Macquarie Mexico Real Estate Management SA de CV

OTC:DBMBF

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to FIBRA Macquarie's Fourth Quarter 2018 Earnings Call and Webcast. My name is Carmen, and I'll be your operator for this call. [Operator Instructions]

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

[Nikki Sacks, executive]

Thank you, Carmen, and good morning, everyone. Thank you for joining FIBRA Macquarie's Fourth Quarter 2018 Earnings Conference Call and Webcast. Today's call will be led by Juan Monroy, our Chief Executive Officer. And to answer any questions you may have at the conclusion of today's prepared remarks, we also have Simon Hanna, our CFO; and Peter Gaul, MPA's Head of Real Estate Operations.

Before I turn the call over to Juan, 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 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 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 prepared supplementary materials that we may reference during the call as well. If you've not already done so, I would encourage you to visit our website at www.fibramacquarie.com and download these materials. A link to the materials can be found under the Investor Relations Events and Presentations tab.

With that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Juan Monroy. Juan?

[Juan Monroy, executive]

Thank you, Nikki. Good morning, and welcome to FIBRA Macquarie's Fourth Quarter 2018 Earnings Conference Call. On our call today, we will review our operational and financial performance and discuss our ongoing progress for driving long-term growth.

The fourth quarter was a very strong year, where we delivered record results across several leasing and operational metrics. We also made meaningful progress on a number of core strategic initiatives, including noncore asset dispositions, investing in accretive expansions, continuing our certificate buyback for cancellation program and balance sheet enhancement.

I will first discuss our fourth quarter results, and then I will provide more details on our key accomplishments for 2018 and priorities as we move through 2019.

In the fourth quarter, we delivered AFFO per certificate of MXN 0.5972, which was an 11.3% increase from the prior year. This strong performance was a result of solid execution in both our industrial and retail portfolios.

In our industrial portfolio, we ended the quarter with occupancy of 94.5%, which is a 187 basis points increase from the end of 2017. We also delivered an impressive 3.9% rental rate growth for the year, boosted by the third consecutive year of positive lease renewal spreads, reflecting ongoing healthy market fundamentals. Some of the improvement was also due to dispositions that we closed in July, where the assets sold had lower occupancy and rental rates than our portfolio-wide average.

Notably, however, we also saw year-over-year improvement on a same-store basis, where occupancy increased 56 basis points to 94.5% and same-store rental rates increased by 2.3%. As a result, our industrial portfolio NOI increased 4.1% year-over-year to MXN 681.8 million, which is a particularly impressive result given last summer's asset sale.

On a same-store basis, NOI in the fourth quarter increased 8.9% from the prior year. We also had our most active leasing quarter on record, culminating 35 new and renewal leases, comprising 3.7 million square feet. Our leasing teams took advantage of strong underlying market conditions to pursue earlier renewals.

A notable example is that of Whirlpool, where we pursued and signed an early renewal for its 1 million square foot strategic logistics hub in Monterrey. The early renewal for largest industrial property drove a significant expansion in our weighted average lease term remaining to a record 3.6 years.

Another highlight for the quarter was a particularly low number of move outs at just 122,000 square feet. In fact, this represents an all-time record low quarter since our fund inception and less than half of the new leads volume. These transactions allowed FIBRA Macquarie to achieve a record trailing 12-month retention rate of 87%.

Now turning to our retail assets. Our retail portfolio delivered quarterly NOI of MXN 141.6 million, boosted by quarterly increasing occupancy of 32 basis points. This contributed to record annual revenues and NOI, both up around 4.5% over the prior year.

I will now provide more detail on our key accomplishments in 2018.

In terms of operations, for the year, we delivered a 7.6% year-over-year increase in AFFO per certificate. This growth was driven primarily by higher same-store average occupancy and rental rates, along with accretive buyback activity. Our leasing teams took advantage of a favorable leasing environment and delivered record results across several metrics.

This includes average consolidated occupancy for the year of 93.2%, up 57 basis points from the prior year, and 94.4% at year-end. We executed a record number of leases, totaling 8.4 million square feet in industrial and 4.8 thousand square meters in retail.

