Corporacion Inmobiliaria Vesta SAB de CV

BMV:VESTA

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Dana, and I'll be your conference operator today. At this time, I would like to welcome everyone to Vesta's Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions]

And as a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Christianne Ibañez, Vesta's Investor Relations Officer. Please go ahead.

[Christianne Ibañez, executive]

Thank you for joining our call to discuss our financial results for the fourth quarter and full year 2018. With us today from Vesta in Mexico City are Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, Chief Financial Officer.

Following their prepared remarks, there will be a Q&A session during which time, we will answer your questions. Yesterday, we discussed our earnings press release after market close. The release is also available within the Investors section of Vesta's IR website.

Before turning the call over to management, I'd like to remind you that this conference call includes forward-looking statements based on currently available information. Forward-looking statements inherently involve risks 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 February 14, 2019, 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.

Let me turn now the call over to Mr. Berho. Please go ahead.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Christianne. Good morning, everybody, and thank you for participating in our earnings call today. I have been leading Vesta for a little over 6 months now, so it's personally gratifying to see our company extend what is becoming a 7-year winning streak.

2018 was another year in which Vesta excelled. We surpassed our upper ranges of our performance guidance and generated the highest returns in our sector as we remained disciplined in our approach to leasing and how we allocate our stakeholders' capital. We continue to leverage Vesta's market-leading position and strong balance sheet as well as our deep customer relationships and strong presence in our chosen local markets, both of which give us unique visibility into emerging market trends and enable us to capitalize from the incremental growth opportunities we see on the horizon in existing and new markets.

As we continue building out and optimizing our property portfolio under the Vesta Vision 20/20 strategic plan, the goal continues to be driving total shareholder return and net asset value expansion, as well as maintaining an attractive dividend policy. In fact, our Board of Directors recommended to its shareholders to approve, within the next shareholders' meeting, a $52.2 million dividend payment, which is more than 10% higher per share than last year. In order to follow best practices globally for real estate listed companies, it will be distributed on an equal quarterly basis starting in April 2019.

We only invest in areas where there is high demand. Tijuana, Juarez and Silao in Guanajuato are perfect examples of outstanding performance, with 50 new contracts begin signed during the year, which represents around 1.2 million of total leasing activity with excellent multinational clients, such as Schenker Logistics, [indiscernible], Ishikawa and AG Industries, among others.

Each development project within Vesta is carefully reviewed and vetted to ensure the investment will be accretive. Additionally, whenever we believe we can increase return, we will return it to our shareholders in the form of periodic share buybacks as we have strong conviction on the value of our property portfolio and continue to have an eye on the discount at which Vesta shares trade relative to net asset value.

In light of Vesta's strong performance last year, steady client demand, healthy market conditions across the regions in which we operate and a strong development pipeline, we are affirming our guidance for 2019. However, some macro challenges remain. There is uncertainty related to economic growth in the U.S., Europe and China, and it also remains to be seen how trade disputes are resolved and how new trade agreements are implemented. And here in Mexico, a new political environment is evolving as the new administration finalizes its policies.

Nevertheless, a strategic location, low-labor cost and highly skilled engineering talent all continue to make Mexico a desirable hub for global manufacturers. Its appeal is also why we have seen demand related to investments by more Asian companies such as ones from China.

A somewhat tenuous environment is another reason why we are -- proximity to client is so important. Using the superior market intelligence, this unique position afford us we continually calibrate our investment plans Our ability to lead large portions of spec space speaks to our ability to anticipate market demand to effectively manage risk as well as size opportunities to achieve higher levels of growth.

Further, the diversity of Vesta's customer base lowers our risk in the event of any economic downturn in the future. Among our scale advantages is Vesta's balance sheet, which we continue to strengthen and which have a loan-to-value ratio of 35% at year-end. As we do this, we enhance Vesta's strong position in the credit markets, where interest rates have been rising and our ability to borrow on comparatively favorable terms.

