Vesta Real Estate Corporation SAB de CV

NYSE:VTMX

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by. Welcome to the Vesta Second Quarter 2021 Results Conference Call. [Operator Instructions] I would now like to turn the call over to your host for today's call, Ms. Claudia Medina, Vesta's Head of Communications. Please go ahead.

[Claudia Medina, executive]

Thank you, and good morning. Welcome to Vesta's conference call to review our second quarter 2021 results. On today's call will be Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, Chief Financial Officer.

Our results were released yesterday afternoon and can be found on the Investor Relations section of our website along with our supplemental package and the appropriate filings with the Mexican Stock Exchange. A replay will be available shortly at the conclusion of the call.

Certain comments we make during today's discussion will be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to the future performance of our portfolio, financing activities, our pipeline and other investments. All forward-looking statements represent Vesta's judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Investors are asked to review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the Mexican Stock Exchange.

In particular, uncertainty remains about the duration and contemplated impact of the COVID-19 pandemic. This means Vesta's results could change at any time as the impact of COVID-19 on our company's business results. Our outlook is the best estimate based on the information available as of today's date. Finally, note that all figures included herein were prepared in accordance with IFRS and are stated in normal U.S. dollars unless otherwise noted.

With that, I will now turn the call over to Mr. Berho.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Claudia, and good morning, everyone. Thank you for joining us today. The first quarter of 2021 was a positive but tentative start to the year, and I'm pleased to say we saw continued strengthening during the second quarter. We reached a decisive moment having passed an inflection point as the unprecedented effects of the COVID-19 pandemic finally showed significant signs of resigning. Demand for industrial and logistics real estate in Mexico is gaining momentum on the back of meaningful U.S. economic recovery. Mexico's industrial real estate market reached more than 800 million square feet during the second quarter with 34 million square feet in available gross leasable area. Today, Vesta's tenants have also reached a comfort level where they're starting to make decisions, many who are expanding operations.

Turning to our quarterly results. Vesta's second quarter 2021 revenues increased to $39.8 million, an 8.6% year-on-year increase, while NOI and EBITDA increased 10.2% and 9.8%, respectively. Our second quarter performance was supported by the inflow of our $229 million equity follow-on proceeds, with strong Level 3 strategy execution and solid activity due to close client relationships, strong sales and marketing and our country's outstanding reputation as a permanent global industrial manufacturing hub. We saw demand for industrial space from high-quality tenants and a wide range of international and local companies and sectors during the quarter, including Coppel, The Home Depot and Samsung, among others. We pre-leased a development building with Eaton Corporation that is currently under construction.

Reviewing our portfolio stats at quarter end, leasing reached 1.3 million square feet with 92.5% occupancy in the second quarter, up from 90% in the first quarter 2021. It's important to note that today, Vesta has ultra low vacancy numbers in various healthy markets, particularly in Northern Mexico. E-commerce and logistics represented 994,000 square feet during the quarter, 72% of our total leasing. Our success in this regard reflects a continued e-commerce focus as part of our nimble and adaptive Level 3 strategy. With Tijuana and Puebla as 2 newly added e-commerce markets for Vesta during the second quarter. We also saw promising leasing activity from the electronics, electric car component and energy sectors. Further, while construction costs have increased, demand for Vesta's buildings remained strong due to our demonstrated ability to differentiate ourselves through Vesta's unique and compelling product and offering that's tailored to our customer-specific needs.

Taking a closer look at regional dynamics, automotive and logistics continue to drive future investments within the Bajio region, with strong performance in data center land purchases, tenant expansions and build-to-suit construction during the second quarter. Demand for industrial space in the Mexico City metropolitan area continued to be led by logistics and e-commerce tenants. We also note occupancy increases with transactions for safety stock facilities. In Northern Mexico, the Monterrey Industrial market remains active with the highest half year net absorption in the last 10 years. Similarly, demand is outpacing supply in the Tijuana and Juarez market. Tijuana and Juarez comprised 41% of second quarter leasing activity with Tijuana achieving a 12.6% increase compared with previous tenants in terms of rents.

Inflation had a favorable impact in our company's uniquely dollar-denominated rents during the quarter, an important competitive advantage related to our peers. Vesta's U.S. dollar-denominated contractual rent increased indexed to the U.S. CPI, were favorably impacted by inflation during the first half of the year, as the U.S. CPI increased to 5.4% in June from 1.4% in January 2021. Further, looking back at prior periods of inflation in relation to commercial real estate, property values and rent levels have increased overall. Given that these 2 items are primary drivers of real estate returns, a natural inflationary hedge is built into real estate investment, providing security in times of economic volatility. This has never been more evident than in the current environment. We maintain an unwavering focus on ESG excellence for which we were recognized during the second quarter when Vesta was included in the S&P Bolsa Mexicana de Valores Total Mexico ESG Index based on the S&P's Corporate Sustainability Assessment for the second consecutive year.

