Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2022-Q3

[Operator]

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the FIBRA Prologis Third Quarter 2022 Earnings Conference Call [Operator Instructions]

Thank you. Alexandra Violante, Head of Investor Relations. You may begin.

[Alexandra Violante, executive]

Thank you, Chris, and good morning, everyone. Welcome to our third quarter 2022 earnings conference call.

Before we begin our prepared remarks, I would like to remind everyone that all the information presented in this conference call is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call speak only as of the date of this call. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements.

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

With that, it is my pleasure to hand the call over to Luis.

[Luis Gutierrez, executive]

Thank you, Ale, and good morning, everyone. Our third quarter operating and financial results have exceeded our expectations, demonstrating our portfolio resiliency despite the uncertain financial markets, an environment of increasing interest rates and cloud sway recession. We successfully completed our rights offering last month. I am very appreciative of the support we received from our current shareholders.

We're able to issue 153 million certificates raising MXN 8 billion. This is one of the very few capital rates in the Mexican market in 2022. We feel good about this accomplishment. With the proceeds we are strengthening the balance sheet, expect to make a strategic acquisitions, but most importantly, it positions us to take advantage of opportunities that may arise under the current environment.

Now let me provide some highlights for the third quarter. We're sold out. Our occupancy reached 98.5%. This is 150 basis points above last year. Our FFO and AFFO continued to grow mainly due to strong rental increases and the addition of last year's acquisitions. We have reached a new record in a rental change on rollover of almost 25%, driving a strong same-store NOI growth.

Turning to the [indiscernible] route environment. The sector continues to show a strong performance. The positive operating results reflect the demand is still strong, while developers struggle to keep up the pace of supply, it is likely to see record demand in 2022. Year-to-date, we have seen demand increased 16% year-over-year in our markets. The expansion is generated mainly from dynamic manufacturing activity and near shore. Other drivers of demand from logistic operators and omnichannel activity have been underpinned this growth.

Quarterly demand surpassed once again 8 million square feet in our 6 markets, outpacing supply by 1.5 million square feet, resulting in a record low market vacancy of 1.4%. As mentioned, developers are struggle to keep up with demand. There continues to be barriers of supply, which reinforces the fundamentals for further rental increases. Market rents have increased around 9% year-to-date, and we expect rent growth to continue with an upbeat pace towards year-end. Valuations for the FIBRA remained flat for the quarter with a rise of 20 basis points on the cap rates, which was offset by market rental growth.

We expect that volatility in the capital markets will keep on pressure in real estate valuations. Let me expand on what we're seeing on the ground. Decision-making is taking longer as the cost of money increases and the capital markets become thinner., but the best are also rising as customers try to secure larger facilities on pre-lease opportunities. We sense clients are willing to pay a higher cost to secure the few available spaces left.

On the manufacturing side, nearshoring is the most robust trend driving demand in our markets. We expect that 2/3 of total demand will come from near-shoring related opportunities. Monterrey, representing 30% of the total demand and border markets have been the primary beneficiaries of this strength, and will continue attracting customers as global conditions show signs of slowing down and labor in the U.S. remains tight. We hope we have more than 70 meetings with investors during the rights offering, interested in a vehicle that would give them exposure to this lasting trend.

We also continue to see a strong build-to-pipeline. Our responses secured to opportunities for almost 1 million square feet during the quarter. On the logistics front, customers are reigniting their warehouse utilization ahead of the fall sales season. And for its part, consumer spending is expected to have positive real growth for the year. Logistics was led by e-com operations, 3PLs and retailers. Sentiment is prudent as customers are willing to secure space in a tight market. However, there are concerns about a slowdown during 2023.

We have worked hard to build a company that is resilient during times of economic uncertainty with a focused investment strategy and prudent balance sheet philosophy. Let me highlight why we're better positioned heading into this period. Logistics real estate is the backbone of the supply chain. Our portfolio is well positioned to outperform through different cycles. We took advantage of the e-commerce trend during the pandemic shutdown and our exposure to global markets. This time, as economies open up and companies seek adjusting case strategy, nearshoring has become a way to have more resiliency, supply chains.

We're very well positioned to take advantage of the strengths given our exposure to the border markets and Monterrey. Our portfolio vacancy is only 1.5%. Over the past years, we have been pushing rents. This has accelerated and is a durable driver of generating cash flow and same-store NOI as we increase rents above inflation, our in-place lease spreads are 16% below market.

On acquisitions, we have been disciplined, and this is a time of capital preservation and patience to wait for the right investment opportunities, and finally, we have worked hard to improve our financial flexibility and liquidity. With this rights offering, we're in a unique position and view our balance sheet as a major competitive advantage. In summary, we remain committed to creating long-term value for certificate holders. Our portfolio is resilient and built to outperform in any part.

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

[Jorge Girault, executive]

Thank you, Luis. Good morning. Thank you for joining us. Starting with our financial results. FFO reached $41 million or $0.047 per certificate, representing a 10% increase for CBFI if compared to last year, one of our highest increases on a relative basis. AFFO was $31 million for the quarter, a 7% increase when compared to last year and above our expectations. Moving to operating metrics.

Leasing activity reached 1.5 million square feet with period-end occupancy at 98.5%, which is a record high. Net effective rent change on rollover increased about $25% in dollar terms, representing a new record since IPO. And for the last 12 months, it has been around 19%. In terms of same-store cash and GAAP NOI, we had a positive increase of 7.3% and 5.7%, respectively. These results reflect FIBRA's rent growth and annual bumps for the quarter.

As Luis mentioned, we concluded last September 29, our rights offering. We received $396 million, equivalent to additional 153 million CBFIs or a 19% increase in certificates. Proceeds will be used as stable. We have already paid down our outstanding loading debt for $230 million, resetting our $400 million line of credit and having our next debt maturity until 2026 for $160 million.

As a result, we are improving our loan-to-value to around 20%, increasing our borrowing firepower to $600 million while maintaining a lower than 35% loan-to-value. On this line, our cost of debt maintained practically unchanged at 4%, which is one of the most competitive in the sector. In terms of weighted debt maturity, it has increased to 7.8 years, and debt to adjusted EBITDA will be 4.1%. All these represents a real advantage on the current capital market conditions.

In light of financial market movements and recent events, we will be prudent on the capital allocation, looking to bring value to our investors under current conditions. In short, this rights offering has fortified our balance sheet and placed us in a very strong and competitive position for the future. We will take advantage of this by being vigilant on the best use of proceeds and [indiscernible] of the most efficient use of our debt capacity.

As a result, we are modifying our 2022 guidance at as such, due to the additional certificates, we now expect FFO per CBFI for the year to be USD 795 at the midpoint, down from 18.5% on previous guidance. And given the delay on capital deployment, we now expect acquisitions for the year to be $125 million at the midpoint, down from $200 million on the previous guidance.

Moving to ESG. We have mentioned before our ESG goals and alignment to Prologis on achieving net zero by 2030. In line with this, we started last September, our solar initiative in 9 of our buildings. We will monitor results and as provided under lock of regulation will increase our program through time. Also we are happy to announce that for the third year in a row, we were named sector leader from the global real estate sustainability benchmark or GRESB.

Before I finish, I would like to thank our investors who participated in the recent rights offering, which was executed during a period of quite a bit of financial uncertainty. As I mentioned, our responsibility lies with the best use of proceeds and our commitment to our stakeholders is to be prudent and patient in the use of capital. We have today a company with proven strategy, strong balance sheet and experienced integrated management team that has gone through many economic cycles. It is in this type of environment when we can take advantage of our leadership and portfolio to continue adding value to our investors.

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

[Operator]

[Operator Instructions]. Our first question today is from Nick Lippmann with Morgan Stanley. Nick Lippmann, please go ahead Your line is open. Okay. We'll move on to the next question, which is from Gordon Lee with BTG.

[Gordon Lee, analyst]

Two quick questions. The first is, Jorge, I was wondering if you could remind us or give us an update of the time line that you expect for the deployment of the capital and for the acquisitions that are already under negotiation to be completed just given that obviously, the environment is in a little bit of a state of flux. And the second question is, I noticed that Prologis' pipeline in Mexico increased pretty significantly from quarter-to-quarter.

But at the same time, in their earnings release, they seemed a little bit more cautious about capital deployment overall. So I was wondering whether that caution at the Prologis level applies to Mexico as well, just in the context of what's happening with near-shoring, et cetera? Or that's more a comment for the U.S. and European operations.

[Hector Ibarzabal, executive]

This is Hector. Thank you, Gordon, for your question. Let me start with the first one regarding acquisitions time line. We all know that the environment has very complicated in the capital markets, and this situation might result in a little delay to the original schedule that we were anticipating to do this appreciation during the voting. We feel confident that we will move forward, and we are expecting to have some third-party acquisitions before year-end.

On the Prologis portfolio, our expectations since the road show was to make these contributions between the first and the second quarter, and I think that the timing on the delivery of the facilities is still there, but Prologis will act as a good fiduciary with FIBRA Prologis, understanding that we need to have a certain price visibility and to be certain on the price of the facilities before moving forward. So we're going to be prudent, but we will keep on moving on the deployment side of FIBRA, regarding Prologis development, the new, the new capital market conditions are making more difficult and more expensive projects to be delivered. I think that this applies in the U.S., and this applies in every country where Prologis has activities.

Having said this, what we do see is that the market is still very strong. So we anticipate that the share of Virtus projects will increase and the Virtus projects will be sensitive to the new market conditions. In this environment and until interest rates settle, it's going to be very difficult to start a speculative investment. But the Virtus activity is pretty strong, and we anticipate that probably 60% to 70% of the development activity will be related to this field.

[Operator]

Our next question is from Nick Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

I'm sorry, I just got dropped, so I might be -- and it came back as I might be repeating I apologize for that. First of all, congratulations on the strong quarter. A couple of sort of different questions. First, can you talk a little bit about to what degree you are working with developers in particular in the North or maybe around Mexico City to ensure that they are developing products that you could be interested in down the road and also maybe using option schemes as a right of first refusals, those kind of things. So that's question number one.

Number two, you mentioned that 2/3 of the new demand come from nearshoring. How do you define that? Is that the marginal demand for manufacturing vis-a-vis logistics or because the number seems very high for sort of new clients, and then finally, and I'm sorry about all these questions. As we approach a likely slowdown in 2023, how do you think this potential slowdown would be different from prior slowdowns or downturns in the market. Again congratulations on the numbers.

[Hector Ibarzabal, executive]

Thank you, Nikolaj. This is Hector. We do have a good relation with some local developers. They have some advantages because they have a low-cost structure that helps them to develop at lower prices than institutional developers. I think that we have already built in the past good relationships with some of them. We work with them. So we help them to improve the quality of their product and the quality of the leasing activities that they have.

We anticipate to keep on working with them. Particularly, we have done this in Guadalajara, Ciudad Juárez, Tijuana, we're working with some possibilities. So this is part of the tools that Prologis has to keep on growing with third parties, and we will keep on doing it. Regarding near shoring, and we have commented this in the past, it's a challenge really to make a clear distinction between what it's really a near-shoring activity and what is an expansion of something that has already been happening in Mexico.

What we have seen in previous, what we have seen lately is that an important part of our demand is coming from near-shoring probably 60% of our demand or manufacturing money is coming from here. We monitor and we see important activity coming from China, at least 50% of is Germany and Sweden are probably streaming countries in which we see Hitech high technology and furniture are the 2 sectors in which we see the highest penetration front.

The slowdown that is going to be happening. And the question is about the answer, is the residential happening in the U.S. or the U.S. is going to maintain steady during next year. I think that the answer is to be seen on 2023. But what we have seen in previous cycles is that when conditions get tight in the U.S. is when Mexico represents even a better activity, even a better opportunity. The labor cost in Mexico now is almost 50% of what is in China. The transportation cost on the supply chain represents between 55% to 60% of the cost, so I think that we still with the structural elements to keep on touching this demand. The challenge on the other side is the lack of infrastructure.

We require better infrastructure and we're working with the authorities in order to have the availability to be there. The infrastructure issues have a solution, but it takes more time to develop and to solve through these deals. So we need to keep on working internally with our customers without authorities in order to keep on having the ability to keep on growing this important nearshore phenomenon that for sure is a tailwind in our FIBRA.

[Jorge Girault, executive]

Nick, just one additional caller. So demand mainly doubled in '21 and '22 compared to 2020, and the most active and dynamic markets are the manufacturing markets, which are Tijuana, Ciudad Juárez, Reynosa and Monterrey. And if you look at the demand on those markets, it represents 2/3 of our total 6 markets. So that's how we qualify the additional demand in those motor markets.

[Operator]

Our next question is from Valentin Mendoza with Actinver.

[Valentín Mendoza Balderas, analyst]

I have a couple of them. The first one has to do with rent rollover that you just posted this sky rocketing figure and regulations on that. But I was wondering, how should we think about this evolving in the next year, especially considering how the market conditions are. And the second question is has to do with cap rate. Are you seeing some change in cap rates in the market amid the higher interest rate environment?

[Hector Ibarzabal, executive]

Valentin, thank you for your question. I think that we have a very good monitoring of the performance of our portfolio. And what we are expecting for next year is potentially even a higher rent growth in the rollover than what we're experiencing in 2022. There's several challenges to supply new space, and that's providing us the ability to keep on increasing rents. And as pushing rents up, we push the value of the properties up. So that's a key fundamental of our strategy and 2023 looks good on this side.

[Jorge Girault, executive]

So on your cap rate valuation question, so values came flat during the quarter. We saw cap rates expanding 20 basis points, which were offset by rental growth, but market fundamentals remain healthy, and we see potential for additional rental growth this year and 2023. I think there's going to be pressure on values as the increase in return requirements will be more than impact on market rental growth. Although it is difficult to predict given the limited transaction volume, it will take a few quarters for full price discovery. Talking about cap rates, I think our average cap rate is around 6.3%. Today, Mexico City is around 5.9% and Juárez is about 6.9%. We're expecting that cap rates may increase around 50 to 100 basis points by year-end next year.

[Operator]

The next question is from Jorel Guilloty with Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

I have to mostly focus on your leasing spreads. So we clearly saw in some spreads going stronger and hitting record levels. And what I was wondering is, you mentioned a few cities, both focused on manufacturing and logistics, and being the driver for these high weaken spreads. I was wondering if there's more of one versus the other. For example, is it more logistics driving these mid-20 leasing spreads? Or is it more manufacturing? And then the other question is, how long do you expect this to persist? I mean, you've mentioned some secular trends such as nearshoring as being a driver. We do know that there is a supply/demand mismatch, which favors your portfolio. But you know how much higher do you think this can go? And how long do you think it could persist? Those are my questions.

[Hector Ibarzabal, executive]

Thank you for your question, Jorel. I think that the city that has been more importantly, increasing rents without any doubt is Tijuana. And Tijuana has captured a lot of these near-shoring activity and the possibility to supply new space in Tijuana is very limited. If you compare the rents that you have in Tijuana, which today might be between $840 to $850 per square feet compared to the rent that you captured in L.A., for example, which is between $13 and $14 per square feet, the different us in months. So I do expect for manufacturing, keeping rents up, and this will be happening, particularly in Tijuana, in Ciudad Juárez and in the [indiscernible] municipality, which is an important submarket motive.

[Operator]

Our next question is from Pablo Monsivais with Barclays.

[Pablo Monsivais, analyst]

Just a quick one. In terms of your, I know you're not giving guidance yet for 2023. But in terms of M&A activity, how do you envision 2023 and 2024 in terms of developing more looking for external acquisitions or -- and getting prepared for that and seizing the opportunity of [indiscernible].

[Jorge Girault, executive]

Thank you, Pablo. And certainly, this rights offering position is best, I think, in the sector, lowering loan-to-value and increasing our capacity for $600 million. So I guess, you have seen how we increased our, the pipeline of the Prologis to 4.5 million square feet. We believe 80% of this will be stabilized during 2023. As Hector mentioned in his last question, we will wait a few quarters for price discovery so that those contributions could happen as soon as that. So that could give you a little bit of guidance on that front. And I guess on third-party acquisitions for '23 and '24, I think environment will present opportunities very difficult to guide today. But as we move through, I think in January, we'll be better positioned to give you a number for those 2 years.

[Operator]

The next question is from Andre Mazini with Citigroup.

[André Mazini, analyst]

So my first question is on the solar pilot program you guys mentioned that was implemented in 9 buildings. I remember that the FIBRA structure makes it a little bit hard for it to invest directly in solar panels, right, because it's not seen as real estate. So maybe you guys have to be a little bit more creative. So how is the structure really designed, are you guys renting out the rooftop to someone else who's doing the CapEx? How is the monetization of that? Does the tenant amortize over 60-something month period, which is the average contract? And then the second question would be just coming back to the theme of cap rates. If I got it correctly, you guys think the cap rates for the acquisitions going forward will be between 6.3% and 6.9%. I think Luis mentioned some cap rates, but I didn't get exactly what those words, that will be an interesting range or the range that the market is right now for acquisitions?

[Jorge Girault, executive]

Okay. So starting with the solar program. So we have been working now more than a year to have the right structure because you're correct. It is difficult for FIBRA to sell electricity that is not allowed by the code. So we have this 9 pilot program in which FIBRA is getting additional rent. But what's most important is that we have already studied a good structure, and we'll be probably rolling out a second phase, which will be around 60 roofs. The program will meet the local regulation by the use of the 0.5 megawatt per meter through a permitting or qualified user. And this, of course, will move towards our material goal by 2040. And of course, we will use a third-party partner to do this program.

In terms of cap rates, as I mentioned, today, the cap rate is 6.3% in average. And we believe given the financial conditions and the increased cost of capital, a potential increase in cap rates between 50 basis points and 100 basis points in which probably today, Mexico sits at 5.9% and Juárez around 6.9%. So that would be the range.

[Operator]

Our next question is from Alan Macias with Bank of America.

[Alan Macias, analyst]

Just 2 quick questions. The first one, in terms of the debt pay down, could you just confirm the amount and the timing? Have you paid down the debt yet? And the second question is, if you can provide the percentage of lease contracts that are capped.

[Hector Ibarzabal, executive]

[indiscernible] for your question. Regarding the debt paydown, we paid $230 million of our floating debt facilities. And 100% of that number was paid last this last Monday. So it were 3 different facilities. We paid them the last payment was on this last Monday.

In terms of percentage of leases that have a cap, I think you're referring to a cap on the annual increase. The answer to your question is that we have 66% of our leases that have aromatic 3% annual increase, and the rest have CPI, either U.S. or Mexico. And the ones that have a fixed CPI increase as they are renewed, the tenant has given the option of going to U.S. CPI or have around a 4.8% fixed increase depending on their needs. Most of them have taken US CPI.

[Operator]

The next question is from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Just discussed already a little bit of your advantages on how to tackle near-shoring compared to your peers. Can you elaborate a little bit more on how internally you are positioned yourselves with advantage of PLD to attract nearshore into Mexico and how that works internally because other countries will be benefiting from the same phenomenon either, say, Vietnam or Poland or the like. But the question here is, if you can walk us a little bit on how internal PLD make sure that those opportunities are tackled and communicated to you.

[Hector Ibarzabal, executive]

Francisco, this is Hector. Thank you for your question. I think that we're tackling near shoring by means of using the strengths that we have, we all know that FIBRA Prologis has a proprietary access to all the Prologis development in Mexico. Prologis is the largest industrial real estate company in the planet has a very strong balance sheet. And the strategy that Prologis has been facing is in every market and in all of the markets in which we operate, we try to have the best part. The best part represents to provide additional amenities to customers, the best customers without any doubt, will be selecting to be on our part.

We have amenities. We have part life conditions in our new developments. And whenever we were a customer of a [indiscernible] into our parts, we feel the response that they really want to be here regardless that we will, that we will be presenting a higher face rent than competition. How Prologis takes advantage of our global network. We have a Chief Customer Officer, whose name is Scott Marshall. He's based in the States. And he leads a full team of professionals that is called Global led solutions, is through this team that we approach and we create networks between the customers to mention a figure, probably 20% of our customers, we are having 60% or 70% of our growth.

So we try to focus on recurring business because it takes time to develop a relation with the customer and it's more convenient and more efficient if that relation gets replicated. So we will keep on doing this going forward. We will be increasing our approach. We're a customer-centric company. This global led solutions team has been very careful on our leasing activities in Mexico in our build-to-suit program.

[Operator]

Our next question is from Juan Macedo with GBM.

[Juan Macedo;GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division;Intern Equity Research, analyst]

We understand that we renegotiated in Monterrey during the quarter were not significant. But we saw low average lease at in what we consider a hard shoring a hot market. Could you give us some more clue on these trends? Or why did it happen?

[Jorge Girault, executive]

Thank you, Juan. This is Jorge. I mean at the end of the day, if you see the table that we have in our supplemental when you see each of the markets, Monterrey had a small lease spread is just because of the nature of the previous lease. So it all depends on where the previous lease is because you're comparing previous net effective to new net effective. So probably the previous net effective leases that we have and were renewed or given to a new tenant, had a closer to a higher rent and then the lease spread is smaller. So it all depends on the leases a case-by-case basis. In overall, 25% increase, Monterrey, smaller, but that's the reason why it depends on who you have, what the conditions of the previous lease.

[Hector Ibarzabal, executive]

In the last 4 quarters, Monterrey has been the market that has presented a higher net absorption above 14 million square feet. We have been talking within the call about near shoring. Our opinion is that Monterrey is a market that has captured more of this activity. And it has to do with its proximity to the border with the way the Monterrey people approach business and is able to adapt to different nations. And at the end of the day, the Monterrey City is a very important city that provides besides manufacturing activity, it provides a real alternative for some plant managers to bring their kids to school and so on. So we keep on seeing Monterrey as a very important market. The largest piece of land that PLD Prologis has bought in Mexico has been last year in Monterrey. It's already presenting important traction, and we are very enthusiastic about the Monterrey part.

[Jorge Girault, executive]

And Juan, let me just give you clue about lease spreads, which were very high for the quarter, and they have been very high year-to-date. So you can expect even a higher number for next year with 98.5% occupancy and a market vacancy of 1.4%. I think you can expect the number to be higher in 2023.

[Operator]

The next question is from Alejandro Chavelas with Credit Suisse.

[Alejandro Chavelas, analyst]

Congratulations on the results. Also thanks for the very detailed discussion around brands. Going on that topic as well, talking about development costs, I know you guys track this very closely. Perhaps just to think about the market, let's say, Juárez where there is some land available. What has happened to development costs this year? Has it gone up? Has it gone down? Because I understand the steel costs have gone down significantly, but land prices have gone up. So on the balance, where does that take us in development cost per square feet relative to, let's say, end of 2021?

[Hector Ibarzabal, executive]

Thanks, Alejandro, for your question. Development costs for sure, are going up. Construction costs are going up. Infrastructure and services are going up, the best estimation that I have for 2022 is that this delta has been around 25% entire process is getting more complicated and more expensive. Financial costs are going up because of the increase of interest rate. Rents are going up. So everything is going up, and the only potential piece of the cost equation that could receive an adjustment is land. On a more mature market like the U.S., land prices have dropped between 20% to 25%.

In Mexico, the land holdings do not belong to institutional owners, so the recognition of a write-off on the land cost is very difficult to be acknowledged and to be presented in the market. This is why one of the reasons I was mentioning that most of the activity is going to be related to [indiscernible] projects where the users really need the space. Just remember that the rent cost is a small cost on the total structural cost of the most of our customers. So [indiscernible] projects, new customers are recognizing all these increases in cost. They have projects that could pay off for this increase. And this complicates a lot the speculative development because the new product, for sure, is going to be more expensive than the product that is already in the market. interesting times to come. The strategy will be key to take decisions, and I think that we do have the advantage of having visibility to what is happening in other latitudes because eventually, they will be replicated in Mexico, particularly what is happening in the U.S..

[Jorge Girault, executive]

Talking about replacement cost, Alejandro. They have increased as sector offset, and if you want to talk about ranges probably Juarez you mentioned it's about $88 per square foot. And probably your highest replacement cost is in the market of Tijuana around $120 per square foot.

[Operator]

Our next question is from Anton Mortenkotter with GBM.

[Ernst Anton Mortenkotter;GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division;Equity Research, analyst]

Just following up on Juan's question and what you Jorge mentioned about leasing spreads. I was just wondering, I understand that the base price will have a significant impact on what lease spread you report. So I was just trying to understand if this, how much of this 25% increment that you reported is related to rents catching up to market rents? And how much is on top of that?

[Hector Ibarzabal, executive]

Well, I think that most of the activity represents to the first category. We always our approach as a renewal contract is always to take rent to market. Sometimes, as Jorge was mentioning in our previous question, if the previous rent is relatively close or not that, or the ranges that we have the ability to present is smaller, when we have a contract that was dated 6, 7 years ago, we have a higher possibility of represented a higher debt in this regard. Our policy is to treat our customers early. We always take rents to market. And the number that you see is just previous rents catching up to new market conditions.

[Operator]

[Operator Instructions] I will turn it over to Mr. Gutierrez for any closing remarks.

[Luis Gutierrez, executive]

Thank you very much, everyone, for attending this call. I would like to end just by saying that 2022 will be another record year, and with this right offering, we're very well positioned to navigate through this economic environment and that we will be disciplined and opportunistic. In addition, I want to take the opportunity to invite you to the upcoming Prologis Groundbreakers Conference, which is going to be held on October 25, and it is happening at the shed in the Hudson Yards in New York as well as a broadcast virtually. I really encourage you to listen to it. So please contact our IR team for further information. With that, thank you very much, and we'll see you on the next one.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.