Now I'd like to discuss certain areas, Vesta's fourth quarter and full year performance before turning the call over to Juan to discuss some of the details of our performance. Despite volatile macroeconomic conditions, Vesta generated net asset value growth of just over 4% in 2018, resulting in a 6.6% net asset value per share annual growth for the last 3 years.

Total shareholder return was just over 16% for the year, to which our solid dividend policy contributed. Robust leasing activity, 43%, which came from new world-class clients and a historically high occupancy level of just over 97% in our stabilized property portfolio are what drove our -- a 21% increase in annual revenues. This growth delivered a 96.3% NOI margin, while continued disciplined expense management also contributed of an expansion of Vesta's EBITDA margin, which rose to just 85% for the year.

Higher taxes at the end of 2018 mostly led to a nearly 2% decline in Vesta's FFO. On the investment front, we expanded Vesta's property portfolio to nearly 30 million square feet, a 12% increase in our GLA. Aside from an opportunistic acquisition in Tijuana, 96% of this growth was organic. Our expansion plans remained focused on Mexico's most dynamic markets. As always, we emphasize accretive long-term leases with high-quality tenants from diverse industries and geographies.

While we invest to generate new sources of growth, we never lose sight of optimizing Vesta's existing portfolio. The local team's so far newly appointed portfolio officer remain methodical in their approach to optimization. They also work hard to continually cultivating relationships with the long-standing clients who occupy a large portion of Vesta's properties. It's why approximately 50% of our leasing activity is repeat business.

Before I turn the call over to Juan, I would like to announce that on June 4, 2019, we will be holding our Investor Day conference in New York City. During that day, other members of our management team, as well as some board members, will also present to give you a deeper insight into how we intend to continue building on Vesta's success. They are an integral part of our ongoing efforts to optimize corporate governance, best practices, current property portfolio and the selective expansion to capitalize on the global opportunities we see ahead in our current markets and in new ones.

This will also be an opportunity to present to our investors our strategic plan for the years after the execution of our 20/20 Plan. Please look out for further details that our Investor Relations team will be sending in the coming days. Now I will turn the call over to Juan to discuss the details of the quarter and the year.

[Juan Felipe Sottil Achuttegui, executive]

Thank you, Lorenzo. Good morning, everyone. As Lorenzo noted, we exceeded to upper range of our 2018 revenue guidance and delivered a net operating income margin of 96% and an EBITDA margin of 85%. We were also above our target. I'll provide additional details on Vesta's strong performance as well as insights into why [ globally ], with an emphasis on the final quarter of the year.

The 21% increase in fourth quarter revenues to just over $35 million was mainly due to our strong leasing activity and steadily improving prices. We've had a nearly 8% increase in monthly rent per square foot, which reached a historical high of $0.415 The nearly 852,000 square feet of lease renewals in the quarter drove 2019 and 2020 maturity to 4.8% and 5.9%, respectively.

Our lease maturity profile remains at 5.3 years for this capital maturity. Vesta's net operating income grew just over 19% to $33.5 million, and although our operating margin decreased approximately 100 basis points versus last year's quarter, we finished the year with more than 100 basis points above our [indiscernible] target for the year.

Year-over-year margin compression was due to a noncash structural maintenance provision that we have introduced to our financials for future maintenance CapEx needs. Costs in fourth quarter 2017 did not consider such provision. Administrative expenses rose slightly to just over $4.5 million, with the margin expense remaining unchanged. This, coupled with the strong interest increasing revenues, resulted in a 24% increase in EBITDA and a 224 basis points expansion to our EBITDA margin to just over 83% for the quarter.

Due to the repurchase of around 5 million shares during the quarter, EBITDA per shares rose 24%. 41 million shares have been repurchased under Vesta's buyback program, and 25 million shares are currently in the process of being canceled and we will continue to cancel shares on future potential buybacks.

Moving further down the income statement, there was a 45% increase in interest expense totaling $9.6 million, which reflects the management's effort to lever the company to its healthiest capacity. Using marginal debt increases along with reaping earnings to fund Vesta's development pipeline. Regarding the latter, we would always favor organic funding in addition to being disciplined with capital allocation.

The current tax on Vesta's operation resulted in a $4.22 million gain, a combination of a gain related to the exchange rate-related portion of the current tax and a minor current operating tax. Funds from operations in the quarter increased 6% over the last year to $23.8 million, aided by the positive current tax that I explained earlier. On a per share basis, FFO was $0.393, increasing 5.8%, taking into account our share repurchase during the quarter.

We remain on track with our CapEx plan, which calls for $125 million of investments per year or 3 million square feet. CapEx for the quarter reached $37 million, primarily for the construction of new inventory and build-to-suit buildings in the North and Bajio region. During the fourth quarter, we added 4 inventory buildings to our operational portfolio, expanding GLA to approximately 750,000 square feet, of which nearly 30% is occupied.

We added one build-to-suit building, expanding GLA nearly 2,015 square feet. Vesta development portfolio was just over 1 million square feet of GLA. The weighted average cost for this project was 11%. We also expanded Vesta land bank, which increased nearly 12% sequentially to 37.5 million square feet, with 17 million square feet of potential buildable GLA. At the end of the year, the total value of Vesta investment property portfolio was approximately $1.9 billion, a nearly 11% year-on-year increase.

During the fourth quarter, our stabilized portfolio expanded just over 9% to 27.9 million square feet, while occupancy in this portfolio increased 192 basis points to 97.2% compared to fourth quarter 2017. While our same-store portfolio grew 20% to 25.5 million square feet and occupancy in this portfolio rose 276 basis points to 98.2% compared to the same period of last year. Both occupancy levels are historical highs for our company.

Vesta total portfolio increased 12% to nearly 30 million square feet of GLA year-over-year, with the addition of 11 properties that brought a total of -- the total to 184 properties while our vacancy rate finished the year at 8.2% despite the 2.2 million square feet of inventory that were added this year.

As Lorenzo stated earlier, our 2019 guidance remains unchanged: a 12% to 14% increase in rental revenue, a 96% NOI margin and an 85% EBITDA margin. Operator, that concludes our prepared remarks. Please open the call for any questions.

[Operator]

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

[Pablo Monsivais, analyst]

I have just one quick question. Can you please elaborate on the optimization plans you are referring to? Are you thinking on selling assets? And if so, can you please give us more details on size and timing?

[Lorenzo Dominique Berho Carranza, executive]

Hello, Pablo, this is Lorenzo Berho, and thank you for being on the call. Definitely, I think optimization of our portfolio is a key strategy in order to have the best type of buildings in the right locations with the right type of tenants with a good mix of different industries. And that's what we have been working in a very disciplined way over the years. This isn't something new. Additionally, what we have not done in the past has been assets -- asset capital recycling through asset sales. And as we have expressed in the past, that is something that we would be analyzing in order to finance part of our funding mix, and we'll be doing that in the near future. Nevertheless, as you know well, we are still focused on the growth of the company on having better operating metrics, increasing occupancy, extending the leases, having more and better credit rating tenants and that's, in the end, what we have been working on in order to optimize our portfolio. As you can see, we have currently record-high occupancy levels in same-stores, in stabilized portfolio. And in the total portfolio, it's basically the new buildings that we're putting into the market, the ones that are vacant, which are currently in a lease-up stage. And that's the nature of our business and we still will be focusing on leasing of those buildings in the strategic markets that we have identified.

[Operator]

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

[Luis Saldana Flores, analyst]

First one, I would like to get your view on the industry-related market cycle. We've heard from other participants that they fear supply might be surpassing expected absorption. You added 2 build-to-suits to your development roster this quarter. Do you share this view in some markets, or is this decision related to the fact that you feel comfortable that the Vesta 20/20 expansion plan is 90% completed, and you wanted to slow down development? The second one, and related to this expansion plan completion that I just mentioned. What are your next strategic steps or what are you envisioning doing over the next, let's say, 5 years? And if you are considering changing your dividend policy going forward?

[Lorenzo Dominique Berho Carranza, executive]

Gracias, Eugenio, and thank you for being on the call. This is Lorenzo Berho again. Definitely, one of the things we track very well in very detail is exactly how the markets are performing and how the fundamentals are weighting in each of the markets. And that's how we have defined our strategy towards developing spec buildings, acquiring land. And what we have seen in the past is that companies are still leasing up space and companies are still expanding operations. And that, together with still a lack of Class A industrial supply, is that we have been able to capitalize in order to be able to close deals. And I think that in our business, it's very -- it's -- I think we have a very clinical type of analyzing things, and we have been able to anticipate to demand. And whenever demand slows down, we can also be able to anticipate that. So I think we feel comfortable with the amount of space that we're developing currently because we have been able to lease it up, and a sign of that is the last 8 quarters. So looking forward, we will keep an eye on it. If it slows down, we can react very rapidly. And if it still keeps up as we have been seeing, we can also speed up if needed. Currently, there's volatility in the macro economic level. There's volatility and uncertainties in Mexico. Those are things that we are still -- we've been very cautious on those things, nevertheless, if our clients -- if potential clients are expanding, we will follow them. I'll give you an example. Recently, we developed 2 buildings in San Luis Potosí in the New Park, it's the Vesta Park San Luis Potosí which is across the street from the BMW plant, which will start operations this year. And before finishing the building, we leased it up for Continental, which is a great supplier in the auto industry, a German company, which we have done business in the past. And they are expanding operations and we leased up a logistics facility even before finishing the building. I'm pretty sure that if that base keeps on, we're going to be able to develop another building as long as we see good demand and have a good pipeline. But again, I think that our strategy has always been to have a good eye on the market, be cautious, and if there's an opportunity, to capitalize it. Regarding the plan, going forward, definitely, we have been very successful executing the Vesta Vision 20/20 Plan. But you're right, we're almost done with it. We are pretty much on track of it and we're going to take opportunity of the Investor Day to present the new strategy after the 20/20 Plan. I have already a sense of signals on what we would like to achieve. It's pretty much in line to what we have done, doing better, what we have done well and learning and doing better with some things that we have learned in the past. So in the end, I think that we think we have a good strategy. And looking forward, I think that the company is going to be very well positioned for a good plan.

[Juan Felipe Sottil Achuttegui, executive]

Regarding the dividends, this is Juan Sottil, let me just elaborate a little bit Eugenio. One of the, great benefits of being a C Corp in a REIT world, in the FIBRA world, is that retention of profit, it really allows us to continuously grow without diluting our shareholders. And we will take full advantage of that. As we have talked in the past, in my model, a modest retention of profit, provided with some additional level, some additional debt levels will allow us to continue to fuel our growth.

[Luis Saldana Flores, analyst]

I don't know. My line went down. I don't know if it happened for everybody, but I just heard Juan's remarks and the very last statement from Lorenzo, but I didn't know if this was general or just me. If that is not the case, I will read the transcript. No worries.

[Lorenzo Dominique Berho Carranza, executive]

Operator, were you able to listen?

[Operator]

Yes. Our next question comes from the line of Roberto Waissmann with Bradesco BBI.

[Roberto Waissmann, analyst]

I have 2 questions here. The first one is that on both same-store sales and stabilized property portfolio, we saw a decrease on Schenker Mexico occupancy, if you could just comment a little bit on that. And my second question is, we saw that you had increased our 8.3% in rev per square foot growth, which [ related ] to the record high of rent per square feet. But I would like to know how much was the impact of new GLA from acquisitions and our development in this and how much would be the levels of same-store rent per square foot growth?

[Lorenzo Dominique Berho Carranza, executive]

Okay. Thank you, Roberto. I think I cannot -- didn't hear the last part of it, but let me answer the first part of your question regarding the central region. You're right. We have one building which was vacated during the year. This is a building in the state of Mexico, in Mexico City area, in Naucalpan, and this is a building that we are currently in marketing mode. This was a building that was leased for 15 years. The tenant moved out, and we are currently trying to target a last-mile clients for this type of building. If you're familiar with Mexico City, this is only 8 minutes away from Polanco, which is a fantastic destination. So we believe that there will be some e-commerce potential users that require good facility, last-mile facility. And if the e-commerce trends continue, we think that we are going to be able to market that in the upcoming quarters. So -- and that's why -- that was the only building that was vacated that we have not been able to re-lease as of today, and it's in the central region. For the rest, we were able to renew 90% of the leases of the total portfolio, which is a sign that the companies are still confident in the operations all throughout Mexico. Regarding your -- what I understood, your question was regarding the increase in rents, and I think that our -- so probably, what you have seen is that we were able to increase the rents per square foot of the total portfolio. The average today stands at $0.415 per square foot per month, which is, I think, 8% higher to what we had last year. So this is a very important increase. We believe that it -- we think that it's coming from increasing rents, market rents in most of the markets where we are because the markets are tight. As I mentioned before, supply is limited for Class A buildings, so we have been able to achieve better rents in dollar terms in those dynamic markets where we operate, which everything translate into greater returns of our investments. We're currently developing our pipeline. Today, we're still very disciplined in achieving a return on cost of above 11% in average, which we think is very accretive considering the stabilized cap rates that we're seeing in the markets, which are around the 8%. There's a good opportunity to create value still through development.

[Roberto Waissmann, analyst]

Okay. But what will be the levels presently of the same-store rent per square foot increase or decrease?

[Lorenzo Dominique Berho Carranza, executive]

What would be the increase in same-store portfolio rents per square foot? Is that what you asked? Sorry.

[Roberto Waissmann, analyst]

Yes, yes.

[Lorenzo Dominique Berho Carranza, executive]

I think it could be pretty much in line to what we have in the total portfolio, if not higher. But anyway, it's not something that we have been distributing to shareholders. Let me take some hard work, do some hard work and, probably, next quarter, get back to you with more information and detail on the total -- on all of the portfolios. Nevertheless, what we are confident is that we have a very high occupancy level, record-high occupancy level on the same-store portfolio, and we're excited about it, without having to give a concessions to renewals. Renewals regularly tend to renew at market or inflation above the in-place rents, which lease between 2% and 4%, depending on the currency. So it's -- I think it's a very good trend and it's helping us definitely to increase rents for total portfolio.

[Operator]

[Operator Instructions] Our next question comes from the line of Pablo Ordóñez with Itaú BBI.

[Pablo Ordóñez, analyst]

A couple of questions from my side. Lorenzo, can you share with us how are the prospects for leasing activity this year for the 1 million square feet that you will be delivering in your development pipeline? Are you seeing the same number of request of proposals relative to last year? And for Juan. Juan, can you comment on this noncash provision for future maintenance CapEx? What should we expect ahead, and how much are you provisioning as a percentage of revenues? And finally, also for Juan, is your current development pipeline already funded with a level of debt, or you will be hiring more debt?

[Juan Felipe Sottil Achuttegui, executive]

Let me answer first. This is Juan Sottil. Regarding the debt, looking in -- we have cash on hand of around $60 million. By the latter part of the year, we may increase the debt on a marginal basis, meaning, $75 million, maybe $60 million. And with that, we will fund our development pipeline. As you know, the quarterly rental income that we received is significant. So why don't -- I don't think that we will be -- you won't see Vesta accepting the debt market on big transactions. We're going to be very cautious on debt levels and reaping earnings, as I said before, provide a good fuel for our [indiscernible] portfolio. The provision -- the provision, look, we're talking about a $60,000 provision. We want to be prudent. Our portfolio is fairly new. We have the youngest portfolio among the industrial real estate in Mexico. However, I do want to begin to build a provision for future maintenance. I think it's prudent. Again, we're talking about $60,000. So it's nothing to, I mean, to really scare ourselves. We're just being prudent for the future.

[Lorenzo Dominique Berho Carranza, executive]

And Pablo, regarding your question on the pipeline on the spec buildings that we're developing. As you can see on the development pipeline, development portfolio section in the supplemental package, we are developing a couple of buildings in Ciudad Juarez, one needing a [ single story ] building, one in Silao, San Miguel de Allen and San Luis Potosí. As I mentioned, San Luis Potosí, we have been very active developing this new project, so we are confident that we're going to find a good client in the logistics supply chain. San Miguel de Allende is another success story that we have been leasing every year, a couple of buildings. This was a -- this is a project that we started developing 3 years ago, and there have been plenty European companies taking space in this area and committing for long term. We recently signed a lease for Carcoustics, a German supplier of the auto industry. It's a long-term lease, and they pretty much took everything we had available. That's why it's, for us, important to keep developing. Silao is another success story. We're fully leased in the Puerto Interior, that's why we're developing another building and we have a strong pipeline on it. And Ciudad Juarez is the same case. We're fully leased in Ciudad Juárez, in the VestaPark Juárez, and that's the reason of why we were developing these 2 new buildings. Remember that these are spec buildings, very flexible, very easy to accommodate multi-tenants in the buildings. And we are still seeing a very good pipeline in these markets. Some of the growth may come from existing clients that have required expansions, and some is coming from new tenants who are looking for this type of high-quality buildings.

[Operator]

Our next question comes from the line of Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

Well, my question is mainly about your monthly rent average and historical highs. My question here, if you could give us a little bit more detail by region how we [ compares ] these levels to the market average?

[Lorenzo Dominique Berho Carranza, executive]

Okay. So I think we do this analysis very often to analyze where we're standing regarding the market rent. And we believe the Vesta portfolio, in general terms, is very close to market or probably slightly above market but this is slightly. And I wouldn't consider -- and I would consider that in general terms, this is the same situation. Probably the only area where we could be a little bit below market is in Tijuana where the rent prices have increased in an important way in the last quarters. And we did an acquisition on our portfolio last December -- I'm sorry, December 2017, which was below market rent. And that was our main driver of why -- one of the drivers of why we were doing the acquisition because we thought that there was a good opportunity to bring up rent to market and, therefore, generate a greater return on the acquisition. Nevertheless, besides that, I think that most of the markets where we're at, we -- we're very close to market. I think that at some point, since we have a leading position in many of the markets that we operate, I think that we are good drivers of where the market rents are going.

[Operator]

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

[Vanessa Quiroga, analyst]

I would like to know about the absorption that you saw during 2018, your different markets. Do you think net absorption was stable compared to 2017, for example? And then the other question is, if you can be more detailed on the dynamics that you see based on requests for proposals also in each of your main markets?

[Lorenzo Dominique Berho Carranza, executive]

Gracias, Vanessa, thank you for being on the call. The market, in 2018, the net absorption was different in the different markets. I would say that Tijuana was higher than 2017. Ciudad Juarez was higher than 2017. The Bajio region was slightly lower. Nevertheless, 2017 was a record year for the Bajio. And Central Mexico has been even higher than 2017. So, overall, I think that it's -- it was slightly below 2017 levels. Nevertheless, we think that in the end, these were pretty good numbers. The result of that is amount of leases we were able to close, which is pretty much in line to what our peers have been also doing and closing in the last quarters or even in the last years. So the industry is still performing well. We think that definitely, we don't think that it might be increasingly -- there will be high increases in terms of net absorption compared to other years. But as long as it maintains and remains in a good position, in a good rate, I think that it's going to be good for us and even some of our peers will also benefit from good market dynamics. And currently, our pipeline, it's very similar to what we have been seeing in the past. As you know, many of these transactions take longer to close. So we have been working on some of them that is, we think, that will mature in the next couple of quarters. Nevertheless, I think that it's hard to anticipate what will happen in the long term. But it's -- we can -- we have confidence that in the short term, we're going to be able to close important transactions and keep on with the good results that we have been having in the last quarters.

[Vanessa Quiroga, analyst]

Okay, that's great. And just last question on the team in terms of SG&A. Do you expect to have to expand the team and, therefore, SG&A for the next couple of years? Or for now, you think the structure is the appropriate?

[Juan Felipe Sottil Achuttegui, executive]

Vanessa, this is Juan Sottil. Let me tackle your question. Look, I -- we believe that we have the right people in place throughout the country to take advantage of client opportunities as well as development as well as asset management. I don't think that we're going to increase, in any way, our headcount in the coming years. Please take note that our administrative expenses have come down as a proportion of revenue. I have always talked about the benefit of economies of scale, and I think that we're beginning to see those. I mean, 85.5% -- 85.1% EBITDA margin is a good number to have and it has been increasing also. Look, I think that we have the right people in the right place. I -- we're tight control on expenses and I don't think that we're going to increase headcount for the future.

[Operator]

Our next question comes from the line of [ Gianno Diego ] with Santander.

[Unknown Analyst]

First, congratulations on the results, especially on the operational performance. Just on the asset sale, can you repeat of the amount you're expecting to get from this and maybe the timing and just the implicit exit cap rate of this asset sale?

[Lorenzo Dominique Berho Carranza, executive]

Sure. Well, as mentioned before, the good thing about our -- of Vesta is that we have the flexibility financing or getting financing -- funding from different sources, and one of them is definitely asset recycling, which we have not done in the past. Definitely, as I mentioned before, we are still working on the -- identifying what we should be -- if we should be able to sell something, what we would be selling and even the sizes. So I don't think that if we do any sale, it would be a larger sale. Definitely, our growth plan continues to be financed by debt. We have retained earnings. And if there is some asset recycling, we could have other alternatives on financing. But today, we don't have major financing needs in order to comply with the investment plan that we have. I think that if we do asset recycling, it will be more to signal that there's a cycle into real estate where we develop to an 11% return on cost, where we stabilize assets and that we can sell at a cap compression closer to our net asset value, which could be somewhere in the range of the 8%. And we think that the market in -- there's still a lot of demand for institutional class assets, like the ones that we have. We have, currently, 30 million square feet of great buildings that any institutional investor would be interested in acquiring. It's just part of a new stage of the company where we are going to be starting to recycle capital through asset sales.

[Operator]

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

[Cecilia Jimenez, analyst]

I have a follow-up, actually, in the potential asset sale, but it has to do with the tax treatment that it may have. So just to confirm, let's assume hypothetically that you sell something from your portfolio today, that it's valued at [ $100 ] and the price you use to calculate the tax on the sale will be the price the asset is valued, but the broker said, "No. Every quarter, I'd give you the estimate value of the amount." That will be the initial price, and then the final price, obviously, the price you're selling at? And that's multiplied at the 30% tax level? Is that a reasonable assumption to calculate the tax implications of any potential sales? That would be my first question.

[Juan Felipe Sottil Achuttegui, executive]

Cecilia, this is Juan Sottil. Thank you for your question. Look, like in every country, everybody pays taxes in Mexico and we certainly do. Look, our properties have a fiscal value that's derived from the construction costs plus all the things that we do on development. You have inflation adjustments to that price by the Mexican tax code. And that integrated cost vis-à-vis the sales price, both taking into account the particular company tax benefits, if any, will allow us to the -- that difference, you do pay the statutory tax rate. Bear in mind that in the past, we have sold and bought properties among our subsidiaries. Therefore, the actual fiscal cost of the properties it not necessarily the development costs that we have when we develop the properties 5 or 7 years ago, which is our average life of our properties. There are variations. In any asset sale -- in any asset sales recycling, what we try to do is to optimize the tax burden, and that's what we will certainly do. The strategy of the company is to develop VestaParks, and ideally, these, let me call them, horizontal condominiums are -- should attract a lot of interest from institutional -- global institutional investors. And we have been careful to have a cost basis that is favorable to optimize the tax burden. But yes, your calculation is correct, taking into account what I said. And we seek to minimize the tax burden within the margins that the law gives us.

[Cecilia Jimenez, analyst]

Perfect. That's very clear, Juan. I have another question, which is maybe more on a strategic point of view for further growth. Just regarding geography, when you wrote with your current clients, which is part of the relevant growth you had in the past, have you seen any change in the trends where geographies or where the footprint is located towards larger expansion? Meaning, are you seeing any stepping out the current regions to go somewhere else, taking into consideration a lot of investment under the administration are being done in the southeast part of the country? So are you seeing a trend over there? Or you are to continue to see investment in your current geographies? That's my second question.

[Juan Felipe Sottil Achuttegui, executive]

I couldn't understand all the facets of your question, but let me -- I did get a couple, so let me try to answer. No, no, no, don't worry, let me try to answer those, Cecilia. Look, we follow demand. We think that all the areas of Mexico have potential, but we follow what our clients need. If our client goes to the southeast of the country, you can bet that Vesta will follow within reason. So we have close contact to the markets we operate. If there is demand in the Mahia Peninsula or [ Bajio ], we will be there. We are going to be careful about the implications of those expansions in our administrative costs, meaning, people that we have on the ground. One of the greatest advantages of Vesta is the local knowledge that we gather from our offices in the ground. So we balance destinations with the local economy of scale that we can achieve. So those are the considerations that management takes into expansion into new regions. So I guess that's kind of how we approach it. And remember that the message that I want to give you is, we will always grow on a very disciplined fashion. If there's an opportunity, we have to see that it makes sense, that it's accruing for the company on a return -- on, investments, let it be buildings or administrative investments that we do in situ.

[Operator]

[Operator Instructions] Our next question comes from the line of Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Congrats on the results, impressive delivery, guys. Fantastic. The question that I have is have you get any concerns on your tenants on the strikes that are emerging along the U.S. border now, anything that might concern your tenants in your view?

[Lorenzo Dominique Berho Carranza, executive]

Francisco, thank you for being on the call and for having that creative frontline on your research report, which totally blew our mind. Lovely. Well, it was a lovely headline, let me put it that way. Look, our tenants -- foreign investment, the tenants that use our services really come to Mexico because there's a big opportunity of manufacturing in Mexico for the global economy. Clearly, the U.S. is one of our primary destinations of our tenants. We don't see that they are hesitating right now. We think that they consider the Mexico, U.S. and Canada relations into the U.S. and whatever the new name is, as just normal friction between 3 great partners. They continue to invest in Mexico. They continue to seek opportunities. On the social side, they don't seem to have any concerns. They continue to invest with gusto in the northern region and in the Bajio area. So look, so far, so good. That's the way I can put it.

[Francisco Suarez, analyst]

So in other words, the strikes that have been emerging in the Northeast of Mexico, that potentially could actually go to places like Juarez or the like by this new, [indiscernible] seems to be sponsoring this. You don't think that, that is something that is on the radar screens of your tenants at the moment?

[Lorenzo Dominique Berho Carranza, executive]

Well, we don't really operate on the northeast part of Mexico. And really, we have one facility. This type of worker movements tend to be very local, where new organized labor sees an opportunity to enter. From the markets we operate and we have been -- we have asked these questions to our local guys in Ciudad Juárez and Tijuana, they feel that, look, this, they have -- our tenants have very good labor relationships. They seem to have good workers and they don't -- their tenants have not been voicing any concern at all in those regions. So that's what we hear, that's what we see as of today. Now it is a changing landscape, certainly.

[Operator]

There are no further questions. I'd now like to turn the call back over to the Mr. Berho for concluding remarks. Please go ahead, sir.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Dana. Before we end our call, I would like to again remind everyone to be on the lookout for the information on our Investor Day, and we hope to see you there. As always, we thank you for the trust that you place in our management team and in Vesta's employees. Together, we'll remain committed to Vesta's continued success.

[Operator]

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