Let me remind you that our record AFFO per certificate was delivered even as we sold 35 properties, representing 7% of total GLA in the middle of the year.

As we have previously discussed, the sale of these 35 nonstrategic industrial assets were $80.2 million. Another 2 assets are under contract for sale for an additional $7.2 million, which we expect to close in the first half of this year.

With the completion of these dispositions, we will have sold a total of 44 assets, generating $117 million at a premium of 2.2% above book value.

We have substantially completed our near-term asset recycling goals and now have a higher quality portfolio with enhanced operating metrics, fewer single asset markets and a more flexible financial position. This demonstrates the successful execution of another -- of one of our strategic initiatives: proactive asset management and recycling.

It is of prime importance to invest this source of capital, along with retained AFFO, in a highly accretive and disciplined manner. In this way, one of our ongoing key initiatives is to invest in expansions and development projects.

During 2018, we completed 3 expansions for a total of $5.1 million investment. We also have 3 additional expansions in progress, with an anticipated investment of $4.8 million.

Today, FIBRA Macquarie has completed or has in progress 31 expansions and development projects, adding 1.2 million square feet of GLA. This represents an investment of $62 million, with an average projected NOI yield of approximately 12%.

In addition to the highly attractive economics, these projects also consolidate our customer relationship, resulting in improved retention, satisfaction and lease term. We've had productive relationships with our customers and maintain a solid pipeline of additional expansions and development opportunities in excess of $70 million, with expected double-digit returns.

We're also excited about the continuing progress of our development project in Ciudad Juárez, with groundbreaking occurring in January this year. Given strong economic trends and market fundamentals, Ciudad Juárez is a strategic location to pursue our long-term objective of developing Class A buildings in core industrial markets.

The project involves the construction of up to 2 buildings, totaling approximately 445,000 square feet. Development will be completed in 2 stages, with an expected total investment, including the land, of approximately $20 million. The first Class A industrial building is expected to be completed in 2019, with an approximate investment of $9 million.

Over the medium term, we intend to increase our investment in development projects. We do not intend to have more than 5% of GLA under development at any point in time.

For this year, we have commenced remodeling works at 3 retail properties as we seek to improve their image and vibrancy. These works will enhance experience for shoppers, along with retaining and increasing our high-quality tenant base. We expect to begin the projects during the first quarter, with completion in the second half of 2019. The 3 shopping centers being remodeled are all located in the core markets of Mexico City Metropolitan area.

Expected total capital to be deployed for these remodeling projects is approximately $9.3 million. We have planned construction to minimize disruption, and the centers will remain open during renovation.

In 2018, we actively executed on our certificate buyback for cancelation program. Since implementing this program in June of 2017, we have invested approximately $45 million for the repurchase and cancellation of 41.4 million certificates, representing 5.1% of total certificates.

Through to June 25 of this year, we have a remaining available program size of MXN 845 million, which equates to approximately an additional 5% of outstanding certificates. We remain committed to executing on these programs on an opportunistic basis, and we will be balancing this opportunity alongside other alternative accretive uses of capital, including property expansions and development projects.

Additionally, during 2018, we further strengthened our balance sheet by lowering our real estate net loan-to-value by 210 basis points to 37%. We closed the year with a fully undrawn revolving credit facility of approximately $258 million.

Our balance sheet is in great shape, positioning us well to support ongoing growth. We continued our proactive approach to balance sheet management, and we will be opportunistic in pursuing ways where we can further enhance our position.

We are well placed to pursue our 2019 business plan. Despite some lingering macroeconomic uncertainty, we are encouraged by a number of positive indicators related to trade and consumer confidence. While Mexican interest rates continued to rise through 2018, inflation has remained stable, and the new government has introduced some stimulus programs, which should boost countrywide consumer spending and competitiveness of business operating in the northern border regions, many of which comprise our industrial tenant base.

Despite NAFTA renegotiation uncertainty, 2018 registered record levels of auto exports of 3.4 million units, a 6% year-over-year increase. With greater clarity having been obtained on the path to completing the new NAFTA agreement, now known as the USMCA, alongside ongoing trade disputes between the U.S. and China, we believe that Mexico's competitive fundamentals as a major manufacturing and export hub have been consolidated for the long term.

