Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Analysis

Strong Q3 Results with Growth Continuity

The company's Q3 results exceeded expectations, boasting the highest recorded rent change on rollover at 46.5%, reflected in a significant same-store cash NOI rise. With an occupancy rate above 98% for five consecutive quarters, the company announced the acquisition of 1.1 million square feet and preparation for further purchases. The portfolio valuation increased by almost 9% due to market rental growth, which is expected to stay in double digits in 2024. Forecasting a rise in vacancy from 1% in 2022 to 1.5% in 2023, the company is nonetheless on an upward earnings trajectory, especially with logistic demand remaining robust. Guidance for bottom-line growth has been raised from $250 million to $350 million.

Guidance Update and Acquisition Progress

The company has raised its lower guidance range from $250 million to $350 million. They've been proactive in acquisitions, with $180 million already procured to date.

Leasing Spreads and Market Rent Projections

Leasing spreads have soared to a record 47% at the NEI (Net Effective Income) level. Looking ahead, market rents are expected to rise between 15% to 20% next year, suggesting continued strong performance in leasing spreads.

Operational Efficiencies Amidst Rising Costs

The company's NOI (Net Operating Income) margin is slightly higher than 85%, indicating it is operating efficiently. However, this efficiency is slightly down from the last 12-month average of 86% due to rising costs in security and insurance.

Development Pipeline and Energy Availability

Development activity will remain agile, potentially reaching between 3 million and 4 million square feet, largely influenced by the availability of energy, particularly in border towns like Madera, Reynosa, and Tijuana.

Financial Strength and Liquidity

The company has a robust cash position of $470 million and anticipates a credit line of $400 million for 2024, offering multiple leverage options to support growth and investments.

Innovative Energy Solutions

They've begun a solar panel installation project on 120 roofs through a joint venture, enhancing clean energy solutions for clients, which, while not significantly increasing rent, will add to client retention and satisfaction.

Policies, Permits, and Fiscal Incentives

There's an optimistic outlook for improved infrastructure support due to policy changes from new administrative candidates. Recent tax incentives also align with the company's efforts in solar energy projects.

Long-Term Supply and Infrastructure Challenges

Supply constraints due to infrastructure limitations, such as energy, are driving market dynamics. It will likely take 2 to 3 years to build necessary infrastructure, impacting margins in the meantime.

Addressing Energy Deficiencies

A vacancy rate of 2.6% is acknowledged, with some properties lacking sufficient energy for tenant needs. While new infrastructure is emerging, the company emphasizes there's no quick fix to this complex issue and proactive measures are needed to manage the impact on costs.

Leadership Transition

There will be a leadership transition, with Hector Ibarzábal becoming the new CEO at the end of the year, replacing the current leader who will remain actively involved as Chairman of the Tailing Committee and a senior adviser. The current CEO expressed optimism about the market conditions and confidence in the company's future under new leadership.

Earnings Call Transcript 2023-Q3

[Operator]

For standing by, and welcome to the FIBRA Prologis Third Quarter Earnings Conference Call. [Operator Instructions] And finally, I'd like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Alexandra Violante Head of IR, to begin the call. Alexandra, over to you.

[Alexandra Violante, executive]

Thank you, Mandeep, and good morning, everyone. Welcome to our third 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 actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by the forward-looking statements. Additionally, during this call, we may refer to certain 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 preferred 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 Jorge Girault, our Senior Vice President of Finance, who will review results and guidance. Also joining us today is Hector Ibarzábal, our Managing Director; Federico Cantu, our Head of Operations; and Alejandro Chavelas, our Head of Valuations and Research. With that, it is my pleasure to hand the call over to Luis.

