Prologis Property Mexico SA de CV

OTC:FBBPF

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the FIBRA Prologis Fourth Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Ms. Alexandra Violante, Head of Investor Relations.

Thank you. Please go ahead.

[Alexandra Violante;Head of Investor Relations, executive]

Thank you, Katrina, and good morning, everyone. Welcome to our fourth quarter 2021 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 speaks 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 had 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 Hector Ibarzabal, 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.

2021 marked the best year for FIBRA Prologis in our 8-year history. Our results surpassed our expectations in both our operating and capital deployment goals. And as a consequence, we achieved strong financial results.

Let me discuss some of the highlights for the year. Our FFO and AFFO continue to increase year-over-year. We achieved record same-store cash NOI. Occupancy was almost 98%, which is the highest we have reached after the IPO in June 2014. Our balance sheet is one of the strongest. We have the lowest cost of capital in the sector. Our team did a great job refinancing $370 million through a green bond and a partially green US private placement, and also negotiating a sustainable line of credit to provide flexibility for future acquisitions.

We acquired 2.8 million square feet during the year for more than $230 million, above our guidance. Most of these acquisitions came from third parties. These properties fit our investment strategy are being located in irreplaceable locations, built to the highest standards and leased to some of the best global customers.

Appraisals for the portfolio increased 14% during the year, mainly driven by cap rate compression and rental growth. In another topic, I am proud of our team's work in publishing our first ESG report. We continue to be part of the main sustainability indices, and we were named Industrial Sector Leader by the Global Real Estate Sustainability Benchmark. We are committed to continuously improve our metrics and standards.

Globally, logistic real estate has had an unprecedented year and Mexico is not the exception. E-commerce, nearshoring and most recently, global supply chain disruptions have been driving demand locally in logistics real estate. We expect this trend to continue in 2022, as they are more aligned than ever.

Exceeding our expectations, demand for the year almost doubled 2020 levels to more than 32 million square feet in our 6 markets, outpacing supply by more than 6 million square feet, resulting in vacancy declining from 3.7% to a record low to 1.6%. While supply closed during the year, it remained disciplined and constrained, limiting construction.

In Mexico City, land scarcity, increases in development cost and lengthening settlement process has limited completion. In our border markets, limited access to electricity have lowered new supply. Tijuana, Guadalajara, Juarez and Reynosa had vacancies below 1%. This low vacancy market rents rose approximately 10% during the year. This is the first time we have seen this growth above inflation. We expect this trend to continue. We expect demand to outpace supply during 2022. The most favorable markets for this growth will be Tijuana, Juarez and Guadalajara.

Let me spend a few moments on what we're seeing on the ground. On the logistics front, e-commerce changed consumer behavior and is leading the activity in the market. Sales continued to grow at a double-digit for the second year in a row. Penetration to total retail sales remained relatively low at 10%. It is forecasted that 60% of the next 3 years' retail sales growth will come from e-commerce.

There are expansion plans as leaders build their infrastructure and more request for less touch locations. As an example, our portfolio in Mexico City has reached a high occupancy of above 98%. This is due to the very active market. Expansion plans of our customers are requiring an additional space to accommodate their e-commerce divisions and any space that becomes available, we have several options to choose from.

On the manufacturing side, manufacturing is still a major driver of demand. Proximity to the United States and cost of labor has always been a competitive advantage. In addition to the nearshoring, this has been further fueled by the recent supply chain disruption, which has led to labor shortages in the US. Evidence of that is a surge in demand, especially in the second half of the year. Demand is broad-based from global companies in sectors such as electronics, auto, appliances, medical devices, among others. Our sponsor is working on more businesses requests than ever. These projects, if they get awarded, will be offered to the FIBRA on an exclusive basis once they are stabilized.

Before concluding, let me discuss our 2022 outlook. We're optimistic as we start the year. We're expecting our growth drivers to remain, which should be a catalyst to an already strong year. Logistics real estate continues to be the favored asset class among investors. We saw meaningful cap rate compression and there could be further room this year.

Operations, our focus remains on pushing rents and maximizing lease terms. This is a good opportunity to grow our cash flow, as we have [16%] growth of our portfolio during the year. On the development front, we expect to be active and opportunistic. In addition to the Prologis pipeline, we will keep on exploring third-party assets that align with our investment strategy.

We view our balance sheet as a major competitive advantage. We'll maintain our financial discipline. Putting everything together, we're excited about 2022. Our hard work will carry forward into the New Year, and we are increasing our dividend while distributing our success with our investors.

