Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to FIBRA Macquarie's Third Quarter 2022 Earnings Call and Webcast. My name is Kevin, and I'll be your operator for this call. [Operator Instructions]

I would now like to turn the call over to Nikki Sacks. Please go ahead, Nikki.

[Nikki Sacks]

Thank you, and good morning, everyone. Thank you for joining FIBRA Macquarie's third quarter 2022 earnings conference call and webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer. And to answer any questions you may have at the conclusion of today's prepared remarks, we also have Andrew McDonald-Hughes, our CFO.

Before I turn the call over to Simon, I'd like to remind everyone that this presentation is proprietary and all rights are reserved. The presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements.

These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation whether as a result of new information, future events or otherwise except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts unless otherwise specified. As usual, we've prepared supplementary materials that we may refer to during the call as well. If you've not already done so, I'd encourage you to visit our website at www.fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab.

And with that, it's my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon?

[Simon Hanna, executive]

Thank you, Nikki. Good morning, and thank you for joining us. On today's call, I will discuss our third quarter results, provide updates on our growth initiatives and capital position as well as our improved outlook including our increased AFFO per certificate guidance for the remainder of this year. We continue to effectively execute on our strategy, which is reflected in the sustained high occupancy across our portfolio, the delivery of strong financial and operating results as well as the continued execution of our strategic value creating industrial growth CapEx program.

Our third quarter results are reflective of our high quality portfolio and an encouraging market backdrop. We delivered AFFO per certificate growth of 18.8% year-over-year to MXN 0.71 and importantly a 400 basis point AFFO margin expansion to just shy of 50%. These strong results were driven by a robust top line performance in both our industrial and retail portfolios.

Taking this outperformance into account, we're increasing our annual guidance even after absorbing a stronger peso in our FX forecast for the remainder of the year. Whilst we continue to see the ongoing benefits of near-shoring supporting the solid performance of our industrial portfolio, we're also cognizant of the evolving geopolitical and global market dynamics. Inflation and interest rates still remain high. However, there are also signs that global supply chains are beginning to normalize.

We consider the near-shoring tailwinds to be structural in nature providing strengthened stability to long-term market fundamentals. We believe in the resiliency of our business resulting from the strategic location and quality of our assets, especially with more than 3/4 of our industrial footprint positioned in the Northern markets, which is the key beneficiary of the growing manufacturing for export market.

This combined with our vertically integrated property administration platform continues to provide for a powerful combination to continue to drive performance and deliver optimized per certificate returns for our investors. Let's now turn to discuss our industrial portfolio in some more detail.

As mentioned, core industrial markets in Mexico continue to be active as market vacancy in our key markets such as Monterrey, Juarez, Reynosa and Mexico City remain at historic lows. Move-outs continued to be on the low side and retention rates remained at high levels, which is a great foundation to build our operational performance upon. We saw another quarter of solid increases in both occupancy and rental rates as we benefited from our concentration in high demand limited supply in Northern markets and we delivered a record quarter of lease revenues.

Industrial NOI increased by 8.6% year-over-year or 7.6% on a same-store basis while we increased our leased GLA by 1.6% for the quarter and 3.3% over the last 12 months. Our same-store average monthly rental rate also grew by 4.5% continuing its gradually accelerating trend throughout the year. We enjoyed our highest quarter of leasing renewals for the year with 1.2 million square feet of activity and these were booked with a healthy re-leasing spread of 10%.

New leasing activity in the quarter included 4 new leases in our Northern markets. New leases featured 2 logistics providers and a U.S. domiciled metal plating company as well as a U.S. based manufacturer of electrical vehicle parts. Looking ahead, we have 3% of leased GLA expiring in the fourth quarter and given current market conditions, we feel comfortable working through these renewals in an overall successful manner.

