Corporacion Inmobiliaria Vesta SAB de CV

BMV:VESTA

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Vesta's Second Quarter 2018 Earnings Conference Call.

Vesta issued its quarterly report yesterday, July 26, 2018. If you did not receive a copy via e-mail, the release may also be found on the company's website within the Investor Relations section.

I'd like to remind you that this conference call includes forward-looking statements based on currently available information. Forward-looking statements inherently involve risk and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained within the company's earnings release dated July 26, 2018, and within the most recent regulatory filings for discussion of those risks. All figures included herein were prepared in accordance with IFRS and are stated in nominal U.S. dollars unless otherwise noted.

Joining us today from Vesta in Mexico City is Lorenzo Berho, Chief Executive Officer; Juan Sottil, Chief Financial Officer; and Christianne Ibañez, Vesta's Investor Relations Officer. Also present on our call and available for your questions is Lorenzo D. Berho, Vesta's Chief Operating Officer. I would now like to turn the call over to Mr. Berho. Sir, please go ahead.

[Lorenzo Manuel Berho Corona, executive]

Thank you, Rob, and thank you, everyone, for joining us in our call today. As you may know, 2018 is Vesta's 20th year anniversary. As we celebrate this historic milestone, I would like to take the opportunity to reflect on Vesta's remarkable evolution. From our genesis in 1998, as a small, young company with 8 buildings and 500,000 square feet from GLA to who we are today, one of the most highly regarded and innovative real estate operators in Mexico with a diversified portfolio of 187 buildings of fully operational properties as well as properties under development. Further, we are on the path to successfully achieving 30 million square feet by the end of the year. With a growing roster of prominent international clients in a wide range of industries.

Importantly, over the last 20 years, Vesta has become a bellwether of best practices in sustainability and corporate governance. The operational best practices we have implemented throughout our organization, have also enable us to attract a team of some of the most qualified and respected professionals in the industry. Today, our position and better operations within the most dynamic regions in Mexico, notably, the Bajio and Northern regions.

We continue to deliver on an aggressive expansion strategy driven by our close relationships with our clients as well as by our country's reputation as a prominent global industrial manufacturing hub. This is evidenced by our ability to again achieve strong results in the second quarter of 2018. Juan will discuss our financial results in detail. But I wanted to comment that this quarter's operational performance was again characterized by steady growth complemented by an unwavering focus on balance sheet strength, ensuring we remain well positioned for exceeding growth opportunities -- exciting growth opportunities.

Our timely and accretive leasing deliveries increase our total portfolio by 1.4 million square feet this quarter at an expected average weighted return on cost of 11.1%. Our past quarter's dynamic and disciplined leasing activity also drove revenue growth to 22% and FFO growth to 91.4% year-on-year.

Early renewals have further strengthened the quality of our future revenues.

Turning briefly to the geopolitical environment, we note that investors' confidence in Mexico has been reinvigorated. And the capital markets reflect renewed investment in Mexican publicly traded companies after our country's general elections on July 1. As the investment community has placed continued trust in our country, we too remain confident in the sophistication and competitiveness of Mexico's manufacturing and logistics platform. We continue to see strong demand for industrial space from high-quality tenants and expect favorable industry trends to drive this demand over the long term.

Further, the world is rapidly evolving towards a new way of producing apart being known as the Fourth Industrial Revolution, characterized by a fusion of technologies that is blurring the lines between the physical, digital and biological spheres. Marked by emerging technology breakthroughs in a number of fields including robotics, artificial intelligence, blockchain, nanotechnology and quantum computing. Vesta's ability to anticipate client demand related to these areas have made us an agent of change and transformation, ensuring our company and country will flourish in this scenario and in today's climate of renew optimist for growth.

Driven by our confidence in Mexico's new presidential administration, we look forward to continue designing today's most innovating manufacturing and warehousing spaces. To support leading-edge technology that meets both clients' and supply chain's logistical needs.

In conclusion, the above factors instill considerable optimism and confidence in what the future holds for Vesta. Today, we're in a position of significant strength and forward momentum. I look forward to taking on my new role as full-time executive president of Vesta's Board of Directors effective August 1, 2018. I will continue to be actively involved in strengthening Vesta's relationships with our key stakeholders while remaining committed to our company's future strategic direction, working closely with Vesta's new CEO, Mr. Lorenzo Dominique Berho.

