Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the FIBRA Prologis Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Kosta Karmaniolas. Please go ahead.

[Kosta Karmaniolas, executive]

Thank you, Amy, and good morning, everyone. Thank you for joining us for our second quarter 2020 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 Ibarzábal, our Managing Director.

Before we begin our prepared remarks, I would like to remind everyone that all of 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 non-accounting financial measures. As is our practice, we had 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. Before I begin, I want to say that our team here in Mexico all continue to work remotely. We remain committed to doing everything we can to help our employees, customers and communities through this difficult time. I hope you and your loved ones are staying healthy and safe.

Our second quarter operating and financial results exceeded our expectations, demonstrating our portfolio resiliency. I would like to take this opportunity to thank our operations team for their impressive work at keeping our portfolios sound, while delivering terrific results.

Let me highlight the operational results for the quarter. With a record 5.1 million square feet with an average term of 79 months, our operations teams proactively contracted customers with expiring leases this year and next. We advanced dialogue on renewals providing rent concessions to date in exchange for extending term and increasing rent over the life of the new lease. Effectively, this creates a win-win situation.

Through the first half of the year, we have addressed 64% of the 2020 expirations. We collected 98% of rent due in the second quarter. And as of yesterday, we have collected 86% of the rents for July, which is ahead of pace we set last year by 10 percentage points.

To date, we have granted rent deferrals totaling 1.9% of annual revenues. We expect to recover 85% of those rents before year-end and the remainder in early 2021.

Occupancies remain elevated at more than 95%, but decreased due to known move-outs in Mexico City. Leasing spreads exceeded double digits in 4 of our 6 markets.

On the capital deployment front, we acquired 10 properties over 2 transactions. The first was Prologis Park Grande in Mexico City from our sponsor, which comprised 8 Class-A buildings over 4 million square feet. The customers of this park serve consumption needs throughout the country and includes global e-commerce players such as Amazon and MercadoLibre. The second was 2 urban Last Touch facilities from a third party in a sale-leaseback. Over time, proximity to the end customer will be critical for our customers' success, and FIBRA Prologis will be at the forefront of this trend.

Turning to the border real estate environment. Demand exceeded our expectations in the second quarter, and development activity was muted, except in Monterrey and Ciudad Juarez. Market vacancy remains at a historical low for our 6 markets at 3.4%, while vacancy in the border market was less than 2%.

Net absorption for the quarter was in line with completions, and our revised forecast for the year calls for a balanced market. Despite the otherwise positive operating conditions, market rental rates declined marginally during the quarter, primarily in Mexico City and Guadalajara, and this was largely driven by a weaker peso.

Now let me spend a few moments on what we're seeing on the ground. Customer sentiment has been resilient. Despite expectations for a weaker economy in the second half of 2020, there is a lot of pent-up demand. Utilization remains high, and given the need of separate workers for safety purposes, more space is required. Currently, 99% of our customers are operations.

With USMCA officially signed and enacted by all 3 countries, any uncertainty around manufacturing has dissipated. As tensions between the U.S. and China continue, nearshoring operations to Mexico is the viable solution that we expect more companies to pursue. We have seen evidence of this in Ciudad Juarez, Monterrey and Tijuana, which bodes well for future demand. We're still engaging customers on expansions as we have over the past several quarters, particularly in Tijuana, where the outlook for growth remains stable and market rents continue to grow.

E-commerce, which was -- which is a growing part of the portfolio as well as an important and structural drive for logistics real estate, continues to accelerate. Mexico still trails other developed countries in terms of e-commerce adoption, meaning there's a lot of room to grow.

In addition, as more consumers migrate towards digital consumption, we expect to see traditional retailers add more space to hold inventory for their online platforms. This has played out in other parts of the world, and we expect to see this in Mexico, too.

We have worked hard to build a company that is resilient during uncertain times. Our results are the direct outcome for our investment strategy, which has been consistent since day 1. And this is: to invest in the best market in Mexico; to own the highest quality properties; to serve a diverse group of customers across various industries with the highest level of service; and maintain discipline, particularly when others do not.

