Vesta Real Estate Corporation SAB de CV

NYSE:VTMX

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Donna, and I'll be your conference operator today. At this time, I would like to welcome everyone to Vesta's First Quarter 2020 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. Maria Fernanda Bettinger, Vesta's Investor Relations Officer. Thank you, ma'am. You may now begin.

[Fernanda Bettinger, executive]

Thank you, Donna, and thanks to everyone for joining our call to discuss Vesta's first quarter 2020 financial and operating results.

Today, with us from Vesta 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 we will answer your questions.

Yesterday, we issued our earnings press release after market close. This release is also available via the Investors section of Vesta's website.

Before turning the call over to management, I would like to remind you that this conference call includes forward-looking statements based on current 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 in this conference call should be considered together with cautionary statements and other information contained within the Vesta's earnings press release dated April 23, 2020, and within the most recent regulatory filings for a discussion of those risks.

All figures include herein were prepared in accordance with IFRS and are stated in nominal U.S. dollars, unless otherwise noted.

I will now turn the call over to Mr. Berho.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Fernanda. Good day, everybody, and thank you for joining us. Despite our good first quarter results, today, we are not experiencing a normal environment. Therefore, I would like to start by giving an update on current status of the company and the way we believe we will overcome together the challenging current situation successfully.

We have created a COVID-19 task team to develop quick reaction contingency plans to ensure that we maintain property and administrative operations at optimal levels, close and proactive communications with our clients and particularly with regard to mission-critical activities and supplies. This committee is comprised of key senior executives and myself, to assess regional operations during the moment and generate reports in real time. We have taken precautionary steps to help mitigate the various risks that the virus possess, risks that we closely and carefully monitor. We have had the benefit of observing what has occurred in China, Europe, and most recently, the U.S., and we prepared early on.

Our immediate priority has been the health and safety of Vesta's employees, clients and their families. In late February, we began adopting protocols and measures recommended by the World Health Organization and local authorities. These safeguards have been implemented across our organization and made extensively to the community.

Employees who do not work at Vesta facilities are now working remotely from home, and all nonessential business travel is not permitted. Enhanced cleaning and sanitizing procedures have been implemented at all construction sites and Vesta parks. Within workspaces, employees are able to maintain safe distances. We have also increased the level of staff communications regarding preventive, personal and family care, including wellness tips to help them stay motivated and productive during this difficult period.

Talking about the financial situation, another precautionary measure we did was the drawdown of $85 million from an existing credit revolver, increasing our cash position to $122 million at quarter-end. This gives us more near-term financial flexibility. To date, we have received client requests for rent aid of around 5% of our total annual revenues, which are coming from clients operating in a variety of industries and regions and mostly fall under a global operations mandate.

We will continue to engage and maintain close communication with clients. We possess a solid base of high-quality multinational clients with which we have close long-standing relationships, long-term leases and high renewal rates. Additionally, they are the types of companies that are likely to recover faster than others might. As a reminder, the average weighted maturity of Vesta's leases is 5 years. And only 5% of our leases are up for renewal this year. Further, 85% of our rental income is paid in U.S. dollars, which puts us in a very good position to overcome the next quarter.

For the time being, we will not begin construction of any new inventory buildings, based on what we know today. Instead, we will focus only on leasing existing facilities, renewals and build-to-suit projects. Pre-existing development projects will be finalized, except for one facility in Guadalajara, which we were able to stop without major implications and will be able to resume at a later time.

Given the current environment, for the moment, we're not exploring any strategic transactions such as asset sales or other ventures, even though they remain part of our Level 3 Strategy and could be resumed at a later stage if the conditions and economic environment permit. We have not lost sight of our Level 3 Strategy objectives. Our flexibility and resilience are now serving us well in the face of the various economic disruptions resulting from the spread of the coronavirus across the world, most recently in Mexico. Importantly, we have highly experienced management team and a strong independent board as well as a healthy balance sheet that we recently reinforced.