In recognition of Vesta's evolution into a leading institution and industrial asset management platform and in conjunction with the successful implementation of its previous announced succession plan, we would like to highlight the following organizational enhancements. The company's former Chief Operating Officer position will be transformed into a newly created Chief Commercial Officer position. Elias Laniado Laborin, Vesta's Vice President of new businesses for Northern Region, has been appointed as Vesta's Chief Commercial Officer, effective August 1, 2018. In his new role, Elias will be responsible for all activities related to marketing, leasing and investing throughout all regions in which Vesta has a presence.

Additionally, Diego Berho, Vice President of Development, who has also served as Interim Chief Development Officer since first quarter 2017, has been named Vesta's Chief Portfolio Officer effective August 1, 2018. In his new role, Diego will be responsible for the oversight of all activities related to asset management and development of the portfolio.

I am confident that the new dynamic team now in place will continue our company's vision and successfully grow, but will also make significant contributions to Mexico's progress. It has been an honor to lead our company as its Chief Executive Officer. And I maintain my undiminished enthusiasm to -- as we move to this exciting new stage for Vesta.

Thank you. Let me now turn the call to Mr. Juan Sottil, our CFO.

[Juan Felipe Sottil Achuttegui, executive]

Thank you, Lorenzo. Good morning, and thank you, everyone, for joining us. As Lorenzo has discussed, we deliver a strong second quarter to, again, achieved a double-digit increase in revenues and EBITDA during the second quarter 2018. With solid demand for our facilities, as we continue to focus on those regions with significant economic growth throughout Mexico, key logistics, manufacturing and trade corridors.

In the second quarter of 2018, Vesta's total portfolio grew to 28.5 million square feet from 27 million square feet in the second quarter of last year. Our strong performance this quarter was due to new building deliveries of which 585,000 square feet were build-to-suit facilities for following clients such as TPI Composites and Polymer, which directly fed into our stabilized portfolio, while 843,800 square feet were inventory buildings currently undergoing their lease-up period.

We signed new leases totaling 759,000 square feet during the quarter, leveraging our client relationships to expand business with existing clients, while signing contracts with new clients from a broad range of industries and countries.

Early renewals drove the percentage of 2018 maturities -- maturity of GLA to 2.9% and 2019 maturing GLA to 6.4%. It is important to note that while new inventory deliveries impacted our vacancies in the second quarter, aggressive leasing activities offset this increase to drive total portfolio occupancy to 91.9%, a 1.58% sequential decrease.

Our same-store occupancy remained flat during the 3-month period.

Turning to key financial metrics. Second quarter revenues rose 22% year-on-year to $32.4 million. This increase resulted in a 96.7% margin, while disciplined administrative expense management drove Vesta's second quarter EBITDA to 85.9%, both therefore, exceed our guidance.

Vesta achieved 96.7% NOI margins and EBITDA margins of 86.5%, again exceed the guidance of 95% and 83%, respectively.

FFO increased 91.3% from $10 million in the second quarter of last year to $19.1 million in the second quarter of 2018. This was due to a higher dollar-denominated revenue base and to a tax yield resulting from peso depreciation from year-to-year.

FFO per share increased 95.6% in the second quarter of 2018 from $0.016 in the second quarter of last year to $0.032 in the second quarter of this year due to an increased cash generation for the quarter and to Vesta share buyback program. As the company took advantage of purchasing its shares on a price to NAV of a discount of 35% average.

Second quarter net operating income increased by 22.4% to $31.31 million, while NOI margin increased by 33 basis points to 96.7% due to a higher rental revenue.

As Lorenzo commented, it is important to note that we remain focused on strengthening Vesta's balance sheet. In the second quarter of 2018, Vesta secured additional funding through a $90 million unsecured term loan agreement with Prudential Insurance Company of America and its affiliates, comprised of a 7-year nonamortizing tranche of $45 million with a fixed 5.5% semiannual interest rate and a 10-year nonamortizing tranche of $45 million with a fixed 5.85% semiannual interest rate.

Today, Vesta's loan-to-value has reached 36% with a 7-year average debt maturity profile at 4.7% fixed average interest rate. This also ensures we can continue to take opportunistic advantage of important nondilutive growth opportunities.

We ended the quarter with an overall balance of debt of just over $699 million all associated with long-term liability. The secured portion of the debt, 48.4% of the total debt, is guaranteed by some of the company's investment properties, as well as the related income derived. Vesta's debt is denominated in U.S. dollars and 100% of interest rate has been fixed.