We remain focused in several key strategic priorities. First and foremost is leasing. With a busy 2018 behind us, the hard work executed during the year has resulted in a manageable rollover profile for 2019. I am pleased that we already successfully addressed our most significant expiration with Whirlpool. This has reduced our industrial rollover to be just 16% of annualized base rent, considerably lower than the 29% that rolled over during 2018. Additionally, retail rollover is also comparable and in line with prior years.

We believe it is a favorable leasing environment, with attractive supply-demand dynamics in most of our markets, and we are optimistic about our ability to continue to deliver the solid financial and operating results in the same manner that we achieved in 2018.

We will also remain focused on our disciplined capital management in terms of both sourcing and utilization. As I mentioned, we intend to continue to pursue expansions and the new development project in Ciudad Juárez and other core markets.

On the balance sheet side, already this year, utilizing surplus cash, we have repaid a peso-denominated secured loan equivalent to $14.4 million, carrying an annual coupon of 7.6%. This provides further balance sheet flexibility and reduces gross leverage and weighted average cost of debt. This is indicative of the priority we placed in maintaining a conservative balance sheet.

As is typical for this time of year, we have launched our 2019 AFFO and distribution guidance. Reflecting our positive outlook, we are setting our AFFO guidance to between MXN 2.45 and MXN 2.50 per certificate for the year, an increase from our 2018 results. We also expect to make cash distributions of approximately MXN 1.70 per certificate, which represents an increase of 6.3% from the prior year, while maintaining a prudent AFFO payout ratio.

This guidance is based upon the following assumptions. First, the cash-generating capacity of our existing portfolio and an average exchange rate of MXN 19.25 per U.S. dollar. Second, no new acquisitions or divestments other than the completion of the sales of 2 remaining properties from the portfolio sales announced last summer.

Third, we are assuming no additional certificate repurchases for the purpose of guidance assumptions, with a stable standing base of 770 million certificates. And finally, the continued stable performance of the properties in the portfolio and stable market conditions.

In another positive development, I'll also like to note that we are updating our AFFO reporting methodology beginning in 2019 related to the methodology to record upon normalized maintenance CapEx, tenant improvements and leasing-related costs.

On a pro forma basis, the impact to our 2018 AFFO results is an immaterial amount of MXN 0.03 per certificate. We see this reporting enhancement as another important step in demonstrating our ongoing commitment to continuously improve our corporate governance framework, in this case, through improved transparency and reporting disclosures. Further detail on this change can be found in our fourth quarter supplementary information pack that we published last night.

As always, I'd like to recognize the unwavering valued contribution from all of the members of the FIBRA Macquarie team.

And with that, I will ask that our operator open the phone lines for your questions. Carmen?

[Operator]

[Operator Instructions] Our first question is from Marimar Torreblanca with UBS.

[Marimar Torreblanca, analyst]

My question has to do with buybacks. In your guidance, you're assuming no further buybacks. But I'm unsure if this means you're expecting to be more quiet in buybacks throughout the year or if it's just for simplification purposes. If it's the latter, can you tell us what's your strategy for buybacks for 2019? How much you have left on your program? And how you intend to use it?

[Juan Monroy, executive]

Yes. Marimar, thanks for the question. Yes, we're happy with the program that we completed last year. We've done today a 5.1% of total certificates at a pretty attractive price, taking advantage of dislocation in share price and discount fees to NAV. As we announced last year, we have a new program approved for an additional up to approximately 5%. And we intend to be opportunistic in the way we book forward our resources. Obviously, we value highly our available cash flow and will be prudent in terms of how we allocate between completing alternative investment opportunities, between expansions, development and certificate buyback. Simon, do you want to add something to that?

[Simon Hanna, executive]

Yes, Marimar, just in terms of how we get to that approximate 5%, the exact program remaining is MXN 845.5 million. And that's due to expire on 25th of June. So that if you say that's the maximum amount available based on our current share price, that's approximately another 40 million certificates, which is the additional potential 5%, on top of the 5.1% we've already done to date.

[Marimar Torreblanca, analyst]

Okay. So I'm just getting from that, that you are still going to be active, just not using it for your guidance?

