Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the FIBRA Prologis Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Alexandra Violante, Head of Investor Relations. Please go ahead.

[Alexandra Violante, executive]

Thank you, Dennis, and good morning, everyone. Welcome to our Second Quarter 2023 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 during this call speak only as of the date of this call. Our 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 non-accounting 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 [ Victory Warsaba, ] our Managing Director; and [ Alejandro Chavelas ], our Head of Valuations and Research.

With that, let me pass the call over to Luis.

[Luis Gutierrez, executive]

Thank you, Ale, and good morning, everyone. Our results continue to demonstrate one of the strongest quarters exceeding our expectations. We remain confident of an outstanding second half of the year. Let me give some highlights. FFO and AFFO recorded the largest increase since our IPO. Occupancy continues to be at 98%. This is due to a strong market conditions and our focused strategy. Same-store cash NOI was positive 9.4%. One of the main drivers was our almost 31 rental growth on rollover, generating a strong cash flow.

In May, we successfully completed our follow-on transaction. There was significant interest mainly from new international investors, most of them wanting to play the nearshoring trend. We raised close to $400 million to fund new acquisitions. With this issuance, we have improved our liquidity, increase and diversify our shareholder base. Related to the offering in June, we announced the acquisition of 3 properties from our sponsor for $75 million.

We will continue to move forward with the remaining of the Prologis pipeline that we presented during the roadshow as well as third-party acquisitions. Industrial real estate fundamentals remain solid. Demand continues to surpass supply and we expect a very positive 2023, mainly due to nearshoring. As we have mentioned in the past, this is a trend that will persist for the upcoming years since it is a structural change in supply chains as companies are making strategic decisions to relocate their manufacturing operations for the long term to Mexico.

Demand in the second quarter persists to be at high levels. Net absorption in our 6 markets reached 17.5 million square feet, flat versus the strong first half of 2022, mainly driven by continued strength in demand from the northern markets. On the back of this, our forecast of balanced supply/demand and similar levels of net absorption compared to last year remains unchanged. Vacancy in our markets is close to record low levels of 1.2%, particularly they benefited from lack of sufficient supply in Mexico City, which brought market vacancy down to a record low.

Rents continue to rise with an accumulated increase of about 10% year-to-date in our markets. Given the very tight supply-demand environment, rent levels remain most justified by replacement costs. We expect rental growth for the year to be around mid-teens, reflecting better-than-expected dynamics. Let me expand on what we're seeing on the ground. [indiscernible] projects represent more than 50% of total space under construction. This does not take into account pre-lease space, which we think is also substantial. Availability of land with energy infrastructure remains very limited.

We believe a large portion of the space under construction is not ready to provide energy to customers. Even in this tight environment, we're not seeing clients redo their interest in the nearshoring operations or securing space.

On the manufacturing side, Monterrey continues to show very strong fundamentals as continued deliveries have been easily absorbed by the market. The main sectors that stand out are 3PLs oriented to providing logistics and light assembly services to manufacturing companies, representing an outsized share of our new leasing, given our industry-leading building and site specifications, which are particularly important for logistic operations. Electronics as we saw a couple of closings from world-leading manufacturers, which are expanding their footprint in the country, mostly from Asia. Regarding our activity, we have recently been able to close several renewals with top-quality tenants at 10% to 15% higher rents compared to our expectations at the beginning of the year, which will support our rental growth for the rest of 2023. We also highlight a recent new leasing [ quotes ] with one of the most world-leading electronics manufacturers. On the logistics side, consumption expectations have improved materially in the year, with consensus now expecting 2.4% real growth, well above prior expectations.

