Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Krista, and I'll be your event specialist today.

At this time, I would like to welcome everyone to the FIBRA Prologis Second Quarter Earnings Conference Call and Webcast.

[Operator Instructions]

I will now turn the conference over to Kosta Karmaniolas, Vice President of Finance and Investor Relations. Please go ahead.

[Kosta Karmaniolas, executive]

Thank you, Krista, and good morning, everyone. Thank you for joining us for our second quarter 2018 earnings conference call.Today, we will hear from Luis Gutiérrez, 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 Ibarzabal, our Managing Director. 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 solely for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call are subject to a number of risks and uncertainties. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are current as of the date of this call. We take no obligation to publicly update or revise any forward-looking statements after the completion of this call, whether as a result of new information, future events or otherwise, except as required by law. Additionally, during this call, we may refer to certain nonaccounting financial measures. 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 would encourage you to visit our website at fibraprologis.com and download this material. With that, it is my pleasure to hand the call over to Luis.

[Luis Gutierrez, executive]

Thank you, Kosta, and good morning, everyone. I am pleased to report that FIBRA Prologis' second quarter operating results exceeded our expectations. We achieved record rent change on rollover, while maintaining elevated occupancy levels. FFO for the first half of the year increased 7% compared to the first half of last year, while AFFO was higher by 13% over the same periods. Despite the backdrop of uneven financial and capital markets stemming from the presidential election and the political events, our customers are active and moving ahead with their business plans. Mexican logistic real estate is a growth industry that is underpinned by multiple and structural drivers such as: increasing consumption from rising affluence and a young population entering the workforce, a vast majority -- vast undersupply of modern stock, rapidly growing e-commerce and a strong supply chain linkages to a robust U.S. economy. The operating environment remains healthy. In the second quarter, net absorption was 5.6 million square feet against completions of 3.7 million square feet, bringing the vacancy in our 6 markets to 3.9%. This is down 60 basis points from last quarter. Scarcity of available product continued in Mexico City, while net absorption 3x that of available supply. Vacancy remains under 1% for modern, well-located products such as the buildings in our portfolio. This environment has propelled market rents, and we anticipate that this trend will continue.

At the border markets, demand has remained strong, and most of the development activity has been in the form of build-to-suit. Vacancies in our markets continued to decline falling to 3.8% (sic) [ 3.9% ] at the end of June. Market rents have continued to grow and this is evident in the strong re-leasing spreads that we are achieving at lease expiration. Last quarter, I discussed the headwinds in Guadalajara and, to a lesser extent, in Monterrey brought on by undisciplined developers. In Guadalajara, we have seen several new institutional entrants begin projects. While we believe that market will recover, this increased supply has dampened our ability to push rents. Putting in all together, we expect vacancy to remain low, which should result in continued market rental growth and increased NOI.As the saying goes, actions speak louder than words.

So let me highlight some of our customer activity during this quarter. In Mexico City, a multinational 3PL took expansion space in our Tres Rios park, signing a 5-year lease, while renewing their existing lease in another building at the same park. We had a similar experience in Guadalajara with another multinational 3PL leased additional 110,000 square foot facility, while renewing their existing space in another building. In Monterrey, we had several key achievements in the second quarter, as customers from the electronics, packaging and 3PLs industries expanded by leasing more space from us. Looking past on result trade negotiations and recently implemented tariffs, we leased 1.2 million square feet in our border markets, all of which were renewals. This was a clear affirmation of the strong relationships we have built with our customers and confirmation that their outlook remains positive. Despite political rhetoric, business is continuing, and in some sectors, growing. As evident by our results, business activity does not appear to be slowing down. Before wrapping up, let me highlight why we're well positioned to continue to outperform and deliver results. We own the best real estate serving the consumption and manufacturing sectors. The exclusive access to the Prologis' development pipeline is a key competitive advantage. We have in-depth understanding of logistic requirements for e-commerce companies, and we have a big head start relative to the competition. And we have the best real estate team in Mexico.

In summary, FIBRA Prologis has delivered strong results in the first half for the year, and we expect to build on that momentum in the second half. With that, let me turn the call over to Jorge.