[Juan Monroy, executive]

Yes, on an opportunistic basis, that's correct.

[Operator]

And our next question comes from Gordon Lee with BTG.

[Gordon Lee, analyst]

Two quick questions. First, on the -- I was wondering if you could provide us with a bit more color on the tax situation that led to the change in the payout schedule. My impression was that you had still a couple of years to go in terms of the retained losses that would allow you to distribute primarily capital as opposed to income, and that seems not to be the case. So I was wondering if there was a change to the treatment of certain losses. Or what drove that? And then the second one is just on the asset recycling program. You were obviously very active on that front last year. And I was wondering whether we would -- we should expect you to be active. And if so, to what degree on the sell side this year as well?

[Simon Hanna, executive]

Gordon, it's Simon here. I'll take the first question. Yes, there hasn't really been any underlying change to the expectations. I think if you go back all through the last year, we've consistently guided through our supplementary information materials that we expect during the course of FY '19 to, I guess exhaust tax losses and reverting to our taxable income position. So that's been, I think fairly well disclosed on a consistent basis all through last year. And what we've done as part of our update for this quarter, we've just provided a bit more clarity on the impact sensitivity and give it an FX rate, where if it goes below, in this case, MXN 19.8 at the end of 2019, then we would revert into a taxable income position. So obviously, this is all subject to where we are at the end of 2019, so it's -- given that the sensitivity is on the actual closing FX rate. So although based on where we are today, we would expect, if rates prevail, that we would revert into a taxable income position. But obviously, if peso was to depreciate and go above MXN 19.8, then that would give us the bandwidth to have 100% capital return, just as we've done for all of 2018 and prior to that.

[Juan Monroy, executive]

Yes. Gordon, and regarding your second question, we largely have completed our short-term asset recycling program goals, very happy with that. We've sold today 44 properties at 2.2% above book value. We've divested about 7% of our industrial GLAs, so very happy with the improved quality of our portfolio and a much better shape. We have 2 properties remaining to be sold completing, we expect to close in the second quarter. And then I guess, as always, we'll be opportunistic in divesting assets going forward. And with any mature REIT around the world, we will always have divestments, expansion, development, acquisitions in any given year. So I guess it will be no different with us for this year. We're not assuming much more additional activity, other than the 2 properties that are contracted already, and maybe just opportunistically a handful of assets, if any.

[Gordon Lee, analyst]

Perfect. If I could just have one follow-up, Simon, on the tax question. And this is -- it's probably unfair for me to ask you this right now, but if you had to ballpark an estimate, if the FX stayed here more or less where it is, of your 170 distributions for this year, what share would you expect to come from income and what share would you expect to come from capital?

[Simon Hanna, executive]

Yes. Look, I think once we get below an FX of MXN 19, it's, obviously, in terms of how far you go, but it gives us a guide. I think if we get to sort of around a closing rate of MXN 18.9, then I would expect that the second half distributions would be all a return of the income, assuming that the first half distributions were paid as capital. So it's really -- once you get below MXN 18.9, I think that's really where we're seeing the breakeven for the second half distributions matching income, if that makes sense.

[Operator]

And our next question is from Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

Juan, on the CapEx for the shopping malls, is this -- does this mean that we will see higher CapEx recognized on the AFFO this year versus what you have done in previous years? Or will this be capitalized? So will you be spending less on other maintenance CapEx from -- on other assets? So bottom line is are we going to see a large increase on the maintenance CapEx this year on the back of -- for this CapEx for the shopping malls?

[Juan Monroy, executive]

No, this will capitalized. And obviously, we're doing this to shape up the properties that we remain 1 step ahead in terms of these retail properties. We want to ensure that they remain vibrant and that we maintain and increase foot traffic. So we are proactively addressing that. Examples of what we're doing with that investment is, for example, splitting a big box that is underutilized into a smaller shop space and bring in a more vibrant set of tenants, including restaurants to create a better experience for our customer. So we're excited about the 3 projects. And yes, in terms of financials, that will be capitalized and shouldn't have an impact this year. I don't know, Simon, you want to provide additional color on this?