In conclusion, following a strong start to the year, we have hit the ground running in today's invigorating market environment. We are as bullish as we have ever been on our outlook for industrial fundamentals and the strength of our markets. And we foresee a continued strong trend in the quarters ahead with robust cash flow outflows from new projects under development. Our concentration on the segments which drive during the pandemic, e-commerce, in particular, proved to be a winning strategy. We are focused on expanding our e-commerce footprint into new markets through strong relationships with high-quality global clients in diversified industry sectors while capturing the opportunities we're seeing related to U.S. clients near-shoring trends as well as exciting new Asian clients now re-shoring to Mexico. Properties in our warehouse and our markets continue to appreciate in value. It will be hard for them not to, with new supply remaining constrained in our target markets and tenants looking for space to accommodate growth and access to Mexico's uniquely skilled labor centers.

Let me now turn our discussion over to Juan, who will review key financial highlights for us.

[Juan Felipe Sottil Achuttegui, executive]

Thank you, Lorenzo, and good day, everyone. Let me start an update of our financial performance for the second quarter, beginning with our P&L. Total revenue increased 8.6% to $39.8 million, mainly due to rental revenue coming from new leases and inflation adjustments to rented properties made during the [indiscernible]. This was partially offset by expiring leases that were not renewed in the first quarter of 2021. And to a lesser extent, the lower rental rates on certain leases that renewed during the period. In terms of currency mix of the second quarter revenue, 87.8% was denominated in U.S. dollars, representing a significant increase from the $68.41 recorded last year in a comparable period.

Turning to costs. Total operating cost declined 9.2% to $2.6 million in this quarter. This was mainly due to lower cost from occupied properties, resulting in lower allowances for doubtful accounts from improved collections during the first half of the year. As a result of higher rental revenues and lower costs from occupied properties, net operating income increased 10.2% to $37.2 million, with a margin expanding 141 basis points to 94.3%, while administrative expenses were up 24.4%. This was mainly explained by noncash expenses due to an increase in the company's long-term compensation plan. In turn, EBITDA reached $33.7 million in the second quarter of this year and almost 10% increase compared to the prior year.

Moving now to the P&L, the total other income reached $8.6 million compared with [indiscernible] million in the second quarter of 2020. This increase was due to $91 million revaluation gain on investment property arising from better lease contracts term renewals. Improved discount rates and capitalization of the successful execution of new leases and building developments in the quarter. In addition, we recorded a gain of $4.3 million from the sale land in Querétaro. This was partially offset by higher interest expenses. As a result, we closed the quarter with a tax income of $110 million compared to $36 million in the second quarter of 2020, while pretax FFO decreased 16% to $17 million. The decrease in FFO is further explained by the effect of the debt repayment of $250 million of the previously contracted debt by the issuing of the new global bond in May. The prepayment cost and make-whole payment of $3.6 million, if not the make-whole payment, the FFO would have been $20.9 million representing a growth in FFO of 1.8% without the effect of the prepayments.

Now turning to our CapEx and portfolio composition. We invested $22.4 million in the quarter, mainly in the construction of new buildings in the Northern Bajio and Central regions. At the end of the second quarter, the total value of the portfolio was $2.23 billion, comprised of 189 high-quality industrial assets with a total GLA of 32 million square feet and with 87.8% of total income denominated in U.S. dollars. Year-over-year, our stabilized portfolio grew 5.6% to 31.2 million square feet with occupancy of 92.7%, down from 93.9% in the second quarter of last year. We ended the second quarter of 2021 with a land bank of 37.5 million square feet, down 10.1% sequentially. Due to the sale of the plot of land of Querétaro and the construction of the new inventory building.

Moving on to our capital structure. Following the successful completion of our equity offering in the first quarter of this year, we closed our inaugural sustainability-linked bond offering, becoming the first real estate company to issue a sustainability-linked bond out of Latin America. The 10-year $350 million notes that were placed at 3.625% interest rate, allow us to pay down debt as we mentioned. We extended the company's debt maturity profile, and together with the equity offering, provide us with financial flexibility and a strong balance sheet to execute against our Level 3 strategy.