In summary, our goal is and always has been to put the interests of our certificate holders first. We remain committed to delivering sustainable growth in an accretive manner. Our strategy is resilient and built to outperform in any market.

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

[Jorge Girault, executive]

Thank you, Luis. Good morning, and thank you for joining us.

Before I begin, I wish everyone a great 2022. As Luis mentioned, we had an outstanding year. Operating results driven by higher rents and increased occupancy, where in most cases, above our expectations. These together with the efficiency of our balance sheet supported our strong earnings. We believe 2022 is going to be a year where FIBRA Prologis will harness last year's accomplishments on both the operating and financial performance.

Having said this, let me start by sharing our financial results. FFO for the quarter was $36 million or $0.042 per certificate, which represents an 11.8% increase when compared to same period last year. On annual basis, FFO was $145 million or 8% growth year-over-year. AFFO was almost $28 million for the quarter, or 16.3% increase when compared to last year. On annual basis, AFFO was $115 million or 16.5% year-over-year.

Moving to operating metrics. Leasing activity was 1.4 million square feet, with [ period end ] occupancy 90 basis points higher than previous quarter, 97.9%, above our expectations. On a year-over-year basis, period-end occupancy increased 80 basis points.

Net effective rent change on rollover was 15.2% during the quarter and 8.8% for the last 12 months. This reinforces our confidence in completion rents. This organic growth has resulted in higher cash flow and valuation. We see additional value coming from the spread between average market rents and in-place rents. This spread is today close to a positive 9% and 16% of the portfolio rolled off during the year. These low annual contractual bumps will lap around 4.5% in total annual NOI. These adjusted by FX and other operational factors will result in approximately 4% increase in 2022 on a same-store basis. Same-store cash NOI was 6.8% for the quarter and 10% for the year. Higher rents, lower lease concessions and stable FX contributed to this increase.

Moving to our balance sheet. We started to implement the refinancing strategy from the end of 2019 to mid-2021, with a total of $745 million. We took advantage of low interest rate environment, leasing 100% of our long-term debt at attractive levels, with more than 60% under our green bonds. In addition, we launched a sustainable land credit at lower cost and larger capacity than the previous one.

Our [indiscernible] leverage is at 29.4%, with an weighted average cost of 3.8%. Furthermore, we have smooth out the debt expiration path by having annual expiration callouts at prudent levels given the size of the portfolio, which improves the risk profile of our balance sheet by increasing our debt maturities to 8.5 years.

One tangible result can be seen in our 2021 interest expense rate, which was $4 million debt in 2020. Even though we had increased our total debt to [indiscernible]. We could not have achieved this without the support and commitment of my team and guidance [from them].

Now let me summarize with our ESG accomplishment. Regarding the portfolio, we achieved green certifications, either LEED or BOMA from an additional 7 million square feet, which brings out to a total of 21 million square feet of certified building or 48% of the portfolio, moving closer to our target of 50% in 2022.

On the financial front, as mentioned before, we now have multiple debts under our green or sustainable [bond]. And we take a holistic approach to our ESG efforts, support our local communities to different social problems. The intent is to improve the quality of life of the people in our buildings and communities.

Turning to our 2022 guidance. A reminder, we use an FX rate of MXN21 for each dollar, which is a level we have hedged peso earnings by using put options to protect from the downside of participating the upside given the peso strength. Our 2022 guidance is, in terms of year-end occupancy, we expect the range to be 96% to 97%. Following our leasing and positive rent change in 2021, we expect same-store cash NOI growth range between 2.5% and 4% for 2022. Annual CapEx as a percentage of NOI to range between 13% and 14%. G&A to range between 30 and $35 million.

On the capital deployment front, we expect to acquire between $150 million to $250 million. Putting all these together, we're setting our full year FFO per certificate range between $0.1750 and $0.1850, which represent a 5.4% increase year-over-year at the mid-point versus 2021. Given our outstanding results, we are increasing our distribution by 11.6%. [indiscernible] $0.12 per certificate, which will be our second consecutive increase of 11% or more. The distribution is equivalent to a 5% dividend yield in dollar terms.

Before I finish, I would like to take the opportunity to talk about the quality of our earnings drivers and what set us apart from others. Since day one, our resilient business model is based on a well thought-out strategy, which has proven itself as evidenced by record low occupancies and unprecedented market rent levels. Strategy has even been mirrored by some of our peers. Based on these, we don't see any significant negative adjustments in the short or medium-term in market dynamics.