[Simon Hanna, executive]

Yes. Thanks, Juan. As Juan was saying, just to refer to the supplementary information pack, Page 35. We have a very thorough explanation of what's included in AFFO and what's not under the methodology. And you'll see the group remodeling costs, which, obviously, that falls below AFFO. We, of course, have the capacity to fund these sort of value-add projects through the basis that we have a relatively conservative AFFO cap ratio. So with the $30-odd million that we're retaining or expecting to retain for FY '19, obviously, we can use some of that retained AFFO to fund these sort of projects without impacting debt.

[Juan Monroy, executive]

And in terms of investing less in other properties, that is not the case. We'll continue to properly maintain our properties, as always.

[Operator]

Our next question is from Eugenio Saldana with GBM.

[Luis Saldana Flores, analyst]

I just want an update on the Matamoros situation with your tenants and how is it evolving? That's the first question. The second one is we continue to sink performance on the retail side, particularly on the JV. I mean I just want some update on what your JV partner is telling you regarding this performance?

[Juan Monroy, executive]

Eugenio, yes, on the Matamoros issue, we monitor that issue very closely. It is a serious matter that has impacted the Matamoros market, a lot of volatility. And there have been some -- a good number of workers that have been laid off, unfortunately. I think that the issue now has been stabilized. It was fairly volatile in January and early part of February. What we have observed, and we are in very close contact with our local property management and leasing teams there, is that it is starting to stabilize. We had, last year, 10 properties. And as part of our project [ Impala ] -- sorry, as part of our asset recycling project, we sold 6 assets. And we will have only 4 buildings remaining in that market, which will be the market with a -- that will have a less exposure putting aside those small cheese. So we have further limited exposure to the market. We have a good asset quality, good tenant base, and we are in dialogue with our customers to understand the impact of these strikes and increases to worker's compensation and anticipate -- or hope that the matter will be stabilized in the short term. With regards to your -- retail property that sit in the JV, just like we mentioned that we are fairly active in the managing of those properties. So it's not like we're needing to ask our JV portfolio about its performance. We are hands-on, actively managing the property management using strategic direction expansions, et cetera. So we are in a journey to better position those properties as the occupancy of those properties is below the wholly owned. And I think this year, given the pipeline that we are observing, it should be a positive year for that portfolio as we are completing a repositioning of one property and starting the repositioning of one other. So we are positive in terms of the increased performance of that portfolio during the 2019 year, okay.

[Simon Hanna, executive]

Yes. And just to add to that, I guess, yes, in terms of where we've landed for retail on a full year basis, still a very solid result with record revenues, record NOI, both up around 4.5% on an annual basis. So even with that looking into 2019 as one of the indicators, we feel there's probably more upside risk than downside here. So hopefully, more to come.

[Luis Saldana Flores, analyst]

Just a follow-up on this JV partnership. I see that you already paid down the debt that was due for first, second quarter this year. I mean were you -- or are you thinking of refinancing or taking out equity by levering these assets again? Or I mean are banks willing to do so, is the case?

[Simon Hanna, executive]

Yes. Thanks, Eugenio. Look, we repaid the -- our JV a little deposition. It was a peso-denominated debt of around $40 million equivalent. And for us, it was a bit of a no-brainer. It had a coupon of 7.6%. On a refinancing basis, we're probably looking even way out where local rates are at, probably a refinancing rate in the low double digits, so maybe up to 11%. So for us, it made absolute sense to repay that down, lower our average cost of debt and also, obviously, increase our flexibility by unencumbering an asset that was previously secured. In terms of where we are from a general refinancing point of view and balance sheet position point of view, as we said earlier, we're in a very strong position as of today. And our net LTV position has gone down 210 basis points for the full year, so down to 37% by 31 December. We're happy with that level. Over the longer term, we'd probably still like to see that come down and much more closer to 35%. But at 37%, with a fully undrawn revolver of $258 million, so a lot of liquidity and flexibility, 100% fixed-rate debt, giving us a very high visibility on our cost of funding through to next year, we feel we're in a very strong position. So we don't actually have any material near-term maturities coming up. But having said that, we're always on the front foot and being opportunistic, assessing if there's any opportunities to do, accelerated refinancing. So heading into this year, we still consider the markets are fairly good on the debt side to perhaps take advantage of 1 or 2 opportunities. So we'll continue to actively assess and monitor that and potentially do something if the opportunity arises.