Interest expense increased to $8.2 million -- $8.3 million at the close of the second quarter of this year compared to $4 million to the same quarter of 2017. This year-on-year increase reflects a higher debt balance related to the company's new debt issuance.

In closing, as Mexico's leading real estate company, we look to the remainder of 2018 with optimism. I look forward to Mr. Lorenzo Dominique Berho, new leadership, as we move forward with benefit of a strong balance sheet, robust demand for our premier industrial facilities and a commitment to sustainable long-term growth.

With that, we would like to conclude our prepared remarks. Let's open the floor to questions. Please go ahead, operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Enrico Trotta with Itau.

[Enrico Trotta, analyst]

I have 2 questions. The first one on leasing activity. Specifically, this quarter leasing activity was a bit weak, if we look -- compared to historical levels, it was the lowest level over the last 6 quarters. So I'd like to understand if there was any specific reason for that, for the weaker leasing activity or can be partially also explained by the fact that you have been anticipating a lot of contract renewals since last year? The second question on the guidance. You have been surpassing your NOI and EBITDA margin guidances, especially, looking at numbers that we had so far in the first semester. So I'd like to understand if you have any potential for actually surpassing this guidance or if you see SG&A or cost increasing in the second semester so your margin should convert back to those guidance that you gave in the beginning of the year. That's basically it.

[Lorenzo Dominique Berho Carranza, executive]

Perfect. Enrico, this is Lorenzo Berho, Chief Operating Officer. Thank you very much for being on the call and thank you very much for your questions. Regarding the leasing activity and the renewals, you have it right. We anticipated most of the renewals for 2018 during the year 2017. One of the largest one, as you might remember, was Nestlé, which we extended -- which had an expiration in 2018 for their 3 distribution facilities in Jalisco State of Mexico and we extended those leases for 7 more years in early renewals. Therefore, renewals for this particular year or this first semester have been slighter -- slower than or let's say, less than other years. Definitely, this is only -- the only reason is because of how early we'd like to renew the leases and that's why the result of lower leasing on this particular quarter. Additionally, in terms of new vacant space, we were able to close a couple leases for almost 500,000 square feet. And I would like to highlight that even that it's not -- there were not that many transactions, they were very important transactions. One of them was a deal done in Juarez with DB Schenker, which is a logistic company. They are actually going to do the logistic operations for Microsoft in Ciudad Juárez. So for us, this is very important since Juárez has been a very active market and Schenker has been a very important logistic player and, you know, Microsoft is a very important company, it's 1 of the 5 largest companies according to Standard & Poor's 500. And we like to stay closer to these type of companies, multinational companies. Additionally, we were able to lease a building that we have in Querétaro with one of our existing clients, Vallejo, which is a fantastic company in the automotive industry. And the best thing about it is that they are doing long-term commitments. It was a building that we delivered last year and we have a 10-year commitment with Vallejo, which in the end, I think, represents the commitment that most of the automotive companies are having to Mexico, are having to the OEMs. And this is going to be -- we believe, that this is going to be following also in the next quarters. And I would like to add up that regardless of the closings on this particular quarter, I would like to highlight how active we have been in terms of request for proposals. We -- this quarter, we had a record number of request for proposals being submitted. So we are very busy this particular quarter. As you know, the -- we received a request for proposals and it takes us some months to close the transactions. So hopefully, in the next couple of quarters, we're going to have closings of most of the proposals that we have had. Just to give you an idea, regularly, we have close to 40 prospects per quarter that we analyze internally in our investment department. And this quarter, we have above 70 prospects or new potential prospects, that are in line in our pipeline. So which represents a growth of almost of roughly 50%, so we hope that this will translate into closings for the next coming quarters.

Regarding the margins on our guidance, look, we have been well above our guidance level for now, 3 or 4 quarters. I believe that the rest of the year will continue with this trend. I will be more aggressive in providing guidance of EBITDA. But just to remind you, over the last 2 second quarters of last year and this year, third quarter and first quarter, we have been having EBITDA margins of above 85%. So I believe that we -- that trend will be solid enough to be sustained for the rest of the year on their own. We have always talked -- I have always talked how economies of scale should kick in and that's what we're seeing. We are tightly controlling expenses, administrative expenses, and revenues are growing rapidly. So we're seeing these economies of scale. And this is why EBITDA has been popping up. In terms of NOI, I only have to say that our very modern portfolio, the most modern portfolio of industrial real estate in Mexico, most of it composed build -- of our concrete tilt-up facilities, requires significant lower maintenance level than the older buildings that are throughout Mexico. So I believe, also, that as long as we continue to have a high occupancy rate, our NOI will continue to be as strong as it is today.