[Jorge Girault, executive]

Thank you, Luis. Good morning, and thank you for joining our second quarter 2018 earnings call.Starting with our financial performance. FFO for the quarter came in at $16.8 million, a decline of 12.6% compared with the second quarter of last year.Excluding the noncash incentive fee to our sponsor in both the second quarter of this year and last year, FFO was $27.1 million, which represents a 1.7% year-over-year increase. For additional color, the incentive fee earned was due to a total return outperformance calculated in pesos reaching 13% and will be paid in certificates. Moving to operations. Leasing volume was 2.3 million square feet, with Mexico City and Reynosa representing 61% of the volume. As evidence of our building quality and locations, 82% of the total volume came from renewal. Quarter-end occupancy was 95.9%, down 10 basis points from the first quarter and 140 basis points lower than the same period last year. This was due to lower occupancy in Tijuana and Guadalajara. As discussed previously, we are focused on increasing rents and expanding lease terms. This strategy has been working as shown in our steadily increasing NOI.Net effective rent change on rollover increased by a record 15.1% in dollar terms. This marks the fifth consecutive quarter above 10%. Rent change was led by Juarez and Mexico City. In relation to market rents, it's important to point out that FIBRA Prologis' average rent is 5.5% below market rents, resulting in an opportunity to keep on harvesting this gap as lease grow, which represents an important internal growth factor. Higher rents and annual bonds were the main reason for our cash same-store NOI increase in -- of 2.5%.Now let me move to our balance sheet. Last earnings call, we mentioned that we finalized our FIBRA's financing, creating a stronger balance sheet that is in line with our risk management strategy, which was established at IPO. Today, we have significant liquidity, low leverage, we have fixed most of our debt cost, mitigated FX risk and extended our debt fixed maturities. This has resulted in one of the strongest balance sheet in the sector, with one of the lowest weighted cost of debt. We will continue to have a prudent liability management, and we will continue to monitor geopolitical events.

As per guidance, we are holding our forecast. So please refer to Page 7 of the supplemental financial information for specifics. In conclusion, we are committed to our certificate holders, and we will endeavor to deliver accretive results as our track record shows. FIBRA Prologis had a strong first half of the year. Not only we were able to achieve excellent results, thanks to our outstanding team and focused strategy. We were also able to execute on the risk management plan, resulting in a healthy and flexible balance sheet. We are excited for new opportunities in the second half of the year.

With that, I'll turn it to operator for Q&A. Thank you.

[Operator]

[Operator Instructions]

Your first question comes from the line of Alejandro Lavin from Citigroup.

[Alejandro Lavin, analyst]

I have a couple of questions, please. The first one is on elections and NAFTA, right. So these have been clearly 2 main headlines that caused noise in the first half of the year, but now that we do have certainty on one of these events, I mean, now as we know the result of the presidential election, I'm wondering if you are sensing that if your tenants' sentiments have changed. I mean, it's too early to tell, but do you feel they are -- they have a more positive outlook or the same or less positive than before? And then, my second question would be on acquisitions. If you can give us a quick update on the time lines and what do you expect for the second half?

[Luis Gutierrez, executive]

Thank you, Alejandro. So certainly, the presidential election and, I guess, the rhetoric of NAFTA, which has been uneven, is -- has affected somehow sentiment. As said in our remarks, our markets have remained very resilient in the consumption side and on the manufacturing side. I guess, those two have been the key drivers of the Mexican economy, and this has been reflected as we have seen growth and demand in these both drivers. I would say that after the Mexican -- the presidential election, especially in some specific consumption markets, maybe some of our customer put some projects on hold. And now that the presidential election has been resolved in a peaceful way and, I guess, the initial rhetoric from the new President-elect has been a conciliation, some of the projects have been -- that were put on hold are beginning to -- so we have seen, in these few weeks, stronger activity in some markets. Related to the acquisition question, let me refer. So the pipeline of PLD is 5.1 million square feet, which this will be the main source. This is about $350 million. This proprietary access is a key competitive advantage that FIBRA Prologis has, as all of these are new assets in the strategic market. Of this 5.1 million feet (sic) [ square feet ], 3.5 million square feet are located in Mexico City in our Grande park. So at this time, we have several scenarios for onboarding these assets: number one is acquiring them with debt. So we have enough liquidity in our line, but it would take us through 40% leverage, which at this time, we would prefer to limit our debt to 35% given the current higher interest rate environment. The other one is the recycling of assets. So we continue to assess our dispo strategy, which we have been putting on hold given the tax impact, and this is much related to where the FX level will be. And then, number three is the [ recycling ]. We have been continuing to outperform the FIBRA sector, but are still trading below NAV. Our policy is not to issue equity until we reach NAV. So as the year progresses, we have more clarity on the environment. We will be making a decision. But for now, our contribution guidance is of the low end and it's of $100 million, and it is on track for the second half.