While we're cautiously optimistic in our outlook given the pandemic, we believe FIBRA Prologis is an attractive investment opportunity given our stable distribution in U.S. dollars relative to the low interest rate environment and future upside due to our exposure to nearshoring and e-commerce. We remain committed to creating value for our certificate holders while serving our customers and communities.

Before turning the call over, I would like to highlight 2 key items. In late June, FIBRA Prologis was included in the S&P/B&V Total Mexico ESG Index, a new index launched by S&P Dow Jones and The Mexican Stock Exchange. And I also want to highlight that we started reporting FFO as defined by AMEFIBRA. This metric was developed from contributions of all AMEFIBRA members to achieve transparent results that are easily comparable. Adoption is voluntary, although a standardized financial metric will help move FIBRAS forward as an investable asset class. Jorge will go into more detail.

With that, let me turn over the call to Jorge.

[Jorge Girault, executive]

Thank you, Luis. Good morning. Thank you for joining us, and I hope everybody is staying healthy. Before starting with the results of the quarter, let me update you with certain key events that happened since late June.

On July 13, FIBRA Prologis received a reimbursement of MXN 1 billion related to the VAT paid on the acquisition of Park Grande last April 6. These refunds have been used to pay down our existing line of credit for approximately $30 million and to fund the current distribution. As Luis mentioned, at the beginning of July, AMEFIBRA published the definition of FFO, which you can find under ESG at the AMEFIBRA website. The white paper took FFO as defined in other regions, such as the U.S.A. and Europe, as the starting point and adjusted it to fit the Mexican market. Beginning with second quarter results, FIBRA Prologis is using this definition along with FFO as adjusted by FIBRA Prologis. Going forward, we will report both metrics.

Let me highlight the 2 main difference between AMEFIBRA and our definition of FFO. AMEFIBRA definition excludes any incentive fee saving certificates and excludes any deferred financial costs. For avoidance of that, my prepared remarks will be based on FIBRA Prologis-designed FFO.

Having said this, let me go to our financial performance. FFO for the quarter totaled $33.2 million or USD 0.038 cents per certificate, which represents a 12% decrease compared to the same period last year. Excluding the impact from nonoperating items on both quarters, FFO per certificate decreased 20%.

AFFO was $23.4 million for the quarter, flat relative to last year. This is due to higher straight-line rent and CapEx. In particular, CapEx expenditures were $6.9 million or 40% higher than the second quarter last year driven by timing of tenant improvements and increased leasing commissions given our volume.

Now before going into operating metrics, let me update you on account receivables. Last quarter, we said that our account receivables would reach approximately 3% of growth rents for the full year. Given conversation with our customers and rent collection achieved, we now expect our account receivables to reach 2% of annual growth rent. Leasing activity was almost 5.1 million square feet or about twice the volume we had in the first quarter. New leasing volume was the largest in the last 5 quarters, reaching 737,000 square feet.

Quarter end occupancy declined 110 basis points year-over-year to 95.5%, in line with our expectations as we had known move-outs in Mexico City. Despite weaker peso and in line with our strategies to push rents higher creating value, net effective rent change and rollover for the quarter increased 13.2%, which was above our expectations.

Cash same-store NOI declined 11.4% and was mainly driven by concessions relative -- related to longer lease terms, lower average occupancy and a weaker peso. I would like to point out that even though we contracted a hedge to cover our cash flow in dollars, which has had a positive effect in 2020, it does not impact our same-store cash NOI.

Moving to our balance sheet. With no debt maturities until 2022 and no capital requirements for development for land acquisitions, our financial strength and flexibility gives us optionality in this current environment. We ended the quarter with 29% loan to value, below our internal target of 25%. Our weighted average debt cost was 4.4%. Weighted average maturity was 3.2 years, and we have $284 million of liquidity through our unsecured credit facility. As credit spreads are narrowing, we are starting to see more refinancing options for our 2022 debt expirations. We will keep you posted on our progress.