The lease executed with the EV parts manufacturer in our recently delivered development in Apodaca represents the second property occupied by this customer in our portfolio. It was a fantastic transaction fully leased upon completion with no vacancy downtime [ printing ] a 10.4% NOI yield with a high quality 10-year U.S. dollar denominated triple net lease. Furthermore, we are on track to certify the property with a minimum LEED Gold green building standard and we are proud to say that this represents the highest quality product in the market. Prudently deploying capital into value-creating growth CapEx projects at attractive returns is a key element of our long-term growth strategy. FIBRA Macquarie's 2022 growth CapEx program comprises 1.8 million square feet of GLA, which includes projects already completed this year along with projects under construction.

This takes into account development projects of 1.4 million square feet, an opportunistic acquisition of a 293,000 square foot property closed this quarter and built-to-suit expansions of 115,000 square feet. We have now commenced construction on our second building in Apodaca comprising 210,000 square feet of GLA with an expected completion by the second quarter of 2023. This along with our other ongoing developments in Juarez and Mexico City are expected to begin contributing to NOI from 2023 onwards.

Turning to our retail portfolio. We are pleased with the continued positive performance of our defensively positioned retail assets. There are encouraging signs provided for a sustained recovery. Firstly, COVID related discounts have now been fully worked through. Variable and car parking income is trending up with an impressive 44% increase over the prior comparable period.

New leasing from nonessential customers has now become a welcome trend and we have enjoyed lower credit loss provisioning through stronger cash collections over the last 2 quarters. Importantly, our top line is also benefiting from rent escalations reflective of an elevated Mexican CPI and we are now starting to see some positive leasing spreads. Together, this has resulted in occupancy trending up to 91% and 4 consecutive quarters of rising in OI book-ended by a year-over-year increase of 35% for the current quarter.

New leasing activity was strong. FIBRA Macquarie signed 20 leases encompassing 5,600 square meters of GLA. Leasing highlights included the renewal of a 1,700 square meter office supply store as well as new leases in the merchandise and sports bar segments. Retention levels are gradually increasing and now stand at 87%, comfortably above the 50% to 60% levels we were experiencing last year through COVID.

Our general outlook for the retail portfolio for the remainder of the year is steady and is also boosted by the recent removal of market restrictions in Mexico City that should positively impact foot traffic. Although on balance, we are also expecting to work our way through some scheduled fourth quarter move-outs. Turning to our capital position. As of the end of the quarter, our debt metrics are stable with real estate net LTV at 34.2% and net debt to EBITDA at a 5x multiple. Balance sheet liquidity remained strong at $280 million comprised of $244 million of undrawn committed credit lines and $36 million of unrestricted cash reserves. In addition, we also have access to undrawn uncommitted credit lines of $40 million. 97% of our debt is U.S. dollar denominated and 88% is fixed rate in nature. Our guiding principle has been a focus on disciplined growth with target stabilized NOI yields of 9% to 11%, a target that we have consistently achieved.

We currently have approximately 1.5 million square feet of GLA under construction and over the next 5 years are targeting to add over 5 million square feet. We remain disciplined in how we fund our growth, reinvesting the cash generation from our operating assets and supported by our well-positioned balance sheet. Furthermore, we are increasing our AFFO guidance for the year to MXN 2.7 per certificate, a 3% increase from the midpoint of our prior guidance and a 13.3% increase from 2021. This reflects our strong third quarter performance and the positive momentum in our underlying financial and operating results. We are also reaffirming our full year guidance for cash distributions of MXN 2 per certificate. Whilst there is increasing uncertainty around the broader global economy, we believe Mexico continues to be well positioned.

We anticipate that near-shoring demand will persist and our portfolio is poised to benefit from this backdrop. We have a highly occupied industrial portfolio, which should continue to see rental rate growth and a retail portfolio that is seeing an ongoing recovery along with a pipeline of accretive growth opportunities. We remain focused on realizing the embedded value of our platform and creating value for our certificate holders. I would like to take this opportunity to thank the FIBRA Macquarie team across the country and all of our stakeholders for your ongoing support.

With that, I will ask that our operator open the phone lines for your questions.

[Operator]

[Operator Instructions] Our first question today is coming from Juan Ponce from Bradesco.