This much-improved environment should lead more aggressive decision-making regarding demand for space by the retail and logistics industry. Mexico City continues to show extremely attractive supply-demand dynamics with vacancy declining for the tenth consecutive quarter. Leasing activity is led by consumer-oriented 3PLs which continue to require space to service brick-and-mortar companies looking to provide digital offerings. Lack of land is driving potential clients to look for space in either Toluca or other regions of the Mexico City metro. Our sponsor is also pursuing development opportunities in Toluca, which we see as a natural extension of the Mexico City market with excellent connectivity to the main metro via two toll roads.

Clients have been receptive to this alternative. On valuations, our values increased 5.3% in the quarter, which was fully explained by rental growth. While cap rates remained flat, Mexico values are outperforming compared to other parts of the world. We're very confident about our values for the remainder of the year. We expect cap rates to keep in line with current values, while we continue to see market rents growing.

In summary, logistics real estate continues to be a favored asset class among investors, and FIBRA Prologis is well-positioned to outperform. Rents continue to grow and our lease mark-to-market has increased from 24% to 30%. This will be a major driver of FFO per share going forward. On the capital side, we're active. Our sponsor has on the development pipeline, 4.6 million square feet, which most of it we expect to be acquired this year. We're also in some third-party acquisition processes that are aligned to our business strategy, and we hope to provide more color in the upcoming months.

Our balance sheet is one of our major competitive advantage and provides us flexibility to play offense. Finally, we remain committed to creating value for certificate holders. With that, let me pass the call over to Jorge.

[Jorge Girault, executive]

Thank you, Luis. Good morning, and thank you for joining us. We keep on seeing excellent results for our portfolio. Operating metrics are strong, and our balance sheet management has proven to be a competitive advantage. Turning to our results for the quarter. FFO and AFFO reached $49 million and $42 million, respectively, a 24% and 41% versus last year and above our expectations. It was driven by higher rents on rollover, occupancy levels and last year's acquisitions. Moving to our operating metrics. Leasing activity was 1.4 million square feet with a period end and average occupancy around 98%, in line with previous quarters.

Net effective rent change on rollover increased almost 31%. And for the last 12 months, it has been above 30%. As Luis mentioned, our portfolio lease mark-to-market is 30%. What this means is that we could generate $0.07 of [ AFFO ] per certificate of incremental earnings as leases roll over time, which is equivalent to almost 40% increase to the midpoint of our guidance. In terms of same-store cash and GAAP NOI, we have a positive increase of 9.4% and 7.8%. I'd like to go through our accomplishments regarding capital markets and balance sheet during the quarter. Last May, we did a successful follow-on which allow us to bring new investors and increase our liquidity.

We raised close to $400 million, up [ MXN 59 ] per CBFI above our NAV. And since then, we have been trading above this benchmark. We recasted our green line of credit for $500 million, including our accordion feature, adding 5 years and reducing the cost of borrowing by 50 basis points as well as our unused fees. Standard & Poor's gave FIBRA Prologis a BBB+ rating, one notch above Mexico sovereign and at least two notches above our closest peer. Which represents a clear testament of our risk and balance sheet management. To give you some perspective, let me go quickly through some of our financial metrics.

Our average debt maturity is 7 years, and we do not have any determination until 2026. 100% of our debt is fixed at weighted average cost of 4%. More than 80% of our debt is unsecured. Loan-to-value is below 11%, and our fixed coverage ratio is 6.1% and debt to adjusted EBITDA of 1.9%. Turning to guidance. Given the strength of our net rent growth, occupancy levels and FX, we have updated our same-store cash NOI growth to be between 8.2% and 11.2%. We are keeping the rest of our guidance unchanged, which you can see on Page 8 of our supplemental financial information.

Now let me move to ESG. During the quarter, we certified 10% additional areas. Reaching 65% of the total portfolio. This result puts us closer to the 2025 goal of 100% based on 2021 total area. Also, early this week, we published our ESG annual report in line with previous years. I would like to finish by thanking our investors for delivering their trust in our teams and business model supporting us in our last capital raise and also to our teams on the ground who have made an excellent job.

With that, I'll turn the call back to Luis.