Moving to guidance. We are adjusting some of our ranges given our performance and conversations with our customers. I will only comment on the metrics we are updating. For more details, please go to Page 7 of the supplemental financial information. Our forecast calls for MXN 24 per U.S. dollar in the second half of the year.

Starting with FFO per certificate, we're increasing the low end of the range, $0.015. Our new range is between USD 0.155 and USD 0.165.

Moving to period end occupancy. Given our focus on proactively reaching our customers in advance of expirations and having minimal rolls left, we are narrowing our range by increasing the bottom of -- by 100 basis points. We expect our portfolio year-end occupancy to range between 95% and 96%.

Ending with same-store cash NOI. Due to a weaker peso, which drives around 400 basis points of our results, we're updating our cash same-store NOI to be between a negative 5% and a negative 3% for the year. As mentioned before, the positive effect of our hedge does not impact our same-store cash NOI.

To wrap up, we have now experienced a full quarter with the COVID pandemic, and while economic impact remains unknown, the combination of what we see in our property data, the state of rent collection and dialogue with our customers gives us more positive outlook. This, together with our balance sheet, makes us feel great about our business going forward.

With that, I will turn it to the operator for Q&A. Thank you.

[Operator]

[Operator Instructions] Your first question today comes from the line of Sheila McGrath from Evercore.

[Sheila McGrath, analyst]

Could you describe the reasons behind the known move-outs? Was it higher rent? And how is your progress going to release those recent vacancies?

[Jorge Girault, executive]

Sheila, can you repeat your question, please? You were a little bit off, sorry.

[Sheila McGrath, analyst]

I'm sorry. Could you describe the reasons behind the move-outs in Mexico City? Was it higher rent and how your progress is going to release those vacancies?

[Hector Ibarzabal, executive]

Thank you, Sheila. This is Hector. As we've mentioned in the opening remarks, this decrease that we presented as occupancy was expected and was included actually since prepublic when we prepared the 2020 budget. We have a couple of spaces in Mexico City, one of them in our Izcalli 3 Park with a logistic operator. And the second one in Cedros Park. The 2 of them have 550,000 square feet. We have a space left in Guadalajara with IBM, 80,000 square feet. Mexico City is in good shape. We are in the process of leasing the space in Izcalli 3. Izcalli 3 is a state-of-the-art park, and we have 3 or 4 prospects. And Cedros tenement have e-commerce activity as well as creating some sort of demand. The space in it, IBM, is obviously lower, but we feel comfortable that we will achieve our occupancy there. The reason for 3PL leaving the space was that they were looking for a cheaper space due to the conditions required for their customers.

[Operator]

Your next question comes from the line of Nikolaj Lippmann of Morgan Stanley.

[Nikolaj Lippmann, analyst]

This is a little bit embarrassing because I'm afraid I might ask the same question that Sheila did. I just could not hear except -- the connection wasn't great. So my question is that you're moving out the maturities and a bit -- if you can give us color on a couple of things there. Should we -- typically, that's something you do to kind of buy protection because you went from maybe optimistic to cautiously optimistic. So are we reading that right? And can you provide color on which parts of Mexico this is happening, including Mexico City?

And I'm sorry if this question overlaps with the prior question.

[Hector Ibarzabal, executive]

Thank you for your question, Nik. Mexico City is our largest market. And since day #1 of this COVID situation, we started a very tight conversation with our customers. The most of our activity is related to logistics and e-commerce. 75% of this activity is related to this market. And as we have noted, e-commerce activity has increased. We don't have the final figures about this, but we expect that e-commerce activity has increased up to 50% during the second quarter.

This stay-at-home economy has caused as a consequence this important increase. And I think that most of these customers are going to remain buying online for now. So our conversations with them are not only to keep their operations as they are, but increasing space in the future. And we are working hand by hand with 2 of the main e-commerce players in order to try to achieve the plans that they have to serve their customers. Service has become very important, and we are very well positioned to take care of these needs.

