Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is David, and I will be your conference operator today. At this time, I'd like to welcome everyone to the FIBRA Prologis first quarter earnings conference call. [Operator Instructions] Thank you.

Alexandra Violante, Head of IR, you may begin your conference.

[Alexandra Violante, executive]

Thank you, David, and good morning, everyone. Welcome to our first quarter 2022 earnings conference call. Before we begin our prepared remarks, I would like to remind everyone that all the information presented in this conference call is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities.

Forward-looking statements that are in this call speak only as of the date of this call. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements.

Additionally, during this call, we may refer to certain nonaccounting financial measures. The company does not assume any obligations to update or revise any of these forward-looking statements in the future, whether as a result of new information, future events or otherwise, except as required by law.

As is our practice, we have prepared supplementary materials that we may reference during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologis.com and download this material.

Today, we will hear from Luis Gutierrez, our CEO, who will discuss our strategy and market conditions; and from Jorge Girault, our Senior Vice President of Finance who will review results and guidance. Also joining us today is Hector Ibarzábal, our Managing Director. With that, it is my pleasure to hand the call over to Luis.

[Luis Gutierrez, executive]

Thank you, Alex, and good morning, everyone. There is a positive momentum that has been carried out from last year. In spite of the recent geopolitical events, the logistics real estate sector keeps expanding at a rapid pace. This is reflected in our strong operational and financial results above expectations, which gives us confidence in our outlook for the year. Given the current market dynamics we're seeing, we are adjusting up our guidance, and Jorge will provide more color.

Let me give you some highlights. FFO and AFFO posted one of the highest growth since IPO in June of 2014. Occupancy closed at a historic high near 98%, reflecting favorable market conditions and the quality of our portfolio.

Rental growth on rollover accelerated this quarter to 11%, which is reflected in the company's same-store NOI. Valuations have increased 6% quarter-over-quarter and 19% year-over-year. Given the dynamics we're seeing, we think that these values are still lagging. We have already sold 50% of the rollover for the year.

On the external front, we acquired 670,000 square feet for around $17 million. These properties came from third-party acquisitions and from our sponsor's pipeline. Additionally, on the ESG front, on the environmental side, we achieved 50% of green certifications in our portfolio 1 year in advance. Our commitment on leadership to sustainability shows in our actions.

Fundamental drivers such as e-commerce and a structural shift, derived from supply chain disruptions that continue to foster nearshoring and foreign investment in manufacturing will keep on driving the demand in our markets. Demand was 8 million square feet in our 6 markets, outpacing supply by more than 2.5 million square feet, resulting in vacancy declining to a new record, and this is low of 1.1%.

Barriers to supply, such as land scarcity and increased development costs imbalanced the market. Our markets registered 6 million square feet of new supply. In the case of Monterrey, Tijuana and Juarez, this imbalance underpinned a higher occupancy facilitating rents to rise. With this low vacancy, market rents are expected to grow.

This first quarter, we saw a rental increase of 5.3%. The industrial real estate sector has proven resilient against inflation and economic downturns. In an extreme case of volatility or uncertainty, it is reasonable to expect that our tenants increase their inventory, hence the demand for space.

Let me spend a few moments on what we're seeing on the ground. On the manufacturing side, [ corn events ] are making companies review the supply chain and bring manufacturing closer to the end consumer, initiating a near-shoring process. In addition, as a result of the pandemic and economic response, there is a labor shortage in the United States and Mexico is well positioned to take advantage of these 2 trends.

Manufacturing is now 2/3 of overall industrial demand. It is broad-based among electronics out of medical household products, distribution among others. We continue to see several requests from clients requiring build-to-suits in the border markets and Monterrey, making evident the lack of available space and the need for future space for our clients.

On the logistics front, e-commerce remains to be a key driver of demand near big urban areas. Despite the rise in mobility since the last part of 2021, consumers changed their behavior permanently during the pandemic, favoring omnichannel retailing. Due to this, it is expected for these customers to have an increase in their SKUs of marketplaces and additional demand for high-quality space. Current deals are bigger in size than in the past. We see more activity outside of the [ topos ] given there is a lack of space in Mexico City and rents are growing.