[Juan Ponce, analyst]

I have 2, one on capital allocation and the other one on EVs. Regarding capital allocation, how should we think about payout ratios and buybacks next year? I mean this quarter we saw a 71% AFFO payout with guidance revised upwards once again. You have a healthy balance sheet, a good development pipeline ahead, development yields shy of 11%; but the stock trades at a significant discount to NAV with an implied cap of around 12%. So my question is how should we think about capital allocation in the coming quarters? That's my first question.

[Simon Hanna, executive]

Juan, it's Simon here. Look, I think same story as usual really in the sense that we have a balanced approach where we're looking at a number of targets. Obviously we want to maximize total return to investors on a per certificate basis so in that sense, buyback definitely becomes a good option. On the other hand as well, we obviously have our balance sheet metrics, which will also have a laser focus on LTV sort of not really wanting to go too much above 35%. We're below that today. Net debt to EBITDA 5x and ideally sort of there or below as a target as well.

So in that sense, I think to the extent we do any meaningful buyback, that obviously goes against the balance sheet targets and that along with the fact that we have quite an attractive investment pipeline where we're seeing development and expansions where we just obviously do a 10.4%. We think we've got other opportunities underway, which will give us that 9% to 11%. So sort of I'd say comparable to buyback in some respects.

We think that the focus for us is really allocating capital to that attractive growth CapEx program. We'll remain opportunistic on buyback and obviously if the opportunity is there, perhaps we will do something. But for now I think obviously the capital allocation, as you would have seen over the last few quarters, has been on the interactive growth CapEx program.

[Andrew McDonald-Hughes, executive]

It's Andrew here, Juan, and I just wanted to complement on what Simon said as well. You're right, we have seen our payout trend down this quarter to roughly 70% and if you take the midpoint of that or the updated guidance rather, you'll see that the full year is at approximately sort of just north of 74% and that's in line with the prior guidance that we've communicated since we adjusted our payout ratio back in 2017 down to sort of approximately 75%. So we're very comfortable at these levels. We think it's the right way to position the balance sheet and maintain a well-covered dividend whilst providing ourselves with an opportunity to access our most efficient source of capital to fund those growth CapEx projects that Simon was speaking to a moment ago.

[Juan Ponce, analyst]

Okay. Great. And just a follow-up on this. Can you remind us what is the target for LTV?

[Andrew McDonald-Hughes, executive]

Target for LTV has historically been 35% so we are inside of that target now. I think over the long term we would like to see that trend down slightly towards closer to 30%, but I think we're certainly very comfortable in the range that we're in at the moment between the 30% to 35% type area.

[Juan Ponce, analyst]

Okay. Great. And my second question is on EV demand. So how much industrial activity are you seeing in the space? I mean we saw you leased to another part manufacturer. We recently saw Elon Musk in Monterrey. So what is your outlook on the auto sector and how are you positioned to benefit over the coming years?

[Simon Hanna, executive]

Look, we think we're well positioned obviously with the footprint that we have in the Northern markets. Just did a deal, which was actually the second property we leased to this particular customer in Monterrey on the EV parts side. There's definitely a couple of others that are like that that we're striking as well from a leasing perspective. I would characterize the demand side on EV as incremental. It's obviously coming through gradually as the whole sector really transitions into EV. So it will remain a long-term driver, but not necessarily something that's going to be meaningful in any particular quarter. But obviously, as you say, I think we're all excited with the fact that Elon Musk has come down to Monterrey over the weekend. I think it only bodes well in terms of intent. And certainly when you think about the broader supply chain, I mean the particular customer we leased up, which was a U.S. based customer. There's obviously a lot of other activity coming across from the other side of the Pacific and that will obviously complement what we've just done. So we feel very confident that that incremental leasing demand will be there over the long term.

[Operator]

Next question is coming from Alejandra Obregon from Morgan Stanley.

[Alejandra Obregon, analyst]

It's actually on lease spreads. If I remember correctly, you mentioned last quarter that about 20% of your industrial portfolio is rolling over next year. So I was just wondering if you could provide some color on how will that be distributed throughout the year and where do you see lease spreads landing with all the moving parts? You mentioned geopolitical risks earlier, but you also have the near-shoring trends so how should we think of that 20% portfolio rolling over? And then if you could elaborate a little bit on the 10% spreads that we saw this quarter versus the 13% reported last quarter. Is that just specific for these shorter contracts? Are you seeing anything different from a sector basis or a regional basis? Anything that you can provide here would be very helpful.