[Luis Gutierrez, executive]

Thank you, Ale, and good morning, everyone. The market continues to accelerate and real estate KPIs are set to have another record in absorption, rental prices and higher valuations. Our third quarter financial and operating results once again came above expectations. Let me give you some highlights. We had a record rent change on rollover of 46.5%. That is reflected in the same-store cash NOI. As a result, we recorded the highest FFO and AFFO growth, setting the company in an upward earnings trajectory offsetting the dilution created after the follow-on. The portfolio continues to be very resilient and occupancy is closing above 98%. These levels have been for the last 5 quarters. On the external front, this week, we announced the acquisitions of 1.1 million square feet, and we are prepared to shortly acquire more properties from our sponsor and third parties. In addition, Prologis has launched the construction of solar panels in 20 buildings. This represents more than 50% of the goal, and it's a great step to meet our net 0 goals. With that in mind, the actual environment is good news to our business regarding the logistic demand of space, and we expect it to remain well into next year and beyond. Growth in our sector continues to be at high levels. Net absorption in our 6 markets was about 31 million square feet year-to-date, and this is 18% growth versus 2022, mainly driven by a strong pace of pre deliveries in the manufacturing markets, coupled with new leasing from the logistics and e-commerce sector. Vacancy is 1.3%, in line with previous quarter. We forecast vacancy to rise from 1% in 2022 to 1.5% by 2023. We do not foresee our supply in any of our 6 markets in the near future. Market rental growth is expected to reach around 16% for the year. We're estimating double-digit rental growth for 2024. This is explained by the tightness in the market and also the replacement costs have risen more than 10% in the past 6 months due to the strong peso and rising land values, which pressure rents upwards.The mix [Indiscernible] we're seeing on the graph. Digital price represent 46% of total space under construction. This does not take into account prelease spaces, which we think is also substantial. Energy availability remains limited. We have recently seen this issue affect Monterey very clearly. In addition to the broader markets where this problem has been prevalent for some time. The energy availability issue has led some competitors to develop or construct space without energy near the border. For instance, our estimates indicate that 40% of the vacant space in Juarez is under this situation. On the manufacturing side, Monterrey continues to be the darling of nearshoring, but we also seen impressive activity in Juarez and in Reynosa. The main sectors that stand out are 3PLs supporting the supply chains of manufacturing companies, electric vehicles and auto sectors as well as electronic related to the semiconductor industry. Furniture and air conditioning where Mexico appears to be building a strong foundation for the long term. Recent outreach from manufacturers to our sponsor reflects an elevated appetite for build-to-suits with sufficient energy to meet their needs. The renovations are resulting in rising rents and higher terms. On the logistics side, consumption expectations continue to increase, with consensus now expecting 3.8% real growth for the year. We're seeing this estimate reflected by a very active leasing pipeline, especially with e-commerce tenants, particularly returning to the market.Mexico City continues to show extremely attractive supply-demand dynamics and vacancy is below 1%. Given the tightness of the market and interest in the footprint expansion, clients are being more aggressive in bidding for the limited available spaces. Regarding the value of portfolio, our externally appraised value increased almost 9% in the quarter, mostly explained by market rental growth. We think our valuations will remain on a positive trajectory given the strong fundamentals. In summary, Mexico is a leading performer across global logistics markets. Nearshoring and supply chain reconfigurations are long-term structural changes in which companies are making strategic decisions to relocate their operations, and we expect this demand to continue for the coming years. The most important margin increase will come by the adjustment of our in-place rent to market and the growth that it generates in the cash flow. We will keep on pushing rents. Our mark-to-market for the total portfolio is at 36%, and we're estimating a higher number for next year. On the capital front, we will continue to play offense. Our sponsor has a pipeline of projects for 2024, and it's also replenished its landbank in addition to some third-party acquisitions.Our balance sheet is an important competitive advantage, and we will remain disciplined.  Fibra Prologis  continues to outperform. This is mainly given its focused strategy to be the leader in the most active take... With that, I will pass the call over to Jorge.