[Alejandro Lavin, analyst]

That's very clear. And would you expect this to be like in the fourth quarter, maybe?

[Luis Gutierrez, executive]

We'll have a few in the third quarter, and the majority will be done in the fourth quarter.

[Operator]

Your next question comes from the line of Francisco Chávez from BBUVA (sic) [ BBVA ].

[Francisco Chávez Martínez, analyst]

Actually, it is a follow-up of the previous question. Regarding raising equity in the market, which is your NAV according to your estimates? And the second question will be regarding the asset divestments? Do you plan to resume the plans for divesting some assets in the second half?

[Luis Gutierrez, executive]

Thank you for your question, Francisco. I guess, NAV levels are somewhere around 43, more or less. So that's where we believe our NAV is. And in relation to your second question of divesting, yes, this is something that we laid out in our yearly plan and that we decided to put on hold. We announced that in our first quarter earnings call. And as this strategy is very much related to the tax impact, this is something that we are monitoring closely. We are also working with the authorities to get some concessions. So as the year progresses, we will be looking at both and how they play out and we will be making the decision. For now, the disposition plans are on hold.

[Operator]

Your next question comes from the line of Marimar Torreblanca from UBS.

[Marimar Torreblanca, analyst]

I have one question on your net effective rent change. It was particularly high this quarter as you highlighted, and it's been very strong for a while, and you're still slightly below market rents. So how long do you think you can sustain double-digit net effective rent change going forward?

[Hector Ibarzabal, executive]

Thank you for your question, Marimar. This is Hector Ibarzabal. Hello, everyone. Effectively, our markets are strong as we have been mentioning. We were able to present an extraordinary of 15.1% rent change in this quarter. On the remaining rollover that we have on 2018, we still see that our rents are below market in the range of 11%. So we should be able to keep on presenting important rent growth above 8% I would guide for 2018, the third and the fourth quarter. And on 2019, the rollover that we have, we have identified that we're slightly 5% below market, which is in line with what the portfolio is, which is 5.5% below market. What we have seen is that our markets are in a position in which we have the possibility to keep on pushing rents. Market rents are going up because of our strategy of investing in these 3 locations, and that provides us a unique ability to be presenting positive rent change as it has been since the IPO of FIBRA Prologis.

[Francisco Chávez Martínez, analyst]

Just a super quick follow-up on that. You say the rents in the markets are going up. Can you quantify that how much are rents in your market going up?

[Hector Ibarzabal, executive]

I think it varies depending on the markets. The market which is tighter -- the 2 markets that we have tighter conditions are Mexico City and Tijuana. In Mexico City, I could say that markets this year are going to be increasing something between 5% to 7% in dollar terms. But regarding FX volatility, I think that those are extraordinary conditions. There is a good market demand, and there is a very challenging ability for competition to be able to provide you with space. I think that the sponsor for Prologis is very well positioned to keep on developing and to keep on taking advantage of these conditions. The other market that is presenting important rent growth, which is Tijuana, it's a market where the land is very difficult to get as well. And our sponsor has recently announced that there is a joint venture with the largest landowner in Tijuana, which is El Florido. So our sponsor will keep on developing at the end of this year in Tijuana, and we will be able to take advantage of these market conditions. On the other hand, the only market that I see that it's more complicated to push rents today is Guadalajara. In Guadalajara, there has been recently supply, and the supply has been larger than demand. Guadalajara is a market in which our assets are very well located, better located than competition. And eventually, this oversupply might be hurting our ability to push rents. But in all of the other 5 markets that we have, I feel very positive that we will be presenting good and positive numbers.

[Operator]

Your next question comes from the line of Eugenio Saldaña from GBM.

[Luis Saldana Flores, analyst]

My question related to the future growth is as follows: how much extra GLA in Mexico City? Could your sponsor drop down in the FIBRA besides Prologis Park Grande? And how easy is for your sponsor to replenish that land bank that is being used for Park Grande. Is it in the interest of the sponsor to expand its land bank elsewhere instead?