[Luis Gutierrez, executive]

Thank you, Jorge. Before passing the call for Q&A, I would like to talk about the press release we issued this morning relating to the leadership changes. These changes are part of the ongoing succession for a sponsor Prologis. As of January 1, 2024, I will be moving to a new role as Senior Adviser to Prologis and Hector [indiscernible] will replace me. He is currently the COO and will become the new Chief Executive Officer, CEO. I will also remain as Chair of the FIBRA Technical Committee. I could not be more excited to see Hector take this new role. He has been my partner for the last 30 years in which we have worked together. He is someone that you already know as we launched the FIBRA together in 2014.

He brings deep experience that will benefit our customers, investors, employees and communities. This is a great moment for the FIBRA and I am confident Hector will take it to a new level. I could not think of a better person to hand over this position. Finally, I'm deeply grateful with investors and analysts for your time and interest over the year.

With that, let me open it up for Q&A.

[Operator]

[Operator Instructions] And your first question is from the line of Juan Ponce with Bradesco BBI.

[Juan Ponce, analyst]

So given the current environment, do you see potential upside risk to your acquisition guidance for this year? And if you can comment on the factors that may impact the timeline to complete all acquisitions, please?

[Luis Gutierrez, executive]

Thank you, Juan. We remain with our top of guidance, $450 million. This will mainly come from the Prologis pipeline and third-party acquisitions. On the Prologis pipeline, we have 4.6 million feet, and we will acquire 3.5 million feet, which will be roughly $350 million and most of them will be completed in the second half of the year. The properties will be located in the North and Monterrey, Juarez, Tijuana and Reynosa. All of them are leased to manufacturing clients and with great accretive returns with an IRR of 9.5%. In relation to the third-party sales, we have several processes ongoing. These third-party sales sometimes are more unpredictable than the Prologis Pipeline. We are participating, and we feel comfortable these are going in the right direction.

[Operator]

Your next question is from the line of Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

I have a quick question on land cost. To what extent rising cost of land is pushing out competitors to develop more properties? And do you think that higher rent can offset a higher cost? What's the lag there for new developments? That's the first one.

[Hector Ibarzabal, executive]

Thank you, Pablo. This is Hector, and I want to thank Luis for his kind words. Land is very scarce. Our strategy is focused to be in markets where there's ample barriers of entrants. The combination of having land with energy and with entitlement certainly is making land prices with these conditions to go up. We are seeing a very important increase, I would say, a kind of focus stick increase on new rents related to new projects, either they are spec or build-to-suit. Probably these rents could be 15% higher than operating regular rents. So land is up, construction costs are going up and new rents are going up as well.

[Operator]

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

[Gordon Lee, analyst]

And first of all, I'd like to congratulate both Luis and Hector for the -- well, for Luis for the 10-year CEO for his new role at Prologis and Hector, obviously, for the appointment, congratulations.

I just have one really quick question on the operating side, which is leasing activity has been pretty strong for the past several quarters, but I noticed that your retention rate has slipped for the past 3 or 4 quarters sequentially, not hugely, but materially. So I was wondering whether there's anything to be gleaned from that or if this is just -- the starting point was a very high retention rate, and we're looking at more normalized levels?

[Hector Ibarzabal, executive]

Thank you, Gordon. I think retention is not necessarily an evidence of how our business is going. We are probably the best in the markets, pushing rents up. Part of this loss of customers is related to push these rents up. But the most of the customers that we lost in these periods are because we have not been able to provide expansion of spaces for them. Occupancy is in good shape, rent growth is in good shape. So I wouldn't be that concerned about retention.

[Operator]

Your next question is from the line of Luis Yance Santander Asset Management.