[Operator]

Our next question is from the line of Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

My question has to do with the construction activity. Basically, since early this year you have been investing a lot on building infrastructure for new land plots like in Querétaro, I believe also in San Luis Potosí. Should we expect given the strong demand that you have seen and all these record level of proposals, should we expect development pipeline to increase from the -- close to 170,000 square meters of new GLA that you had under construction as of 2Q? And then the other question is, the build-to-suit component on the stuff that you have under construction is relatively low versus what you had in previous years. Can you just tell us what are you seeing as a demand from -- for build-to-suit rates?

[Lorenzo Dominique Berho Carranza, executive]

Adrian, this is Lorenzo Berho. Again, thank you very much for being on the call. I think, you addressed very important questions regarding the pipeline. Definitely, we have been very active in terms of construction. We still have a strong development pipeline. As you well know, we acquire land in the last years, very important land particularly in the markets that we operate. You mentioned the Querétaro and the San Luis Potosí project. Those were land plots that were acquired last year and we had to develop the infrastructure in those parts. And naturally, when we develop the infrastructure, we also develop the inventory buildings. And in Querétaro, we finalized the first 2 buildings, currently -- and the infrastructure of the park is also being finished. So this is -- we believe, this is going to be a very successful project. This is a 100-hectare project and we're going to be developing more buildings in the upcoming years, roughly, it's going to take us 5 years to develop completely. Nevertheless, we are seeing a lot of interest for this particular market. As you also have seen, we are -- we have a very high occupancy in the Querétaro market. Therefore, it was very important for us to anticipate and acquire the land in advance and put the infrastructure in place, so that we can -- whenever new potential clients come, we already have the buildings available and the infrastructure available, so that we can accommodate their requirements. And the same case for San Luis Potosí. We will be delivering the first 2 buildings at the end of the year. Our pipeline is -- our strategy has been very well, particularly for the spec buildings. In the last couple of years, we have anticipated -- we have strong demand in each of the markets. We are very close to our clients and we are very close to potential clients. And that's why we have identified that there is a big need in most of the markets for inventory buildings. That's why our strategy has been very strong to that and the results are very clear on our leasing activity in the last 6 quarters. And the build-to-suit projects normally take longer to negotiate and longer to deal with our clients. You're right, the development pipeline has very little build-to-suit projects in this particular quarter. Nevertheless, you know that this is dynamic. This can change over time. And we are currently working with other potential build-to-suits that we will be announcing whenever they are finished. Now bear in mind that this quarter, we delivered 2 important build-to-suit projects. One of them was a TPI project in the Northern Region and the other one was an expansion in Polymer in San Luis Potosí. So we are still very active in that regard. We are very -- we're confident that the fundamentals are even stronger than ever. And that's why we have taken advantage of delivering great inventory buildings, modern assets and the result of that is strong leasing activity that we're going to still be showing in the upcoming quarters.

[Adrian Huerta, analyst]

And just one last question that is for Juan. What is -- what cash tax rate should we expect for the year? How much are you expecting to pay in terms of cash dividend for this year -- sorry, cash taxes for the year?

[Juan Felipe Sottil Achuttegui, executive]

Look, Adrian, thank you for the question. That's a particularly difficult question for a company like us. The best estimate that I can give you is the one that we have cash taxes as the second quarter, which is $11 million. Let me remind us why this is a difficult number. From a tax point of view, and only from a tax point of view, Vesta is a company that invoices dollars, but really they are peso invoices from a tax point of view. And from a tax point of view, my liabilities are dollar-denominated. So I am significant affected by the end of the year exchange rate as Mexican authorities mark-to-market the VAT on a peso basis from the swings on the dollar exchange rate for year-to-year. Using the closing exchange rate as of the 2017 and the second quarter closing exchange rate and putting on the -- putting that number in the tax accounting of the company, my best estimate for the year-end tax bill would be $11 million assuming everything else being equal. Obviously, on the second quarter, I will produce another significant bump in revenue. I will -- we will produce another $63 million in revenue, roughly and that will have certain cash tax consequences. But as a percentage, I think that's an accurate figure.

[Operator]

Our next question is from the line of Marimar Torreblanca with UBS.