[Jorge Girault, executive]

Good morning to everyone. I want to start by thanking Luis, as you know, he retires at the end of this year for our 30 years working together. From retail, office, housing and industrial development, my professional career has been an amazing ride. It has been an honor and a true privilege to have had a mentor such as you. Thank you for your trust and support all this year. [Indiscernible] With this, let me now go through the results of the quarter. FFO was $56 million or $0.049 per certificate. This is an increase of 3.9% and 4%, respectively, versus last year. AES had total reached $48 million, a 48% increase versus last year and above our expectations. These results were driven by recurrent increases on rollover, acquisitions and a stronger peso compared to last year. Moving to our operating metrics. Leasing activity was 1.9 million square feet with a period end and average occupancy above 98% in 9 with previous quarters. Net effective rent change on rollover reached a record high in the quarter and 12 months of 46.5% and 35.7%, respectively. As we mentioned, our portfolio lease mark-to-market is 36%. What this means is that we could generate approximately 45% of additional FFO per certificate of earnings as leases roll over time. In terms of same-store cash and GAAP NOI, we had an increase of 9.5% and 9.6%, respectively.Moving to our balance sheet. We have kept a strong peso and flexible balance sheet with attritable loss rating, the highest in the sector and above mentions with stable outlook recently relative by Standard & Poor's. In today's rate environment, we have the commitment to be vigilant of its performance and structure. Now let me go through the metrics. Our average debt maturity is 6.3 years and no expirations until 2026. 100% of our debt is fixed at a weighted average cost of 4%. More than 80% of our debt is unsecured and more than 60% has a green stand. Loan-to-value is below 10%. Our fixed rate coverage rate is sometimes and debt to adjusted EBITDA is 1.6%. We have a committed and unsecured line of credit for $400 million. Let me move to guidance on capital deployment activity. Acquisitions have taken longer than we expected. That said, we are confident of our team's execution from here to the end of the year. Therefore, we are increasing our bottom range of the guidance from $250 million to $350 million. And as of today, FIBRA has acquired a total of $180 million. We're keeping the rest of our guidance on change, which you continue on pace of the supplemental financial information.Let me now mention a couple of news on the EAT front. First, we're proud to announce that for third year in a row, FIBRAPL has been named industrial sector leader by [Indiscernible]. Also our response for Prologis announced the start of a solar program with one of our clients, Viva Logistics in the Mexico TV market. The plan is to reach 120 buildings by the end of 2025. I would like to finish by thanking our investors for delivering their trust in us and to our teams on the ground for amazing results. With that, I will turn it to the operator for Q&A. Thank you.

[Operator]

Operator Instructions] We'll pause for just a moment to compile any questions [Operator Instructions] our first question comes from Juan Ponce from Bradesco BBI.

[Juan Ponce, analyst]

My question is on the acquisition pipeline. Can you comment just a little bit on what you're expecting exactly from here to, let's say, the first half of next year? And if you can comment on what has taken so long regarding the third-party acquisitions? That will be my question.

[Luis Gutierrez, executive]

Thank you, Juan, for your question. And so as you have seen, we have just recently acquired 1.1 million square feet, mainly from properties coming from Prologis. So if you add what we have acquired year-to-date, it's around $180 million. So we're planning to continue acquiring properties before year-end in the fourth quarter, and most of them will be coming from Prologis pipeline and some from third parties. And you can expect around 20% of that pipeline from third parties and 18% from Prologis. So we are confident that we will meet our guidance. As we said in previous calls, we have around 3.5 million feet for the year from the Voice pipeline that will be coming in. Most of these properties will come from the border markets and moderate. So as for next year, the pipeline is active, but certainly on certain third parties as the third-party acquisitions, sometimes you win and sometimes you do.

[Operator]

Our next question comes from the line of Jorel Guilloty from Goldman Sachs.

[Wilfredo Jorel Guilloty, analyst]

 I just wanted to focus on leasing spreads. So as you acknowledged earlier, they were very high, reaching record levels, 47% at the NEI level. And I was just wondering how much more can this go? I mean if we look at the corporate presentation, obviously the most recent one, the delta between your in-place rents and market rents. I suggested there's around where we are right now around 50%. And so I was just wondering is -- can we see this going higher? Are we at the limit? How should we be thinking about leasing spreads going forward? That's maybe my question...