Structural changes to consumption as e-commerce manufacturing of goods closer to U.S. are here to stay. I believe the fact that our cost of capital is the lowest in the sector, our-world class sponsor and professional local integrated teams makes us confidence that the best years are yet to come.

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

[Operator]

[Operator Instructions] Our first question is from Gordon Lee with BTIG [sic] BTG.

[Gordon Lee, analyst]

And congratulations on an excellent year. One quick question and I guess it's a bit of a philosophical question, which is, do you think there is a risk maybe that you have a little bit of too much of a good thing in the sense that the inability of new supply to keep up with demand could eventually even last long enough, destroy demand, meaning that potential -- I don't know, companies that are thinking of moving manufacturing to Mexico or even companies looking to grow their e-commerce footprint might just become frustrated with inability to source adequate space and maybe sort of turn elsewhere? Do you think that's a risk? Or do you think that supply is beginning to adjust to the reality of demand?

[Jorge Girault, executive]

Thank you, Gordon, for your question. I think that there is a lot of thinking. 2021 was a fantastic year. The visibility that we have today is that this positive situation of a strong demand will remain in 2022, 2023 and 2024 at least. If you analyze the numbers, you will realize that the supply of the space on 2021 was more than 2 times what happened in 2020. So what is happening is that the demand for space is growing more rapidly than the ability to supply space. The ability to supply space even in 2021, which was a difficult year, was strong and much more stronger than what happened in 2019 and 2020.

Having said these, it's difficult to supply space as new investors are jumping into this arena. I think that they are learning that they need to anticipate all the needs. This means that you need to buy lands in advance. You need to work with your general contractors and your suppliers, because our supply chain as well gets hurt because of the current circumstance that the world is facing. And the interim process is just taking more time.

So, I don't think that the supply is going to be suddenly or dramatically stopped. I think that all the process to supply space is evolving, and we need to play with the new rules. What are we doing on our rent? PLD as our sponsor is buying larger pieces of land, is anticipating still and some other supplies that we need for the product and we need to enhance the conversations that we have with our customers to understand their future needs. So the environment is going to be complicated as well in this year. There was a 25% increase in contraction costs. We do see that the inflation will keep on happening in construction. So you need to plan accordingly. But we think that the dynamic and the strength of the markets are such that what is going to I think happen in 2022 is going to be very similar to what happened last year.

[Luis Gutierrez, executive]

So -- and I would just add that this is a global phenomenon. Vacancies are lower around the world at a record level. And I think this is attracting a lot of people to the logistic space. So I think the creativity will be there and some of us and our competitors will be adding more space as we speak. So I don't see demand being hampered by this space crunch.

[Operator]

The next question is from Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Yes. What a great year did you have. Congratulations. The question that I have is that it's impressive to see the huge increases in investments made by your parent company on land and the starts that these guys have announced. The question that I have is that it seems that, Jorge, you have stated before, having this contractual agreement with PLD is a competitive advantage. We see these huge investments now in land. Do you think that the land that in which PLD is investing would be able to fit your overall strategy to give more access for additional assets. Do you think that the land will be right in the sense of having the right connections to electricity so that won't be a bottleneck as Gordon was saying before?

[Luis Gutierrez, executive]

Thank you, Paco, and very good question. So let me just say that for the sponsor, this will be a record year of capital deployment, not only in Mexico but also around the world. It's amazing how everything is surpassing expectations. So I guess in 2021, we made $234 million, and this were mostly acquisitions coming from third parties, and we have prepared the company for growth. Our loan-to-value is very prudent at 30%, and we have a line of credit. So we're ready to play offense. In fact, this year, we have already acquired a property in Tijuana for around $40 million, which is comprising to our capital plan. Our guidance, as you saw, is $150 million to $250 million, and we believe some of this will be coming from third parties and some Last Touch locations as well as properties coming from our sponsor.

So just answering very concretely your question, the sponsor will put to work during 2022 around $6 million square feet of properties given what we see in terms of demand, and this is something between around 400 and $500 million. So this is a great competitive advantage. There's no other competitor that has this feature. And as a result, the team has been working in replenishing our land bank, and this has been something that has been going on in the last 18 months. We saw some of the first acquisitions in Monterrey, which have been announced. But you will see other lands come to play in Guadalajara, in Tijuana, in Mexico City, which will mainly align with our investment objectives. So for sure, you will see more capacity of land to increase the development pipeline of the sponsor.

[Francisco Suarez, analyst]

Very clear. And congrats, again.