[Luis Yance, analyst]

Congratulations Hector. Thanks a lot Luis for all these years. Just a quick follow-up on the pipeline that your parent company has. I mean you mentioned that a big chunk of that's in the development pipeline, you'll be acquiring it this year. But can you talk a little bit about the possibility of potentially accelerating from your parent company standpoint, the development pipeline adding more into that given the strong demand, what would be the constraint, is energy a big factor? Or is that something that we could start seeing in the next few quarters as you buy some of that development pipeline that gets leased? Is it fair to assume that given the opportunities you might be seeing there might be a possibility that you accelerate -- you probably accelerate the development there? So that would be my question.

[Luis Gutierrez, executive]

Thank you, [ Tokayo. ] Good to see you're in Santander now. So this is a very good question. In fact, I see that having our sponsor Prologis developing its balance sheet and then having this exclusive access to it is a huge development, a huge competitive advantage. We have 4.6 million feet of property that we will acquire between '24 and -- '23 and 24 and it's around $460 million. And what I can say is that development conditions have gotten much more tougher. So to begin development has to do with a lot of infrastructure challenges that have to do with energy. But in addition, you also have entitlement challenges a little bit as a result of the pandemic and municipalities have closed, and it just has been taken a little longer than before.

But having said that, I think business conditions are in good shape to continue development. As we said in our remarks, rents are growing. Vacancies are record low. And most importantly, our sponsor has the capital to put to work. Plus I think we will see a more active second half of the year. I think you can expect maybe 2 million to 3 million square feet of properties that will be put to work in the second half. And then maybe for '24, our pipeline, I think, is going to be between 3 million and 4 million square feet. So this is a pretty healthy. In addition, the sponsor is also in good progress to replenish our land bank, especially in those markets that have very tight conditions. So we have been in the market for many years, and I think we're in a special position to take advantage of this special opportunity that Mexico has.

[Operator]

Your next question is from the line of Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

Congrats also to Luis and Hector for this transition of leadership. So my question is regarding a comment that, Luis, you made on your letter on the results about some markets slowing down. I was wondering if you can specify what market you are referring to, and if this poses any risk to the trends that we are seeing for nearshoring in Mexico.

[Luis Gutierrez, executive]

Thank you, Vanessa. I -- we have been reviewing our forecast of demand, and we are very bullish for the year. This is driver -- is mainly driven by structural changes. Now companies need to relocate their manufacturing facilities, and these are long-term decisions which somehow are going over the short-term volatility that the slower environment is putting. And we also see this trend lasting. And it has to do with labor shortages in the U.S., the U.S.-China dispute and sectors that are changing like electronic vehicles and electronics. And in that sense, we see Mexico well positioned.

So to be very specific on your question, I see our six markets with a strong demand for the year. Very similar to what was in 2022, but this is double prepandemic demand.

[Operator]

Your next question is from the line of Francisco Chavez with BBVA.

[Francisco Chávez Martínez, analyst]

Thanks for taking my question. And also congratulations for Luis and Hector for these new changes in the leadership roles. My question is regarding the items between FFO and AFFO, the CapEx to NOI ratio has been below the guided range. Can we expect CapEx to catch up in the second half of this year? And also if you can give us an idea of the AFFO payout that we can expect for this year?

[Jorge Girault, executive]

Francisco, for your question. This is Jorge. Let me start with the second one. Our AFFO rate is going to be around 90% on our guided distribution. That's where we are going to be. Regarding the items between FFO and AFFO, we will end the year with 13% to 14% of NOI as guided. It depends on the time of the year, et cetera, as you said, probably some of the CapEx will accelerate in the second half of the year to get into the 13%, 14% level. The way that you might see it is that if you look at the last 12 months, over the last 4 quarters, our FFO and AFFO margin has been 60% and 50%, respectively. So I mean, you can see, you will see those margins going forward. This quarter, obviously, is higher than that, given exactly what you said. But I think at the end of the year, on a normalized basis, on an annual basis, you will see those levels as I mentioned and as guided. Thank you, Francis.