[Hector Ibarzabal, executive]

Thank you very much for your question, Eugenio. As you mentioned, Mexico City is our most important market. In FIBRA, we have 12.4 square feet (sic) [ 12.4 million square feet ] and it's a market where we are facing low historic vacancy. So it's a very strong market. E-commerce keeps on being very active, keeps on gaining penetration to traditional brick-and-mortar retail. And as you mentioned, the development that our sponsor of Prologis did in Park Grande was absorbed 1 year earlier than what was anticipated. Land is getting every day more and more constrained. Our sponsor is in a position currently of acquiring additional land to expand Park Grande 25%, 1 million square feet more, than what we currently have. We permanently spend time on the ground trying to identify land opportunities. Getting land in this market is a complete arts and crafts process. You need to assemble several users to get there with together, be careful how you approach these. But I think that one is -- that's one of the fields of expertise that our sponsor has. We are in permanent contact with our current customers, and most important, e-commerce players, and most important, third-party logistics. And we understand the plans that they have, the growth that they are expecting, the consolidations that they need. And our sponsor is investing accordingly to do that. It's challenging, but I am positive that we will be able to replenish our land bank. We already have 3 very concrete alternatives in which the sponsor is currently working on. And I do not see the scenario in which we want to be developing because we do not have land in Mexico City. We're active there. We have alternatives. Our sponsor is not shy about investing there. And you will keep on seeing the Mexico City market as the market with the most important dynamics there with Prologis as a sponsor, and eventually, giving those opportunities to FIBRA, so FIBRA could have the ability to buy them following the process that we have in place.

[Operator]

Your next question comes from the line of Cecilia Jimenez from Santander.

[Cecilia Jimenez, analyst]

I actually have 2 questions. First, how long are the new leases you're signing? That will be the first one. And then the second one is regarding leasing activity to see how much out of the 2.3 million square meters you find this quarter are related to e-commerce, if you could share that number with us?

[Hector Ibarzabal, executive]

Thank you very much for your question, Cecilia. The way -- the ones that we have in the leasing activity of this quarter is 44.4 months. So I think that this number is reflecting our strategy of keep on pushing rents up and keep on enlarging terms. I'm very pleased with these results. Regarding the leasing activity question, this quarter we were able to have 2.3 million square feet, which basically is 1/3 of the leasing activity expected for the year. And this year, we have a lot of renewals. And I would say the e-commerce penetration in this quarter was between 15% to 20%, was not that big. But having visibility to what the sponsor is doing in the development of assets, e-commerce activity, I would say, is on the neighborhood of 50% of the market participation.

[Cecilia Jimenez, analyst]

I'm sorry, what was the last number? Sorry, I missed that.

[Hector Ibarzabal, executive]

50%, 5 0.

[Operator]

Your next question comes from the line of Vanessa Quiroga from Crédit Suisse.

[Vanessa Quiroga, analyst]

I have a question regarding the rent growth, just to understand better. So the fact that you remain below market rents even after posting several quarters with double-digit growth in the new contracts signed means that there are other players in the market that are signing contracts at rents even higher -- at higher levels than Prologis is? Or they are signing new rents -- new contracts faster or larger contracts? I'm not understanding how come Prologis is still behind the market even when it's actively having new contracts signed?

[Hector Ibarzabal, executive]

Thank you for your question, Vanessa. Very good question. I guess, this answer is somehow linked to what I mentioned in the previous question. The markets in which we are because of the strategy that it's very clear and that you'll know it provides us with the ability that the market rents are permanently in this part of the cycle trending up. This means that regardless that every quarter we have been able to push rents up as markets are going up, which is preserving this spread from our in-place to market rents. On the second part the question, problems that I face on the field all the time is that the face value of our rents are always the highest one in the marketplace. It is a profile of our customers, which are -- the most of them multi-national and sophisticated companies that they understand that -- the importance of not having the lower face rent on a lease agreement, but they want to have the lowest operating cost. Our facilities that have low coverage and that have more space for [ no need for this indiscernible] plot lots and parking spaces and security provides, without any doubt, facilities that are more efficient for them to utilize. At the end of the day, what is important for customers is not a nominal rent on the contract, but what is important for them is to preserve a very efficient operating conditions, and facilities are the ones that provide so. So I can assure you that the rents that we have in the marketplace on a nominal base are the highest one, but that on the operating manner are the most efficient and most convenient for our customers.

[Luis Gutierrez, executive]

But as an addition, we are chasing market only on 20% to 25%, which is what rolls every year, and it will take a long time to catch the market for the full portfolio.