[Marimar Torreblanca, analyst]

I just have a question on your buybacks program. Can you give us an update on what you're thinking about buybacks right now? If you think it's the right time to continue doing buybacks or not? Or how you're thinking about this going forward?

[Juan Felipe Sottil Achuttegui, executive]

Thank you for the question, Marimar. As you know, buyback is an important part of our strategy of deployment of capital. Basically, what management does, and this is the best role that any management can do, is to allocate capital investments among the different alternatives. We believe that at the prices we did the buybacks, which were -- this semester we did a few buybacks, I mean, from the top of my head around $3 million this semester. And we did them below MXN 25 per share, roughly speaking. Look, I believe that the company still has a steep discount to NAV. I also believe -- we also believe as management that we have a lot of opportunities to develop new buildings that will add long-term value to our portfolio. So therefore, from the perspective of the management, even though our discount to NAV is significant, we are focusing now for activities at the moment on an aggressive development pipeline as you have seen on our development sheet. So buybacks would be, for the moment, a little bit subdued. We will be ready, however, if for whatever reason the opinion of the market is that -- the price of the stock should come down. We will continue -- we will reinstate the buyback aggressively as we have done before.

[Operator]

Our next question is from the line of Cecilia Jimenez with Santander.

[Cecilia Jimenez, analyst]

Lorenzo and Juan, congrats on the anniversary and on the new responsibilities. I have a more open question. I know you have mentioned technologies several times and it's quite important on the strategy. So my question is, how technology is actually impacting your business? And what changes should we expect in the future regarding investment in the construction process of the properties or the time of properties you are having or investing in the portfolio? That will be my question.

[Lorenzo Manuel Berho Corona, executive]

Thank you, Ceci, for your question. And I believe that this question goes exactly to the event that we hold yesterday last night, when we celebrated our 20th anniversary. We did publish a book and presented a book called Innovating Mexico's Industrial Platform, in which we, specifically, talk about how important technology is evolving rapidly. And especially about manufacturing 4.0 applied to most of our clients today from the aerospace to the automotive and how important it is to -- for them to be ahead on those trends that are completely changing the way we produce and the way we consume. On the other hand, on the development side, our parts and our buildings need to fulfill the needs of those evolving trends. And that's something that we are following very, very close in terms that our parks work in order so we can increase the productivity of our clients. And that's exactly what we presented yesterday. I will encourage you to go deeper in our book to see the trend, how we see the future and Vesta will be a top niche on that regard, making sure that the way we build and the way we design and the sustainability involving buildings and the way we manage, control the energy in our buildings will be according to what our clients' needs and according to the new trends.

[Cecilia Jimenez, analyst]

That was exactly what I was thinking of. In terms of investment, shall we see any particular investment in the near future related to the technology part of the business? Or have you been including already it in the current CapEx of the properties already?

[Juan Felipe Sottil Achuttegui, executive]

Look, I can say that what we're seeing some clients that are requiring buildings, specifically, logistic buildings that require certain investments in technology, certain specific requirements of the way they want to manage the supply side of the building. We're adapting our formats to suit those needs. We're careful very, however, that specific investments do not surpass our comfort level of investment per square foot. As you know, we feel very comfortable in $50 per square foot including land. We're not that comfortable of levels way beyond that. So there is always a guidance with the client so far. We understand what they need, we're ready to accommodate what they need on the buildings, but we are very stringent in the returns and the amount of -- how heavy the business -- the building investment is. So that's a -- but that's typical that we have managed that process in the aerospace business, for example, quite successfully. But yes, some of the new clients are requiring this type of -- way of thinking.

[Operator]

Our next question is from the line of Eugenio Saldaña with GBM.

[Eugenio Saldaña, analyst]

Yesterday, Mr. Berho announced some strategies for the next 22 years, one of them being increasing your exposure to e-commerce and new geographies such as Monterrey and Guadalajara. My question is, how much of your current land bank do you believe has the potential to serve e-commerce? And secondly, after complying with the 20/20, the expansion plan, are you going to focus more on developing on just those new regions? Or where your land reserve is going to be? Or how do you see your land reserve evolving after complying with the 22 -- 20/20 expansion plan?