[Operator]

Your next question is from the line of Jorel Guilloty with Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

So first off, I want to say congrats to Hector, thanks, Luis, for the partnership and the transparency. I wanted to dig a bit more into the net effective rent change number that you published this quarter. So last figure, this -- last quarter, this figure was 39%, which is a record. And this quarter, it came down to 31%, still strong, but it is a step-down.

So I just wanted to see if you can comment on this dynamic. Because when we start digging through, for example, we see that in 1Q, '23, 50% leasing activity was in Mexico City. That's a near 40% net effective rent change 2Q '23, 40% of the leasing activity was in Guadalajara, 26% net effective rent change. So I was wondering is this 30% for this figure specifically, is it more of a normalization? Is it more market specific? Could we see an acceleration? That's my question.

[Hector Ibarzabal, executive]

Thank you very much, Jorel, for your question. If you analyze the spread in-place rent to market that we had previous quarter was 23.7%. This quarter, we are above 30% in just one quarter. With these rent changes that you are mentioning, we have some cases in which we were able to raise almost 70%, 69.8% to rent in some specific markets. So what is happening and what is prevailing is the lack of supply of new space. And this will keep on bringing our rents up.

As analyzing potential opportunities, we see that trends are spiking importantly. [ Japan ] and Mexico City, for example, in the last year, they have increased potentially 20% or 25% and the lack of supply of new space is enhancing this condition. I would be expecting going forward, similar ranges of rent growth, if they're going to move, they're going to move upwards because of the current conditions, demand is still very strong and supply is limited. This is one of the best mechanisms that Prologis has to create value to our shareholders. We probably are leaders in the market on pushing rents up. We will keep on doing it, learning from the market or creating market as market leaders that we are.

[Jorge Girault, executive]

And Jorel, this is Jorge. Just to follow up on what Hector said. Remember that net effective rent change is a function of obviously the volume lease in that quarter, where those leases are, meaning which market is, it's not the same, Tijuana, Mexico and Guadalajara, for example, and also the conditions of the previous rent. So we might be a little bit below last quarter range change, but this is a function of what you are leasing, where it is and what the conditions were. The main point is rents are going up, and we keep on pushing.

[Operator]

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

[Nikolaj Lippmann, analyst]

Congrats on the numbers and also Hector, on the new role, Luis, thanks for this partnership. Just -- you've guided -- you changed guidance twice already this year, right, rents are vertical, it's happening very quickly. Can you give us a sense of where you think we will see some level of stabilization in some of the key markets in terms of sort of rates per pricing per feet per square meter? And also how this plays into your thinking around M&A from external sources. The whole market is repricing. It's -- a lot of people have issues building. It seems like a -- obviously, we would have -- everyone would have loved to buy stuff 2 years ago, but it still seems like a market where external could be favored. So I was wondering you can say about that. Again, congrats.

[Jorge Girault, executive]

Regarding your question on rents and that we keep guidance where it is, I mean, we look every quarter how our results are. As I said in my preliminary remarks, some of our FFO and AFFO and some other metrics are higher than expected. And regarding that, we keep on changing -- we will keep on revising our guidance. If it makes sense, we will go upward as we did this time with same-store cash NOI. Also, FX has a role in all these changes. Where do we see rents and if we see them stabilization going forward? It's hard to say. I think that this year, we -- in the whole year, we expect, like we said mid-teens in terms of increase on rents -- market rents, I mean, and probably next year, we're going to see a more stable number, maybe a lower number, who knows. We don't have a crystal ball in front of us, but we think that the dynamic is going to be positive. So -- but hard to say where they're going to be stable at this moment, Nik.