[Operator]

And our next question is from Jorel Guilloty with Morgan Stanley.

[Jorel Guilloty, analyst]

I'm a bit interested in learning more about your outlook in terms of fundamentals. So specifically, I wanted to see about your thoughts on leasing activity going now into 2019, particularly for the auto sector. Are you seeing more demand from existing tenants? New tenants? How are you seeing leasing and re-leasing spreads going forward? So if you can provide some bit of more color on your expectations on fundamentals, that would be helpful.

[Juan Monroy, executive]

Jorel, thanks for the question. I mean I'll say, fundamentals are pretty strong. Supply-demand dynamics are very strong. I guess, a very clear example of that is just looking at 2018 results of our entity and also occupancy levels of the broader market. It was a very, very strong year and a very strong close to the year. And what we have observed so far this year remains fairly vibrant generally. So I say that there is quite a bit of unknown, still a bit of volatility both from the macroeconomic and political perspectives. So there is still a bit of the political risks and trade risk that could impact more the broader economy. For our industry and our business, in particular, for this year, we are fairly confident that the fundamentals will remain fairly strong. We continue to see a lot of appetite from existing tenants to commit to long-term leases. And having that, when you look at our results, you will see that renewals that were done with pretty attractive terms. And the renewal rates that we have are, again, a clear indication of the market being fairly robust. In terms of auto sector, we saw a 6% increase year-on-year in the export numbers, which is fairly healthy despite of the stagnant sales level in the U.S. and a softer sales levels in Mexico. Obviously, the Mexican product being more competitive from a cost perspective is attractive to OEMs as they have higher margins. That's becoming increasingly important, so we are confident from that perspective. But not only the auto industry seems robust and very well diversified in terms of tenant demand, but also from other industries, we continue to see strong appetite. We continue to see electronics, medical -- equipment medical devices, logistics as an increasing tenant using a number of our properties. So across-the-board, we see short- and medium-term strong prospects in terms of demand with a fairly disciplined supply. So the fundamentals, in general, are good. In terms of rental rate spread, as always, we're fairly -- I guess we don't expect a significant increase to rental rates, so we model just inflation. So this year, I think that we can expect to continue seeing a similar trend to what we've seen over the last 18 months or so.

[Jorel Guilloty, analyst]

One more question, if I may. You, I guess focused on existing tenants. What about new tenants? Are you seeing incremental demand from potential new tenants? Or is the demand basically coming from existing?

[Juan Monroy, executive]

Yes. I don't think it's different to the past. It's a mixed bag. Obviously, what we're seeing is existing tenants committing to long term, existing tenants bringing subsidiaries that are not in Mexico. And then we are observing as well new tenants coming into the marketplace with, obviously, variances by market and with different timings for each of these, and it comes and goes. But I'll say that it's no different to what we observed last year. So a good representation of existing and new tenants.

[Operator]

Our next question is from Ramon Obeso with Scotiabank.

[Ramon Obeso, analyst]

Juan, Simon, thanks for adding more transparency to the way you calculate AFFO. That's very helpful. My question is on your growth strategy in the medium term. As I understand it, you'll be developing rather than acquiring assets. Is it a matter of higher returns? Prices? Or maybe there are no properties in the market that fit in your portfolio? I'd like to understand a little bit the rationale behind this.

[Juan Monroy, executive]

Yes, sure. Ramon, thanks for the question. Yes, our growth strategy is largely concentrated in the core markets. And we continue to explore acquisitions opportunity. We are very focused on making sure that we increase the quality of our portfolio in the core markets. So finding good quality assets in these core markets is becoming increasingly harder, number one. And then number two, obviously, there is a price consideration that, given the share price that we're trading at, at the moment, are very tight priced and that we are observing the private markets makes it fairly difficult to complete transactions that will be accretive in the short term. So that's certainly an important consideration. So as a result of that, we have, starting last year, started with our development program and the development to Ciudad Juárez, which is a core market for us. It's an example of what we intend to do, which is develop Class A product in core markets. And we expect to continue in that. So we'll monitor acquisitions and be opportunistic if there is any opportunity on that front. And on the medium-term, our objective is to get to more than 5% of our GLA in terms of development pipeline, where we expect to generate attractive development yield results that will be accretive for our portfolio.