[Simon Hanna, executive]

Look, I think next year as we are publishing our supplementary information, we have a total expiration of around 20% coming through in 2023. We haven't shown the quarterly breakdown on that, but it's not going to be sort of too radical quarter-on-quarter. I do think that as we go through that, we do think there's an opportunity there to capitalize on the current dynamics, which are in the landlord's favor. We have seen that over the last few quarters now where we've done 13% Q1, 13% Q2, 10% this quarter as positive re-leasing spreads. So it's a consistent track record and something that we believe that is an opportunity if that's real fourth quarter and beyond. Let's see how that goes.

We're always cautious in expecting too much about inflation, but obviously the dynamics have proved real in the last few quarters. So I do think that when we -- to address the second part of your question in terms of geographic spread. Certainly the leases that we've been rolling through I'd say across the board have been positive not particularly weighted to one geographic area, but as we all know, Northern markets in particular are quite buoyant. So rollover that we have in some of our highest geographic markets by ABR such as Juarez and Monterrey, we're seeing really positive trends there and that's the case for other broader markets. So I think that's a very consistent theme with what we're seeing across the industry.

[Andrew McDonald-Hughes, executive]

I think that's right and just to complement Simon. We do have an uptick in rollover in the fourth quarter of FY '22. We had a very small level of rollover in the third quarter of this year and we have approximately 28% of annual increases scheduled -- sorry, I should say leasing anniversaries rather than rollover in the fourth quarter. So the seasonality, typically speaking the summer is a slower leasing season and we tend to see a pickup in the last quarter of the year. So I think some of that will also help with that adjustment in terms of what we expect to see coming through in the fourth quarter also.

[Operator]

Next question today is coming from Andre Mazini from Citigroup.

[André Mazini, analyst]

So my question is a follow-up on the lease readjustments. Of course you guys give a very good disclosure that are out some quarters ago about what's U.S. CPI link, what's Mexico CPI link and also the fixed and the cap increases, right? As we're in a very high interest rate and inflationary environment, do you think the fixed portion of the portfolio will maybe make rents lag going forward or do you guys think that you can increase the fixed portion of the portfolio? I understand this is ahead, right? If inflation were too low, the fixed will probably bias upward the readjustments; but if inflation is too high, it may be a little bit of a drag, right? So how do you guys see the fixed portion going forward or if you can actually increase the fixed portion when the leases come due given that it's an 8% give or take inflationary environment both in the U.S. and in Mexico?

[Simon Hanna, executive]

Obviously it's a customer-by-customer negotiation. The fixed rates that we have in the current lease portfolio I think it's something that's obviously worked well for us in a low inflation environment. In this environment, it is correct to say it's a drag up until the time of renewal where then we can take the opportunity to have it catch up and so that's what we're seeing on the positive re-leasing spreads.

I think as we think about the ideal lease structure as part of any renewal or new lease, I think it's hard to think that we can capture fixed rates at the current inflationary environment. I think rather the conversation is trending more towards having a CPI or inflation-linked lease structure for now. What we are doing though is trying to have our cake and eat it and as we go through that, take away any caps that we have whilst trying to kick floors I think would be the ideal scenario.

So we are getting some of that in a positive market for landlords. And I think that's going to be the emphasis going forward sort of having the CPI with hopefully some cuts rather than trying to get fixed rate at the current level, which is not so realistic.

[Andrew McDonald-Hughes, executive]

I think just to put a couple of numbers around that, Andre. You would have seen from the disclosure that we started preparing since the fourth quarter of this year with respect to the lease rate rental summary. That number of inflation linked to leases has actually stepped up from around 56% to around 58% and that's in a year with a very small amount of rollover. So we had sort of an unseasonal or abnormally low level of rollover. As Simon mentioned earlier, we do have a step-up closer to 20% and then slightly above that if you include what's rolling in the fourth quarter of this year. So I think given the strong on-the-ground fundamentals that Simon was referring to, we could potentially see that number continue to grow albeit incrementally as we work through some of the leasing renewals in the book more broadly.

[Operator]

Next question today is coming from Felipe Barragan from BTG Pactual.

[Felipe Barragan;BTG Pactual, analyst]

I have a quick question on your retail portfolio. Last quarter we saw an acquisition from Grupo Mexico for Planigrupo at a 17% discount against the trading price. What is your outlook on the retail market? Given that there's a discount in the market, would there be any potential acquisitions in this field?

[Andrew McDonald-Hughes, executive]

Thank you for the question. So I think it's an interesting data point that we saw the Planigrupo come to market this year. We are conscious there are some other potential trades and I think it's a healthy signal with increased activity in the market that we have not seen in a couple of years and I think that is a positive sign in and of itself. I do think we do have a very different portfolio to the Planigrupo transaction with our very well located largely predominantly in the core markets of Mexico City, Monterrey and Guadalajara, sort of with respect to the formation of our portfolio. I think it's fair that we did take an adjustment to reflect the increase I guess the market transaction along with the increase in interest rates that we're observing particularly with respect to the peso denominated debt and now with the [indiscernible] 10%, we thought it was prudent to adjust the valuation.

So we've actually taken 11.3% adjustment downwards with respect to the retail portfolio, which implies approximately a low 9% level NOI yield when you take 3Q annualized retail NOI. And so we think that that's a prudent level and reflects the quality of our portfolio. However, an adjustment that we felt was appropriate in the market. I think healthy to see, as I mentioned earlier, the return of more M&A activity in the retail space and so I think that we're hopeful that that will continue and certainly seeing an additional player into the market is constructive with respect to the broader dynamics of the market. I think with respect to our capital allocation specifically, we'll continue to focus on deploying capital and applying capital to our industrial growth CapEx program across the development and expansion space rather than look to add additional capital to the retail portfolio in the near to medium term.

[Operator]

Next question today is coming from Alan Macias from Bank of America.

[Alan Macias, analyst]

Just one quick question on asset recycling. If you can give us an update on what you're thinking about asset recycling and if you're looking at any opportunities out there?

[Simon Hanna, executive]

Asset recycling is always something that we're having a think about. We obviously have gone through a decent amount of asset recycling in our history something over $120 million of asset sales historically at a 2.2% premium to book. The current market environment again particularly in industrial obviously lends itself to something where there's attractive rates out there. So for the time being we don't have actually anything in the market. I wouldn't expect to have any sort of portfolio type program similar to what we've done before at the moment. We think what we have at the moment is quite a vast majority of good core product and good core product that will perform over the long term. Having said that, we're always open-minded to any opportunistic sale opportunities. There could be the odd asset sale here and there that we do do, whether it's to the end user or to a buyer, an investor and that will be done on an opportunity basis for the main part. That could give us additional proceeds for reinvestment into our growth program. So potentially a little bit to do on that side, but it won't be transformational in any way.

[Operator]

[Operator Instructions] Our next question is coming from Juan Macedo from GBM.

[Juan Pablo Macedo Carrillo;GBM, analyst]

Congrats on the results. I have 2 questions. The first one is related to your retail properties. You say given any COVID related discounts so we were wondering what trends are you seeing in the segment?

[Simon Hanna, executive]

Look, I think on retail, I'd like to think if anything retail has actually been a quiet performer for the year or quiet achieve for the year when we think about it. I think industrial grabs a lot of headlines for very good reasons. But when we think about our own retail performance and the trends that we can read from that, NOI up 35% year-over-year. There's a lot that goes into that, but it's been 4 consecutive increases of NOI and a lot of that is driven off the fact that we have seen the expiration of the COVID discounts, which in of itself I think is a great statement to be making now. We think that hopefully COVID discounts are a thing of the past and what we're now sort of seeing is actually an increase in variable income. So car parking and variable income through tenant sales linked to tenant sales, that's up 44% year-over-year.