The market that we see with a downward pressure in rent is the Guadalajara market. This is a situation that was happening even pre-COVID as supplies in Guadalajara had been important compared to the months that has been kept online to what it was before these supplies started to hit them. And on the border markets, we do see an important activity, we're 100% occupancy in the 3 markets, and we see additional demand coming from nearshoring activities.

So on the overall, we understand that we're about to start an important challenge because of the recession that Mexico is leaving. But on the overall, I think that the sectors in which we are participating, that CDP and the central facilities that we have as well as the relations that we have with our customers should keep the resilience of our portfolio.

[Luis Gutierrez, executive]

Yes. So you asked about the maturities. So we had a record leasing the, 5.1 million feet, which advanced some of the rollover that was in the second quarter and 2021. So I think we have been derisking the portfolio, importantly, and we only have 5% of the portfolio roll in 2020 in the second half and only 12% for 2021. So we feel very good about keeping a strong operating performance since we have derisked the portfolio in the second quarter, importantly.

[Operator]

Your next question comes from the line of Gordon Lee with BTG.

[Gordon Lee, analyst]

Two quick ones. The first on the leasing spreads that we saw for the quarter. I was wondering how much of that you would attribute to below-market leases coming closer to market rates. And how much would you attribute it to a natural tightening of underlying rental conditions in those markets where you saw the renewals?

And the second question is on the comments lease that you made with -- as far as some evidence, some traction on the nearshoring thesis in some of the Northern markets. I was wondering if you could tell us what type of industries you're seeing considering that nearshoring.

[Hector Ibarzabal, executive]

Thank you for your question. Today, the increased market rent that we used to have has been shrinking, and this is not a surprise for us, as this has happened in the previous cycles. When a devaluation, like the one we experienced, happens, usually it takes some time. I do consider it from 12 to 18 months for peso leases to catch up with the new market trend. So I can say we experienced a 23% devaluation. Probably peso leases have increased 50%, but we're still lagging from the previous levels that we have before the devaluation.

So the market rent in pesos are today a little bit lower because of these conditions. But if the same situation that happened in previous cycles repeats in this one, we will keep pushing a peso market rent to keep on going up to catch up with the previous market rents. This situation happened in the Mexico City and Guadalajara, which are the 2 markets in which we have incidents from peso leases.

Regarding your question about nearshoring, we have seen, particularly in Tijuana and in the Juarez market, we're working into these projects. And the reason behind this is that there is a shift in the strategy. Previously, everybody was chasing efficiency, and it was important to save some nickels and dimes in the supply chain. The name of the game today is resiliency and geographic diversification.

So we have seen companies from Asia going into the markets that I mentioned, looking to find a safe harbor in which they could have a better reliability to keep on supporting their supply chains. We are working in a couple of factories, one of them related to the automotive industry, the other one to electronics. And I have had the opportunity to be in contact with the owners of these projects, and it is impressive at the velocity that they have and how they are focusing Mexico as a good place to do this.

I would expect from now on, the demand on the border market, including Monterrey, for these nearshoring projects to be probably between 20% or 25% of the future demand.

[Operator]

[Operator Instructions] Your next question comes from the line of Vanessa Quiroga of Crédit Suisse.

[Vanessa Quiroga, analyst]

Concessions that you mentioned were granted in exchange for longer lease terms and higher rents. Can you quantify the impact of that or provide more details if possible?

[Hector Ibarzabal, executive]

Thank you for your question, Vanessa. Once again, this is not the first time that we face a change in the cycle. The last one, in 2008 and 2009, we are very clear of the strategies that we pursued in those days. And actually, in those days, it was very successful, and we are just replicating it. We create win-win structures with our customers. We were able to have 21 cases of this blend-and-extend program that they represent 2.6 million of rent concessions. It is important to highlight here that these rent concessions are not due to the COVID situation. The rent concessions have not increased, and they are linked as part of the market conditions to every rent that we have.