[Unknown Executive]

Thank you for your question, Jorel. What we're seeing in the ground is that the demand coming from customers mainly from nearshoring as well as Luis mentioned in his opening remarks from e-commerce, the demand is probably at peak in the markets in which we participate. Supplies keep something very difficult, mainly because of entitlement infrastructure. So we do see market trends increasing next year, probably between 15% to 20%. That's the expectation that we have. So this at least to market spread that you mentioned waiting for growth. I think that the high barrier of entry of our strategy in the markets in which we participate allows Fibra Prologis to be in the best position to take advantage of the situation. One of the key things because we understand that there's a lot of value behind is the ability and the way we know how to please rents, and you should be expecting this to keep on happening important.

[Operator]

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

[Pablo Monsivais, analyst]

I just wanted to pick your brain on the competitive landscape that you how do you see the competitive landscape based on what FIBRA Won is doing in terms of doing a potential IPO on the industrial portfolio. Should we expect more aggressive competition, perhaps in the medium term? Or what's the readthrough for you guys?

[Luis Gutierrez, executive]

Thank you, Pablo, for your question. And certainly, industrial real estate seems to be the darling and everyone is piling into the sector. I guess on the development side, you have seen a lot of new players. A lot of them are local. And then I guess on the more stabilized projects, everybody wants to buy industrial properties. So yes, we have recently seen the -- what you are commenting the Fibra Uno potential internalization and the spinoff certainly will be vigilant to see what happens. Having said that, in order to grow, it takes some time to develop a focused strategy and a big portfolio. So I think our platform is well prepared for the future. And the cycle always turns, and that's where the opportunity comes. So I think we'll be there all the time in the good times and the bad times, but we feel very good about our prospects going forward.

[Unknown Executive]

As Luis mentioned, Pablo, competition is a peak. We have the retain so many competitors. But it is important to mention that probably 50% or more of the business that we do has to do with our current customer base. So it's not a good thing that some competitors underestimate these relationships that you have. It has a trust. It has service. It has reliability, delivering on time. And I think that, that's part of what Prologis [Indiscernible].

[Operator]

Our next question comes from the line of Francisco Chávez from BBVA.

[Francisco Chávez Martínez, analyst]

Congrats on the strong results. My question is regarding the NOI margin. We haven't seen this level since the last few quarters. Can you give us more color on what happened on the cost side? And when can we expect the margin to recover?

[Jorge Girault, executive]

Ola Paco, this is Jorge, and thank you for your question. Yes, our margin to NOI for this quarter is just above 85%. If you look at the last 12 months, we're in the 86%, which is what we have guided around 86%. The reason for this quarter has to do with... Sorry, did you hear me? The phone was mute and I didn't notice. But -- the margin went down because of increasing the cost of security and insurance in particular. This is across the board. There was an increase in these 2 areas. And obviously, it has had an effect in our NOI margin. That said, on an annual basis, you're going to see 6% on average. And that has been our average in the past year. So those 2 were the ones that affected mostly the margin.

[Operator]

Our next question comes from the line of David Soto from Scotiabank.

[David Eduardo Soto, analyst]

Just 2 quick questions regarding -- the first one is regarding about the strategy that you follow for securing energy under building. And if you could share some thoughts about the strategy about your competitors are following for this matter. And the second question is, could you please provide some guidance about how are you going to fund your acquisitions? Should we expect third-party acquisitions until 2024?

[Luis Gutierrez, executive]

Yes. So let me address the first question, and I'll let Jorge address the second question. So I guess on the energy question, certainly, the difference is that the sponsor will never develop a project that does not have energy -- and the land that we buy always will have energy when we go vertical. So in that sense, the land that you see in the supplemental, all of it has energy or we're in the process of acquiring that energy. And so our pace may be higher or be lower depending on the availability of energy in each time. So today, we are going to be very active developing in the border towns in which we have energy like Madera, Reynosa and most recently, Tijuana. So I think the pipeline for next year from -- coming from the sponsor will be, I think, between 3 million and 4 million square feet. As to the competition, I think you need to ask them what is their strategy. Let me now pass the word over to Jorge.