Along these lines, we closed the quarter with a total debt of $945 million and a cash position that stands at $393 million. Net debt-to-EBITDA was 4.1x and our loan-to-value 35.1%. Finally, the company's Annual General Shareholders' Meeting subsequent to quarter end, Vesta shareholders agreed to pay a $55.78 million dividend in quarterly installments during this year. On July 15, we paid a cash dividend for the second quarter of 2021, equivalent to MXN 0.40265 per ordinary shares. With that, we conclude our second quarter review. Operator, could you please open the call for questions.

[Operator]

[Operator Instructions] First question comes from Gordon Lee with BTG Pactual.

[Gordon Lee, analyst]

A couple of questions. First, on the outlook for rents. A competitor of yours mentioned recently that they would expect rents in some markets to grow in dollar terms. This is contractual rents, double digits year-on-year, which obviously implies not only a boost from inflation, but significant real leasing spreads. Is that an outlook that you would concur with that you see sort of maybe high single digit and in some markets low double-digit contractual growth rates in rents? And the second question is on the financial side. So I guess this is for Juan. Your interest expense in the quarter was $16 million and it had been running around $9 million to $10 million quarterly prior to that. I assume that the $3.6 million in the prepayment expenses are included in the interest expense line. And in addition to that, would there be issuance costs related to the debt issuance? Or what would explain even beyond the $3.6 million in prepayment expenses that jump in quarterly interest expense?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Gordon, for being on the call. I will take first question and the second one will be for Juan. Yes, we are definitely in this times where we are seeing ultra-low vacancy rates in many of the markets, we are starting to see big hikes in terms of rents. As we mentioned only in Tijuana, we were able to sign leases with rents that are more than 10% above previous rents. And I think that this is exactly -- this is very well reflected not only in our assets, but mainly in most of the market in Tijuana, where there's really -- the vacancy rate, I believe, could be even less than 1%. And that's why it is important to have good land reserves to start new buildings, and I'm sure that the strategy would be to even prelease the buildings before developing them.

That similar trend in U.S. dollars is happening also in Ciudad Juarez where we have also low vacancy rates. But in the Bajio region, which we see also that there's several dollar leases. What we're seeing even that the market is probably not as hard as Tijuana and Juarez for the moment. We have seen a very resilient market with pretty low vacancy rates, very disciplined developers approach. And I'm sure that, that together with pent-up demand will trigger into high-growth rents in most of the markets throughout Mexico.

One of the things that we are seeing pretty much overall in all markets nationwide is that developers have a very disciplined approach towards development on top of many of them that do not have land reserves and do not have the infrastructure in the land reserves, such as energy, water, utilities -- other utilities. And I think Vesta on that regard is well positioned to capture some opportunities as we have been able to anticipate with good land acquisitions, with good infrastructure in our Vesta parks. And that's clearly going to be a key advantage looking forward for new projects that might be arriving from pent-up demand that we're seeing in many of the markets.

[Juan Felipe Sottil Achuttegui, executive]

Thanks for the question. Regarding the interest, yes, the total interest for the period was $16.4 million. If you remove the $3.6 million in hold payments for the refinancing of the debt portfolio, you will see the effect. And in terms of how that -- how the interest will increase, please take into account that we increased the debt amount of the company by $100 million by means of the issuance of the long-term bonds of $350 million. So net-net, our interest expense on a normalized basis will increase about $1 million per quarter -- $900,000 per quarter. That would be the effect.

Now the overall impact of the new borrowing is very beneficial for the company. The interest rate of the loan is particularly effective if you compare it with our average interest amount of the existing value to the issuance of 4%. So all in all, I think in terms of the debt, it gives a very strong signal to the market of the exception and ability of Vesta's global market. Now you also mentioned the issuance cost of the debt, this customary issuance cost to the debt amortized over 10 years of the bond, so that we'll consider on a quarterly basis on the interest expense. I don't know if it answers your questions fully.

[Operator]

Our next question comes from Javier Gayol with GBM.

[Javier Gayol Zabalgoitia, analyst]

I have a couple. My first question would be related to capital deployment. And I just wanted to see what's the company looking at in terms of CapEx throughout the year? And what are the main hurdles for that? So is it capital for the company, which I would expect not to be because of the recent equity offering? Or is it the returns that you're seeing? Is it land? What is your investment committee looking at, at this time that there's a good sentiment in the market? And my second question is related to Querétaro. Just if you could give us a little bit of a breakdown of what happened in that market in terms of land bank? We -- as you mentioned, we know you sold some land, but we could imply that you also acquired a higher market value land. So just a breakdown of what happened would be very helpful.