In the case of Mexico City, for example, rent concessions grew from 0.5 to 0.75 of a month for every year that the customer engages with us. So we have been able to enlarge important number of contracts. As I mentioned, 21, 9 of them have been in Mexico City, 5 of them have been in Guadalajara. And we have been able to get a good ratio in turnover costs, a good extension in term and a very important rent growth behind this.

So even though we document them and we need to present as rent concessions, I want to reiterate that they are not a COVID additional concession, but it's part of our customer increases every time that we enlarge or that we renew our lease agreements.

[Vanessa Quiroga, analyst]

Just to follow up, do you expect additional impacts from these concessions in the third quarter or we will see all of the impact in the second quarter?

[Hector Ibarzabal, executive]

It has been a very active quarter, Vanessa. We have 337 contracts, and we have been able to contact all and each one of them. So we think that we have a good visibility of everything that is happening with our customers. And I think that 95% of this activity is behind us.

Of course, we have in front of us, and this is where prudency needs to come, a very important recession that has reverted in Mexico. So, so far because of this COVID situation, understanding current conditions of our customers, I think that the very heavy lifting, 95% of this job, is behind us.

[Operator]

Your next question comes from the line of Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

So I was actually a little bit amazed that the dividend per share guidance wasn't changed, not even to catch up to the revised guidance on FFO, which implies an even lower payout ratio than before. How should we think about this? Is this a new strategy from the company to limit the distributions and having a lower payout ratio than in the past? Or is this only something exclusively of this year because you are being prudent? Can you give us some more color on that?

[Jorge Girault, executive]

Froylan, this is Jorge. We didn't -- you're correct, we narrowed some of our guidance. As I said in -- and Luis in his opening remarks and mine, we see -- we have seen a stronger first half of the year. That will say that we haven't seen the end of this pandemic. We don't know where it's going to end and what are going to be the final effects, in particular, for Mexico, if you want to put it that way. And in that sense, we're being prudent. And for now, we are keeping our distribution guidance at USD 0.097 per certificate.

[Fernando Froylan Mendez Solther, analyst]

So we should expect next year to see a more normalized payout ratio more close to the 90s versus the 75%, 80% that it's implied today in the guidance.

[Jorge Girault, executive]

That would be the idea, Froy. It all depends, as I said, on where this pandemic ends. It has -- where it comes to end, it depends on the vaccine. There is a lot of news around the vaccine. It's going to be this year, next year, so it depends on that part of the -- and the pandemic, its economic effect has a lot to do with it. So answering your question, when everything is normalized, we probably will see that.

[Luis Gutierrez, executive]

Froy, this is Luis. So this is something that we will review every quarter, and we will assess. We came into March and we have to -- we had the emergency, and we needed to review our guidance. Now the first quarter after the pandemic is the second quarter, and we have updated a lot of stuff, which is a higher FFO. We have a lower AR than we had anticipated. So things on the ground seem to be coming out a little better than what we expected coming into this. So what I can tell you is one of the aspects is to remain prudent and also to keep it quick. We don't want any surprises. So at this point, we will see how the next quarter evolves and then we will assess each one of the metrics one by one as this unfolds.

[Operator]

Your next question comes from the line of Luis Yance with Compass.

[Luis Yance, analyst]

Just a question on e-commerce just to explore a little bit more than that opportunity. If you could talk a little bit about what your clients are telling you in terms of their e-commerce needs going forward, whether some of this increased demand we're seeing could be temporary as lockdown measures are still strict and whether that sort of normalizes down going forward.

And in terms of your exposure right now, about 15% that's e-commerce related, where do you guys think that will go in the next year or 2, whether you can accelerate that exposure via M&A and whether that growth, it's mainly from existing clients, the Amazons or the MercadoLibres of the world or whether you're seeing kind of clients -- new clients that are actually trying to venture into this sector?

[Hector Ibarzabal, executive]

Thank you for your question. I think this is very interesting to analyze how e-commerce has been evolving in Mexico, and I think that is completely linked to the agreement of important players and the competitions that now really exist head-to-head in Mexico.