[Vanessa Quiroga, analyst]

Okay. Now that's very clear. That's a very clear answer. And just another quick one regarding the acquisitions. How -- what's the amount that you expect to be able to acquire in new buildings this year?

[Luis Gutierrez, executive]

The guidance for this year is $100 million, Vanessa. And the location will be Monterrey and Guadalajara.

[Operator]

Your next question comes from the line of Pablo Monsivais from Barclays.

[Pablo Monsivais, analyst]

I have 2 questions, the first one is, it's more like an overview on your tenants. What they are thinking regarding the trade policy of the U.S., particularly with the tariff war that we have seen? And the second question is regarding the -- your leasing commissions. I saw that this quarter was kind of low, and I just want to understand why was low leasing commission during this quarter?

[Luis Gutierrez, executive]

Thank you, Pablo. So we saw a number of things happening on the trade policy and the NAFTA negotiation. Since the election of the U.S. and NAFTA was beginning to put in the conversations, we haven't seen a lot new entrants coming into the manufacturing market, and most of the demand mainly comes from existing companies that are already operating. It seems that given the FX conditions, manufacturers that are operating in Mexico have very good costs. And they have an increasing and even bringing new divisions to Mexico. So this quarter, we have the aluminum and steel tariffs. And most of our clients have maquila operations, and the raw materials that are imported into their operations are not taxed with this. So we really haven't seen any important change in sentiment in the border markets, and also the Mexican manufacturers being pulled by a strong U.S. economy. So, so far, we'll keep vigilant, but -- on how this gets resolved, but it's going -- and the sentiment is good, and we haven't seen any changing plans on our customers in the quarter at Monterrey. Let me turn it to Jorge to enter on the commissions.

[Jorge Girault, executive]

Our leasing commission this quarter per square foot was $0.62, which is exactly the same $0.62 that we had during the first quarter. If you want to see this figure in 2016, we have $0.54 per square feet, and in 2017, we have $0.54. So we can probably reveal probably now these numbers, our leasing commissions are -- have been consistent to what they have been in the previous quarters.

[Luis Gutierrez, executive]

Just as a side note, Pablo, remember that renewals on -- renewal on leases has a lower commission than new leases. And our volume for renewal was 82% this quarter. So just take that into consideration regarding the leasing commission costs.

[Pablo Monsivais, analyst]

Okay. So it was more because of the mix of renewals and explaining the number, right?

[Luis Gutierrez, executive]

Correct, correct. It's a lower commission when you renew than you have a new lease.

[Operator]

Your next question comes from the line of Froylan Mendez from JP Morgan.

[Fernando Froylan Mendez Solther, analyst]

I have 3 questions, actually. How much of their incentive fee has the sponsor sold to the markets? And can you remind me of the lockup period? That's the first question. My second question is on, which specific markets that you're running with lower rents versus market? And how long should it take to catch up? And lastly, in the options that you mentioned where Prologis is looking to replenish its land bank in Mexico City, are these new corridors? Or is there land in current logistics corridors still available?

[Jorge Girault, executive]

Hello, Froylan. How are you? This is Jorge. Just touching on the incentive fee, let me remind, you probably have not sold any certificates earned last year. The certificates earned through the incentive fee are locked -- has a lockout for 180 days. So I guess, that's what your question.

[Hector Ibarzabal, executive]

Regarding in-place to market rents, the markets in which we have more possibility of getting high rents are Juarez. In Juarez, our estimation is that we are 4.5% below market. In Reynosa, our estimation takes us to be at 6.6% below market. And in Mexico City, we think that we're still around 8% below market. So that's why, I was mentioning that we still have room to keep on pushing rents up. The location in which the sponsor is chasing lands to keep on replenish the land bank is in the logistic corridors that you guys know well is the CTT submarket. We are as well analyzing the possibility of start doing development in north of the tollbooth, which is the 57 Highway. There is some important players as Liverpool that are already launching important distribution centers on that regard. That's something that we are analyzing with our customers. Our customers, they have a perfect understanding of their operation other cost. Having facilities north of the tollbooth, we'll have a lower lease rent that somehow will offset the additional logistic costs that you know that toll could have to them. So it's interesting. We have experienced this situation because all the investment that Prologis has done in Brazil has this characteristic. So we are capturing all that expertise in the benefit of our customers and in the benefit of our FIBRA shareholder investors.