[Lorenzo Dominique Berho Carranza, executive]

Javier, thank you very much for being on the call. Regarding your first question on the capital deployment, definitely, the investment committee is very active looking at opportunities right now throughout many of the regions. We believe that the upcoming quarters will be key for some ground-up development starts. Returns are incredibly attractive. Even with some construction costs that have increased, we still see double-digit return on cost for development. And that's a particularly important spread when you compare with -- not only with the existing cap rates which are in the sub-7% area, but also with interest rates, which are currently at close to 3.5%, which is stated in the last bond offering that we did.

So spread investment is still going to be key for us. We're not considering any acquisitions. We believe that for the pricing of acquisitions, which are pretty rich, we are able to develop at a spread which, in the end, turns to be more accretive for our shareholders, and we're going to keep that same discipline looking forward. And we are seeing many of the markets recovering. We closed important transactions with good tenants as mentioned, with Home Depot, with Coppel, with Samsung and some other logistic companies throughout Mexico. And we believe that for the moment, we're in a great position to start ground-up development as we have done in the past, and it's going to be important to do some -- a combination of build-to-suit projects as well as spec buildings in some of the strongest markets at very attractive returns.

So that's something that we're going to be doing in the next upcoming quarters to start new projects. We already own land reserves in Tijuana, for example. We recently acquired land reserve in Monterrey, and we have some land reserves in other markets. And for other markets, we are looking at new land parcels. Getting into -- and pipeline is incredibly strong, and we believe it's coming from having very low quarters in the last economic cycle. But looking forward, we think that this is piling up very quickly with good quality tenants and strong demand in different sectors and in different regions.

Talking about Querétaro. What we did in Querétaro is we sold land -- and these times, we sold it to Microsoft, which is a -- for a data center. This was part of our strategy to sell part of the Vesta Park to final users and particularly final users that are not necessarily in our same business. We decided not to invest in data centers. And we have been selling land at very attractive pricing. And with that, we think that we are -- in Querétaro the next phase is to keep on developing in the Vesta Park that we have already put infrastructure in. There's no necessity to keep on selling land in Querétaro per se.

And actually, the land that we still own is going to be good to keep on developing build-to-suit and spec buildings for the upcoming years. And that's kind of the strategy in most of the markets where we own land, where we develop Vesta parks to develop build-to-suits and spec buildings for the sectors that we cater. In other markets, we might be selling a little bit of land, particularly where we have larger land reserves and part of the strategy is to sell the land and to make a good profit on some assets -- some land sales, too.

[Javier Gayol Zabalgoitia, analyst]

Thank you Lorenzo. That was very helpful. Congratulations on the results.

[Lorenzo Dominique Berho Carranza, executive]

Thank you very much, Javier.

[Operator]

Our next question comes from the line of Pablo Monsivais.

[Pablo Monsivais, analyst]

Actually, I have two. The first one is kind of a follow-up from a previous question. We have heard from competitors and other sources that construction costs have increased meaningfully. What's your take on that? Right now, we know that you achieve a 10% development yields. But what happens when construction cost increase 15% or even more? Can we expect lower yields going forward? That's the first question. And the second question is, again, similar to the previous question. It is again on [ land Querétaro ]. Over the last couple of years, it has been underperforming region. Are we close to an inflection point in terms of rents? I don't know what's your take on that?

[Lorenzo Dominique Berho Carranza, executive]

Pablo, thank you very much for the questions. And I will start with the second one. Definitely, we're seeing an inflection point clearly coming from good net absorption in some of the markets as it relates particularly with Querétaro and with Guanajuato, we are starting to see better demand. And I believe that absorption has come before rent increases. So now that we have, I believe, healthy vacancy rates throughout the markets because vacancies in Querétaro and Guanajuato are between 6% and -- 5% and 6%, it's really not a bad number. And we believe that from there on, we're going to start to see more rent increases in many of these markets.

Our focus is very clear. We like to focus on the best companies and have great creditworthy tenants. And that's the case of, for example, Home Depot, where we leased 175,000 square feet facility in Querétaro, a long-term lease in U.S. dollars, and that's something that we're going to keep on doing to have high-quality tenants in good dollar leases and long-term leases. And I believe that looking forward, rents are going to start picking up. Also related to increase in land values, Querétaro is one of the markets with the highest increase in land values. And as I stated earlier, we have 3 very clear signals of that 3 sales -- land sales close to $100 per square meter.