Before Amazon entered into the market, e-commerce represented 1.6% of total retail sales. By the end of last year, e-commerce in Mexico was 4%. And we're estimating that in the second quarter, this potential participation of e-commerce jumps to double, so close to 8%. When Amazon started its appearance in Mexico 6 years ago, it was amazing. The jump that it had was difficult to break the industry and geographically went from 1.6% to 4%. When MercadoLibre started competing to Amazon, this competition has, as a consequence, a higher participation of e-commerce in the total retail sales. And I think that the 2 stronger players are having a great business, the 2 of them, because of -- they have probably been competing against each one of them. But the most of the business that they are taking from is from the traditional brick-and-mortar business.

What we see going forward are these figures in the States as well increase. In the States was 14% and now is probably near 20% of total retail sales because of this COVID economy. What we should expect going forward in Mexico is a very dynamic growth, a growth that has not been presented in the past. And it's interesting to understand where the demand is coming from. Players that concentrated at the beginning in Mexico City, they're going to be going out to some other markets, as we've already seen. Guadalajara and Monterrey are in the following list about the operations that they want to have. And service is going to be the key point of this competition. So Last Touch facilities are going to start gaining a very important role as what they want to have is the best service because that's the way to capture customers.

We are well positioned in the 2 assets. We have strong operations in Mexico City, in Guadalajara and in Monterrey. We have serious and strategic conversations with our customers. Amazon is the largest customer that Prologis has worldwide, and Prologis is the largest landlord that Amazon has worldwide. And MercadoLibre is first facility with us in Mexico City.

So the combination of our current backlog and the knowledge through these conversations with our customers on what the trends, on what the needs and what type of product is coming represents a very important competitive advantage for us. I do see 2 important tailwinds. One of them, for sure, and probably the most important one, is this e-commerce trend that the COVID is going to accelerate and is going to incentivize. And the other one has been mentioned already in this Q&A, that is related to the nearshoring activity. So despite of the environment that is now, I think that FIBRA Prologis is privileged because of the sector that we have and because the strategy that we have developed and that Luis mentioned in his opening remarks.

[Luis Gutierrez, executive]

Luis, so this is Luis. And in addition to what Hector mentioned, there is another trend that is growing that could be a great tailwind for the logistics sector. And one is -- that is resiliency over efficiency. So it seems that in the pandemic, we saw a lot of the supply chains disrupt. And now companies are beginning to hold up more inventory in order to make sure the delivery times are met. And there's some calculations that companies may probably have about 8% additional inventory to meet this resiliency against efficiency. So if you add up that additional trend that -- besides the 2 that Hector mentioned, this could also be a positive for logistics real estate. And also it could also be a balance to the lower consumption that we may see as a result of a lower economy.

[Operator]

Your next question comes from the line of David Soto with Principal.

[David Eduardo Soto;Principal;Analyst, analyst]

Just a quick one. If you could provide some color about the percentage of U.S. and peso rents that you have on Mexico City and Guadalajara, if you can give us more focus on the breakdown.

[Hector Ibarzabal, executive]

Thank you for your question. 63% of our leases in Mexico City are peso-denominated already. Where in Guadalajara, we're a little bit above 50%. We do not see a very important increase in pesos on the overall portfolio because I think that our customers that are already in pesos, they will keep on pesos. And every time that there's a devaluation, the anxiety increases and the request for pesos start increasing. But the volatility that we experienced this year, there were some parts in March and April where FX was at MXN 25. Today, it's at MXN 22.50 on an average basis. So customers taking decision of moving into pesos at MXN 25, now they're experiencing an issue because it has been a 10% reduction on the FX.

FX is very hard to predict. Our customers are sophisticated. They have good financial divisions, and they know what is more convenient for their operations. Usually, a peso lease ends up providing more money to FIBRA Prologis compared to dollar-denominated business. Peso leases are more expensive. And what companies look when they request peso leases is to avoid a mismatch because this cost -- this company generates pesos, so they would like to have a peso-denominated lease. But bottom line, we don't see an important substantial increase on the peso leases moving forward.