[Lorenzo Dominique Berho Carranza, executive]

Eugenio, this is Lorenzo Berho again, Chief Operating Officer. You're right, I presented yesterday the framework to the short and midterm strategy now as new CEO starting next week. And the first point was to conclude the 20/20 Plan successfully as we have been doing as of today. It was a very ambitious growth plan in 2015, when we presented it to our investors. And we have been very successful, doing accretive investments, creating value for shareholders, and therefore, the most important thing today is to conclude that particular project, which still is a couple of years ahead. The second point that I mentioned yesterday was, how important it is for us to increase our exposure to different industries that are growing in the market, particularly, e-commerce. E-commerce, as you -- as all of you know very well, in the developed countries represents roughly 15% to 20% of total retail sales are done online. That's something that Mexico is lagging. Today, we present close to 2% of total sales that are done online. So this is -- there is definitely a new opportunity in the e-commerce business. We are probably 7 to 10 years lagging to other countries. Nevertheless, I think that it's the right moment to start analyzing it. Some of our peers have been doing it. And at some point, nevertheless, I think that Vesta is very well-positioned to take advantage of a new trend, that is a global trend that will be coming in Mexico for sure. E-commerce is definitely coming in all regions. In all regions, which we are present and, of course, it is important that Mexico City, Guadalajara and Monterrey being the largest cities, will be some of the largest users of e-commerce business. Therefore, we'll be tapping a little bit more on these particular markets in addition to the ones that we are right now. As you know the markets where we are, are high-growth markets, growing way ahead of the national average GDP. And therefore, it has been very important for us to be in those markets and it's good for us also to tap new markets. If we find good opportunities that still can be accretive for our investors and that still can be adding value for our existing portfolio.

[Eugenio Saldaña, analyst]

I have a quick follow-up on this. So you see that -- because if my numbers are correct, there could be a huge land bank that is going to be left after complying with the 20/20 Plan in the regions that you are already -- that you already have presence. So if you are -- if you try to -- if you tap new markets, you're still going to be developing on these high-growth markets along with how the, perhaps, e-commerce opportunities on Mexico City, Guadalajara, Monterrey and all those markets that look appealing to you?

[Lorenzo Dominique Berho Carranza, executive]

Yes.

[Eugenio Saldaña, analyst]

But in terms of -- do you -- can you mention any proportion that you see perhaps going forward? And how much you're going to be developing in either of these 2 types of markets?

[Lorenzo Dominique Berho Carranza, executive]

Sure. Well, as you know, with the land reserves that we have today, we could develop roughly 14 million square feet. And we still need land reserves for the next couple of years to finalize the 20/20 Plan, which will -- it's going to be about 6 million square feet. So you're right, we still have some land available for potential development after the year 2020, which, in the end, it's also part of our plan. Sometimes we need to anticipate to acquire land before we require it, to put the infrastructure in place. And so -- and for example, the project in Querétaro is going to take roughly 5 years to develop. And that's why we still -- we're going to have land after 2020 to keep on developing and to keep servicing the industries that are demanding these type of spaces in the Querétaro area, which logistics, automotive, aerospace and consumer goods and some others, even potentially e-commerce, we believe, that is coming to Querétaro soon. And with -- and again, the other markets -- we currently are serving 7 very important markets. So adding 3 more markets is something that we believe could easily been achieved without really making a major change in our portfolio, in our structure. And in the end, it's -- it will be another good proportion of our portfolio looking into the future. Nevertheless, our portfolio will still be growing in the existing markets. So even if we tap new markets, the largest proportion will still be in the markets where we are today, which I repeat, they're very -- they are high-growth markets, very dynamic markets and that's why we want to maintain our leading position in those particular markets.

[Operator]

Our next question is from the line Fernando Ulacia with Crédit Suisse.

[Vanessa Quiroga, analyst]

Hello, this is Vanessa Quiroga. Also, congrats on the results and the new responsibilities, Lorenzo and Lorenzo. So my question is regarding -- I have 2 questions. First, if you can mention any market that you see currently on the soft side. Do you see any market where you're present that is decelerating in demand in any way? The second is, if with the new government you foresee any delays or changes in the administrative processes for getting permit, which is important, given your profile as development. And the third one is on your sources of funding for future growth, what are the options that you are considering? If -- and if you have analyzed the option of issuing a FIBRA?

[Lorenzo Manuel Berho Corona, executive]

Thank you. Thank you very much, Vane, for your questions and your interest in Vesta. Let me maybe start by the second question that you raised according to the new government. In our case, what we believe is that the elections took place and the institution -- democratic institutions of Mexico show their maturity and our population show that the level of civil commitment that we have, voting more than 60%, which is very high. Now on that regard, the results were respected. And the new government was very well accepted not only internally but also internationally. And the fact that they have been started working since Day 1 with a lot of collaboration from the current government shows a lot of maturity in the way they handle things. The fact that yesterday, one representative of the new government, is already in Washington, talking and being part of the negotiating team with NAFTA, shows how strong commitment there is between the 2 governments. So on that regard, we're pretty confident that the -- and relating with permits, remember, that permits will be completely either municipal and state governments are the ones that give these permits. So with that, we are really working very close. We're very close in promoting companies and investment to each one of these states. So we don't see any change. On the contrary, we are following very closely all the proposed changes, especially, at the northern part of the country. If that happens, we have to probably maybe accelerate more investment to those regions, but we will be close to that. Related with the sources of funding, I will ask Juan to go through that question.

[Juan Felipe Sottil Achuttegui, executive]

Vanessa, thank you for the question. As we have said before, in the future funding of CapEx is something that is very close to us. We are reaching 36% LTV as of this quarter. Certainly, in the future, funding of CapEx has a lot to do with heightening of properties, selling our properties that we will recycle with a clear strategy and a clear message. And as part of that strategy, a possible disposition of a portfolio through our FIBRA as part of Vesta would be a good idea. It would be analyzed accordingly. Just remember that hiking we still have a substantial potential of leveraging. Our stated objective is 40% as we grow the portfolio, 40% is a dynamic number. We believe that, at least in my model, we can continue to develop at this pace for some future, still. So yes, at some point in time that would be an option, but that's about it then.

[Lorenzo Manuel Berho Corona, executive]

And finally, related with some of the questions related with market deceleration, we have not seen that in the markets that we operate, Vanessa.

[Operator]

Your next question is from the line of Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

You really have lots of things to celebrate, congrats. The questions that I had relates a lot with potential disruptions across the supply chain, generally speaking. And I'm not talking about the trade risk that we might or might not have in effect in Mexico. Clearly, you have great asset quality, nevertheless the risk of reassuring technological change and so forth that might affect the supply chain from the production side of you. How can you see your overall portfolio suited for those potential shocks that might emerge eventually?

[Lorenzo Manuel Berho Corona, executive]

Thank you very much, Francisco, for your question. And this goes right on what we talked yesterday in our event. But let me tell you, the disruption that we are much more worried is the increase of investment into Mexico's regions. What we believe is that Mexico has gained competitiveness. And in these last 25 years, there has been more than $500 billion invested in the supply chains. So Mexico's competitiveness is here to stay. And Mexico -- that is helping U.S. competitiveness, even the negotiations are still or renegotiations taking place as a part of the dynamics of what is happening today. So we are convinced that Mexico has industrial application. Has a very strong base and it's going to keep growing in a good pace. So that will be what we will be supporting and that's why we want to position our company anticipating those trends related with the positive disruption that we see. On other hand, let me tell you, what we have also seen is that the U.S. have been growing faster with a 4.1% since 2014. So this is something that is pulling very much Mexico's dynamics.

[Francisco Suarez, analyst]

But you don't see the risk of actually capital reassuring, for instance, because the technological changes, and of course, what has happened from the consumer's point of view that potentially may affect the autos industry in general diverting some of the production elsewhere. Does that might be a risk, I mean, I fully buy your argument that on Mexico's competitiveness, but I am more -- I have more doubts in general to relate with the potential shocks affecting or creating incentives to reassuring production like Mexico.

[Lorenzo Manuel Berho Corona, executive]

Again, thank you for your question. But on the contrary, not at all. We see the potential of Mexico. We see -- we are a country that we know how to adapt to changes. From -- and you're talking about the auto industry. If the auto industry keeps changing to more electrical cars and the way they produce, Mexico is taking the lead and will be playing a very important role in the future. We are convinced of that. And the disruptions that we are -- the positive disruption that can increase the investment into the regions in which we operate.

[Operator]

The next question is from the line of Alejandro Lavin with Citi.

[Alejandro Lavin, analyst]

I have a couple of questions. The first one would be on the build-to-suits, a follow-up. So I noticed that returns or expected returns of the build-to-suit projects seem to be lower than the inventory projects recently, right? And a couple of years ago that was probably the other way around. So my question is, what have changed here? And is this also part of the -- your preference for inventory projects in the short term?