Secondly, we think that the increase in prices and cost -- in construction cost that will also trigger an increase in rent. And I believe that even that if cost of construction costs are increasing, we believe that development yields are still very appealing. In the past, we were able to do deals at 10% to 11% return on cost. So even with increasing construction costs, I think that returns are going to be incredibly attractive even if we will have to reduce a bit our yields, let's say, 50 basis points. I think that it's worth doing. It's worth developing to a spread. And still, I mean, we can be developing in the Bajio region at $45 a square foot, give or take; $50 a square foot for some build-to-suit projects. And that's compared with acquisitions, which could be in the $75 -- $70 to $80 per square foot range, I think it's worth considering development still and attract great companies to great buildings instead of acquiring at low returns.

[Operator]

Our next question comes from the line of Zoe Tan with Columbia Threadneedle.

[Zoe Tan, analyst]

This is Zoe. My question is with -- I saw headlines with the new Biden administration, are you seeing any change in terms of the enforcement of the 75% regional content requirement? And are you seeing that affect kind of the auto industry and the signing of new leases on that end?

[Lorenzo Dominique Berho Carranza, executive]

Great. Thank you Zoe, for being in the call, good talking to you. Definitely, there have been several headlines coming from the auto industry, particularly given the large disruption globally that there is in that sector. We believe that the main driver of it still has to be North American competitiveness. And in that regard, we feel very positive with the new Biden administration that -- that's exactly what they want to achieve. And to get competitiveness in North America, we believe that the integration of supply chains between Mexico and the U.S. has to be closer, narrower, and it's going to be every time more relevant.

That creates a good opportunity for facilities not only to keep producing in the U.S., but to expand the supply chains in Mexico because this is where they are -- they become competitive. And I believe that now with the Biden administration for the first time in many years, we're starting to see large announcements from American companies in Mexico, and I will use the example of General Motors. They did an announcement of $1 billion investment roughly a couple of months ago. We never heard of those $1 billion investments from American companies in the Trump administration. So I see that as a very positive sign, not only because it shows that companies feel comfortable in Mexico, but also because there's a big disruption now with electronic vehicles and companies are looking into Mexico for that particular sector.

So I think that the USMCA will have its own adjustments. There's a 3-year period where companies and automakers have to adapt to the regional content regulation. But I think it's good timing to adjust and that will clearly favor Mexico in order to attract more suppliers in that in a particular industry. The current Secretary of Economy, Tatiana Clouthier, is currently actually in Washington, talking about this particular situation in order to get to better agreements. And we see this as a favored sector now not only because of Biden, but also because of the disruption in the pandemic and geopolitical challenges.

[Zoe Tan, analyst]

Right. So like I was on the call with CBRE Mexico, and they mentioned that it seems like this is causing a delay because companies are trying to structure, like maybe having a main plant in the U.S. but the supply chain in Mexico. Are you seeing -- is that what you're hearing like that's causing some delay of signing leases? Or is that -- has that not been an issue where you're continuing to see companies moving to Mexico despite what is going on in Washington? Like is it a wait-and-see approach? Or do you think that companies are already making the decisions right now?

[Lorenzo Dominique Berho Carranza, executive]

No, I think the main delay was the pandemic. But clearly, the pandemic brought opportunities. And actually, right now, we are seeing a very strong pipeline. And remember that these investments are long-term investments in the auto sector with good high-quality tenants. And that's why sometimes they take a bit longer because of how their approach toward long-term investment. But actually, we're seeing some of the companies, Tier 1, Tier 2 companies, global companies in multi-regions expansions throughout Mexico. So it's not only one region, but some of them are opening several operations. So this is a huge opportunity. And -- but of course, I think that many of these companies, they do large investments in automation, in robotics, in machinery, in equipment, and there have been some delays. But looking forward and thinking long term, I think Mexico will be well positioned for them to establish operations over time.

[Operator]

Our next question comes from Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

I wanted to ask about land bank, the land values. We can see in your supplemental information that the land value for Querétaro per square foot increase by almost 170% quarter-on-quarter, while Tijuana declined about 35%. So I wanted to get more color on why -- I mean the reason for these drastic changes in these specific markets? The other one is some outlook regarding your land purchases. So you said that you are looking at different land parcels. So should we expect land acquisitions from Vesta in the coming months? And finally, maybe just more details about the increase in interest expense one?

[Lorenzo Dominique Berho Carranza, executive]

Great. Vanessa, thank you for being on the call. We -- in the Querétaro transaction in land, the increase comes from having a mark-to-market on the land, considering recent market transactions. And secondly, what we did also is we -- previously, we had the land as raw land value, and we had an infrastructure component to it. And now the land that already has the infrastructure because it has already been improved shows -- reflects that value of having improved land. And that's why the increase is a combination of infrastructure as well as market conditions. However -- and that's the third-party appraiser that does the appraise on the land value as well as the rest of the properties.

Yes, we're going to be buying more land in other markets. However, as you know, we are very disciplined in trying to hold a certain threshold in terms of land. But clearly, we think that Vesta has the ability of buying land, improving it, and the most important thing is anticipating to potential demand. And I think that this -- we are finding great opportunities. We did it in -- recently in Monterrey with our last mile location where we acquired land, and we developed and we recently closed the deal with a company for e-commerce and the same in Guadalajara, we acquired land. We developed the first anchor project for Mercado Libre. And I think that a particular anticipation is giving great results, and that's exactly what we're going to keep on doing.

And regarding the -- and yes, we have also -- we already have some land. We need to do improvements on some of the land, for example, in Tijuana, where we are going to be able to develop more than 1.5 million square feet in one particular project. The good thing is that the land is already ours and we bought at attractive price. And the same in Monterrey, where we're going -- where we also acquired more than 30 hectares, and we are going to start putting infrastructure in place this year.

And regarding the interest expense, I believe that what is important to understand is that this particular quarter we paid down the debt for Metlife 7-year loan that we have, and we paid down the debt for the syndicate loan. And both of them together with the make-whole breakage fees as well as prepayment of interest that gave us a total expense of approximately $3.4 million. So that particular expense on interest is only for the quarter since this was the quarter when we issued the bond as well as paid down the -- and refinanced the -- yes, payed down the debt that we have. So that's why we had a major expense on interest for this particular quarter, which is not going to be happening in the upcoming quarters, clearly.

[Vanessa Quiroga, analyst]

All that information is very helpful. So just a follow-up, Lorenzo, every land that you plan to buy, to acquire, do you expect to be able to anchor it like you did in Monterrey with Coppel and Guadalajara with Mercado Libre?

[Lorenzo Dominique Berho Carranza, executive]

Regularly yes, there is an anchor to the project. So normally, the Vesta parks we develop is -- we have -- we do build-to-suits as well as spec buildings. And sometimes we have a new business line, which we call spec-to-suit, which is we start the spec building, and while we are in pre-marketing stage or we start construction, we lease up the building, but instead of being -- only according to the terms of the client, it's a spec building which we really like because they are flexible. They are -- they last longer in terms of the design. We develop them to our needs. And I think that that's exactly what we're going to see looking forward. We're going to start specking. But however, in the process of marketing, we're pretty sure that we're going to be able to prelease some of the buildings. So yes, many of the projects will normally would have an important anchor like the one that you mentioned of Mercado Libre.

[Operator]

Next question comes from André Mazini with Citi.

[André Mazini, analyst]

Congrats on the results. So the first question would be on the current tax liability, right? So if you look at it both on a quarter-over-quarter -- I'm sorry, second Q '21 versus second Q '20 and also the first 6 months of '21 versus the first 6 months of 2020, there was an important increase, right, in the current tax. So has anything changed in the tax rate, the effective tax rate that you guys have to pay? I remember, a while back, there was some discussion in Mexico about property tax. I don't think that went through. But any structural change for the higher current tax deal that you guys are -- are witnessing this year versus in 2020?

And the second question, a broader one. On the use of proceeds from the follow-on. Of course, the market is pretty hot. If you guys could remind us again about the time line for user proceeds, I think something around 12 to 18 months was something that you guys had in mind at the time of the IPO. But if the market has with the GM, huge investments that you were talking about, the rules of origin and companies having to accommodate and more production in North America. So anything changed in the proceeds, maybe a little bit faster, your take on that?

[Juan Felipe Sottil Achuttegui, executive]

I can address the first question. Regarding the taxes, look, nothing as a structural change. But please bear in mind that -- I mean, this quarter, we paid, roughly speaking, in current taxes, $13.5 million. In 2019, we paid a similarly high amount. I mean this is -- the normal run rate of -- I mean nothing structurally has changed, but current taxes are significantly affected by trends in exchange rates. So this particular year, exchange rate was more stable on this particular quarter. And therefore, the operational taxes were roughly what they showed. Current tax is quite volatile in Vesta because of exchange rate fluctuations. And -- but that's about it. I mean, nothing particularly changed on our quarterly -- on our effective tax rates for quarterly operations.

[Operator]

Our next question comes from Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

My question has to do with -- also related to Javier's question on capital deployment. The pace of our new construction so far year-to-date has been, I believe, somewhere around 60,000 square meters of new GLA. Why given the strong demand that we're seeing in many markets, why we haven't seen yet a faster pace of new construction? Is that related because you're preparing the land for that. For example, in the case of Monterrey, and I don't know guys the same case for Tijuana. And so what -- you did mention that some new projects will be approved probably in the coming quarters. Can we see this pace of the new construction accelerate significantly already in the second half? If you can give more details on this.

[Lorenzo Dominique Berho Carranza, executive]

Sure, Adrian, great having you on the call. Yes, when the development pipeline that we show is only a picture in the quarter. But I think you have to exactly start considering that, that yes in the next quarters, we're going to start new construction, and there's a lot that is -- we have been working on our desks in terms of design, in terms of evaluations, in terms of bidding processes, and there is a huge work that is being done. But normally, we present it on development pipeline when we really start construction of it. That's an important milestone the way that we report. So clearly, next quarter -- so we are currently under approval stage, but clearly, the next quarter, that particular pace will improve. Now that we have raised the capital, now that we have actually increased by an important amount occupancy, now that we see that net absorption is really happening. This is exactly the right timing to start doing more specs, and we are already negotiating some build-to-suit. So definitely, we're going to see a way larger, stronger pace in terms of development in the upcoming quarters, Adrian.

And that's something that we -- not only we start, we want to start stronger, but also we will monitor very closely according to how we see each of the markets. And that's something that we have done in the past. We can accelerate when required. And when we need to stop also, we know that this company can stop when needed. But currently, conditions look like favorably for the company with a strong balance sheet, with good land reserves, with well marketing leaders in each of the regions and a strong pipeline. So everything went favorably for us. And that's something that we're going to be giving more clarity in the upcoming quarters.

[Adrian Huerta, analyst]

And most of these new construction that we could see over the coming quarters, is that going to be highly concentrated in these 2 markets, Tijuana and Monterrey, basically?

[Lorenzo Dominique Berho Carranza, executive]

I think that it will be -- in pretty much all regions, also even some in the north, some in the Bajio and there could be more land acquisitions in other markets too. So -- but yes, clearly, we see good demand in Tijuana. As I mentioned, we have a 30-hectare plot of land where we can develop 1.5 million square feet. It doesn't mean that we're going to develop everything at the same time, but we have good land reserves for good timing. The same with Monterrey, where we acquired 30 hectares in Apodaca. In Juarez we started a new inventory building. And actually, in Juarez, we started 250,000 square foot facility. And as soon as we hit the ground, we signed a long-term lease with Eaton Corporation. So those are exactly the examples that we want to repeat. And I think that we're going to be able to repeat all of those in many of the markets that are favorably at the moment.

[Adrian Huerta, analyst]

And I would assume that you're looking for land in Juarez because we basically run out of land in that market. Is that a market that where you're going to be looking for -- to invest in land?

[Lorenzo Dominique Berho Carranza, executive]

Yes, that's a good point. And you got it right. The way we work is we acquire land, and when we finalize developing it, that's when we acquire more, and that's exactly what we're going to be doing as -- as mentioned, Juarez has been a key market for us. We have been developing a very attractive spread, developing at attractive cost. So just I recently read an acquisition which was recently in $80 per square foot. Well, I'd rather develop at $50 per square foot than acquire at $80 a square foot. So that's why for us, it's important to keep acquiring land and developing to higher spreads, and there's going to be a huge value creation for our shareholders. And Juarez is a good example where we can create that particular value.

[Operator]

Our next question comes from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

The question that I have relates to a follow-up made by Zoe on supply chain configuration. To what extent decarbonization across supply chains in the auto industry is also another huge driver to get more net absorption in your facilities, assuming that your facilities are the right ones to do that? Or to what extent that is actually a risk given your overall exposure that you have to the auto industry?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Francisco. If I get it right, it's regarding carbonization, do you mean that the shift towards electric vehicles, is that...

[Francisco Suarez, analyst]

A shift towards electric vehicles, but also to decarbonizing the supply chain, namely reducing your carbon footprint regardless if you engage in EVs or not?

[Lorenzo Dominique Berho Carranza, executive]

Okay. Okay. Good. Well, that's an important point. So probably the way I would approach your question is by saying that we recently raised the first public ESG bond for a real estate company in Mexico. Actually, I think it was even Latin America. And one of the objectives that we have is that we develop with green -- to green standards all of the projects that we have currently under construction. And we are going to increase our GLA in terms of green-certified buildings. And that's exactly our approach towards development and towards our ESG exposure, particularly when it comes to sustainability and to green buildings. And that's actually for all of our buildings, for all our sectors.