[Operator]

[Operator Instructions]

Your next question comes from the line of Armando Rodriguez from Signum Research.

[Armando Rodriguez, analyst]

Just a quick question related to the buyback program. And as you mentioned, you have NAV discount on your CBFI. So my question is if you will be more active maybe in the second half of the year related on this program?

[Jorge Girault, executive]

Armando, thank you for your question. This is Jorge. As you know, we have authorized the buyback program through the holders' meeting. And nevertheless, we have not bought any certificates in the market. Yes, there is a discount of around 15%, 20% when you see the number against the NAV of the company. But we believe that given the size of the program that it's authorized by the local authorities, and the fact that to buy that stock, we will have to leverage out. We prefer to buy real estate at this discount. It would have to be a larger discount for FIBRA Prologis to look at potential buyback.

[Operator]

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

[Francisco Suarez, analyst]

Sorry for that. The question relates a lot with the strategy. And it is a high-level question. Can you walk us a little bit on how do you think your portfolio is positioned in the context of the major disruptive forces across the value chain that we see globally. And if you can divide this answer between light manufacturing and particularly your exposure to the auto industry and within logistics distribution and e-commerce? Discuss specifically as well what is happening in Guadalajara?

[Luis Gutierrez, executive]

So thank you Franco. So I guess, given the portfolio, it's around 2/3 in consumption markets and 1/3 in the manufacturing market. So consumption in Mexico City, Guadalajara and Monterrey, more than 1/3 is in Mexico City and around 50% of the growth is in Mexico City. So I guess, it seems that -- and there's structural change in consumption, not only in Mexico but all over the world is happening and supply chain reconfiguration, even the e-commerce players. So we see our portfolio, and we are very well positioned, and I think this is why FIBRA Prologis has been outperforming is because of our exposure to Mexico City and our positioning on the e-commerce side being able to provide 1 million square foot warehouses to clients as all of this is changing the landscape. And if you see the absorption in Mexico City after these changes, there has been a very important increase. So from the strategic perspective, we are favoring the consumption markets, and specifically, we see big growth on the e-commerce side. I guess, on -- and maybe, I'll let Hector comment on Guadalajara.

[Hector Ibarzabal, executive]

Yes. Effectively, Guadalajara is a market that has been facing some issues recently. I got to mention that Guadalajara is important market for FIBRA Prologis. And the Mexico City is a market in which we have more holdings. If it's perfect, our strategy, we participate in the submarket in Guadalajara, where the intake conditions are very fierce. We have been mentioning in the past year, Guadalajara has experienced about 4 million square feet of new starts, while net absorption has been only in 3.1 million square feet. So there is additional supply than demand, that's what it has been happening recently and that, of course, affect market rent conditions. And we have the best-located assets in Guadalajara. So the markets -- the customers that have the right profile, they want to be in the right location. And I think that we will be taking the advantage of that situation. We have experienced a reduction in our occupancy. This is basically linked to 3 transactions, part of the rollover that we have, and actually, 2 out of those 3 transactions we were anticipating that they were going to vacate the buildings. So we have a full strategy in place. And what you should be expecting in Guadalajara for year-end is to increase in the range of 100 to 150 basis points the current occupancy that we have. Guadalajara market will remain resilient. We will keep on active there. We like that market, and we do not see Guadalajara market going in a very painful situation. It's just the current conditions between supply and demand, what it is out in this space.

[Luis Gutierrez, executive]

I guess, on your manufacturing -- on the positioning and manufacturing of our portfolio, we believe it's very resilient. Our exposure to auto is 11% of the total portfolio, and it is more linked not to manufacturing, but rather than it is more on the auto parts distribution. The rest of the portfolio located in the border markets has good exposure to medical, consumption products, electronics, and are quite good. So we believe Mexico will continue to be a major manufacturer. Companies will be competitive when they manufacture in Mexico. And this will not be our main strategy, but our portfolio, I think, has an added value because it will be an underlying driver of the Mexican economy.

[Operator]

And we have no further questions in the queue at this time. I will turn the call back over to Luis Gutiérrez for closing remarks.

[Luis Gutierrez, executive]

Thank you for joining today's call. In the next few days, our sponsor, Prologis, will publish an e-commerce white paper on the growing demand in Mexico. We're very excited about the growth coming to our portfolio as e-commerce ramps up. As always, we appreciate your interest in FIBRA Prologis and look forward to seeing you soon.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.