[Simon Hanna, executive]

Yes. And I guess, just to follow up on the comment, Ramon, on the '19 EBIT change rate of our methodology. For us, look, this is an important change because it goes to the heart, I guess, of what we're trying to achieve here by being best-in-class in all areas. And the existing methodology was doing the job, given that the changes are only impacting 2018 on a pro forma basis by $0.03. So although that was doing its job, what we wanted to do was really take it to the next level and moving to a methodology, which was essentially bullet-proof. And so the 2 key changes were done here, where we moved from having an estimate or indicative-type expenditure as part of our methodology to an actual incurred on a cash basis. That's number one. And secondly, what we're doing is ensuring all 100% of maintenance, CapEx and then lease-related costs are included in the AFFO. So we're moving up any items that were previously excluded. They're all included in the AFFO result now. And as I say, on a pro forma basis, it's a pretty immaterial impact, but we do think that this is essentially bulletproofing the methodology going forward. And importantly, we're having an increased level of transparency and disclosure, which we think were very helpful to understand exactly how we're coming up with that number. So we're excited about the change and look to see more disclosure on that coming through from our supplementary information pack from Q1 '19 and beyond.

[Operator]

And our next question is from Vanessa Quiroga with Crédit Suisse.

[Vanessa Quiroga, analyst]

My first question is regarding expirations in 2019. Can you tell us how much -- how many of the expirations are related to build-to-suits? And if you are getting an encouraging feedback about renewals or -- and whether you would expect any of those that do not renew to lead to lower average rents for those contracts? And then in general, about leasing spreads, how you see your rents compared to market in current in industrial?

[Juan Monroy, executive]

Sure. Vanessa, thanks for the question. We're pretty comfortable with rollover profiles for this year, especially as we recently completed renewal of an important tenant of ours, Whirlpool, in a strategic logistics facility for them of approximately 1 million square feet of GLA in Monterrey. So that was a great deal to complete as it will make our 2019 year much easier. Last year, we had a rollover of 29%. And this year, considering Whirlpool, it's only 16%. So pretty comfortable from that perspective. And the rental rate profile of expiring leases, obviously, it carries on a deal-by-deal basis. But on average, [ by large ], is the rental rates are fairly consistent with market rent. So we don't necessarily anticipate much movement in either a positive or negative direction and are fairly comfortable with the renewal profile and hope that the retention rate will remain as high as we've had delivered the last 2 quarters.

[Vanessa Quiroga, analyst]

Okay, that's great. Can I ask you also about the development in strategy that you are talking about? You said that you expect that a thereabout 5% of your GLA will be under development every year, that's your expectation, if I'm not mistaken. And are you referring to industrial, I guess? And does that mean that a large part will be speculative?

[Juan Monroy, executive]

Yes. We were referring to industrial. And it is a medium-term objective to have more than 5% of our industrial GLA in development or strategies to develop Class A product really leading the market in terms of specifications and to develop this product in existing market for us, what we consider core markets. As we've said before, we are very focused in the markets of Tijuana, Ciudad Juárez, Monterrey, Guadalajara, Mexico City and also opportunistically in the Guajillo area. And the dynamics in terms of spec versus built-to-suit vary on a market-by-market basis, and we'll act accordingly. Obviously, we'll include an important component of spec product in certain markets, but we'll only do that on a very prudent basis where we have very clear sight in terms of supply/demand and expected absorption rate. So as we have demonstrated in the past, we'll remain fairly disciplined in terms of the capital allocation and see this as a new strategy to continue increasing the quality of our portfolio and doing that in deploying capital at attractive yields, Vanessa.

[Operator]

Thank you. And I'm not showing any further questions in the queue. I would like to turn the conference back over to management for any closing remarks.

[Juan Monroy, executive]

All right. Thanks, Carmen, and thank you, everyone, for participating 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 first quarter 2019 results.

[Operator]

The conference is now concluded. Thank you for joining our presentation today. You may now disconnect.