We think that there's every time more requirements from companies on this type of facilities. We see more value in this type of facilities and that's not only in the auto sector, I think that we're seeing it in different markets. Many of the products that we're currently developing like the one in Mercado Libre, which is an e-commerce project is actually LEED certified building. So in that case, I think that looking forward, and you're right, it's not only about there's not only going to be electric vehicles looking forward, there's also going to be internal combustion still for many years. But I think that in that regard, suppliers as well as OEMs are very conscious on their approach. But it's definitely the trend is that everybody at some point wants to get to net-zero emissions. And I think that by doing green-certified buildings, we will contribute positively to that.

[Francisco Suarez, analyst]

Perfect. And if I may a follow-up on that. Considering the unfriendly policies towards renewables, do you think that might be a risk of OEMs to reconsider further relocation of production to Mexico? Or do you think that is not going to be an issue?

[Lorenzo Dominique Berho Carranza, executive]

Sure. The positive news is that Mexico is part of a global environment. And I think that if you look at political leadership in the U.S. and other countries, it's actually the other way around. So everybody is looking at considering more renewable energies, considering more net-zero emissions in sectors and industries. And even in Mexico, if politics are not necessarily looking there -- looking that way. I think that there is -- we are more part of a global environment, and there's definitely opportunities for Mexico in that regard. So OEMs are having its own challenges globally. OEMs are having its own challenges in Mexico. And it is unfortunate that the current government is not supporting more renewable energies. However, I think that -- and it's going to be a matter of time that they access more renewable energies, and they're going to see that there's really no other alternative but to have more cost-efficient energy and cleaner energy and that at some point, they will figure out that, that's going to be a requirement. But for the moment, I think there's too much political noise on that regard now.

[Operator]

We have reached bottom of the hour. Our last question will be from Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

Congratulations on the solid results. So my question is about your inventory buildings that nowadays represents like 1 million square feet market, for example, in Tijuana, Ciudad Juarez and Guadalajara. So my question here based on your strong net absorption on these markets, so if you feel comfortable with this share of inventory buildings compared to the total portfolio? That's my only question.

[Lorenzo Dominique Berho Carranza, executive]

Sorry, Armando, could you please repeat your question?

[Armando Rodriguez, analyst]

Yes. Sure. My question is about your inventory buildings that represents more or less 1 million square feet at the second quarter. So my question here is, if you feel comfortable with this share of inventory buildings compared to your total portfolio?

[Lorenzo Dominique Berho Carranza, executive]

Okay. So inventory buildings, you mean the ones that are currently under development, right, on the development pipeline?

[Armando Rodriguez, analyst]

Yes. That's right, particularly in Tijuana, Ciudad Juarez and Guadalajara.

[Lorenzo Dominique Berho Carranza, executive]

Absolutely. Absolutely. Yes. Actually, this is exactly where we believe we can create the most value by developing an attractive returns, 10%, 11% return on cost. We have 3 large projects. Actually, out of the 3 of those, one of them has already been leased to -- the one in Ciudad Juarez to Eaton Corporation, long-term lease U.S. dollars. Good quality tenants, which matches perfectly to Vesta. And Tijuana and Guadalajara we see very favorably, particularly because Tijuana, there is really no building in this size. And actually, even before start, we already had a good lineup of potential tenants for that particular building. So we feel very comfortable. And actually, if we lease up that building throughout construction, we will soon start the second inventory building. And the same for Guadalajara. Guadalajara is a strong market.

We have leased up more than 800,000 square feet with Mercado Libre. We see good demand. There was record demand in the -- record leasing activity in the last quarters in Guadalajara. The problem that we had is we didn't have a building available. So that's why it was important for us to start construction, and we feel very, very confident that, that's going to be leased up at some point. And again, if we are able to lease up part of that, in the meantime, we're going to start construction sooner for another inventory building and to keep with that virtuous development circle.

[Operator]

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

[Lorenzo Dominique Berho Carranza, executive]

Thank you, operator, and thank you, everyone, for joining our call today. We are very excited about the second quarter results, and also, we're very excited by the upcoming opportunities that the third quarter and fourth quarter might represent for us. Vesta has passed an important inflection point, which clearly resonated in this quarter's key operating and financial metrics. Today, we are in a position of strength and forward momentum, and we will leverage our company's ability to create value based on decades of experience as real estate operators. I would like to thank the entire Vesta team for their important contribution for the performance. Thank you all. We look forward to providing further updates on our second quarter call -- I'm sorry, on our third quarter call in October. Goodbye, everybody.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.