This quarter, we renewed some leases with significant increases in the rent, which indicates that the clients are more open to the new market conditions. We have a strategically balanced portfolio and customer base, which allows us to take advantage of tailwinds in both the manufacturing and logistics sectors. Logistic real estate continues to be the favorite asset class among investors, and FIBRA Prologis is well positioned to outperform.

In summary, manufacturing exports and e-commerce will continue to grow, and this trend will persist during 2022. On the internal growth side, market rents continue to increment. Our mark-to-market increased to 16%. This will be a resilient source for this year and future earnings as leases roll to market.

On the external front, we will continue to be active. Our capital deployment plan to invest up to $250 million is on track. In addition, our sponsor has a development pipeline of around 6 million square feet for the next 12 months. These assets are well located and no other competitor has access to anything remotely close to the quality or size.

On the balance sheet, it remains strong. Our team has done an excellent job obtaining a low cost of fixed debt while extending maturities and also maintaining flexibility to keep growing in a rising interest rate environment. This will be a major competitive advantage as we go into the future. Finally, we remain committed to our shareholders, and we put their interest first. With that, let me turn the call over to Jorge.

[Jorge Girault, executive]

Thank you, Luis. Good morning, and thank you for joining us. As Luis said, we started the year stronger than we expected. Market rents in particular, were higher than we anticipated at the beginning of the year. To this extent, we are raising our guidance for 2022.

Starting with our financial results. FFO for the quarter was $40 million or USD0.047 per certificate, which was a 10% increase in sequential basis and 9% when compared to the first quarter last year. This is due to the additional revenue derived from 2021 acquisitions and the positive rent change on renewals during the quarter, which were higher than we expected. AFFO was $33 million for the quarter, an increase of around 14% when compared to last year.

Moving to operating metrics. Leasing activity was 1.7 million square feet with a period end occupancy of 97.6%, a 90 basis point increase compared to the same period last year. Our average occupancy for the quarter was 97.7%. We're including this metric starting this quarter and going forward in our supplemental financial information.

To give you some context, average occupancy has been above 96% since the third quarter of 2018, reflecting our operational strength and high-quality client service. Net effective rent change rollover increased more than 11%. And for the last 12 months, it had a positive change of above 10%. For the quarter, cash same-store NOI was a positive 3.7% and GAAP was 3.2%. This increase is driven by annual bumps and rent change and rollover supported by stable FX.

Moving to our balance sheet. We have built a strong and resilient balance sheet regardless of economic cycles. To this extent, and thanks to the refinancings done in the past 2 years, we have relatively low cost of debt of 3.7%, with 80% of our debts [peak], average term of 7.9 years and a loan to value just above 29%.

Some important facts. We have reached $1.1 billion of debt with $3.7 billion of assets. Our nearest debt maturity is until 2026. We have enough liquidity to reach our 2022 acquisition guidance without breaking our loan-to-value internal metrics, and we have used $250 million out of $400 million on our line of credit.

Now let me update you with our group 2022 guidance as a result of what we have seen. Due to higher market rents and stable FX during the quarter, we're improving our same-store cash NOI to be -- for the year to be between 3.5% and 5.5%, a 125 basis point increase to the midpoint from our previous guidance.

We are reducing our rents of our total G&A to be between USD 30 million and USD 33 million for the year, excluding any potential promote, which represents a $1 million reduction to the previous midpoint. In terms of FFO per certificate, we are raising the range by $0.005 to be between USD 0.18 and USD 0.19 per CBFI.

Before I finish, let me summarize some of the ESG accomplishments. We maintain a strong focus on FIBRA Prologis values, including our long-standing commitment to excellence in ESG, such as the importance of ethical behavior in line with good governance, taking care of the environment, our employees, our stakeholders and the communities where we belong.

That said, let me update you with some of our ESG calls. We expect to reach 100% of our buildings with our green certification by 2025 to-date at 50%. We expect to achieve 100% of our portfolio with LED lighting by 2025 to-date at 62%, give training to more than 700 participants through our community workforce initiative by 2023.

With this, let me conclude by saying that we started the year ahead of our expectations. Adding to a good market environment, a strong and professional integrated management team, making FIBRA Prologis an attractive investment from a risk and growth perspective.

With that, let me turn it to the operator for Q&A. Thank you.

[Operator]

[Operator Instructions] And we'll take our first question from Gordon Lee with BTG.

[Gordon Lee, analyst]

Two quick questions. The first one is I was wondering if you could sort of comment on whether what we're seeing at the border with Texas, and given the political implications of that in an election year in the U.S., is something that worries you? Or do you think this is really more seen as just noise from your customers?

And then the second question is for Jorge. Given the increase in the FFO guidance, Jorge, I was wondering why you didn't also increase the guidance for distributions, which obviously implies a greater retention which, given your balance sheet, would seem like it really wouldn't be all that necessary. So I was just wondering why you didn't raise the guidance on distributions as well.

[Luis Gutierrez, executive]

Thank you very much, Gordon, for your question. It's interesting what is happening in the border. I was visiting Tijuana, a couple of weeks ago and you know border is complicated. In Texas, we all know about what happened with the trucks. You see people from -- migrants from Gdynia, from Ukraine and Russia trying to find a place in the U.S. So the complexity that the border has is very wide.

And what we have always observed, and this has not changed, is that there's much more influence to what happens in the U.S. to -- compared to what is happening in Mexico for those border cities.

What we have experienced from our customers with this truck situation that was in place for 2 or 3 weeks, is that the customers were in deep pain. They were experiencing delays over costs. They were presenting disruptions in the supply chain.

And even though we tried to support them on the bottom line, this presents a good news for our business as they need to increase their inventories. So more to happen in the border, but I think that the pros to our business are extremely bigger than the potential business.

[Jorge Girault, executive]

And Gordon, I'll take the question on the dividend. So certainly, we had a strong cash flow generation. And of course, this is reflected in the same-store NOI and FFO and AFFO growth. We're reaping the benefits of higher rent change and from some of the acquisitions we made last year.

As a result, as you know, we increased the distribution in January 12%. And currently, our yield is around 4.5% in U.S. dollar terms, which we believe is attractive. Our payout ratio will be around mid-80s for the year, and we would like to keep this cash flow flexibility for growth because we have an uncertain macro environment, which could very easily change on us on a rapidly pace. So that's the way we're thinking.

As a final comment, we review every quarter our dividend policy. And if we see market conditions remaining, we will probably make some adjustments.

[Operator]

And next, we'll go to Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

I was wondering if you could comment in more detail on the types of tenants driving demand and also comment on the cap rate trends in the market in a higher interest rate environment?

[Luis Gutierrez, executive]

Sheila, good to hear from you. I think that we are seeing this quarter a stronger demand coming from manufacturing. I can probably estimate that above 30% of our demand is coming from this nearshoring frame. The demand of the space in the quarter is probably as big as we have never seen it. And I think that the issue is coming more on the supply side.

The type of customers that we are seeing are 3PL, furniture, aero, electronics and pharmaceutical. We're starting to see as well a little bit of increase of e-commerce activity in the border, and we assimilate this due to the lack of labor hands on the U.S.

[Jorge Girault, executive]

And thanks, Sheila, for your questions on the cap rate. So logistic values have been going up globally, and Mexico is not the exception. As mentioned, values increased this quarter 6% and 17% on a year-to-year basis. So cap rates are -- for our portfolio are around 6.5%. And the lowest cap rates we've seen are in the low 6s in Mexico City and Tijuana. And then as you go to the other markets, Monterrey maybe at 6.5%, and then the others maybe 25 to 50 basis point spread.

So what do we see going forward is with the increase in rents, we see that rents are going to be the main source of value growth for 2022. So last year, rents grew 17%, this quarter, 5.3%, and we expect that values will go up but now not because of a cap rate compression, but mainly because of increased market rents.

[Operator]

And next, we'll go to Jorel Guilloty with Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

I have 2. First, I wanted to ask about lease spreads. So we have seen that lease spreads historically within your portfolio have reached as much as 15%. That said, if we look at in the U.S., we've seen that lease spreads can be double or even more. What I was wondering though was with such high demand for industrial assets and limited availability of high-quality real estate, if we can potentially see even higher lease spreads versus history in your portfolio?

And then the second question is around your acquisition guidance. So you have $250 million for the year. You've deployed around $70 million so far. And I was wondering if you can comment on potential pricing for this pipeline if it has at all changed for potential third-party assets? Those are my questions.

[Hector Ibarzabal, executive]

Jorel, this is Hector. Thank you very much for your question. I would like to answer the leases, first one. What we are permanently doing, and we try to do this at least once a quarter, is to update the values of leases and the values of cap rates and the values of our assets. This is a continuous exercise that we have done all the time internally. What we're finding recently is that the dynamics on these figures is such that it's a certain problem for us to be updating them, I don't know, at least on a monthly basis.

Every time we see a transaction, it represents a new comp. And this is driving numbers with a dynamic that we have not seen in the past. We are presenting our lease spreads mark-to-market today, 16%. As we were preparing for the call, one of the internal questions that we have is that probably this number was higher as market trends are increasing very rapidly.

The comparison that we make with the U.S. is right. In the U.S., this figure could be -- could have a 2 or 3x multiple. I think that the market there behaves in a more perfect manner. It's a bigger market, and it has more probabilities to be updated very rapidly.

Mexico is moving into that direction. Bottom line, I will see these market trends going up. I see the customers taking faster decisions. They want to ensure the space more rapidly to have certainty on it. And I think that you will like what you will be seeing going forward regarding this lease spreads.

[Jorge Girault, executive]

And Jorel, on the acquisition pipeline, we feel very comfortable about our guidance of $250 million. And as different from the past, this time, it will be a mix of properties that will come from the Prologis pipeline and third-party acquisitions. Talking about values, I just answered a little bit of what we believe are the cap rates for the different markets. And I think our acquisitions will be in line with the cap rates I mentioned.

[Operator]

And next, we'll go to Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

Congrats on the results. The first question is on your expected rent increases for your different markets for the full year 2022. And the other question is about your view on development in general in the main industrial regions because at the current occupancy rates, I imagine that some tenants that are looking for space are not finding it.

And I wonder if development could accelerate or what is stopping it from accelerating further? And yes, I guess the other question is, will Prologis start developing last mile properties as well in the future in Mexico?

[Hector Ibarzabal, executive]

Thank you for your questions, Vanessa. This is Hector. Let me start with the second question because I think that this visibility -- I'll try to answer the first one.

I think that the issue in our business, and I have repeated this in several earnings calls, is we made to the development side. Land is becoming very scarce. Land has increased prices in some cases by 2x, entitlement on the past was very easy to face. Now it can take 1, 2 years to get everything that [we feel that] we can.

So I think that all of the players, we are full speed, considering what we can do, on trying to supply additional space. But it is what it is. It takes time, this pregnancy takes more months that what everyone would be expecting. And there's a few things of this that you can do rather than what we are doing with our sponsor that is anticipating and trying to start with these processes 2 or 3 years in advance. And this is why our sponsor, Land Bank, is increasing importantly.

Having said this, the expected rent increases that we've seen in the markets are going to be, for sure, higher than what we were able to observe last year. I see 3 markets, particularly pressure upwards. One of them is Mexico City, the second one is Tijuana and the third one is Juarez, which is a market that traditionally have not experienced important rent growths.

What are going to be these numbers? I think that the 3 markets, you should expect at least 2 digits, I could say, mid-teens in -- particularly new transaction, new rents are going to be driving these numbers up.

Finally, regarding the Last Touch or the last mile projects that you mentioned, we are actively chasing them. Our business model is not related to develop from scratch. As our perspective is that it's very difficult to make the numbers pencil out on that regard. But we have a strong pipeline of facilities that has potential to be upgraded and to be launched to the market without this entitlement situation at a more convenient price to our users.

[Operator]

Next, we'll go to Nik Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

Congrats on the numbers. I only have one question. It's similar to the one I asked after the fourth quarter results, and it's about calibration. Your net effective rent is high, your real NOI is about 3%. But when I then go into the supplementary material and I look at Mexico City, I can see that rent per square foot is up only 0.8%, NOI is 2%, 3% nominal.

And then I look at the drivers, the peso is kind of flattish, maybe down a little bit less than 1%. Your contracts are in pesos and should be linked to Mexican inflation that running high single-digit, U.S. dollar is above the reported number.

You're buying Last Touch products for the higher rent. How do I calibrate the performance of Mexico City with the overall numbers? And also, is something going on in Mexico City? Are you starting to give discounts? Or is it kind of a pause and then it will continue to the upward trends that we've seen in the past?

[Hector Ibarzabal, executive]

Nikolaj, thank you very much for your question. Didn't I start by saying that by no means Mexico City is deaccelerating. I think that on the contrary, Mexico City is, if not the strongest, is one of the strongest markets that we have in our portfolio.

It is a peso market and the vast majority of our rents are established in pesos. If you review the supplement that you will see that we only have 4 transactions, one of them represented a 21% increase. We had another one with almost 18%, 15%, 19.5%. So the increases that are happening in Mexico City are there.

We see that these numbers, as I mentioned in the previous questions, might be getting higher as vacancy starts getting lower and the ability to supply space is very limited. I think that the company is growing. Mexico City represents almost 40% of our portfolio and the impact that these increases have long term takes some time to be reflected in the numbers, but they will get there.

[Jorge Girault, executive]

Just to be -- to add to Hector's comment, the Mexico City renewals were, in total, 500,000 square feet. That's 1/3 of what we -- we leased during the quarter, but it's only 3% of the 17 million square feet that Mexico City represents. So when you see the average square feet -- rent per square feet, that impact of low 500,000 square feet is very small versus the whole portfolio.

[Operator]

Next, we'll go to Rodolfo Ramos with Bradesco.

[Rodolfo Ramos, analyst]

Congratulations on the results. My first question is on your views on the energy sector. Now the dust seems to have settled down now with the Supreme Court's decision and the constitutional reform out of the picture for now. So how do you expect this to impact your current tenants? And what kind of conversations if you can share that with us, are you having with future tenants as they're assessing this potentially higher energy cost? So that would be my first question.

And my second question would be a follow-up on a similar discussion that we had for Mexico City. If you can comment on Guadalajara, if you're expecting that market to catch up to the more manufacturing-driven markets.

[Luis Gutierrez, executive]

Thank you, Rodolfo, for that. Of course, the energy reform is on everybody's mind. A lot of noise this recent weekend after this important vote. So important to mention, our customers are connected to the CFE network, and they buy electricity from them. And we're not expecting any changes in the short term that it will impact their current operations. So I think currently the portfolio on that regard is operating well.

So this issue about the energy reform is about the future of electricity needs and especially the one that relates to clean energy. So what I can mention is that we have mapped our future needs in every one of our 6 markets, and we know how much electricity we will be needing to comply with our growth prospects.

For that, we have already implemented a plan of investments that is in substations and initiating all the approvals to be ready when the demand will be there. So we're anticipating. And I guess, we're also beginning our solar plan this year, which, of course, complies with the current regulation. But this is something that is evolving and we're just getting prepared for that.

[Hector Ibarzabal, executive]

On your question regarding the Guadalajara market. Guadalajara market that we like a lot. We have a leadership position. Our sponsor recently acquired an important piece of land, which is going to be Prologis Park Victoria.

And each market that we'll keep on growing related to electronics, e-commerce, there is important input from the auto industry. And we see as well an important market regarding data centers, research and development and some engineering. We do expect that market to keep on being active. Guadalajara has surpassed the expectations that we have on 2020 and 2021, it has gone beyond what we were expecting. And we are ready to keep on growing our portfolio there.

Rents, Guadalajara will not be the exception. They will keep on growing. As you can see, our estimation is that in the last year, our rents in Guadalajara had gone above 20%, and this is a very important figure compared on a relative basis to some other markets in Vallejo for example.

[Operator]

And next, we'll go to Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

On rents as well, you have been posting very strong net effective rent growth. Basically, my question is we know that the macro trends are favorable and also domestic trends are in the right direction. But how do you see this rent growth be sustainable, speaking about 2 to 3 years outlook?

[Hector Ibarzabal, executive]

Pablo, I think that this is -- these are pretty good questions. There is some people that might think that all these rent increase and these increasing values could be considered as a bubble that is happening to the sector. And I have a complete automatic vision to the situation.

I think that Mexico was lagging in this type of infrastructure. Mexico is being appointed with the situation that is happening in Ukraine as a manufacturing hub. I think that the conditions that we have, China is being locked down. Another reconfiguration of the supply chain, I think that Mexico has a very strong position and no one else, regardless of the political situations that we are facing, is in better shape to serve these.

E-commerce is still in early stages. I think that e-commerce has potential to be duplicated to what we have to-date at least. And the third important factor is that replacement values are going up importantly.

This is not a bubble because to supply -- to develop a new facility is taking at least 30% or 35% more than what it was a couple of years ago. And those numbers are not going down. Inflation is driving construction costs, there is shortages of supply where we have a specific strategy to face them.

So I will see these values really going down. And I cannot see on the horizon an important change on the slope of how things are growing. I think that eventually, they will have a more moderate pace. But in the short term, in the next 2 or 3 years, I keep on seeing a very similar dynamic to the one that we are facing today.

[Operator]

Next, we're going to go to Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Congrats and apologies if the question was addressed before because I have issues connecting. But the question that I have is that -- it relates with your new ambition to have 100% of your GLA certified, and by the way, congrats on reaching your target already ahead of time.

On this regard, you have been very vocal on how these buildings are considerably less energy, carbon and water intensive. Do you think that these savings will play a role in maintaining rents above the average for your buildings?

[Luis Gutierrez, executive]

Thank you, Paco, for the question. I'm not necessarily sure exactly if there is anything to tell you that green building will -- will be able to have a higher rent. What -- the evidence that I can give you is that our clients or tenants as they move to more ESG-oriented tenants and they require that their buildings have some kind of green certification. So from that extent, the buildings are more -- are sexier, if you may, against one that is not -- has that kind of certification.

Not necessarily on the rent, it can be. But what we are seeing is that tenants or clients require the space because of their own ESG parameters. And obviously, we've commented on the energy reform, and we're trying to do this solar initiative and all that and that also will add up to the stickiness or the attractiveness of these buildings.

But I cannot tell you with evidence that a green building has a higher rent or precludes or could have a higher rent, but that makes sense, your question. And I think it's more on the -- what we have seen is more on the stickiness on those buildings.

[Jorge Girault, executive]

And Paco, let me just comment where we're going directionally. Of course, ESG is front and center, and we want to be taking the leadership. So we are beginning to measure the impact that comes from our clients and tenants.

So we are beginning to measure energy consumption, water consumption, et cetera, coming from our tenants. And I think the biggest impact will be in making joint programs to reduce those impacts with our clients and putting that to work with them.

I think it will be our objective and their objective. And I think once we have those programs in place, that will create just a very, very important stickiness to the portfolio. So more coming on this. This is something that we're working on, and you will hear more on that.

[Francisco Suarez, analyst]

I think that's very good. So in other words, it seems that it allows you to engage better with your tenants to improve or enhance your already high retention rates? And for sure, that has to play a role at least on the occupancy rates, isn't it?

[Jorge Girault, executive]

It's creating a partnership, Paco. So how can we both reduce the impact on the environment. And of course, this will have long-term implications on business relationships, not only in the places we do business but where they, our clients, grow. So I think this will be very important.

[Operator]

And next, we're going to go to Andre Mazini with Citigroup. Okay. We're going to go ahead and move to the next question hearing no response. So we're going to go to Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

A quick question just on the FFO. The acquisitions that happened during the first quarter, did they had any contribution to revenues in the quarter? And the second question on the guidance as well is if we analyze the 1Q FFO, it's almost $0.19 versus a guidance of $0.18 to $0.19. So just wondering on why the low end of the guidance.

[Jorge Girault, executive]

Thank you, Andre. Thank you, Adrian, for your question. Your question was on AFFO or FFO? I couldn't.

[Adrian Huerta, analyst]

FFO.

[Jorge Girault, executive]

AFFO?

[Adrian Huerta, analyst]

FFO.

[Jorge Girault, executive]

FFO. On the acquisition side, yes, we obviously, as I said in my opening remarks, the acquisitions had an impact on the FFO on the growth. We acquired, if you remember, at the end of last year, on December 15, a portfolio called TJ1 most of it in Tijuana. And all that new revenue you may gain coming down to FFO, just adjusted by some G&A and interest expenses derived from the line of credit. So yes, the answer to the first question is yes, the acquisitions, every one, every single one of the acquisitions had an impact in FFO.

Then on your other question, our FFO range increased [$0.50] for the year -- between USD 0.18 and USD 0.19. The main reason for the adjustments that you see and you are well saying, well, you made $0.047 of FFO for the year, in the quarter, for the year, I mean it seems that it's going to be closer to the high end.

The difference -- the main difference is just FX, since FX is not hedged for FFO purposes. And we obviously have an assumption of FFO, it's [ MXN 0.21 ], but these are changes, obviously, that changes the FFO. But that's the -- we will -- the margin that we leave for any movement, to your question.

[Operator]

Next, we're going to go to Alan Macias with Bank of America.

[Alan Macias, analyst]

Just if you can comment on your expectations on EBITDA margin for the year. Do you expect to have a contraction -- another contraction against 2021? What are you seeing in the level of taxes and insurance? Will this level be similar to the first quarter?

And also another corporate expenses, it's $1 million. It has been this quarter and last quarter. Should we expect a similar level to the last 2 quarters? And are these expenses related to the acquisitions you are making? And I guess, should we expect an expansion in EBITDA margin until 2023? Or are you seeing the increase in rents being pushed through to the margins too?

[Jorge Girault, executive]

It was hard a little bit for me to understand the first question, but let me take a crack at it. The first question was regarding our operating expenses at the real estate level regarding insurance and some taxes like real estate. Those are passed through to our clients.

In the first quarter, we always see a higher expense because that's when we pay the real estate tax insurance for the whole year and then we get that back to see it in the balance sheet, that's not receivable. Well, always you will see an increase there in the first quarter. But all those expenses are passed to the -- to our clients or most of them because we have about 80% of our leases are through to May.

Then going down to corporate expenses, they basically, you have -- we only have 2 corporate expenses. One is the fee to Prologis based on AUM. This one grows as we acquire buildings or valuations grow because it's based on valuation. So because we did the acquisition, and there was increasing valuations, you have proportionately increase in that fee.

And on the third -- and the other one is the third-party expenses. The third-party expenses are being almost the same as other years. So there's no significant mover there on that side. But yes, you will see corporate expenses go up as we acquire buildings in particular.

And then your third question was about EBITDA margin. EBITDA margin will stay around where it is today. Alan, it has moved 2, 3 basis points up and down in the recent quarter for some other events. But it won't expand much or not significantly.

You can see in terms of a margin perspective to see the EBITDA margin at the current level where you see it today. If you see -- if you look at it historically, the average is what we have today, a little below, maybe, but in line, you won't see an expansion there. Did I answer your question?

[Alan Macias, analyst]

Yes. Just curious on the taxes and insurance line. I guess, in 2021, it was pretty stable through the fourth quarter, the same as in 2020. Just, I guess -- a reflection, I guess, of the higher acquisitions you made in the fourth quarter and the first quarter, I guess that would explain the higher level during the first quarter of this year.

[Jorge Girault, executive]

Yes, of course, as you grow the portfolio, you have more real estate taxes and more insurance to pay on a -- I mean, on a nominal basis on the proportion, almost the same versus AUM or the annualized revenues of the portfolio.

[Alan Macias, analyst]

Just in absolute terms, I guess, last year, quarterly, it was around $1 million. And I guess you spread it out through the year, but just wondering why it's so much higher this quarter?

[Jorge Girault, executive]

I mean, it has to do with acquisitions we did. There is some delays or timing issues from recuperation of taxes and payment of taxes. As I said, not all of our leases are triple net. So it depends on the new acquisitions that we did.

But if you see it on a relative basis against the revenues or the [ total ] revenue for the AUM, it's basically the same. It grows, as it grows -- taxes in Mexico and real estate have grown in different municipalities, but we pass it through to our clients, the part that we can pass through.

[Alan Macias, analyst]

And any increase in insurance costs?

[Jorge Girault, executive]

Not significantly.

[Operator]

[Operator Instructions] Next we're going to go to Andre Mazini with Citigroup. Okay. We're going to go to Francisco Chavez with BBVA.

[Francisco Chávez Martínez, analyst]

Congrats on the results and the advances on the ESG front. My question is regarding your ambitious target of having 100% of your buildings certified by 2025. Is there a significant impact on CapEx related to this certification plan? And notably, you can give us an idea on how much CapEx do you have to invest in order to certify a particular building?

[Jorge Girault, executive]

Thank you, Paco, for your question. Regarding your first part, our CapEx is going to be anywhere between 13% and 14%. I mean, whatever we put on the buildings to make them a certificate -- green certificate, it's already included in our capex forecast. So for modeling purposes, you won't see a change.

In terms of how much it costs, well, it depends. If we do BOMA, which has to do with green certification on the operations. And once we buy a building, it's easier to do because lead certified goes on the ground up. The cost of that is mainly for building $70,000 to $20,000. It's not significant. What is significant is the amount of work us and our tenants have to do to get the certification.

On the lead side, that's more expensive. Maybe it's $50,000, depends on the certification level. But it depends on the -- or $100,000, it depends. It goes from ground up. As you build the building, you certify it to be lead certified. So answering your question, it's not significant versus the CapEx that we guide, and it's already included in our guidance for each year. It's a matter of timing.

[Operator]

All right. Next, we're going to go to Adolfo Margain with Signum Research.

[Adolfo Margain;Signum Research;Analyst, analyst]

Congrats on the results. My question is regarding the -- your acquisition pipeline. I know that you already mentioned you expected cap rate. I think it was around 6%. But could you give us more color on the initial occupancy you expect on these properties you have?

[Jorge Girault, executive]

Thank you, Adolfo, for your question. So I guess the properties that come from the Prologis pipeline, they are normally stabilized. So our experience is that they are 100% occupied. And most of the portfolios that we buy also have very high occupancy. And we believe that the pipeline that we have will be in those conditions. So the pipeline will be there.

Where we do some value-added acquisitions in which we buy empty buildings is more on the Last Touch properties, but that would be a minor part of the acquisition pipeline. So you can expect that 95% of the pipeline will be, if not fully leased, 95% leased.

[Adolfo Margain;Signum Research;Analyst, analyst]

So these empty buildings will have already the clients so they can start using them when you buy them?

[Jorge Girault, executive]

In the Last Touch properties, these value-add acquisitions, we do some remodels. So we remodel the property, and that takes some time. We go to the permitting process and then once the property is ready, we put it out to the market.

And they normally leave between once they're ready, maybe in the period from 0 to 12 months, that's what we program. But I get the experience that they normally lease between -- before 6 months. But that's on the Last Touch Mexico City projects.

[Operator]

This concludes today's question-and-answer session. I will now turn the call back over to Luis Gutierrez, CEO for any additional or closing remarks.

[Luis Gutierrez, executive]

Well, I want to thank everybody for their time. And of course now that everything is open, please feel free to reach out and maybe we invite you to have a property tour, just to refresh maybe a couple of years of being locked down.

And we feel very good about our business, we feel [very good] where we are positioned. And I also have seen unprecedented conditions in our logistic real estate sector and where FIBRA Prologis is. So thank you very much and looking forward to see you soon.

[Operator]

This concludes today's conference call. You may now disconnect.