Vesta Real Estate Corporation SAB de CV

NYSE:VTMX

Earnings Call Transcript 2022-Q4

[Operator]

Greetings, ladies and gentlemen, and welcome to the Vesta Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Fernanda Bettinger, Investor Relations Officer. Please go ahead.

[Fernanda Bettinger, executive]

Good morning, everyone, and thank you for joining our fourth quarter results. With me today are Lorenzo Dominique Berho, Chief Executive Officer; and Juan Felipe, Chief Financial Officer. The earnings release detailing our fourth quarter 2020 results [indiscernible] yesterday afternoon and is available on the company's website. This conference call is also the investor life with the Investors section of the company's website at vesta.com.mx, and the webcast replay of the call will be available at the same site approximately 1 hour after the end of today's call.

Before we begin, I would like to caution with you that during the course conference call, management will make projections or forward-looking statements regarding future events, including statements of our business asset strategy, demand and market and one-off trends that may continue. Management uses these measures to establish operational goals and review operational performance based on current [indiscernible] and this means that these measures may assist in the best utilizing underlying trends in the company's business over time. These statements are subject to risks and uncertainties that could cause actual results to differ materially. We undertake no obligation to update them as a result of new information or future events. Please also note that our all figures [indiscernible] prepared in accordance with IFRS and are stated in nominal U.S. dollars unless otherwise noted.

Let me now turn the call over to Lorenzo Berho.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Fernanda. Welcome, everyone. Vesta closed an extraordinary 2022, delivering outstanding operational and financial performance when advancing our Level 3 strategy. Since its excellent fourth quarter and full year results were driven by continued nearshoring [indiscernible] and by the ally-shoring that more recently has gained traction. Ally shoring or Friend shoring is a collaborative [indiscernible] on the concept of nearshoring, were very leaning into trade and co-production relationships with the purpose and allies we trust. This was boosted by the North American 3 Amigos leader's summit in January when the region's leaders vowed to tie in economic and trade ties in North America.

The U.S. and Mexico have grown to recognize that not only is ally-shoring more cost effective than onshoring. It's the most powerful path to make critical supply chains more reliable and resilient and the best way to build our mutual economies. These trends drove extremely tight market positions throughout the year. And third quarter was no exception. We're seeing historically low vacancy rates with increasing rental rates per square foot, particularly in Vesta's core markets. Essentially, all construction has been absorbed at rates we have never seen before. In 2022, we delivered some all-time record performances, exceeding the upper range of our revenue guidance to reach $178 million, a 10.7% increase year-over-year.

Full year 2022 NOI and EBITDA margins exceeded guidance, reaching 95% and 84.4%, respectively. In terms of net asset value per share, we reached $2.86 per share, an increase of 10% year-over-year and AFFO per share of $0.15, an increase of 22%. Vesta also achieved record high 2022 leasing activity, closing more than 10 meters square. Just under 4 square feet from new leases with clients such as TSB Logistics, Amazon, Eaton, Home Depot, Foxconn, Safran and Cummins, among others, lease renewals for the year reached 6.7 million square feet, another historical high for VESTA with a 7-year average weighted lease life and a 7% positive spread. Investors rental rates overall have been increasing well above inflation successfully [indiscernible] to our clients. As the key near-shoring markets [indiscernible] Tijuana and [indiscernible] are absorbing a significant part of the country's demand so far. This is pushing net absorption to record highs with average asking rates increasing dramatically, more than 39% year-on-year within this market alone, according to CBRE.

We are particularly well positioned in the [indiscernible] market, having anticipated today's explosive demand when we acquired land for our new Indiscernible, which is currently under development. This has enabled us to continue expanding within a location where we're already adding value. Our approach to this and similar markets is an excellent example of how Vesta is developing industrial parts of outstanding parities and standards and which effectively capture today's opportunities through urban infills as Vesta develops vacant or underutilized land parcels within existing developed areas. Following quarter's end, in January 2023, we preleased 2 buildings with Polaris, a global industry leader in power sports recreational vehicles. The buildings are currently under construction at the Vesta Park Apodaca on for a long-term lease, which comprises a total of 577,000 square feet.