[Lorenzo Dominique Berho Carranza, executive]

Alejandro, this is Lorenzo Berho, Chief Operating Officer, again, and thank you very much for your call. You're right. We believe that build-to-suit projects have pretty much maintained stable in terms of returns, having returns in the roughly 10% to 10.5% return on costs or cap rate. Nevertheless, it's the inventory buildings and the spec buildings where we have seen an increase in returns above 11% and sometimes even closer to 12%. And that's why this is -- this has been an important change towards our investment strategy, and we're taking advantage of that particular situation. We are still having -- we're having high returns on the inventory buildings; therefore, we -- since early last year, we saw that there was an opportunity and that's why we put the gas pedal down in inventory buildings and we have been very successful. And we have created a lot of value for our shareholders by investing in inventory buildings. Nevertheless, as you know, build-to-suit projects are commitments in advance before building the projects. We still believe that they are very attractive in terms of risk-adjusted return. So we're still going to see the same good balance between build-to-suits and inventory buildings. We're very close to the markets. We're trying to identify what are the real estate fundamentals for the each of the markets. And whenever we see a good opportunity, we are -- and for sure, we're going to keep on developing inventory buildings in advance and ahead of our competitors and that's what we've been taking advantage of.

[Alejandro Lavin, analyst]

Okay, that's very clear. And If I may add one final question, just a quick one on dividends. You're obviously generating good cash flows, you're also getting buybacks. So I mean, considering the tradeoff between investing in growth and paying out dividends, right? So you could lower your payout ratio, you could lower -- I mean, you're paying a very generous dividend as of today, right? So you could lower your payout ratio and still manage to keep growing your dividends per share, right? So would you consider that?

[Juan Felipe Sottil Achuttegui, executive]

Look, the dividend question is a key question for any board and any management, we will be cautious. As you recall, the -- our policy is based on actual cash flow generated by the portfolio, not on our particular dividend yield. We will analyze the alternatives. We will certainly look at the potential growth opportunities of the company and will make a rational decision. So we're eager to demonstrate that the company has a lot of growth potential. And we're eager to demonstrate that the company can distribute when needed the excess cash that we generate. So we would be cautious taking that decision in the future, and you will see that as you have seen it over the last 6 years.

[Lorenzo Manuel Berho Corona, executive]

And please remember that the board only -- the board and management only recommend to the general assembly for the decision. So we'll be conscious of the need to do the decision, the rationality of it.

[Operator]

The next question is from the line of [ Roberto Wiseman ] with Bradesco BBI.

[Unknown Analyst]

My question is regarding the leasing spread. We have rarely seen a top line growing at an average of 20% year-over-year. But this is mainly due to new development an inflation adjustment. My question is, should we expect to see a leasing spread is stronger in the upcoming quarters? Or is this behavior of growth should continue?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Roberto, this is Lorenzo Berho, again. There has definitely been some larger bumps in terms of leasing spreads. Normally, these leasing spreads -- these large leasing spread differentials are in some markets that have -- were affected 10 years ago, 8 years ago, and some of the leases what we call vintage leases that were way below market and at some point, will have to recover to market. Nevertheless, the portfolio of Vesta does not represent many of these type of leases actually very little in the markets that we were operating compared to our peers are very solid markets where we have leases in U.S. dollars. And which we in total in our portfolio, we believe, that we have been a leading market rate setter in most of the markets. And therefore, we're very close to market rate sometimes even a little bit higher. And we have seen that the leasing spreads throughout the years, in the long run, if you analyze the long run, normally they increase roughly a little bit above inflation over the years in U.S. dollar terms. And that's what we have seen in the past. And looking into the future, we honestly think that these will hold on pretty much the same as long as we don't have leases below market. Now bear in mind that our business is more about the quality of earnings and the predictability of income into the future and long-term commitments with our clients. And most of our leases are adjusted to the U.S. inflation. So looking forward, we think that, that should be the analysis that has to be done if the markets in the long run could increase somewhat above inflation. That something that we could be considering, looking into the future.

[Operator]

[Operator Instructions] I'll turn the floor back to management for closing remarks.

[Lorenzo Manuel Berho Corona, executive]

Okay. Well, thank you for joining us today and for your continued commitment to Vesta. And together we have embarked on a new and exciting chapter on our company's growth path. The team looks forward speaking to you and seeing many of you over the next couple of weeks and months during the upcoming roadshows and conferences. If in the meantime, please do not hesitate to reach out to us. As you know, we will always be happy to assist. Thank you, again, for your confidence, and congratulations again to celebrate with us our 20th anniversary. Have a wonderful weekend.

[Operator]

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