to mention that we don't want to be overly optimistic about the fact of the pandemia. Because we are not there yet.

You probably know that as of today, the state of Chihuahua changed to red with some implications on the -- not only on the closing of a lot of retail and hotels and restaurants. But also it may have some impact on the manufacturing tenants. This morning, I had a conversation with one of our manufacturing tenants in Chihuahua. And they're very concerned about some inspections that they going to have from the government in terms of transportation. They had to reduce also the number of people that they have on each bus and so on.

So I think that the combination of all these things force us to be cautious about what we forecast for the rest of the year. I listed these 4. But I think that we are not out of trouble yet in that -- and we want to be realistic about what would happen. So I don't think it's for me to go into percentage of all this. I think it's an overall cautious about what -- how the end is going to -- the year is going to end and give you the most accurate information about how we think the end of -- the year is going to end.

[Wilfredo Guilloty, analyst]

And one more question, if I may. You spoke about pursuing land banks for developing e-commerce-focused warehouses. Where would the opportunity be? Because it seems that Mexico City market is tight. But could there be other regions that are underserved that you're looking at? So regionally, where is the key opportunity?

[Alberto Castillo, executive]

Thank you. Good question. I think it is around Mexico City. Indeed, there may be some opportunities in Guadalajara, but also there may be some opportunities in Bajio, which I think because Bajio is not only because of the automotive industry but because also of the geographical location of San Luis Potosí. And indeed, these acquisitions of land will not be similar in price to what we do for industrial. Because when you look at last mile, you need to take a look closer to the population centers. And the land tends to increase also in those areas. So although we think that the developing yields are going to be good, perhaps it's going to be on the -- still on the 10% but even lower than the 10%.

So this will be challenging. Perhaps the financial performance of the facility at that point is not going to be as good as perhaps of an industrial. But I think it's still an opportunity and it still is something that we may want to capture. But the regions will be, as I mentioned, around Mexico City, we see some things in Guadalajara. We do have some land also in Monterrey. We participate in 5 of the most important markets in Monterrey. And we also are looking for opportunities in those markets.

[Operator]

[Operator Instructions] Our next question comes from the line of Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

So we have seen the tenant recoveries line or the tenant reimbursement line in the revenue trending much, much -- so much lower year-to-date versus last year levels. Can you just help me understand if this has to do with the timing of tenants reimbursing for these property expenses and if this has any impact by the deferral agreements?

And secondly, Alberto, you have mentioned a larger focus on development activity than before driven both by logistics and reshoring. But your -- as you also mentioned, your land bank is limited. But can you explain the role of your property managers and the land bank that they might have, how this play into your strategy, into your growth strategy?

[Alberto Castillo, executive]

Thank you, Froylan, very good question. I think, as I mentioned before, we are very fortunate to have, as property managers, 5 industrial real estate developers that, by the way, they're very successful. Many of them are from who we bought portfolios. And they continue to manage their properties and they continue to develop their own land. And we are on the record of buying some from portfolios on them after they develop them on their own.

So the role of our property managers in this is that they are the ones that are every day in contact with industrial real estate, with the economic development organization, with the appropriate community, with the very close contact with the tenants. And they are very much aware of the opportunities that this means.

And sometimes -- and let me give you some detail very quickly. We have made joint ventures with them in which we provide the land and they provide the construction and the leasing activity. And there have been some instances in which they have the land and we participate in land in order to give an expansion to one of our tenants. Because as you remember, we do have in our property management contract with them, we have a no tenant solicitation and no compete agreement. So anything that our property managers do with our current tenants, they must do with us.

However, since they are industrial real estate developers, they do have land. Sometimes they do make investment on spec buildings. They have the risk and then they invite us in order to give them momentum to the success of those facilities. So this is a very productive alliance that we have with our property managers. And that -- and we work very closely with them. And that's basically very much the role that they have with us. And what was the other question, Froylan, the first question? I'm sorry.

[Fernando Froylan Mendez Solther, analyst]

Yes. On the tenant reimbursements that have been much lower year-to-date versus last year, wondering if this has to do with the deferral agreements and if we should expect this line to recover in the fourth quarter or even next year.

[Alberto Castillo, executive]

Yes. I think this is going to recover. This has to do also with the -- these reimbursements have to do also, as you know, with electricity payment, with perhaps some insurance or some property taxes. And sometimes, those are offset by different internal protocols that the companies have. But we do see that these reimbursements tend to stabilize. And there are some peaks sometimes when -- on the payment, but it's something that they are committed to these contracts. And then we expect them to collect as some of the normal procedures, insurance procedures stabilize.

[Operator]

Our next question comes from the line of Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

A follow-up question on Froylan's questions made before, specifically on how you make sure that you will be able to mitigate potential conflicts of interest between the property managers and these potential bankers that you may hear right in the future because -- you have created wonderful regulations in the past. For instance, [indiscernible], for instance, [indiscernible] in my head. But these guys also may have other investors as well or maybe raising other money from private equity investors along the value chain. So my question relates with how to make sure that the overall, any potential conflicts of interest is overseen.

[Alberto Castillo, executive]

Yes. Thank you. Yes. I think that one of the benefits of having external property managers is precisely that there is some sort of competition among them to see who better perform on their activities. We do have the flexibility to change properties from one property manager to the other one, depending on who has the best opportunity to have the best performance on those facilities.

Initially, the property managers were very much regional. But now they are moving to other locations and they see opportunities beyond their initial location. And we do have a program where which we monitor the performance of each one of them. And we are in contact with them to analyze also what are their particular plans and what are their strategies in order to continue to grow their business and their business with us.

And we do have that flexibility, indeed, in the case with [indiscernible], for example, we saw that we went apart. We didn't like some of the things that they were going. And he had some different plans to move forward. And that's why we have a very friendly departure. And that I think it was very good for Terrafina. Because there was an enhancement also on the performance that we had on the portfolio and we have a better financial situation and he went ahead with his plans.

I think that the -- which is not what happened with our current property managers. We also -- when we look at acquisition opportunities, we offer that opportunity also to some of the potential sellers. And that -- but so far, I can tell you that the relationship that we have with the property managers has been very productive, has been -- we come out with very creative plans to achieve some synergies in which at the end of the plan is a win-win situation. And we're very comfortable with the performance of our property managers.

Of course, as I mentioned before, we do have these no compete and no tenant solicitation clauses. And there is an obligation from our property managers that provide opportunities to us. But also, we don't want to put a cap to opportunities that they may have in business in which they are not -- we're not interested. Sometimes they want to go over some flex space. Some of them have gone into retail. Some of them have gone into so some specific manufacturing facilities or manufacturing joint venture with somebody else. And that's fine with us.

So it is a very productive, it's a very flexible relationship with our property managers and with the conviction that we don't want to hinder any effort from their part to grow in other areas. But when it comes to industrial real estate, it has to be with us.

[Operator]

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Señor Chretin for any final comments.

[Alberto Castillo, executive]

Well, thank you very much all for your interest and your attention today. I would like to finish the call by saying that we feel very confident that our asset class will outperform during the highly challenging economic situation we're facing. We will continue to work together with all of our stakeholders to make sure that we are well aligned with them, optimizing the results for everyone. We look forward to speaking with you all again soon, and thank you very much for your trust in Terrafina, and have a great day.

[Operator]

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