[Jorge Girault, executive]

Thank you, David. This is Jorge. Regarding the funding going forward, obviously, for this year, we have $470 million in cash, given the pull-on and some sales that we did for these positions. So that's cover. For 2024, we have a line of credit for $400 million. There could be some other dispositions next year, which could help on the cash part and funding side. And who knows, let's see how the markets behave and we might take the market. But I mean, we have different leverage lever to pull, and we'll evaluate the market perform next year and mid... Thankyou

[Luis Gutierrez, executive]

Let me just add some additional thoughts on the energy side, which relate to our net 0 goals. So I think also one of the things where the FIBRA has been a leader is by trying to offer this clean energy for our clients. And certainly, the program is just beginning after a couple of years of finding the right structure. And we have just begun 120 roofs, which will cover a good percentage of the needs of our clients. This is, of course, doing a joint venture with a qualified supplier. And at this moment, it's a unique structure, and that will also complement on energy efforts.

[Operator]

Our next question comes from the line of André Mazini from Citigroup.

[André Mazini, analyst]

Just a follow-up on the Energy Solutions. You guys been providing, particularly the solar project. So the sponsor is the one that makes the investment on the solar panel and then sell the energy to be set tenants, like in the scale of stable logistics, right, that you guys mentioned. So the panel being installed on the roof of a FIBRA Prologis property, there will be any payments from this for Mexico at the moment, you guys think Thank you.

[Jorge Girault, executive]

This is jorge and regarding your question on the Prologis Energy Solution or solar solution and the relationship with Fibra, the answer is yes, the Prologis will put -- we'll do the investments and put the solar panels on our roofs. FIBRA will collect roof rent. It's not going to be a significant amount. We want to move the new or we will receive rent. And our clients will receive clean and sustainable energy as well as it's going to be a stickiness or will deliver [Indiscernible]. So we will receive roof rent for FIBRA we want put the investment into the solar panel. With that, I'll put to Luis.

[Luis Gutierrez, executive]

Yes, Andre'z.So thank you for your question. So certainly, yes, energy is a bottleneck. And I think we now have 2 candidates. And I think both are very open minded to provide the infrastructure that is needed. So we're always optimistic, and I think that there will be a policy change as soon as the new administration comes regardless of who the candidate is. And we have to say that we have recently seen a change in attitude in the administration. Doing this solar project that we just mentioned, we have seen more readiness to give us, I guess, some of the permits that we need to get a qualified user status, and that is somehow a good news. I guess, in addition of this change in attitude, we just saw this tax incentives that were announced recently, which for me, it was a big surprise. I think now the administration understands that near shoring and this manufacturing trend is very active and good for the country and now is beginning to incentivize it. So I think there's a change in attitude even in this last year of the administration.Â

[Operator]

Our next question comes from the line of Aldo Hernandez from SanTander Asset Management.

[Aldo Hernandez, analyst]

Hi, again, with your strong results. And my question is related again to listen it I don't know if you can give us some here about why maybe other regions were kind of behind that against the other regions like Reynosa. I mean I see that Reynosa is good in terms of business but like 25% and the other regions like more or less. So what was the issue in that region?

[Unknown Executive]

Thank you for your question, Aldo. I think there's no issue Reynosa. Reynosa is a market with high barriers of entry because it's a particular market. I would say probably out of these markets in which FIBRA Prologis participates as probably the one in which we have less competitors. It's a market in which you really need to play local in order to do development regarding entitlement construction, it's difficult infrastructure. So I would say that there's not any specific issue in Reynosa. The only comment that I would make about Reynosa is that Reynosa is very linked to what happens in Texas. It's -- there is a close correlation of the activity between Reynosa and Texas. And as we all know, in the U.S., the trend is not as good as is in Mexico. So probably a little influence on that regard, but it's a market that we like and that we will keep on investing.