[Hector Ibarzabal, executive]

The two most expensive markets, Nik, which are in Mexico City and Tijuana. We are presenting new proposals in Mexico City above $9 per square feet per year and in Tijuana above $10 per square feet per year. Let's have -- let's remind that the lease cost for customers is not the most important cost that they have it could be a very high cost if they don't have the right space to take care of their business. So it's not that we are taking advantage of our customers. It's just where the market is. If these conditions of lack of energy and complexity on the entitlement prevail, rents will just keep on increasing. The way rents have increased from compared to the way transportation costs and energy has increased is minimum. So we're in this environment, and we don't see fundamentals changing in the short term. So we should be expecting, as Jorge mentioned, 10% to 15% at least increase in market trends.

[Luis Gutierrez, executive]

I guess on the last part of your question, Nik, so I think we are in a mood to play offense. We have a fantastic balance sheet with a very low loan-to-value. And we have a great team on the ground to grow the portfolio. Additionally, the share price is also trading at a premium. And this just makes conditions much better to play often. So I think we just need to be patient. Opportunities will come. So there could be some additional portfolios. And whatever books in the market, we will be able to see it and have a shot at it.

[Operator]

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

[Francisco Suarez, analyst]

Good morning. Thanks for the call. Congrats on the results, congrats on the new roles and a big thank you, Luis, for all these years. My question is a follow-up to Jansen's question. It's the second quarter where I see PLD with 0 starts in Mexico. And I just want to clarify. So the reason why PLD has not started new developments and why it is actually cutting their guidance on deliveries in Mexico is basically because of the lack of the permitting or energy. Can you clarify that for me to make sure that is not related by PLD having second thoughts on what the drivers of demand might be in Mexico?

[Luis Gutierrez, executive]

Thank you, Farco , for your question, and thank you also for your kind note. It has been a pleasure to work together. So yes, I fully support what you're saying. So business conditions are in very good shape. As I said, rents are growing, vacancies are low, the sponsor has capital and there is no restriction from corporate in terms of deploying capital in Mexico. In fact, I would say that Mexico is probably all of the markets all over the world, the one that it's outperforming. I mean if you see values went up in Mexico where probably in other areas of the world, values are either flat or going down.

And this is because we have this manufacturing driver that is very different than it is not existing in other geographies. And it's the part of the cycle that we need to take advantage of. So in that sense, the lack of starts in the first half has to do just with timing considerations on specific projects that relate to just getting the land with full infrastructure and sometimes energies, sometimes entitlement. So as you -- as I said, you can expect 2 million to 3 million feet of the starts for the second half of the year and 3 million to 4 million feet in 2024 plus replenishment of the land bank.

[Operator]

Your next question is from the line of Andre Mazini with Citigroup.

[André Mazini, analyst]

First of all, I want to second other people when congratulating Hector for the CEO promotion in 2024 and to Luis for the amazing work he has done in that chair. So congrats guys. So the question is about the disposition strategy, in which you are selling in noncore assets -- noncore markets, sorry, I should say.

If you could talk a little bit about what makes a market noncore. Is it the city size or some other metric? Children divestments happened in Nuevo Laredo and Matamoros, which are border towns with the U.S. And normally, we associate border towns with [ Missauri ], which is, of course, super hot. So being a border town is not enough to make it a core market apparently right. And of course, the investments and the acquisitions have been in bigger cities to that [indiscernible] et cetera. So if you can talk about what is a noncore market vis-a-vis our core market in the northern part of the country.

[Hector Ibarzabal, executive]

Thank you, Andre, for your question. I think one of the factors of success of FIBRA Prologis is that we have a very clear strategy and that we have had the discipline to keep a stick to it. We have selected only six markets. You can have industrial real estate activity in Mexico probably in 15 to 20 different markets. The main conditions that we look to target one of our markets as core as a target market is that the sample barriers of entry. The best way to create value for our stockholders is through pushing rents up. And the only way you have to push rents up is if there is limited supply. So the assets that we sold were not core because they were part of previous acquisitions that we made in the past, and they were not sitting in the markets -- in the 6 markets that we all know we participate.