[Operator]

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

[Francisco Suarez, analyst]

A question on when you are extending the leases and when we see the pressure on overall rent because you are extending the life of the leases, just to make sure, that doesn't mean necessarily that the overall rates of return on that lease is declining if the rent is decreasing, isn't it? So the question is, can you provide us a little bit of examples of how to make sure that in those circumstances when you are trying to extend the life of the lease and in exchange, you decide to cut a little bit your rent, how we make sure that the overall rate of return on that lease is not affected? Or is this time it's different?

[Jorge Girault, executive]

Paco, this is Jorge. You cut off -- you cut at the beginning, but I think your question is on the economic value of the leases when we renegotiate or when we cut payment, do we lose value on the leases. I mean that's why we report the NER, net effective rent change, because it reflects the economic value of the leases that we have. As you can see, in the past history, it has been positive. This year -- this quarter, sorry, in particular, was 13.2%. So I mean that's a quick answer to your question. I mean, that's -- the value of the lease is increasing on economic terms, bringing value to our shareholders.

[Hector Ibarzabal, executive]

But giving a little more of color to what has happened in the 21 transactions that we have done, Paco, of leases needs to be renewed in that market. And we used to be around 5% of each lease market in the past. So some of these extensions have incorporated a lease increase. The rents were a little bit below market. And I would say those represent probably 80% or 85% of what -- the blend and extend that we did. We did a few ones in which leases were above market. Once again, if that's the case, we need -- we do need to take that lease into market, consider what time is remaining left in the contract and then do a blender and then dock with a new lease at the end of the day.

I think that the rent growth that's representing in this blend-and-extend program, which is 13%, represents that we are really creating value for customers. Whether we should have waited 2 years from now for these leases becoming higher, we're lagging this crystal ball to make sure that, that's the case. But in this uncertainty that the environment is providing, I think that it creates additional value to our certificate holders to provide additional stability and to take away the renewal risk, which is an important risk in this business.

[Operator]

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

[Armando Rodriguez, analyst]

And congratulations again for these outstanding results. I have a quick questions regarding the asset recycling program. I can see there is no guidance behind that. And I would love to hear your comments on the sale -- the dispositions on the supply side. I know there's a little bit pressure on the supply area, and I would love to hear your comments on the exit cap rates, maybe from your competitors and -- that's my only question.

[Luis Gutierrez, executive]

Yes. Thank you, Armando, for your question, and this question gives me a chance to give you a little broader topic, which relates to valuations and our capital deployment strategy, which, of course, has taken into consideration the asset recycling. So I think values in the short term have come down marginally, maybe between 0 and 3%. And I believe in the medium term, valuations for the logistics sector will remain stable. I think with the lower interest rate environment, valuations will probably recover from the slight decrease, and we've seen also interest from investors to come into the sector. We have not seen price recovery yet. So in that sense, we will remain prudent, and we want to see where the market comes. So I guess, number one, for the additional pipeline that we have, we will remain on standby, and we will assess acquiring the 1.7 million feet of property that we have in the pipeline from Prologis until we see more price discovery.

And then answering more specific your question, I think this year could be a good year to make the additional dispositions. I think there's a good market. As I said, valuations may be stable given the interest in the logistics sector, and this is something that we will assess. It also has to do with a tax impact on those dispositions. So we'll keep you updated as the quarters come. But that was a very good question. Thank you.

[Operator]

And there are no further questions in queue at this time. I turn the call -- sorry, we do have -- no, sorry. I now turn the call over to Mr. Gutiérrez for any closing remarks.

[Luis Gutierrez, executive]

Well, I want to thank you, everyone, for being on this call and for your interest in FIBRA Prologis. So we are now almost 4 months into this pandemic, and we still have some uncertainty as it unfolds. But up to this time, we feel good about our business. I think we have performed much better than what I expected, and most especially compared to other sectors. I think we are very well positioned for the future. I also believe this will pass, and I'm also looking forward to see you in person. So thank you very much.

[Operator]

And this does conclude today's conference call. Thank you for your participation in today's call. You may now disconnect.