[Jorge Girault, executive]

Although I just would like to comment that lithium press are dependent on vintage, meaning what leases are coming due and are being renovated at each time in Campari. So a market like Reynosa can show a small increase and another market can show a very large increase. In the next quarter, you can see the opposite. It only depends on what type of leases per market are coming to enrolling over the quarter and the new market conditions. So it don't focus necessarily on the market because it depends on what you have, it can vary quarter...

[Operator]

Our next question comes from the line of Philip Barragan from BTG Pactual.

[Philip Barragan, analyst]

My question is on other general and admin income. This quarter, in the last quarter, we saw it significantly higher. Just curious if that's something we'll continue to see for the following quarters and just know a little bit more on what's guiding that.

[Luis Gutierrez, executive]

Sure, Philippe. The answer to your question is the interest gain that we have on the cash from the follow-on. So you're seeing a six million-figure number because of that reason. And following your second quarter -- your second part of the question, for the next year, you won't see this income, and we will see a reduction in other income in the fourth quarter, given that we're going to use that cash for the acquisitions that we have in the pipeline. So that's the reason.

[Jorge Girault, executive]

But I think is going to be substituted by the revenue produced by the acquisitions that previously or different box their results.

[Operator]

Our next question comes from the line of Ernst Mortenkotter from GBM. Your line is open, sir please go ahead.

[Ernst Mortenkotter, analyst]

 Sorry, can you hear me there? Congrats on your say. I just have one quick question. I mean, I know we are still very far from this. But considering that you mentioned how significant is the amount of supply that has been restrained due to the lack of energy. What kind of impact do you think we can see in the market if this issue was certainly sold?

[Unknown Executive]

Thank you, Anton, for your question. I think that you are mentioning a key point. The barrier of supply in space is a very important factor that is driving the market nowadays. What's going to happen with this energy situation is behind. It's not only in energy, it's water could be gas, could be some infrastructure regarding highways. But definitely, these are here is left behind the demand will grow, and this will have an impact in margin. It is important to mention that once that the political will is moving into the right decisions to improve the energy supply, it's going to take at least 2 to 3 years for this infrastructure to be built. So it is an important milestone when this happened, but we don't see the situation improving this year, next year or a couple of years. It's going to take a little bit of time.

[Ernst Mortenkotter, analyst]

How much pressure do you think this could have in maybe rental prices or vacancies?

[Unknown Executive]

It's hard to say I think that current rents are not only driven by supply and demand as the construction costs are going up, particularly because of the FX that we have with the peso. So my opinion, and I don't have a crystal ball is that what is going to happen is that increase on rents is going to be flat or flatter once that this situation is left behind. But once again, it's going to take at least 2 to 3 years to get there.

[Operator]

Our next question comes from the line of Juan Macedo from GBM.

[Juan Macedo, analyst]

 My first question in regards to supply dynamics. You mentioned in the report that fiber supply in Paris mainly changed their currency estimates for that market. So I was wondering if you could give us some color on how our supply dynamics in the other markets. And after that, just another quick question. If you could give us some color on the leaf activity. We saw a particularly large rent increment in [Indiscernible] due to a particular event or mostly market trend catch-up.

[Unknown Executive]

In Guadalajara, the star that you are seeing is not -- is related to what Jorge was explaining in the previous question of this linked to a particular vintage of the rollover that we have with the particular -- with the particular tenant. It's not that oil softening in Guadalajara. Regarding supply and demand, let me show a little bit the figures that we have. In Guadalajara, for example, net absorption is 2.5, and new constructions are 2.3 million square feet. In quoting numbers are 4.2% of net absorption compared to 3.5% of construction starts and to not all of these are at -- in ex proceeding, you have $10.5 million of net absorption compared to 8.1% of construction starts. Monterey, 11.6 versus 10.2%. Reynosa is almost even 0.9 versus 0.7%. And [indiscernible]you have EUR 4 million of absorption and EUR 3 million of construction starts. So as you can see, the strategy that Fibra Prologis has of focusing barriers in markets with high barrier of entries of entrants is in good results to us in any of the cases on the spike of all the interest and all the monetization opportunities. We don't see an oversupply or a constraint between the demand -- the supply and demand region. So we're confident you need to anticipate development cycles are taking 2 to 3 years. So it's not an easy moment for supply to take over demand.