Besides several years of entry that in the most of the cases is land. Today, an important barrier of entry is on top energy and entitlement, as Luis has mentioned, but we also care about the size of the market. I mean, these assets need to have a little similarity to securities. So you need to have liquidity. And if you are chasing for liquidity in one market, you need to have a specific volume of activity. We do not expect to open so far any new markets in Mexico. Part of our strategy is to go deeper in the markets in which we participate, have a higher penetration, allow us to see all the opportunities, and that's again, an advantage that we have.

[Operator]

Your next question is from the line of Anton Mortenkotter with GBM.

[Ernst Mortenkotter, analyst]

Congrats on the results. My question is related to the development pipeline from Prologis. I'm not sure if I'm seeing it right, but it looks like not all the properties that Prologis has been developing in Mexico have been acquired by you. If you could provide some color on the reasoning on this? Is it because those properties are still being stabilized or maybe you are passing on those for other reasons? If you could provide some color there would be great.

[Luis Gutierrez, executive]

Yes. So thank you for your question, Anton. We have, in the pipeline, 4.6 million square feet currently. Just as a clarification, all of the Prologis pipeline, has been acquired by Prologis in the past. There is no -- Prologis has not sold any pipeline property to anyone else but FIBRA. So I guess if you look at the stabilization progress today, it's 72.2% and mainly the properties in Monterrey, Juarez, Tijuana, and almost Reynosa are at about 100%. Reynosa at 75%. We need to wait for that to be at 90%. So we expect all of these properties to be stabilized before the year-end. And as I said, those will be acquired by FIBRA following the technical committee process and everything before year-end. There is 1.2 million square feet that is 14.4% leased, and we're expecting to acquire that in 2024 as these properties are in construction. And as soon as we finish those, those will be acquired by the FIBRA in 2024.

[Operator]

Next question is from the line of Alan Macias with Bank of America.

[Alan Macias, analyst]

Congrats on the new roles. Just a quick question on adjusted FFO payout ratio. Given the strong vessel, is there a risk that at the end of the year, the payout ratio will be higher. Do you see that happening? Or we should expect the same level as last year, for instance?

[Jorge Girault, executive]

Thank you for your question. And -- this is a little bit of a technical question, and let me divide it into two. First, according to our guidance, the AFFO rate is going to be, as I said, around 90%. That said, you are correct. The level of the peso today, we'll make FIBRA Prologis and anyone who has a foreign currency debt will generate some gain, some fiscal gain or tax gain which FIBRA will have to distribute 95% of that. What we have done and what we have at FIBRA Prologis is that last January 30, we got approval from holders to distribute above the guided distribution that we have. If the -- if there is additional taxable gain coming from FX and inflation. That fee that is above our guided distribution. We, as a management, have the option to distribute that in cash, in certificate or in both. So to be clear on your question, most probably, the cash that we will distribute is going to be around 90% of AFFO. If we have to distribute above that and above our guidance, we could be distributing certificates on that piece.

[Operator]

[Operator Instructions]. And at this time, I would like to turn the call over to the company's CEO, Luis Gutierrez for closing remarks.

[Luis Gutierrez, executive]

Well, I want to thank everyone that are participating in this call for your kind comments. It has been a pleasure to work over the years. My profession career has been enlightened and got much better with the interactions we have with you every day. So thank you very much for that. I also want to say the very confident sector will be continue to outperform the FIBRA. The FIBRA is in great shape, and I think Hector will just take it, as I said, to a whole new level. And we're very well prepared to do that.

So I will be here and responsible until January 1, and then I will be chairing the [ technical ] committee. So I will not be going away. You guys will probably see me for a little while. So thank you very much, and I hope we can interact before now and at year-end. Certainly, you guys are welcome to come and visit. Monterrey has been really a key market that has a lot of growth. So I encourage anyone of you to come and visit us there.

So with that, thank you very much and see you on the next call.

[Operator]

This does conclude the FIBRA Prologis Second Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect.