Vesta Real Estate Corporation SAB de CV

NYSE:VTMX

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Vesta's Third Quarter 2019 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]

Thanks, Rob, and thanks to everyone for joining our call to discuss Vesta's financial results for the third quarter of 2019. With us today from Vesta are Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, Chief Financial Officer. Following their prepared remarks, there will be a question-and-answer session, during which time, 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 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 October 25, 2019, and within the most recent regulatory filings for a 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.

I will now turn the call over to Mr. Berho. Please go ahead.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Christianne. Good day, everybody, and thank you for joining our earnings call.

During the third quarter, our Level 3 strategy became fully effective. Due to our new strategy's robust framework and strong fundamentals, we have gotten off to a strong start, which is reflective in Vesta's third quarter results.

As we explained during our Investor Day last June, the cornerstones of our Level 3 strategy are: maintaining and strengthening our current property portfolio; combining investments and divestments to continuously generate value for our fellow shareholders; further bolstering investors balance sheet while also diversifying our funding sources; and strengthening our organization to successfully execute our new 5-year strategy.

On the last point, I am pleased to share that our team clearly understands the strategic direction in which we're taking Vesta. And they are seizing the ambitious 2024 goals we have set, already identifying short-, medium- and long-term objectives to achieve them. Our team is showing tremendous commitment to making Vesta a best-in-class self-advised and self-managed real estate company.

As I noted in my quarterly letter, we delivered on all 4 components of our strategy during the quarter. Our pretax FFO and net asset value per share increased 15% and 10%, respectively, year-over-year. Leasing activity was solid across our property portfolio. We reached nearly 800,000 square feet of leased space, resulting in occupancy of 95.6% in our stabilized portfolio.

Importantly, we achieved this level of occupancy while remaining disciplined, maintaining a strong base of high-quality, creditworthy clients. Examples of this discipline are 3 noteworthy companies that are new Vesta tenants, 2 of which are Fortune 500 companies, FedEx and Home Depot. The other is DSV, one of the world's top logistic companies. Located in Bajio and Northern regions, the logistics operations of these clients also illustrate the success of our strategy to diversify our portfolio and include more tenants outside traditional client sectors.

I would like to point out that one of the newly occupied facilities will be devoted to e-commerce operations. We understand very well the importance of the prevailing trends in global logistics, particularly the significant growth opportunities within the e-commerce space and the crucial last-mile location advantage.

To be clear, we're not new to this market either and remain a strong player. Other recent additions to our extensive list of logistic tenants include DB Schenker and Axle logistics, which joined long-standing clients with logistic operations, such as Nestlé, OXXO, BMW, 3M, Nissan, [ Henkel ] and CJ Logistics.

Also, in line with our new Level 3 strategy, we are entering new geographic markets and preparing for future demand in the logistics sector. During the third quarter, we acquired new land located in Guadalajara, an economically vibrant city and Mexico's second largest. At this site, we plan to build a state-of-the-art Vesta park, one that is consistent with Vesta's clearly differentiated offering. In other words, it will be distinct from existing facilities in this particular market due to our buildings' hallmark features, high quality and well-designed. We expect to invest a total of $85 million to develop 1.7 million square feet of leasable space in a privileged location with last-mile logistic attributes. Additionally, we have begun construction of 3 new buildings in Juarez and Puebla, totaling 357,000 square feet, another $17.4 million investment in our development pipeline.

During the quarter, we acquired an additional 4.9 million shares. Since we have initiated the share repurchase program, we have bought back over $70 million worth of stock. This latest round of buybacks also increased Vesta's quarterly per share dividend by 16%.

Asset recycling remains another integral component of our strategy to drive shareholder value to maintain a robust balance sheet and to enhance financial flexibility for funding new higher returning investments. We demonstrated this capability last May with the sale of 8 properties at a significant premium to net asset value, and we remain confident that we can successfully complete similar divestments in the future as presented in the Level 3 strategy.

With respect to the macro environment, we remain vigilant about the risk of unstable economic and political environments in the world today. The external threats posed by the U.S.-China trade conflict, which has been impacting global economic growth, diminished automotive trade, a somewhat strained relationship between Mexico and the U.S. that has yet to be resolved, and as a consequence of all of these, unclear economic rules under which to operate in this complex international scenario. However, we remain cautiously optimistic and still take a prudent approach to every aspect of our business.

Consistent with our strategy, we do not compromise with regard to the quality of the companies we accept as tenants, the lease agreements we signed with them, the high-dollar ratio of our revenue base or our company's credit ratings.

Lastly, despite exogenous risk that I have referenced, Mexico remains a highly attractive location for foreign investment by global manufacturing and logistic companies that seek competitive advantage, if not more attractive given the geopolitical dynamics that prevail today.

We continually strive to operate more sustainably as another way to differentiate ourselves in the market. So I'm pleased to report that Vesta has been included in the Dow Jones Sustainability MILA Pacific Alliance Index, something that is also personally gratifying as we have a high conviction of sustainable culture in everything we do. We're one of the few realty companies in the region to be recognized for excellence in environmental, social and corporate governance practices, which clearly evidences our strong commitment to global best practices for ESG.

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

[Juan Felipe Sottil Achuttegui, executive]

Thank you, Lorenzo, and good day, everyone. Before I address this quarter financial results, I'd like to point out that we adjusted our 2019 guidance to reflect the recent 8 property portfolio sale and a delay in income generation at certain new projects. In addition, it is important to explain that without the effect of the portfolio sale, we would have expected to achieve 11% revenue growth versus the 12% at the lower end of the growth range of our previous 2019 guidance. We believe this revenue setback is only short term in nature as our vacant projects are beginning to gain traction with a robust pipeline and a strategy to speed up these signed leases for the pending vacancies. In the meantime, we are cautious in our development efforts in markets with lower absorption levels than in the past. We believe these lower levels follow the accelerated growth that some markets have experienced in more recent years.

With that said, we now expect full year rental revenues to grow between 7.5% to 8.5% versus prior guidance of 12% and 14%. We're also lowering slightly our previously forecast NOI margin to 95% from 96% and our EBITDA margin from 84% from -- to -- from 85%.

Returning to our third quarter results, I will start with the top line. Our third quarter revenue increased nearly 6% year-over-year to $36 million, mainly due to higher occupancy, which rose to 92.6% from 91.2% (sic) [ 91.9% ] last year and to a 3.6% increase in rent per square foot on a healthy supply dynamics in our markets.

Revenues were partly offset, among other items, for a $2.6 million decrease in rental income, which was related to expired leases that were not renewed during the quarter. Lastly, on top line, the percentage of our revenue denominated in dollars expanded 150 basis points to 86.5% compared to the third quarter 2018.

Our leasing activity was solid. 798,000 square feet, of which 484,000 was new leases with current as well as new international clients such as those highlighted by Lorenzo. 314,000 square feet was lease renewals, bringing maturing GLA to only 0.5% in 2019 and 6.6% next year. At the end of the quarter, our weighted average lease maturity profile was 5 years, which remains the highest in our sector.

Moving to our main expenses in the quarter. Vesta operating costs increased 23% to $1.8 million, reflecting higher costs in occupying properties, which rose 31% to $1.7 million. That leads us to a net operating income, which increased nearly 5% to just over $34 million. The corresponding margin decreased 91 basis points to 95.2% due to higher cost in related properties generating rental income.

Our administrative expenses increased a little over 15% to $4.5 million, mostly due to higher employee benefits. Vesta EBITDA rose 4.3% to $30 million, while the margin contracted 130 basis points to 84.4% because we generated less rental income following the sales of the property portfolio last May. At the same time, our administrative expenses, considering all adjusted revenues, remained constant. This also had bearing on our full year guidance.

Total other income decreased 70% to $3.84 million. This was mainly the result of a smaller gain on the revaluation of Vesta investment properties, roughly $14 million versus $19 million in the last quarter, and a noncash foreign exchange loss of $1.5 million versus a gain of $3.6 million. At the same time, our interest expenses fell 7% to $9.1 million. This year-on-year decrease reflects lower expenses from the refinancing of the new debt. This brings us to pretax income of $33 million, which we paid taxes of $20.6 million versus $2.3 million last year. While our current tax declined 58% to $6.4 million, there was a net change in deferred tax liabilities and assets of $27 million. Higher income taxes, coupled with a loss of $0.4 million related to the valuation of the regulatory financial instruments and a gain of $0.02 million related to exchange difference in translated other functional currency operations, reduced our total comprehensive income to 77% to $12.07 million.

Our pretax FFO increased nearly 10% to $21.12 million, while our FFO attributable to shareholders roughly quadrupled to $15 million. Investments during the third quarter totaled $35.9 million, primarily payments for the construction of new buildings in the north, Bajio and Central Regions. The total value of Vesta's investment portfolio increased 2.3% to $1.9 million -- $1.9 billion, I'm sorry.

At the end of the quarter, total debt was $714 million, of which less than $1 million is short-term liabilities. The secured portion of our debt is just below 50%. Importantly, all of this debt denominated in dollars has a fixed rate average interest rate of 4.8%. As a reminder, we do not have any major debt due until 2024.

Our debt leverage remained at a healthy level of 5.1x net debt-to-EBITDA and a loan-to-value of 35%. Our focus remains on efficient and accretive capital allocation. As Lorenzo noted, our NAV per share increased 10% to $2.3 per share or a 3-year CAGR of 8.9% in dollar terms. The increase was partly due to the 4.9 million shares that were bought back during the quarter, and it also resulted in the 16% increase of our quarterly dividend, which was $0.43.

Turning to occupancy. The level in our stabilized portfolio increased 20 basis points compared to the second quarter 2019 to 95.6%, while occupancy in our same-store portfolio was essentially unchanged at 98%. Sequentially, Vesta's total portfolio expanded roughly 74,000 square feet to 29.3 million square feet of 182 high-quality industrial properties. Total vacancy fell to 7.4% from 8.8% on a quarter per quarter basis.

At the end of the quarter, we have 8,013 square feet of inventory and build-to-suit facility under construction in Juarez, Puebla, San Luis Potosi and Tijuana, and land reserves of 40 million square feet, which increased 7.3% sequentially.

Operator, this concludes our prepared remarks. Please open the line for questions.

[Operator]

[Operator Instructions]

Our first question comes from Eduardo Altamirano with HSBC.

Our next question comes from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

My question is regarding any views on softer markets that you can share, maybe those that have been affected by the strike in -- by GM employees in the Bajio Region. Can you comment what's the latest update in those markets?

And the other question that I have is the reason for your lower margin guidance.

[Lorenzo Dominique Berho Carranza, executive]

[Foreign Language], Vanessa. Thank you very much for being on the call. This is Lorenzo. I will answer the first question and probably, Juan, can elaborate on the second one.

Clearly, we have seen that in some of the markets, had a very -- had a lot of growth in the last cycle, in the last 5 years. This is particularly in the Bajio Region with growth over, in some cases, even a double-digit growth in terms of demand and in terms of absorption.

What we have been seeing in the last probably 3 or 4 quarters is that some of these markets are taking a little breath in terms of how quickly they can keep on growing. We still -- so this is -- and this has been mostly in Querétaro and Guanajuato. Nevertheless, we see still a very robust pipeline that it's probably just taking a little longer to close. And in addition to that, we see that the real estate fundamentals are still pretty good in those markets. So even that we have had 3 to 4 quarters, which were at a lower pace than historically, we still see that there could be an opportunity looking forward to increase demand from different sectors. I pointed out a particular project that we closed with FedEx in the Vesta Park Querétaro. This was our first tenant in the region -- I'm sorry, in this project. So we think that this reflects the opportunity in Querétaro to attract tenants from logistics sector, automotive sector as well as aerospace sector as a leading industries for this project.

Regarding GM, definitely, there's -- there is still a position -- strike -- there's a labor strike, I don't know if it's globally or it's only in the U.S. and Mexico. But I think it's mostly coming from the U.S. Definitely, this has taken longer than expected. Nevertheless, I think that we have long-term commitments with our tenants. Our tenants are operating normally for GM, but they are well diversified towards other OEMs, not only in Mexico, but even in other places. So I think that for that, they will, at some point, renegotiate, and I think that these companies or these facilities they have in Mexico are incredibly competitive. So therefore, I think that it's in the benefit of GM to get into an agreement as soon as possible.

[Juan Felipe Sottil Achuttegui, executive]

And Vanessa, regarding...

[Vanessa Quiroga, analyst]

[indiscernible] Yes.

[Juan Felipe Sottil Achuttegui, executive]

Sorry, Vanessa. Regarding your guidance question, I think -- we changed guidance for 2 main reasons. Now the first one is easy to understand. We sold a portfolio last May, and the impact of the revenue that we forgo for the sale of that portfolio implied a lower revenue vis-à-vis the 11 -- the 12% guidance -- 12% to 14% guidance that we gave last October.

On the other hand, we also have certain projects that we forecasted to start generating income on -- during the year. And as Lorenzo pointed out, there is a slight delay on the stabilization of these projects. We have a very healthy pipeline of clients, and we expect to close these leases in the forthcoming months.

I have to point out that if we had not [ sale ] the portfolio, our achievement of revenue growth would have been 11%, which is quite a solid number on growth on a very large portfolio that we have right now.

[Operator]

Our next question comes from Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

My question has to do with the land bank that you have in Querétaro and Aguascalientes, where you have land for somewhere around 500,000 square meters on -- of potential GLA on each. And you haven't started any construction in any of these 2 markets. What are your views on these 2 markets? And if you are planning to start construction in any of these 2 markets anytime soon.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Adrian, for being on the conference. Definitely, this -- we have 2 particular projects in Querétaro and in Aguascalientes. The reason of developing these 2 projects -- Vesta Park Querétaro and Vesta Park Aguascalientes, is because we ran out of land in both markets. As you remember, we have been very successful in Querétaro once we were -- our focus was in the park in Querétaro. We acquired land probably more than 10 years ago, and we have fully developed those projects. That's why it was important for us to acquire land, have the infrastructure in place so that we can develop a 5-plus-year project. And that's what we have in Vesta Park Querétaro. And hopefully, you can visit it because that's going to be an iconic project for Vesta in the future. That's a 100-hectare project. We have developed the infrastructure. We have a fantastic substation, and energy is an important element today. And we have developed the first 2 inventory buildings.

We will be very cautious with the next inventory buildings or spec buildings. As long as we keep develop -- leasing up what we have today, we will start another one. And that's why, as I mentioned, we have been taking a halt on that particular project until we lease-up more space in Querétaro, which is in accordance to market, and I think that's a disciplined approach to go.

In the case of Aguascalientes, we actually had the inauguration of our project last week. This is also a, roughly speaking, 90-hectare project in Aguascalientes. And we were able to buy the land in the last 2 years. It took us a while to acquire land at a good cost. We already have the infrastructure, and we already have 2 buildings, which are on the lease-up stage. The reason of doing this particular project, which is also another 5-year-plus project, is that we are fully leased and we have fully developed the first phase of the DSP Park in Aguascalientes, which is right next to the new -- to the Nissan plant and right next to the new Mercedes, Daimler and also Infiniti plants. So that's why, for us, it was important to acquire land, have the infrastructure, and it will be a 5-year-plus project.

Now having said that, we want to be also very cautious on how fast we develop, and we want to be closer to where the market is. If there is demand, we develop more. If it takes us a bit longer, we're going to be very disciplined and very cautious, and that's exactly what we have been showing in both of these projects.

[Operator]

Our next question is from Eduardo Altamirano.

[Eduardo Altamirano, analyst]

And a -- and it was just a follow-up on some previous question. Are you seeing an increase in demand from, say, from current manufacturers based in Asia? In other words, are you seeing or finding the effects of trade wars to your benefit? Or is it a nonissue right now?

And the second one is that would you be considering an acceleration of your development plan? That is to say a return more spec building, or are you comfortable with your current strategy?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Eduardo. Please -- just please repeat the last part of your question.

[Eduardo Altamirano, analyst]

Would you be considering an acceleration of your development plans? In other words, a return to spec building or adding increased spec buildings?

[Lorenzo Dominique Berho Carranza, executive]

Great. Thank you. Thank you, Eduardo, for being on the call. And I will probably start with the second question. I think that we have a very, very well-defined strategy, which is based on market fundamentals and is based on a lot of discipline. And I think that's what we have been working together with our investment committee, and that's what we want to keep on doing looking forward.

We like to do spec buildings that are profitable. We can have great companies, and these are very flexible buildings. Nevertheless, we develop them as long as we lease-up whatever we have currently.

As you might see, our portfolio -- same-store portfolio is pretty much very good occupancy, above 80 -- 98%, which means that there's a couple -- there's only -- the buildings that we have available are the brand-new buildings that we have developed in the last quarters, which are in a lease-up stage, and these are the brand-new buildings. So we don't want to increase our spec building strategy. We want to maintain the same one, and we're going to keep on developing as long as we lease out what we have. That's for the second question.

And regarding the first one, we are very close to trying to understand what are going to be the drivers towards new companies, international companies coming into Mexico, and you asked regarding the Asian companies. We have seen some -- definitely some opportunities in Mexico from Asian companies. We had one recent example of a company that shut down operations in Asia and recently opened something with us in the north part of Mexico in Ciudad Juarez. But we also want to be cautious because we don't know if this is a major trend or if this was a one-off transaction.

I think that the evolution on the trade situation with -- between U.S. and China will keep on evolving. We're going to find out more. Definitely, Mexico makes a lot of sense for foreign companies, but you know what, I think that it doesn't necessarily mean that all of the companies will only come to Mexico. There will be some. We're going to be close to those opportunities. And definitely, I think that what we want to do is just be close to the companies that are -- to any companies, not only the ones that have changed their strategy, but also the ones that have already set up their strategy towards Mexico and want to keep having expansions and want to be still competitive producing out of Mexico.

[Operator]

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

[Francisco Suarez, analyst]

You mentioned that you were investing in a very interesting block of land in Guadalajara. I was wondering if you can share us a little bit of more of what you've seen is happening on that part particularly, mainly if that piece of land it's in front of corridor or how near downtown Guadalajara is? And that it's actually a trend that we will see forward from you guys? I mean investing much more in logistics in general, in last-mile features on your buildings. Anything you can share with us at this moment, that would be helpful.

[Lorenzo Dominique Berho Carranza, executive]

[Foreign Language] Francisco, thank you for being on the call. Yes. The piece of land that we acquire in Guadalajara is right next to the Atlas golf course, which is very close to the most important logistic corridor. This is a very good site, very centralized in the city and definitely has important attributes towards logistics, and particularly, if the trend continues it's mostly towards proximity last-mile opportunities.

What we are seeing in this type of market is an opportunity to develop more for logistics, particularly for -- because of the size of the city, because of the urban dynamics. And that's why finding these type of opportunities is going to be very good for our strategy to diversify our portfolio, which means that we've got -- we still want to keep the leadership in terms of being close to the other sectors, to the other industries, which are the ones that are really making -- being an important part of the growth in Mexico.

And secondly -- second to that, we think that there could be also great opportunities on the logistics sector, and that's why we decided to do this project in Guadalajara. This is going to be a project that could take us, roughly speaking, 4 years to fully stabilize. And we like the size. It's 30 hectares, approximately, and we're going to be developing 1.7 million square feet.

So if you have visited some of our other Vesta Parks, I think this is very replicable in terms of size, in terms of the time that we're going to be developing it. But definitely, I think that this will have its own characteristics so that we can really show the market in Guadalajara that there's an opportunity to increase the quality of the buildings, increase the quality of the industrial parks, and for that, increase the service towards our clients.

[Operator]

Our next question is from Victor Tapia with Bradesco.

[Victor Tapia, analyst]

I have 2 questions here. First one, I'm not sure guys if you already answered this or someone already asked it. But we have been seeing some news regarding a slowdown in the automotive industry, mainly in the Bajio Region. And in the Bajio Region is where you guys have the higher vacancy in the portfolio. And 5 out of the 10 top tenants for Vesta are the automotive industry. So I want to get a color on how this could negatively impact vacancies going forward. So this is my first question.

And the second question, regarding accounts receivables, we saw that account receivables with more than 60 days late significantly increased since the end of the last year. I also wanted to get a little bit more on details on why that is happening. And so you guys should continue provisioning a higher amount for these late receivables?

[Lorenzo Dominique Berho Carranza, executive]

Let me start with the second question, Victor. Thank you for being on the call. Look, the policy of receivables are -- were very stringent. Any receivable that is over 90 days is fully reserved. I think that's very prudent. Second, we're one of the -- we were open in our financial statements, and we provide a lot of detail on all of our balance sheet and income statement items. And I'm very glad that we opened our receivables so that you can fully understand the strength of our client base.

Yes, there's a little bit of a delay in some of the clients. I don't think this is a trend or anything. I think it's just part of the economic cycle. We have good clients. We have very strong relationship with them, and I don't think that this is a particular point of -- particular worrisome point on our balance sheet. But again, we are stringent. We will reserve any receivable that is over 90 days and that's in accordance to the best practices of any real estate company globally.

[Juan Felipe Sottil Achuttegui, executive]

Great. And Victor, thank you for being on the call. And regarding your first question, and I'll clarify -- try to address the situation or how we are viewing the market. But let me probably explain it more on the particular item, which is regarding vacancy. I think that one of the main characteristics of our existing portfolio, which is already at almost 30-million square feet, is that we have a very well maturity profile and a very well-kept portfolio in terms of our leases in the -- remember that we have corporate guarantees in many of our leases. And if you talk about a particular sector, for example, automotive industry, it's mostly about the term of the leases that we have.

We have very few expirations coming in the next months. Actually, if you consider only 2020, I think it's less than 4%. Yes, less than 4%, the expiration -- the maturity profile, which is a reflection of how well we have been able to impact or to extend the lease agreement that we have. So on that regard, I see really a lower risk of increasing a vacancy of our portfolio. This is a very important objective.

Secondly, the -- let's say the rhythm of growth for the automotive sector in the Bajio Region, well, I think that's why for us, it's important to keep on having a well-diversified portfolio. Automotive industry represents roughly 1/3 of our portfolio, but we have the other 2/3, which is still expanding. We're increasing our portfolio in other industries such as logistics, electronics. We have also medical device industries, consumer goods. So in the end, I think that we are very open to keep this diversifying and not only so that we do not only rely on one particular industry, and that has been a key component to our existing portfolio, which we want to keep shaping the same way into the future.

[Operator]

Our next question comes from Alan Macias with Bank of America.

[Alan Macias, analyst]

Just a quick question on security issues. Any issues that have appeared in the other regions that you operate, did you foresee that you have to increase expenses in this -- in security?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Alan. Probably, this is a good time to explain a bit how we differentiate our industrial parks or particularly the Vesta Parks. I mean we know that our security is an important issue pretty much all over Mexico, and this is not new. This has been for several years. And that's why the way that we have designed and built our industrial parks is in a way that we can add more security to our existing clients. And that's why all of them on the Vesta Park, some of the main considerations is that they are close-gated parks, communities, where they can not only have their facilities inside, but they can also have, in some cases, business centers. In some cases, they also have some sports amenities and other sort of amenities. So we have been very cautious in that regard. I mean because it does -- there's a -- throughout the whole supply chain, there's a lot of risk in terms of security, from trucking to parking, to whatever ties between the final user and the facilities. But what we can do and what we can achieve, I think that we have been able to define a good security system in our projects, and that's something that we're going to keep on doing to enhance the security, even -- because we don't know exactly how security will evolve in Mexico.

But for our projects, I think this it is a very important part of -- an important differentiator, and I think that our tenants is -- this is one of the reasons they decide to be in a Class A state-of-the-art industrial park, vis-à-vis being openly in many other industrial areas, so to say.

[Operator]

Our next question comes from André Mazini with Citigroup.

[André Mazini, analyst]

So my question here is on the total rental revenue that you guys disclosed by region, right? If you look at Querétaro and Toluca, those are the only 2 regions that had revenues decreasing year-over-year, and I don't think that it's explained by occupancy, right? Querétaro actually had an increase in [ occupancy ]. I'm wondering is this something related to where market rents are, had you marked down some properties to market rents, which were likely above-market rents? Am I correct in this REIT or it's something else?

[Lorenzo Dominique Berho Carranza, executive]

Okay. I'm looking at Toluca. Thank you for being on the call, too. So I'm looking at Toluca. I think the decrease in revenue is mostly because we sold properties in Toluca and Querétaro. So because of the portfolio of sale, this is why we have the highest impact on our guidance, was because of the portfolio sale. And secondly, it was basically in Querétaro and Toluca. So really, nothing else has changed. We have a very good retention rate in terms of renewals. We have been able to actually renew at higher rates in dollar terms. So we have been very -- the market is very good on that regard. There's no need to give a rate -- rent abatements. So I think that, that impact that you're seeing on the financials is because of the sale of the portfolio.

And I think it's [ fair ] to say that globally, the total portfolio, we have been able to increase year-over-year and quarter-over-quarter the rental rate -- the average rental rate per square foot. So we have been in dollar terms. So I think that in that regard, that's another signal that the market is still -- that the market fundamentals are still very strong, and we're very disciplined in really trying to be -- trying to increase the rents as much as we can and extend the lease agreements.

[Operator]

Our next question is from Eduardo Alvizouri with GBM.

[Eduardo Alvarez, analyst]

My question is regarding a market overview. We have been seeing a healthy equilibrium between supply and demand in industrial buildings, showing high occupancies consistently. How long do you think this expansion phase will last? I mean do you believe economic and political volatility may affect the balance in the short term, in particular, regarding the northern parts of the country, and in particular, for Vesta, the Tijuana and Juarez Vesta properties?

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Eduardo, for being on the call. I think that real estate is about cycles. And definitely, the explanation of cycles is that things could change eventually. And that's why we are very cautious on analyzing how the cycle is evolving, first of all, in each of our markets so that we can define a strategy for each of the markets.

And secondly, what are the exogenous factors that may impact our markets. For example, the economy in the U.S. has an important impact or the economy even in Mexico for certain industries. So all of that, I think, are the ones that really mark how the demand could come in most of the markets.

As of today, we have seen in the last -- even in the last cycle that the markets are still very healthy and that other developers have been also disciplined in how much they develop in spec buildings. So having vacancy rates, for example, in the range of 2% to 5% in most of the markets, these are very healthy numbers. These are at record low. So we're going to be tracking this very closely. This is exactly what -- that we do.

Having local presence for us is very important. As you know, we have regional offices in most of the markets, which have helped us to have a leading position, but this also helps us to have very deep market intelligence that can help us to make decisions on where we want to keep investing and where we want to take a break and where we want to -- and how we want to develop a strategy in the -- for the short, medium and long term.

[Operator]

[Operator Instructions] There are no further questions. I'll now turn the call back over to Mr. Berho for closing remarks. Please go ahead, sir.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, operator. Thank you very much, everybody, for being on the call. We look forward to being close to you during the quarter. This is going to be the last quarter of the year, and we hope to stay in touch with you. If you have any further questions, please contact our IR team.

Thank you and goodbye.

[Operator]

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