[Operator]

[Operator Instructions] we have a question from Philip Barragan from BTG Pactual.

[Philip Barragan, analyst]

Guys, another quick question on my end. You guys touched on the letter at sort of the other report that why is it a vacancy of 2.6% because of energy that wasn't fulfilling the tenant needs. I'm curious on the strategy here. Is this something you can change on in terms of the energy that the property has? Where are you guys waiting for the right tenant so that it can be with where you guys have installed? What's your take on that?

[Unknown Executive]

If I understood your question properly, I would mention that nowadays, there's a new category in the market. And this new category is linked to properties that are in construction or that have finalized construction and they don't have electricity. When I comment this concept with my colleagues in the U.S. is a little bit hard for them to understand. Luis mentioned in his opening remarks, we wouldn't go vertical in the project. If we don't have the electricity guarantee. The issue that happens on the field is that electricity will not appear like a magic situation. I mean infrastructure needs to be done. And there are some markets like Sugar quaries and Madare where it seems that the new infrastructure is getting there. The issue is more about distribution and generation. So it's a very complex concept. And what we are doing and Fibra Prologis is part of deep, we are trying to approach posits. This is a penalty situation because of the commission Federal elites that. And we have been spoken in several of these questions of this conference about this. An important issue. You need to anticipate you need to invest more money with patents and replacement costs are going up because of this. And there is not a short-term solution for this. So we need to keep on working with this and competition needs to learn that it's not a good idea to start development if you don't have the energy solution.

[Philip Barragan, analyst]

Great. My question is more on like you guys have -- here in the letter, it says that 2.6% is vacant. So I'm guessing that's already built like energy is already there. And it doesn't have sufficient energy for tenant needs. So I'm just curious on if I got to strike the energy is already there. It's ready to go for tenants to come in. I'm guessing it's...

[Unknown Executive]

Yes. I mean... The... The number that you are mentioning is a frictional situation... I mean... These kind of things happen. Most of the customers at our building is because they are consolidating or they are requiring more space that we don't have the ability to provide. I would say that that's the #1 issue for customers to live our portfolio. But it's not a trend that is happening in the market.

[Operator]

I would now like to turn the call over to Luis Gutierrez for closing remarks.

[Luis Gutierrez, executive]

As you know, I mean, concords to what has been announced, I will be leading all executive activities as of December 31, and Hector Ibarzábal will become the new CEO. I will remain as Chairman of the Tailing Committee and a senior adviser. So this is my last earnings call after leading 36 calls after the IPO in June of 2014. First, I want to express my deepest gratitude to all sell-side analysts that have accompanied us all this way. I hear through our number of meetings, we are shaping up the sector to become more institutional and attract more capital. And we have done many good things together, and this is great for Mexico. Also to all our investors for the trust, we always are transparent and direct in our plants. I am to see a much larger set of investors that are bigger tickets and more diversified. We're making strides to improve our liquidity, and we have some pending homework to do on that front. Mexico is going through a great period, and I have never seen such good market conditions in my long professional career, and I'm very optimistic that this would last for years to come. FIBRA Prologis well positioned to thrive. I have a lot of thrust in the team, Hector, Jorge and Armando and the whole FIBRA team, that they will take this to the next level. I'm very appreciative since my relationship with them goes beyond the FIBRA IPO. Finally, I want to thank our sponsor Prologis as they have brought a lot of value to our shareholders. I'm very impressed on how this period has been. So my deepest credit to everyone, and I hope to see you again soon. Thank you very much, and I will end the call now.

[Operator]

I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call. You may now disconnect.