Polaris made a meaningful investment in Mexico, adding back shop capacity while also investing in vertical integration and capacity expansion in the new location. We're seeing [indiscernible] expand beyond Guadalajara and Monterrey to less saturated markets as well. CBRE noted that dynamics in the Bajio region are improving and vacancy rates rose at just over 4%, the lowest since 2018. Throughout the year, roughly 50% of our new leasing activity has come from the Bajio markets. Turning to the key aspects of our strategy. Throughout the year, Vesta has been developing its parts with optimal last-mile logistics opportunities. It's important to note that logistics and live manufacturing are not electricity or water intensive industries.

So ensuring the Vesta Park has the capacity to provide our clients with the necessary activities and resources is not a problem that we haven't already solved. Vesta Parks are well connected to roads and levels, guarantee simplified logistics with a reduced transportation costs and risks our logistic clients need. This is another instance where Vesta's considerable industrial real estate experience is an important advantage for us. Manufacturing companies demanding building criteria and restriction is craving a unique opportunity for companies like Vesta that have extensive experience with industrial restate. And our 25 years building 3-year properties represent an important differentiator to our clients.

In the fourth quarter, we acquired 52 acres of land in the San Martin Obispo area of Mexico City, 1 million square feet and located adjacent to one of Mexico City's main roads, which also ensures optimal connectivity. This best-in-class location is ideal for last night distribution and logistics and another [indiscernible] increasing footprint within Mexico City and metropolitan areas, as I have described, in line during the company's Level 3 strategy and related growth plan. E-commerce expansion will fuel the need for more warehouse space as well of the growing economic population migration and the desire for safety stock onshore.

During the fourth quarter, we also completed the acquisition of 2 buildings in Toluca, expanding our footprint in the state of Mexico submarket, further penetrating the central region. Today, industrial real estate is leased as quickly as it is available, and there is little signs of slowing, particularly in those markets where Vesta has a presence. And while we don't expect current trends to change for the foreseeable future, this will always be contained by the limits of Mexico's infrastructure to continue to support development on a massive scale [indiscernible] receive the extraordinary [indiscernible] manageable and Vesta will maintain a disciplined approach of profitable and sustainable growth.

Finally, regarding the ESG as a pillar of our Level 3 strategy, we achieved important milestones during 2022. Vesta was included within the S&P Bolsa Mexicana de Valores Total Mexico Index for the third consecutive year and within the S&P year book for the first time, Vesta was selected for inclusion within the 2023 Bloomberg Gender equality index, which is important recognition of the company's commitment to supporting gender equality. And Vesta is also on track to achieve our related to the sustainability-linked fund we issued at the beginning of 2022, having ended the year with 5 new recertified buildings.

With that, let me turn it over to Juan, and then we'll talk with some great closing remarks.

[Juan Felipe Sottil Achuttegui, executive]

Thank you, Lorenzo, and good day, everyone. Let me briefly discuss some key financial results. Starting with our full year performance in 2022 was another year with a record result for Vesta as Loren has noted. We deliver outstanding financial results, we exceeded our upward annual guidance revision, while reaching several historical records in key metrics, such as leasing activity and renewals. We achieved $178 million in revenue, representing a 10.7% increase year-on-year and 270 basis points above the upper end of our revenue guidance between 7.5% to 8% for the full year 2022. NOI and EBITDA margin also exceeded our revised guidance by 100 basis points, which is 95% and by 93 basis points, reaching 84.4%, respectively. Let me now turn to our fourth quarter results.

Beginning with our top line, total revenues increased 14% to $47.4 million, mainly due to initial rental revenue coming from new leases and inflationary adjustments on rental property during the quarter. This was partially offset by a decrease in rental income related to properties sold at the end of 2021. As a reminder, all of our lease contracts are in with inflation. Therefore, we continue to benefit from the favorable effect of higher-than-expected inflation on our top line results. In terms of occupancy needs of the fourth quarter revenue, 82.3% was denominated in U.S. dollars, decreasing from 83.6% recorded in last year's comparable period, mainly reflecting higher other income, which is recorded in Mexican Pesos.

Turning to our cost structure. Total operating costs maintained relatively stable at 3.8 million in this quarter. Net operating income increased 14.5% to $44.6 million, driven by higher rental revenues, while the margin expanded 4 basis points to 94.1%, mainly due to higher income from increased portfolio occupancy. While administrative expenses were up 60.2%. This was mainly due to an increase in employee benefits and the noncash expense in the company's long-term compensation plan and during the fourth quarter. In turn, EBITDA reached $39.8 million in the fourth quarter of last year, a 15.9% increase compared to the price [indiscernible] quarter and the margin increased 138 basis points to 83.9% as compared to 82.5% for the same quarter of last year.

Moving down the P&L. Total order income reached $36.4 million compared to $44 million in the fourth quarter of 2021. This decrease was mainly due to lower core property valuation gains and lower margin from property sold in this quarter. partially offset by a positive [indiscernible] in foreign exchange results. As a result, we closed the quarter with a pretax income of $74.2 million compared to $76.6 million in the fourth quarter of 2021, while the pretax FFO increased 18.6% to $27.5 million and NAV per share increased 10.1% to $2.86 from $2.61 per share in the same quarter of 2021. Now turning to our CapEx and portfolio composition. We invested $86.6 million in the quarter, mainly in the construction of new buildings in the [indiscernible] and Bajio region. [indiscernible] and the new portfolio we acquired. At the end of the fourth quarter, the total value of the portfolio was $2.74 billion, comprised of 202 high-quality industrial assets with a total G&A of 33.7 million square feet and with 82.2% of total income denominated in dollars.

Year-over-year, our satellite portfolio grew 5.9%. $32.9 million is [indiscernible] with occupancy of 94.4% from 94.3% in the fourth quarter of last year. We ended the year 2022 with a land bank of $39.6 million [indiscernible], down 3.9% sequentially due to the use of land in Tijuana, Monterrey, Guadalajara and Pilar, and we began construction of 18 buildings during the fourth quarter of last year. This was partially offset by new land acquisitions in Mexico City.

Turning to our balance sheet. We closed the quarter with a total loss of $931 million and our cash position stood at $ 139 million. Net debt-to-EBITDA was 5.3x and our low-to-value ratio was 21.5%. As a reminder, in Q3, we closed a $200 million sustainability linked revolver line of credit to provide us the additional liquidity when necessary. Subsequent to quarter end in January 16, we paid a cash dividend for the fourth quarter of 2022, equivalent to [indiscernible] per share in Pesos per [indiscernible] share. Finally, I would like to report our outlook for year-end. We are expecting to increase revenue between 13% to 14% year-on-year, while we expect to achieve 93% NOI margin and 80% EBITDA margin for the full year 2023. With that, this concludes our fourth quarter and full year 2022 release.

Operator, could you please open the floor for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Gordon Lee from BTG.

[Gordon Lee, analyst]

I actually have 2 of them. One on Loren, one for Juan. Loren, I was wondering if you could give us a little bit more color on the acquisition in Toluca because it obviously seems like this is a perfect environment for development, right, just given how tight the market is and how strong the deduction is. So I was wondering if there was anything about that -- those 2 buildings in particular, that you saw strategic and whether this is a one-off or whether we should expect more acquisitions to stabilize properties going forward? And then the other question is a question for Juan, and this is a question that we ask every year when you give guidance and throughout the course of the year, you end up beating that guidance. But the question is, given the big jump in revenues, why the more conservative expectations for NOI and EBITDA margins in the guidance? Is it just conservatism? Or is there something there.

[Lorenzo Dominique Berho Carranza, executive]

The acquisition we did on the properties in Toluca was a great opportunity to close on 2 stable properties that are part of the -- which are part of a supply chain for a major auto manufacturer, which is actually a lasting production lines for electric vehicles. And we think that this is a key market for Vesta. We were able to acquire the low operating costs and our approach towards this type of acquisition will continue to be opportunistic as long as we can be able to buy [indiscernible] with good tenants with good leases in a set market that we like. We will continue to have this type of approach opportunistic.

Actually we are analyzing further acquisitions. As you might see, these are not large in size, but we think that given our exposure in the market and the region, we believe that there could be also more opportunities looking forward in this -- within this type of assets. Returns are attractive from a risk-adjusted return perspective. And I believe that we are still looking for [indiscernible] to be developed and as long as we can be able to find good land at the right price. We think that this is a solid market that will continue to grow in the industry, electrical vehicle industry as well as logistics, e-commerce among other sectors.

[Juan Felipe Sottil Achuttegui, executive]

Look, -- the guidance that I provided is prudent. Let me tell you why I air on the prudent side on this year, and I again aired on that side last year. This year, I'm prudent because the financial conditions of the market are quite volatile. We do not quite know what the end figure of inflation is in the U.S. So this week and last week there were significant revisions for the U.S. market that is on inflation expectations on the possibility of continuing the sale intervention, -- the sale intervention and the response of the [indiscernible] are [indiscernible] local Mexican interest rates way to high. And that has created a very strong peso. I do not know how long the peso will continue to be strong. And please remember that Vestas is a very, very dollar-like company, 82% of my revenues are dollar denominated.

So let's not forget that at the opposite side of the coin, 15% is pesos. And as the peso is very strong and all of my costs are related to pesos. All of my costs are related to pesos. A [indiscernible] strong peso sustained by local [indiscernible] rates begs the question, why is the exchange rate that I can use to forecast my pace of cost in dollar terms and therefore, NOI and EBITDA, particularly tricky. So that's the pipeline. I'm basically being prudent and continue to [indiscernible] that reflects the strength of the growth in sales and the impact on the income statement, while just underlying that my basic costs are peso based.

[Gordon Lee, analyst]

Perfect. That makes sense. Just -- and I'm not sure if this is something you want to disclose, but the peso assumption that you're considering in this guidance is this more or less around what spot levels are today? Or is it where it ended the year?

[Juan Felipe Sottil Achuttegui, executive]

I'm being prudent just in pesos -- and I mean [indiscernible] '19 even. But if the peso continues to be below 18, 60, 18, 55, whatever. That [indiscernible].

[Operator]

Our next question comes from the line of Jorel Guilloty from Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

So first off, I had a question on vacancies. I imagine this has something to do with the timing. But just if you can help us think about the Tijuana vacancy, you didn't have a material amount of [indiscernible] there, and it's about 7%. But is this something that we should expect to narrow down quickly in 1Q? Or is it that you have some space for spec leasing perhaps that we're not aware of for [indiscernible] -- and the other part is the Bajio region continues to see improvements as you mentioned in your comments earlier. And I was wondering if you can continue to provide guidance specifically for vacancy, but I just wanted to get a sense of where do you see the vacancy rates going for the Bajio which are currently around 7% in the near term. Should we expect them to approach the North and center levels as they are in their portfolio. So those are my 2 main questions.

[Lorenzo Dominique Berho Carranza, executive]

Thank you, Gerald. I think you touched on a very important point that is the main driver of the current environment and real estate fundamentals. Definitely, we're seeing historic low vacancy rates, not only investors portfolio but overall in the market. And actually, even though we care about occupancy, we also care a lot about the type of [indiscernible] tenants that we lease to and the rents we lease to. So we're trying to achieve both things try the best to get the best tenants the best uses at the highest rate possible. And in that regard sometimes, as you mentioned, Tijuana, we might experience a little bit longer period of timing in order to close good transactions. And I think that with such a strong market, it's better to wait a couple of months with a vacant building rather than is too quickly and probably not in the right conditions.

Just to use an example of Tijuana, as you could see, we were able to lease the first building to Home Depot's logistic warehouse activities. The second one for [indiscernible], -- both of them are focused in the consumer market is expanding rapidly, e-commerce as well as food and beverage, very resilient sectors, but we're currently dealing also the new buildings that we recently finished with other sectors, including electronic sectors, medical devices as well as others related to new [indiscernible]. So on that [indiscernible], I think that we're very excited that we are able to not only develop to not only being able to have available buildings, but there is going to be very profitable transactions. And actually, we might be even closing way above our underwriting assumptions that we did when we started putting down the price of the of the [indiscernible] in Tijuana.

And that particular example of Tijuana is repeating itself in different markets such as Suarez, Monterrey, Guadalajara where rents are increasing dramatically, and we're capturing more of that value by leasing at very high rates rental rate to fortify rental rates with good leases and great tenants in these recent we did Foxconn in Guadalajara, a larger facility focused in the electronics sector. But in the --and the Bajio region is performing also incredibly well. We actually started construction of a couple of [indiscernible], just because we are seeing that demand is picking up again. We were able to lease good buildings throughout the year in San Luis to proceed. So we're going to have a poor side to the market. We're going to see where opportunities arise, and we're going to have a well disciplined approach towards development and try to capture good risk-adjusted return projects in all of these very dynamic markets...

[Operator]

Our next question comes from the line of Javier Gayol from GBM.

[Javier Gayol Zabalgoitia, analyst]

First, we were positively surprised by the price paid for the land bank in Mexico. So maybe if you could give us a little bit more color. Is this land ready to invest ready to develop or is best committing to put more money into it for it to be ready. That will be my first question. And my second question, maybe a little bit more strategic. So you guys had a very good timing when regarding capital markets, and your plan of expansion seems to be going at a very fast pace. So I think my question here is, do you guys think that maybe there's more potential for growth within the markets and given the [indiscernible] that we're seeing and there's record low vacancy is increases in prices. Could you -- would you guys expect or maybe think of maybe increasing your potential development or are the company's capabilities set at the guidance of [indiscernible].

[Lorenzo Dominique Berho Carranza, executive]

Regarding the first question on Mexico City, we are very excited to being able to acquire a great piece of land in the Periferico market in the close road to the -- closest to the La Venta-Champa highway. In the San Martin Obispo this is also a market loan or a location loam as [indiscernible]. So this is a fantastic opportunity to acquire 20 hectares of land exactly at the moment when we're seeing a rising market with demand accelerating and rents increasing. And that's why we're very happy to be able to close that land. You're right, I think that the price per square meter of land has been increasing the target. However, rental rates are increasing, and we are able to develop a large distribution logistics facility and still get great risk-adjusted returns in a market that is very strategic for Vesta to penetrate and keep on growing with some of our existing e-commerce clients as well as other ones that are entering the market.

So from a risk-adjusted return perspective, we're incredibly happy with having this opportunity. And this is going to be our -- is going to be our second trophy asset in the Mexico City market. 1 million square feet is not easy to find and not easy to develop, particularly in the submarket with [indiscernible] characteristics. We -- we will be developing soon. Hopefully, we can break ground first semester of 2022, which we [indiscernible] or [indiscernible] that the buildings will be available at some point next year and start generating income at some point in 2024. So yes, it's very -- it shouldn't very long. There's plenty of potential for growth for Vesta, not only in the Mexico City market, but also in other markets.

We are seeing that the markets [indiscernible] are the best of buildings are absorbing very rapidly. That's what we have seen in Guadalajara. That's what we're seeing in [indiscernible] in Monterrey now with the Polaris project, which not only were we able to lease all of the existing buildings we have under construction, but also there's an opportunity to keep growing with Polaris as they would like to expand their manufacturing facilities to produce ATVs for the North American market primarily. And this will represent an acceleration to our growth plan in those objective markets that we have already identified. So we're going to be very active throughout the year in development, very active in leasing and also very focused in still getting the best clients investment-grade clients with long-term leases, U.S. dollar buses and keep on our focus on profitability to increase net asset value per share as well as FFO per share.

[Operator]

Our next question comes from the line of Alejandra Obregon from Morgan Stanley.

[Alejandra Obregon, analyst]

It's actually 2 questions from my end. So the first one is on guidance. So I would like to ask the guidance question differently, if I may. So I was wondering if you could provide some of your specific assumptions used for your 2023 outlook? And then perhaps what are the main variables that you think could drive upside or downside to it. So you did mention [indiscernible], but what about the macro and the micro variables? Is there any other that you think we need to take into consideration or maybe on the cost side that could drive upside to what you mentioned? And then my second question is on some of your comments on the release. So you were saying that there's a contribution to rental revenue from the space that was previously vacant and then some decrease from the expire rents that were not renewed. So just wondering if you could elaborate on these dynamics, but from a regional perspective, where are you seeing more demand? And where do you think you are facing more resistance.

[Juan Felipe Sottil Achuttegui, executive]

Let me just try to be brief on the explanation. First of all, on the revenue side, as we have inflation in all of our leases, the inflation expectations that the company has very important vary on our sales growth. So those things have an effect on how much our sales will. As you pointed out, I think, when we lead our substantial pipeline, there is a very important role as well. We have an important development pipeline. Most of it today are the buildings. And therefore, when those buildings are going to be leased as the market rates, which are significantly above our in-place rent also affects guidance on the revenue side. So on the revenue side, what we view at the beginning of the year is inflation, leasing assumptions of our development pipeline, which how quickly we're going to be leasing and if you take a look at my development pipeline is quite substantial.

It's the largest development item that we have ever had. So that's an important assumption. On the total portfolio inflation, U.S. inflation is an important variable. And on the revenue side, exchange rates play a role, 18% of my revenue is peso denominated. So it has a variant. Now on the cost side, as I mentioned before, the vast majority of my expenses, both at the property level and at the administrative level are peso based. So where we view the exchange rate has an important variant on the guidance. We are quite optimistic on our releasing assumptions. And therefore, the revenue guidance of 13% to 14% is [indiscernible] to 13%, sorry. [indiscernible] 13% to 14%, I believe it's quite aggressive, and it basically responds to the items that I said before. And those more or less are comfortable to us. The exchange rate is more difficult, Alexandra [indiscernible]. And again, the peso at -- on this administration historical strength level, cost a pause for [indiscernible].

[Alejandra Obregon, analyst]

Understood. That was very clear. And then on the dynamics of the different renewals and vacancies. Can you provide some color on what you're seeing from the different regions?

[Juan Felipe Sottil Achuttegui, executive]

We're increasing rates on all our rollovers across all regions. And that -- so we're very optimistic on that. And we are we are making very strong assumption about the leasing rate of the seg buildings we're developing in all of the regions across the board, from the [indiscernible] to Tijuana. And that, again, that's an important source of value to Vesta not only to increase the rates on the row that we do, but the fact that with a strong development pipeline, we are basically leasing at the top of the market in terms of leasing rates across all of Mexico.

[Operator]

Our next question comes from the line of Renata Cabral from Citi.

[Renata Fonseca Cabral Sturani, analyst]

I have 2 here. It's, in fact, a follow-up regarding the acquisition is made this quarter. The acquisition to development and then spread for this transaction was 180 bps. And if you continue to find deals with this low spread can we expect for you to continue acquiring? Or would the larger spread, let's say, 250 basis points make an acquisition become unattractive -- and my second question is a hypothetical is hypothetically, you wanted to become a FIBRA, -- what would be the cost in taxes involved, and then if you can talk about the trade-off of this decision?

[Fernanda Bettinger, executive]

Sorry Renata we cannot hear can you repeat your question?

[Renata Fonseca Cabral Sturani, analyst]

Sure, I will speak a bit louder. It's a follow-up regarding the acquisition versus development. It is the acquisition for the spread for this acquisition that you've made was 108 (sic) € basis points. If you continue to find deals with this low spread, should we expect for you to continue acquiring -- and the second question is a hypothetical one. If you -- potentially, if you wanted to become a FIBRA, what would be the cost and taxes involved? And do you see if you can talk about the trade-off of this decision...

[Lorenzo Dominique Berho Carranza, executive]

Did you mention 180 basis points on top of what, sorry?

[Renata Fonseca Cabral Sturani, analyst]

If you continue to find these attractive deals, if you should expect to see other acquisitions on this front.

[Lorenzo Dominique Berho Carranza, executive]

Great. Thank you, Renata. I think that this is a good point. We -- as you know, we regularly focus our capital allocation strategy towards development where we can find attractive -- attractive returns. However, every now and then, we also analyze acquisitions. Not every time we're able to find acquisitions at attractive returns. Some of them have been pricing recently in Mexico in the low 6% cap uprate. Therefore, every now and then, we're able to find even smaller transactions like the one that we did in Toluca.

And as long as they feed our market strategy as well feed our quality of projects and the quality of tenants, and we are able to buy below replacement cost and have an opportunity to increase rents. We believe that there could be value creation for our shareholders, and therefore, we will continue to analyze acquisition. Our main objective is to continue developing we have an important pipeline of over $1 billion. But every now and then, we think that opportunistically, we should be analyzing and acquiring whenever we see an attractive region and in line with our growth and portfolio strategy.

[Juan Felipe Sottil Achuttegui, executive]

On the second question, the second question, basically, we don't see any value in converting to FIBRA structure for our shareholders. Basically, I think that the ability to retain earnings is a powerful motor for value creation. I believe that our counterview that FIBRA is better suit for an acquisition strategy as opposed to our company a development strategy. So we don't have -- I don't see any potential incentive for that conversion.

[Operator]

Our next question comes from the line of Francisco Suarez from Scotiabank.

[Francisco Suarez, analyst]

The questions that I have is a follow-up on Gordon's question related with the acquisition on your buildings in Toluca. Can you walk us a little bit more on what has changed, if anything, on your risk underwriting standards related with -- particularly with certain industries that are in transition. For instance, in this case, it was the auto industry. And you mentioned when you were answering Gordon's call question, sorry, that this -- we're heading towards EV. So in other words, what are you considering now in your risk underwriting on certain value chains that are transitioning like the auto industry? And my second question, well, now that you have been deployed a lot of your excess cash after the last equity follow-on. And considering that you are now at closer to net debt to EBITDA of roughly 5x net debt-to-EBITDA. Would you -- are you considering that is the right time to go to the market again and do another equity follow-on to fund your growth...

[Lorenzo Dominique Berho Carranza, executive]

Yes. So one of the things we like with this transaction is that it has great tenants actually some of the tenants are part of investors already in tenant roster with clients such as HBPO, Android, [indiscernible], all of these are global suppliers to the auto-industry that are very, very successful. And the acquisition was done at almost 15% below replacement costs at a cap rate of approximately 8.5%. And that's why these tenants have manufactured front-end, so special systems, fire assembly, we think [indiscernible] and that very well with the growing electric vehicle industry as well as the traditional combustion engine industry, and this is going to be a part of the supply chain of the new [indiscernible], which is an electric vehicle expected to be reviewed in [indiscernible] as you have probably been seeing some of the news. So that's why we really like this acquisition. Very much in line to the investor strategy and towards the sector. And even though it's small, we think that is fully in line with our ability to grow in store from markets.

[Juan Felipe Sottil Achuttegui, executive]

Regarding your second question, backlog. I believe that we have a lot of financial flexibility, and we have a very strong balance sheet, and we will use our financial stability to continue with our expansion. We have a leverage ratio, which is substantially strong 31%. So there's plenty of room. I have a revolver line available. And there have been several transactions in asset [indiscernible] last year. So I mean there's opportunities to do that. So there is plenty of things that we can do.

[Francisco Suarez, analyst]

And following up on that last question, Juan, if I may, just secured a revolver with a spread of 1.65 is in it. So that's a good spread to continue to do what you're doing.

[Juan Felipe Sottil Achuttegui, executive]

Our spread 160, and we have a 5 basis point upside for ESG purposes. And therefore, our talk on [indiscernible], I expect that this year, starting on June to be 155 because we're way ahead of our ESG gents. And therefore, [indiscernible] from our banking relationships, I can tell you that there's very strong interest in lending to our sector. To all of the real estate success fundamentals. So there's certainly a lot of opportunities to give you funding our aggressive growth.

[Francisco Suarez, analyst]

Got you. So I'm talking about asset recycling, any budget whatsoever for this year on potential asset recycling?