Vesta's loan-to-value is 35%, and our weighted average maturity of our debt is 6 years. Disciplined execution of our strategy has consistently generated profitable growth that has further strengthened Vesta's financial position, which includes our most recent quarter. We began the year with strong leasing activity, reaching 1.9 million square feet, of which 1.7 million square feet was new contracts and 200,000 square feet were renewals.

Over the last quarters, we have seen renewed interest of Chinese companies reshoring into Mexico in order to supply the North American markets. More recently, we signed build-to-suit contracts with 2 internationally-recognized companies, enabling Vesta to further penetrate the e-commerce and consumer goods industries and to continue diversifying our tenant base with greater representation within the logistic sector, one of the goals of our Level 3 Strategy.

Occupancy levels remained healthy at 92.9% and 93.6% for our total and stabilized portfolio, respectively. In addition to the strong foundation upon which we operate, there were other first quarter numbers besides those I have already highlighted. Revenues increased 4% year-on-year to $38 million, with NOI and EBITDA margins at 94% and 83.4%, respectively. It's important to highlight that revenues are higher than first quarter in spite of the portfolio sale we did last year in the second quarter. This performance, along with the share repurchases, helped drive pretax FFO per share 4% higher than last year's quarter while net asset value per share rose 10%.

Looking ahead, so we're being prudent and have adopted a cautious and defensive approach to managing our business as the duration, scope and impact of COVID-19 are largely unknown at this time.

Before turning the call over to Juan, I would like to return to the subject of people. We consider ourselves members of the communities where Vesta facilities are located and social responsibility is an integral part of our company's culture. Following our strong corporate governance standards, Vesta's Board of Directors has made the decision to reduce the Board's compensation by 25% during the second half of 2020. This amount will be redirected to the company's COVID-19 ESG Program. The Vesta COVID-19 ESG Program supports scholarships for 200 nurses, purchases critical medical equipment needed at clinics within the state of Mexico and is funding upgrades for temporary clinics in Mexico City and Tijuana. Vesta is also working with the Mexican Association of Industrial Parks, AMPIP, to purchase much needed medical supplies, together with other developers in the market. These programs are, in addition to the company's existing programs, established through Vesta's ESG Committee. Again, we're monitoring the situation carefully and in every regard.

That concludes my prepared remarks for now. Juan, please go ahead.

[Juan Felipe Sottil Achuttegui, executive]

Thank you, Lorenzo, and good day, everyone. Our first quarter rental income increased nearly 4% year-over-year, $37.7 million, mostly due to revenue coming from new leases but also inflation adjustments during the quarter. In addition, rent increased 2.7%, $0.43 per square foot. The net increase in revenue was partially offset by rent that we do not longer earn on properties that have been sold in the second half of 2019 and by expired leases that were not renewed.

The first quarter revenue 83.5%, was denominated in U.S. dollars, 1 percentage point below last year comparable period. Moving down the income statement, total operating costs rose 61%, $2.9 million, on higher cost at both occupied and vacant properties. Increases in property taxes, maintenance, expenses and allowance for accounts receivable increased cost 70% to $2.3 million, our investment properties that generate rental income. That brings us to net operating income, increased 1.4% to $35 million. Although our NOI margin contracted 235 basis points to 94% due to higher cost at income-generating properties. Vesta administrative expenses increased 8.3% to $4.7 million, mainly on higher legal, audit, consultant fees as well as higher expenses related to our long-term incentive plan.

First quarter EBITDA rose just over 1% to $31.5 million and the corresponding margin contracted 230 basis points, 83.4%, due to higher operating costs, administrative expenses that I just covered. Interest expenses rose 1.3%, $9.3 million, reflecting higher debt balance in first quarter 2019.

During the reporting periods, we went from $1.2 million FX gain, a loss of $9.1 million. This was due to the sequential quarterly depreciation of the peso, functional currency of our WTN subsidiary, reported a lower gain in U.S. dollars. At the end of the first quarter, 16.3% increase in the value of Vesta investment properties resulted in a nearly $14 million gain. A higher valuation was due to increased occupancy in our total portfolio. Netting our interest expenses, the FX loss and the revaluation gain, we reported a total other loss of $4.4 million versus other income $3.8 million last year's quarter, resulted in $8.3 million year-over-year delta in pretax income plus USD 25.6 million, first quarter.

Looking at quarterly income taxes, this expense line increased roughly fourfold

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million. The current tax fell to $1.1 million, [ $7.2 million ] in the prior year's quarter due to the depreciation of the peso, generated a negative FX-related effect. Deferred taxes were $48.2 million versus less than $1 million last year. An explanation of the change in deferred taxes is detailed in our earnings press release.

For the quarter, we reported a comprehensive loss of $25.9 million compared to income of nearly $21 million in the first quarter of 2019. On a pretax basis, funds from operation increased just over 1% to $22.2 million, nearly 4% on a per share basis. Capital expenditures during the quarter totaled $12 million, mainly the construction of new buildings in the North, Bajio and Central regions.

End of the quarter, Vesta total debt was $799 million, a fraction of which is short-term liabilities, compares to debt of $740 million at the end of last year. The increase stems from drawing down $85 million from our existing credit facility, as Lorenzo noted, and highlights our strong cash position.

As we announced last month, facility matures in August 2022, we paid an interest rate of 100 basis points above LIBOR. I will take this moment to also point out that the average weighted maturity of Vesta's total debt is 6 years, bearing an average weighted interest rate of 4.5%, 90% of which is fixed. Further, 100% of our debt remains in U.S. dollars. Further still, we finished the quarter with a loan-to-value ratio of 35% and leverage of 5.6x net debt to EBITDA.

In other words, Vesta continues to maintain healthy debt profile. The total value of Vesta investments property portfolio at the end of March was just over $2 billion, sequential increase of 1.3%. As Lorenzo has also highlighted, Vesta NAV per share increased 10%, aided by additional share repurchase that have been taken over the last year. Before opening the call for questions, I will provide few additional highlights, portfolio properties.

At the end of first quarter, the GLA of our total portfolio rose slightly on a sequential basis, 29.8 million square feet, while our occupancy increased 125 basis points, just under 93%. Our stabilized portfolio expanded 1.4 million square feet this year from 29.6 million square feet, while occupancy declined 320 basis points to 93.6% over the same period.

Inventory buildings under development totaled 1.8 million square feet at the end of the quarter. Lorenzo has emphasized, we will not begin construction of any additional inventory buildings for the next 1 or 2 quarters, cautionary measure.

Regarding Vesta land bank, it stood at 41.8 million square feet, probably 5% less than at year-end 2019. That concludes our prepared first quarter review.

Operator, could you please open the call for questions?

[Operator]

[Operator Instructions] Our first question is coming from Gordon Lee of BTG.

[Gordon Lee, analyst]

Just 2 quick questions. First, I noticed you didn't make mention of the guidance -- of a guidance on your remarks, and I didn't see it on the press release either. So I was wondering, just wanted to confirm that -- I suppose the guidance that you shared with us when you reported fourth quarter results is for the moment suspended until you have greater visibility. And then the second question, you mentioned that you have only seen requests from clients for rent relief for about -- equivalent to 5% of your rental revenues. Just to clarify, is that as of now or was that as of the end of the first quarter?

[Juan Felipe Sottil Achuttegui, executive]

I may -- I can answer the guidance questions, and I will let Lorenzo answer the client requests, if that's okay. In regards of guidance, Gordon, let me tell you, right now, we're not changing guidance. We don't have enough information to give you an impact of the COVID on the books. As of today, we don't see that impact. Our clients are currently paying rent as scheduled. If I look at collection on March and even on April, we see collections coming through regularly. We don't see any clients dropping significantly. So we're just not changing guidance at this time. As the crisis evolve, if we feel the need, then we will adjust the figures. We're not giving any rental concessions at this point. Any help that we're giving our clients involve deferral of rental payments for a couple of months, and payments will -- should -- the loans that we -- in effective our clients will be paid back by the end of the year or it depends on the situation. Our guidance itself, we don't -- we're not changing it as today. We'll be prompt to give information, if anything changes. That's about it, I guess.

[Gordon Lee, analyst]

And is the 5% -- again, is that as of the end of the quarter or is that so far, as of yesterday, let's say?

[Juan Felipe Sottil Achuttegui, executive]

The 5% is as of -- we have a meeting every -- we have 3 weekly meetings, the management team -- the upper management team, in which we analyze client requests, we make a strategy of negotiation, and it is implemented by our asset management team locally. And that number is as of Monday, I guess, this week.

[Operator]

Our next question is coming from Eduardo Alvizouri of GBM.

[Eduardo Alvarez, analyst]

Just a follow-up on the requests from payment deferrals. Can we get a little bit more color on the negotiations you are reaching with tenants? And in the long term, are you worried these deferrals might affect cash flow? And my second question is just about the FX volatility. Have you seen any tenants seeking to renegotiate the contracts and change to peso-denominated rents?

[Lorenzo Dominique Berho Carranza, executive]

Well, Eduardo, thank you very much for being on the call and for your questions. This is Lorenzo Berho. Absolutely, I think it's important to understand the current situation and why the industrial sector plays a different -- plays differently the situation. Let me give you more clarity on what we are seeing in current Vesta's portfolio. And I think this will be useful for everybody. As of today, we are seeing that approximately 60% of the companies have slowed down operations or have shut down operations for the moment. I think this is an important number. And considering -- and the other part of the portfolio is still at the same or higher activity, and this is what we have been able to assess.

Secondly, I think it's important to mention that we're not seeing any particular region, which has had a major impact than other. I think this is very general across the country in different regions, different industries, different ways. To give you also another important update, I -- we have been getting requests from several tenants. In many of them, we stay as we are, and there is no negotiation in process. I think that -- they analyze the situation, we analyze it together with them. They have strong financial capacity, and we're pretty much staying with the same contracts.

In some of them, we have already had -- we're under -- we already have had agreements. And in some of them, we're still negotiating. And we believe that out of that 5% which will impact that -- that represents the rent requests -- the rend aid requests, we believe that for end of the next month, we're going to be able to be closing all of them.

Normally, the way that we are approaching this is the strong tenants that have a good track record with the company that have been paying on time and that still have a long-term commitment are the ones that we're giving important financial aid, which is a pay -- rental deferral. And rent deferral normally is regarding the upcoming months, and they will end up paying for the end of the year. We are seeing that the companies have strong financial positions. As you might know, many of our clients have corporate guarantees. Many of them have global presence and we think that, that is complete -- it's very important in current situation. I think that's why the -- our discipline in order to really close transactions with strong tenants is giving us an edge today when the situation is more difficult.

And regarding the dollars and pesos, we strongly believe that the dollar leases is how the market should operate. And we have been also very disciplined in getting dollar leases. Even -- this is not the first devaluation that we've seen in the -- in the last 4 years, 5 years. This is the second time. And I remember 4 years ago, 5 years ago, we also had approximately 80% of our leases in dollars. And even with that devaluation today, we have more leases in U.S. dollars. And this reflects the economic situation of most of the companies we work with. They are in dollars. And in our case, it's the same situation. Even in some cases, and new contracts that we have been signing lately, even for build-to-suit projects, we have been able to close in U.S. dollar terms. So we're going to keep that discipline, understanding that there could be some financial stress by some companies. We want to have -- find solutions for our clients, long-term solutions also. And I believe that, that approach will benefit ourselves and will benefit the clients in the long term, too.

[Operator]

Our next question is coming from Enrique Alcantara of Citi.

[Enrique Alcantara;Citi;Analyst, analyst]

From what we understood, you have U.S. dollar-denominated assets that had a gain when converted into pesos with the new exchange rate. Could you please clarify which assets are these?

[Juan Felipe Sottil Achuttegui, executive]

I had a little bit of trouble hearing you. Can you repeat a little bit louder, the question? I will address it.

[Enrique Alcantara;Citi;Analyst, analyst]

Yes, sure. Well, from what we understood, you have U.S. dollar-denominated assets that had a gain when converted into pesos with the new exchange rate. Could you clarify which assets are these?

[Lorenzo Dominique Berho Carranza, executive]

Yes. I did get it -- Juan, I did get it clear. And that is not the situation. We have dollar leases, and they are -- stay in dollars. And we have the peso leases that we have with clients in the consumer goods business. And we have mentioned them before, it's OXXO, Nestle, Danone Group. I mean, those are the ones that stay in pesos. So there is no change. That was never mentioned by anybody from Vesta.

[Operator]

Our next question is coming from Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

My question is regarding the 5% that you mentioned...

[Operator]

I'm sorry, we seem to have lost Vanessa. We'll move on to our next question, which is coming from Armando Rodriguez of Signum Research.

[Armando Rodriguez, analyst]

My question is just to know, during these circumstances, if we should expect some changes on your asset recycling program and also on your buyback program in order to preserve liquidity? That's my only question.

[Lorenzo Dominique Berho Carranza, executive]

Gracias, Armando. Thank you for being on the call. Regarding the buyback program, as you know, we were active throughout the first quarter, which was part of our program and plan. Today, we're not active on the buyback. I think that currently, it's important to preserve cash. See how -- after the dust settles where we're at. And I think at that time, we will analyze further. But for the moment, we are preserving cash, which we believe is the appropriate thing to do.

And regarding the asset recycling program, it's part of our Level 3 Strategy, and we will do it only if the environment permits. As for the moment, we are not executing any transactions. We did one last year. It was a good timing to do a transaction. And we believe that in the future, there will be other opportunities to price our properties well and to be successful on an asset recycling program.

[Operator]

Our next question is coming from Froylan Mendez of JPMorgan Chase.

[Fernando Froylan Mendez Solther, analyst]

On buybacks, should we be expecting that every dollar now not going to development should be going to share repurchases? Can you tell me your thoughts on canceling those shares? That's my first question. And secondly, on margins. This quarter, margin contraction follows almost 4 quarters of year-on-year contraction. So what is happening on the margin front? Should we expect this to be a one-off and normalize through the rest of the year?

[Juan Felipe Sottil Achuttegui, executive]

Let me take these ones. Share repurchase. Look, right now, the priority of the company is to devote our cash reserves, which are substantial, the operations, that is you help clients by deferring rental payments, you're in effect not receiving cash. So cash preservation is paramount at this time. So we have contracted our CapEx expenditures significantly. As Lorenzo mentioned, we're not going to do any spec buildings, inventory buildings for the next couple of quarters. And we will be doing the same on -- from a capital allocation point of view into the repurchase of shares. I don't think that we're going to be active at all over the next couple of quarters. We will see -- this is a day-by-day situation. But I don't expect to be active. This is the matter of cash preservation during these times.

Regarding cancellation of the repurchased shares that we have done in the past, let me confirm and underline that every share that we repurchase gets canceled. And that's what we will do. You can expect that the balance that we announced of shares that we have repurchased on the -- the last time we did a summary was on the shareholder meeting of March. Download that presentation. All of those shares are going to be canceled. So that's what you can expect.

Regarding margin contraction, look, we're -- margins have been affected mainly by expenses of maintenance last quarter, and certain reserves on accounts receivable that we have done last quarter and this quarter. We're being extra prudent on receivables. And I think that the things we're going to be doing -- financing of clients, we have to be incredibly transparent and incredibly precise in taking -- very careful ensuring a strong book, all the precautionary measures impact the receivables as we -- management's opinion on the help of our clients. But looking forward, what I can expect is that margins are going to grow. The main reason for it is, most of our expenses are peso based. Pesos are going to be depreciating throughout the rest of the year. And as our rental income is mostly denominated in dollars, that will tend to increase our margins across the board. So that's what I see looking forward.

[Operator]

Our next question is coming from Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

I'm back. So regarding the question about -- that I was making. So 5% of the rent requests that you received, is that the impact to annual revenues that you're expecting from these deferrals? Or are you saying that the tenants that made the requests represent normally the 5% of your annual revenue? That's the first question.

The second one, can you clarify whether you are going to charge interest for the rents -- for the rent deferrals? Is that -- is this financing of rents? Or is there going to be 0 interest on those deferrals for clients? And the third one is, if you can quantify what percentage of your tenants are currently not operating at the plants?

[Lorenzo Dominique Berho Carranza, executive]

Vanessa, this is Lorenzo. And thank you for jumping back to the call and making these important questions, which I think would be very useful in terms to clarify to the whole audience where we're standing. Regarding the rent -- the client requests that we have been getting, it's 5 -- so the requests represents 5% of total income. That's the amount of requests. That doesn't mean that, that will be the impact for the company. Importantly, the way that we're negotiating is a way where we can defer the rents or defer part of those rents. That's part of what we are trying to negotiate, so that we do not have a major impact in the income, total annual income on the company.

The way we're negotiating is deferring the rents so that they can pay at some point in time, according to their business, according to the situation where they are. And I think this is where communication with our clients is very important. And knowing them for many years is what gives us the advantage of really be able to understand their situation and hopefully, find a great solution for them so that they can also overcome the current situation and a very good solution for us in order to be able to collect rents at some point in time and keep on a long-term relationship with our clients.

Regarding the interest, I believe that it's kind of secondary. We do not make money out of interest, out of payments on rents normally. So in the end, I think we're focusing more on the negotiation of the rental income that we want to defer more than interest.

Regarding your question on which companies are -- I think, that are not in operation right now. Is that correct?

[Vanessa Quiroga, analyst]

Correct. Yes.

[Lorenzo Dominique Berho Carranza, executive]

Okay. Okay. Yes. So companies that currently have complete shutdown is, to be precise, 32%. This is up to this week. These are very recent numbers. These are updated every week. But we know that -- and so this is -- but many of the companies also have had a major slowdown situation. And that's -- so those together account for roughly 60%. If it's shutdown or major slowdown, we think that both of them are pretty much in a similar situation. And we believe that those companies will get back in track at some point during the -- during end -- probably end of next month. It's important to understand, and you have all heard the news regarding the supply chain on the auto industry, and how important Mexico is to the U.S. auto industry. So there is -- at some point in time, there would be a slowly but prudent way in order to start operations on many of these facilities.

What we're currently working -- and many of these companies, as you know, the Tier 1 companies in the auto sector, these are very well capitalized companies today, very different to 2008 and 2009. I think many of them are key to the final OEMs and many of them have very modern facilities in Mexico, which I think is going to help them in order to start operations and have the right components with a good cost approach, which I believe is also very important to consider. Probably just to add on that, I think that what we are doing currently is also working, on really having the most sanitized industrial parks throughout Mexico with a high standards and trying to foster our clients to kind of keep the same standards and have very good operational measurements -- measures -- I mean, health measures in their operations whenever they resume operations, which -- it will be at some point, no? And that's something that we're going to be -- we're going to have to focus, particularly in this quarter will be key for our operational team.

[Vanessa Quiroga, analyst]

If I can just make one last question, sorry. Maybe it's for Juan. The -- how are collections done so far in April? What percentage of the rents for the months have you been able to collect compared to last year, if you have that information handy?

[Juan Felipe Sottil Achuttegui, executive]

Sure, Vanessa...

[Lorenzo Dominique Berho Carranza, executive]

I have that, Vanessa. So the number as of last Monday was 75% of rents have been collected. So we believe that we're going to have a good -- in the end, good collection for the rest of the month.

[Juan Felipe Sottil Achuttegui, executive]

Basically in line. I don't see any particular trend if I compare April collection with March or any typical month.

[Lorenzo Dominique Berho Carranza, executive]

Vanessa, I will just go over a little bit on that question. I think that it will be -- we're keeping an eye every day on collection. And that's what we have been doing through April. That's why I knew the number well. And that's part of the task team that we have incorporated. But definitely, that's something that we're going to be watching very closely through the next quarter, particularly, which is the one that we believe that will have the most differences to what normal would be. And so May is going to be important and even June is going to be important. So that's something that we're keeping an eye on. And we believe that we are in a good position to overcome that particular situation, even if the percentage of payments, it's lower than the typical 100% or close to 100%.

[Operator]

Our next question is coming from Francisco Suarez of Scotiabank.

[Francisco Suarez, analyst]

Apologies if you have answered this question because I got briefly disconnected. The question that I have is that, if you are seeing a potential TIs emerging out of COVID-19, and if that -- it's actually an opportunity for you guys to negotiate with your tenants perhaps lengthening the life of the contracts or perhaps an enhancement in rents. And also the second question, if I may, relates to the -- with the overall disruption that you are seeing, I mean, particularly on those tenants that have no activity in their operations. Is that correlated, I guess, with the equity of what industries are essential and what industries are not considered essential in Mexico?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Francisco, and thank you for being on the call. This is Lorenzo again. I think that it does rely -- part of it, it's because of some industries are not considered essential for the Mexican government. That's correct. And I think -- and on top of that, there's also other companies that are having more -- are taking a bit more percussions also because of their global outreach or -- yes, yes, probably their own standards. It's a bit of combination of both. But even the ones that are operating are taking a lot of precautions. But in the end, I think it relies a lot on the -- on how essential they might be and how they are considered in the Mexican -- within the Mexican federal government standards and measures. Then regarding your question on -- I think it was tenant improvement, TIs?

[Francisco Suarez, analyst]

Yes.

[Lorenzo Dominique Berho Carranza, executive]

Normally -- okay. So we have not been getting requests particularly on tenant improvements per se. But what we have been doing is, now that we're in touch with our clients for whatever reason, clearly, we are negotiating with them, and we're negotiating extensions of leases. We are negotiating, in some cases -- normally when we do renewals, we also incorporate sometimes some investment to the company. And I think that's normal in a regular renewal environment, that's something that we would be doing. But we have not seen any major TIs investments requests for the moment being -- for this particular situation. I think it's just the normal situation.

[Operator]

Our next question is coming from Eduardo Altamirano of HSBC.

[Eduardo Altamirano, analyst]

I understand you canceled or at least suspended developments for the time being, but I was curious to find out whether you're getting any inquiries in terms of expansions, developments from current or even new parties. We've heard some chatter from other realty groups in the space that they are getting additional requests for more GLA. So just wanted to see what your tenants or at least potential tenants are saying.

[Juan Felipe Sottil Achuttegui, executive]

Thank you very much, Eduardo, and to be frank, you're talking about the opportunities, and we wanted to update, to give the turn of this conversation to how we are playing a defensive role for the moment. And I think that's what Vesta is currently focusing on. Nevertheless, there's definitely certain situations which have turned into opportunities. We have seen that already with some clients requesting immediate space, some clients requesting expansions. We're dealing with those. And I mean, we did an announcement early last week, and there are certain industries which are just moving incredibly fast, particularly e-commerce and logistics. We're very happy that we brought 2 new tenants to the list of tenants for Vesta. These are fantastic companies. And they're going to be -- we have large plants, 1 million square feet for an e-commerce and goods and beverage in Guadalajara and Puebla, which are strong consumer base markets. And in the end, we're going to see -- we see the -- we're going to see a lot of demand for these type of industries, particularly e-commerce, which was lagging in Mexico. We see that they're looking for more space in new markets, and Vesta is well positioned to take those opportunities. Hopefully, next quarter, we can talk about opportunities and growth. And in the meantime, we want to keep on focusing to overcome the situation and make our tenants also overcome the particular situation. And I think with that, we're going to see these opportunities and even more.

[Operator]

[Operator Instructions] Our next question is coming from Ben Rummelhart of American Equity.

[Benjamin Rummelhart;American Equity;Analyst, analyst]

I just had a question, again, coming back to the rent relief requests. You mentioned 5%. Have you received any kind of indication from any other tenants who might not have requested formally for rent relief, but have given you some indication that, that might be necessary upcoming? And if so, what percentage of tenants would that be?

And then also, just kind of to understand, is it kind of a month-by-month request? Or is it you're granting 1 month, 2 months? Kind of how you're looking at those?

[Lorenzo Dominique Berho Carranza, executive]

Okay. Ben, thank you very much for being on the call and for your question. I think it's important to mention that as of today, it's 5% of total annual revenues, what we are currently under negotiations. Nevertheless, that number will increase. I think that's normal. I think that the companies are assessing their situation. And I'm pretty sure that, that number is going to be growing at some point. Nevertheless, I think we have already a good indication if this is going to be a major number or not. I believe that with what we have seen today, we have some room to maneuver even more requests at some point and we'll not put the company into a very difficult situation. We will analyze them and with our COVID-19 task team give a response back soon. Again, there will be cases where we can be proactive and supportive. And then there will be cases where pretty much -- we can pretty much keep the same situation where we're at. So we're -- I'm sure that there will be more cases of those.

And what your second question was, can you repeat that?

[Benjamin Rummelhart;American Equity;Analyst, analyst]

Yes. I was -- the rents -- the deferrals that you've granted, if those are based on month-to-month and then just deferring till the end of the year? Or if you just said, we're granting you 2 months. Or if they're hard amounts of time?

[Lorenzo Dominique Berho Carranza, executive]

Okay. So yes, it's case by case. Normally, when -- the typical relief ask is a tenant comes and says, I will not be operating fully for the next couple of months. What can you do about it? So normally, they are already anticipating for 2 months or 3 months, and then we give back -- in a case by case, we give a response on how to defer part of the payment at some point in the next -- throughout -- in the next year, throughout the year. So it's case by case. But normally, it's not that they are coming just for this month. They come for the next -- to make a plan and to have an addendum to the lease agreement.

What we are also doing is having promissory notes, signing together with our tenants and ones that we get into an agreement. And with that, we expect to collect that rent or part of that rent at some point throughout the year. But it's in a case-by-case basis.

[Operator]

That brings us to the end of our question-and-answer session. I would like to turn the floor back over to Mr. Berho for closing comments.

[Lorenzo Dominique Berho Carranza, executive]

Great. Well, thank you, everybody. Thank you, operator for this call. This is a very important call for us to keep communicating to our investors who have trusted us through good times, through difficult times. Now more than ever, we want to wish you all to be safe at home, that may be your family safe. And we're going to keep on close communication with you.

To final -- to make some final remarks, I would like to highlight that our Level 3 Strategy was actually designed to make Vesta a more flexible and resilient company in addition to driving FFO and net asset value to higher levels, among other objectives. And Vesta's strengths lies in our leadership team, employees, balance sheet, our relationship with our clients as well as our long-term leases with them. Although much about the current and potential impact of COVID-19 is currently unknown, we are well prepared and also well positioned from a competitive standpoint. I appreciate senior management support throughout these difficult times and applaud a great first quarter operating results, which will fortify our position to overcome the economic global challenges.

Thank you again for joining us today's call, and we look forward to providing further updates during our second quarter call in July. Be safe.

[Operator]

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.