So we are seeing a good bounce back in actual activity at least from a car parking and these are perspective for some of those tenants and the laggards, which have really been the cinemas and the gyms. We think they're starting to turn the corner there. We've done a number of new leases on the nonessential segment. That's now a trend as well. Some of that's been in gyms in the last couple of quarters. We think there's probably another gym new lease that we can strike in fourth quarter fingers crossed and that's going to complement other nonessential leasing that we're seeing such as sports bars and even restaurants. So nonessential is definitely coming back, which is a great complement to our necessity-based anchors. And the other I guess benefit that we're seeing for retail is the fact that it's 100% Mexico CPI linked.

We've been able to really go through all the annual escalation events without any pushback there so that we've been able to actually get the full pass-through of that Mexican CPI and obviously that's going to be a benefit for the quarters to come. So that's also driving top line growth, which is great to see. So when you add that with the strong performance on Industrial, which is also now at record-breaking levels, we're seeing that all come together to have AFFO margin back up to 50% and just a great NOI result as well where overall now we're seeing NOI up 9.5% year-over-year on a consolidated basis, which is obviously tracking above inflation. So that's a really important number to focus on when you take away all the noise about what's to step up, what are we seeing on renewals, et cetera. NOI total consolidated year-over-year 9.5% increase. That's a fantastic result and contributes to the AFFO uplift that we're seeing.

[Andrew McDonald-Hughes, executive]

I think just to complement Simon there as well. The real strong momentum that we see in the retail portfolio a north of 30% increase in NOI in retail year-over-year. We've also seen really strong trends this quarter that you'll see in the numbers, particularly strong step-ups in variable income as well as parking income, which reflect I think the positive momentum across the market in that space. Second, sequential increase in occupancy. As Simon said, termination of rental discounts, lower level of bad debt expense coming through in the retail that continues and we've seen that as a trend. So I think the positive momentum in that concept of a stabilization or COVID recovery is starting to reflect and is coming through in the performance of the portfolio. We still see it as behind where we were on pre-COVID level so there's an opportunity to continue. But we're certainly I think cautiously optimistic mindful of some scheduled moveups that we have in the fourth quarter. But overall, I think we're encouraged by the fundamentals that we're observing.

[Juan Pablo Macedo Carrillo;GBM, analyst]

That's great to hear. My second question is related to distribution. We are seeing some fee rise -- we expect some fee rise will need to catch up in fourth quarter distribution due to fiscal effects since macro trends like inflation are moving fiscal results. Do you expect that your -- if there is a possibility that your fourth quarter distribution comes bigger than expected or are you comfortable with your current guidance?

[Simon Hanna, executive]

Look, I think we obviously just reaffirmed our full year distribution guidance for MXN 2. We're obviously aware and tracking taxable income result for the full year. There's a lot of data points that go into there, a lot of assumptions that also factors in or mainly takes into account year-end FX which we're a long way from locking in. So we're tracking that. We're comfortable with the guidance as it stands and we'll obviously be monitoring total taxable income results through 31 December taking into account all those moving pieces. So as we close that out, we'll see where we get to.

[Juan Pablo Macedo Carrillo;GBM, analyst]

Thanks for the color and congrats on the results.

[Operator]

Next question is coming from Francisco Suarez from Scotiabank.

[Francisco Suarez, analyst]

Congrats on the results. It's a question, Andrew and Simon, on the high level on your industrial portfolio given that both your overall exposure to the auto industry and the [ EV industry ] that you brought this quarter on this new lease with a Tier 1 supplier on the EV chain. What is your overall news? What do you see on the ground from your tenants point of view on how these guys are transitioning to EVs in general from internal combustion engines? So that's question number one. And the second question that I have for you is that given the overall increase in deals that we have seen very sharply, do you think that that will add pressures on your overall loan to values in general?

[Simon Hanna, executive]

Okay. You were coming across a bit patchy there, but I think we picked up both those questions. Jump in if we didn't. The first question was on EV transition and how we're seeing that on the ground. As we mentioned earlier, I think we're pleased with what we're seeing in terms of the supply chain, which we think will gradually transition to EV.

So I guess there's a couple of dynamics there. Firstly, there's actual EV specific suppliers such as the one that we announced in our most recently completed development in Monterrey where they're coming in for specific EV supply chain as new entrants in the market, which is adding to demand overall.

So that's a positive trend and something which I guess we're just at the start of the journey. The other interesting one is with existing suppliers across the existing auto supply chain or auto part supply chain. There it's a bit more of a fluid analysis where obviously you have ICE specific suppliers and then you have for the most part really the majority of suppliers doing other parts of the car, whether it's seat belts, steering wheels and the like, which you really apply whether it's EV or ICE.

So that's something where we are seeing the long-standing suppliers move into being able to accommodate all the OEMs whether it's EV or not. And I think that's something where we're obviously seeing we're conscious of the trend and for the most part what we're seeing is the ability for existing suppliers to mainly I guess work their way into the new supply chain and that's being laid on with the new entrants of a EV specific nature. So let's see how that trend plays out over the coming years. It's obviously going to be fluid with some winners and losers. But what we're seeing overall is that Mexico is set to benefit and the new strong dynamics and the localization of supply chains, I think our hope and belief is that Mexico will be picking up a greater share of that pie overall. The second question was with regards to growth CapEx and to capital allocation if I'm not mistaken. So with regards to...

[Francisco Suarez, analyst]

Sorry to interrupt. No, it was actually about how the effect of increasing yields may affect your overall loan to values going forward? Not that it's a concern for you because you have plenty of financial stability, but it seems that that could be a trend in the fourth quarter, isn't it?

[Simon Hanna, executive]

Okay. I'll let Andrew take that one.

[Andrew McDonald-Hughes, executive]

Yes, I think we're very comfortable with our valuation level, Paco. If we look at the implied yield on our industrial portfolio, we're at approximately 7.8%, which we think is conservative or very comfortable given where the broader market is trading and we're still seeing I guess increased appetite from the private market with respect to this transaction. There's a number of data points that have either closed or in process this year that reference that and I think support that number quite comfortably. So I think on the industrial side, very comfortable with where the valuation stands. As I mentioned earlier on the retail side, we did make a small adjustment to bring that into line with where we believe market is. Holistically speaking bringing that together, I think overall the valuation level is very comfortable. We have a very conservative LTV and certainly in line with our broader level of guidance.

We will go out as is customary in the fourth quarter and undertake a third-party external valuation so you will see those updated numbers come through in the fourth quarter. So we'll see how the external third-party valuation firms are looking at the market and some of those broader assumption adjustments, but we do believe strongly in the data set. The underlying structural trends such as near-shoring that are really supporting the level of demand and appetite for Mexican industrial real estate, the continued I guess existence of positive leverage within those spreads that we're observing on the industrial side, which I think is unique and different to some of the impact and valuation that we're seeing in other parts of the world. So I think bringing that all together, we believe in the overall underlying fundamentals and how that's reflected in the valuation of the portfolio today and comfortable with the levels that that's had on our balance sheet.

[Simon Hanna, executive]

Yes. And just to complement there as well. When you take a step back and see what we've done over the full 12 months, industrial asset valuation is increasing actually close to $330 million year-over-year. That's obviously achieved without any certificate dilution. It's about 1/3 of our market cap, very meaningful, but still at a comfortable cap rate of around 8% based on in-place NOI. So obviously that compares very favorably to current market pricing. And I think obviously there's a great significant asset increase there even taking into account the retail adjustment, it's just under $300 million, as I say, are getting on to 1/3 of market cap. And so great to see the actual underlying operating performance reflected in asset valuations and then there's obviously a level of frustration that hasn't translated into share price performance.

[Andrew McDonald-Hughes, executive]

And I think just to complement and perhaps close out the loop on this as well. The other side of the equation or trend that we're observing is the strong increase in rental rates, which we'll also see continue to contribute to valuation as well over time. So I think that's an important one to bear into mind as we're looking at the overall valuation landscape.

[Francisco Suarez, analyst]

Perfect. Congrats again.

[Operator]

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

[Simon Hanna, executive]

Thank you, operator, and thank you for participating in today's call. We look forward to speaking with many of you over the coming days and weeks as well as updating you again soon on our year-end 2022 results. So thank you very much.

[Operator]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.