[Juan Felipe Sottil Achuttegui, executive]

We are always looking at opportunities. We will not have -- we do not have a specific guidance to provide because it really depends on the timing and what we see from the market. But today, we don't have any open contest.

[Operator]

Our next question comes from the line of Mariel Abreu from T. Rowe Price.

[Mariel Abreu-Santiago, analyst]

So I have 2 things that I want to follow up. I know you said you have some financial flexibility. You have some other sources of available liquidity, and you talk about asset recycling. Could you consider coming to the debt market, I mean, either local or international to continue funding your growth? And can you maybe talk about funding needs for this year?

And then a second question, on the nearshoring theme, I've been hearing mixed thoughts about this. And I know it's been very positive for you. But talking with other Mexican players, especially in the financial side, they seem to be a little bit more cautious with this topic. The reason that they provide is that the infrastructure, especially energy infrastructure in Mexico is not enough to support all that growth, especially with all the limitations that you have in renewable energy. So just wondering how are you thinking about these and maybe limitations to the strong nearshoring driven growth that we're seeing right now?

[Lorenzo Dominique Berho Carranza, executive]

Let me first answer the best question. We have a significant number of alternative sources for debt. The banking sector in Mexico quite active and quite often to relent to my sector and to [indiscernible] in particular. So we will certainly take advantage of that. We have been exploring all the banking type of loans typically a 5-year loan without real estate guarantee [indiscernible]. We have also been talking or receiving interest from banks from investment banks to place our paper on private equity, private debt for a longer period, and there's a substantial interest in doing those types of transactions.

[Juan Felipe Sottil Achuttegui, executive]

In terms of the -- so those 2 pockets of liquidity are still there, and they are they are deep, and we can tap them at any point in time. It's a matter of timing. And that's why I mentioned that I will use my revolver because I think that timing on this environment is [indiscernible]. Now regarding the local market, local debt in the bank in [indiscernible] to bring attention to you that Banco net prime government bank is offering a near showing a line to promote the activities within Mexico. So that, again, a lot of interest elections such as ours or the people that are bringing new song opportunities.

At the local market, the local financial markets basically denominated in pesos, but is not [indiscernible] Banks have been in opening peso related debt compared to dollars [indiscernible] for reasons, but I will not go detail. So leveraging the [indiscernible] and issue, just a matter of using the right market at the right time. Regarding the other question around limits on the new show because of infrastructure, [indiscernible] stronger, but we have a lot [indiscernible] transaction any potential clients because of problems of electricity or water sourcing. Our client base is basically logistics, which is on a lot of those resources or right actions in a heavy way. So the issues connectivity because the balance sheet can provide that and we have been able to sell those resources as the companies that we need with them across all [indiscernible]. So look, I think that so far, we have [indiscernible].

[Mariel Abreu-Santiago, analyst]

Okay. So just to confirm, we should not expect you to be in the international market with a bond this year unless you do something big or a big acquisition.

[Unknown Executive]

[indiscernible] I will hesitate to tell you that you can expect me because I think that the size of the issue and a few hundred million dollars [indiscernible] if the opportunity happens mainly but I hesitate [indiscernible] alternative way to form the company that are more attractive given the state of the market.

[Operator]

Thank you. Ladies and gentlemen, there are no further questions in the queue.

I'd now like to turn the call back over to Mr. Berho for concluding remarks.

[Lorenzo Dominique Berho Carranza, executive]

Thanks, operator. While we are pleased with our outstanding 2022 results, we are also focused on moving toward our future. This year, our company celebrates its 25th anniversary, which underscores our experience in the market, supported by a skilled team with consumer turbo business know-how. Today's market environment has accelerated our plans, enabling us to unlock shareholder value to continue successful execution of our Level 3 strategy. We're therefore [indiscernible] and confident about the year ahead and are leveraging our extensive experience and competitive advantages deliver where we maintained vested long-standing philosophy of remaining vigilant to market dynamics and prudent but opportunistic in our investments. Thank you to the entire Vesta team for your hard work and many successes throughout the year and in the future.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect your lines.