[Operator]

The next question is from Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

Could you provide more detail on the third-party acquisitions in the fourth quarter? Was that a very competitive process? And if you can comment on how cap rates are trending in both the manufacturing and consumption markets with interest rates moving higher?

[Luis Gutierrez, executive]

Thank you very much, Sheila, for your question. And effectively, we are very pleased about this portfolio that we were able to get in Tijuana. Probably the natural question is you guys have not been active on third-party acquisitions and then you come with this big one. I think that this is very linked to the price visibility that we have. I think that we have a very clear understanding of what the trends of the market are. Tijuana nowadays is one of the markets in which we are playing aggressively offense as we do see that the demand of the space is going up and the ability to supply new spaces is very restricted. Electricity is complicated. It could take several years to get electricity in that market. And the way we analyze investments is the snapshot of the current picture, but we do analyze as well the potential upside that we could have by doing these investments.

Having said this, I think that cap rates in Tijuana last year probably decreased between 20 to 25 basis points. But I do see more importantly, the ability to increase rents in that market is what is going to be driving values up. We will continue to analyze these type of investments. I think that we're in a good position to take care of them. Our cost of capital is in good place. And on 2022, we should be expected more similar opportunities to be landed with we should be expected more similar opportunities to be landed with FIBRA Prologis.

[Jorge Girault, executive]

So Sheila, on your cap rate question, so cap rates decreased in the year to 6.7%, around 50 basis points. Our portfolio valuations increased 14% and we see cap rates in Mexico City and Tijuana around 6.5%. And there is probably a spread between 25 to 50 basis points in Monterrey and Guadalajara and a spread of 50 to 100 basis points in Juarez and Reynosa.

[Operator]

The next question is from Nikolaj Lippmann with Morgan Stanley.

[Nikolaj Lippmann, analyst]

And again, from me as well, congratulations on a strong year. I'm hearing you say similar trends in '22 and '23 to what we saw in '21 and ready to play offense. And then on the guidance, 2% to 4% growth. It seems that even inflation adjustments from '21 would take you there, your recent M&A activity would take you there. I'm almost thinking is this real growth or nominal. Can you comment a little bit on what would -- why such apparently conservative guidance? And are you afraid that you won't be able to get inflation adjustments into '22?

[Luis Gutierrez, executive]

Thank you, Nikolaj. So we had a strong cash flow generation. This is mainly reflected in our FFO and AFFO growth numbers. Of course, we're reaping the benefits of high rent change of 2021 and the previous acquisitions. So we increased our distribution 11% in 2021, and we'll raise it again another 11.6% in 2022. So I think this will provide a core yield of about 5%, which I think it's very attractive on a relative basis. And we will continue to share our cash flow growth with our investors. So our payout ratio is in the mid-80s, which does provide flexibility for growth and is also consistent with international practice. We believe this is solid as we're seeing some environment volatility, which could eventually affect the FX, and that is why we believe our guidance is very solid.

[Jorge Girault, executive]

And just as a follow-up on that, Nik, remember that our lease agreements have the dollar terms, most of them have fixed increases. So that's based on that of how we guide our same-store NOI. It's not related -- the peso leases are CPI or inflation related. The dollar leases have a fixed bump. So that's how we guide on a same-store basis.

[Operator]

The next question is from André Mazini with Citigroup.

[André Mazini, analyst]

Yes, sure. Luis, Jorge, Hector, a pleasure to talk to you guys. My question is on the nice occupancy numbers you guys showed. The greatest increase, of course, was in the manufacturing-driven markets, from 94-ish percent to 97-ish percent in the quarter. So which tenants are you seeing at the margin that are leasing up? Are these guys coming from nearshoring or increasing operations, which is I think typical tenant type that is increasing. And also on occupancies, you guys did announce an acquisition some 10 days ago, right, already in 2022. And including that acquisition if the occupancy would be a little bit lower, if I remember correctly, that portfolio wasn't 100% leased, particularly the Last Touch. Probably not material, but how would be the occupancy post all the acquisitions you guys disclosed even this one that was 10 days ago?

[Hector Ibarzabal, executive]

Thank you, André, for your question. Effectively, the dynamic that we're seeing in the manufacturing market is probably as good as we have never seen it. I think that we have different sources or drivers of this demand. One of them is the so-called nearshoring. I think that it does exist that we see new companies, particularly from Asia, looking for space in order to make more efficient their supply chain mechanism. We do see as well an increase in inventories. I think that the companies are understanding that it's much more convenient to have a more ample amount of inventory in order to have reliability on the supply chain. We are seeing as well an increase in activity because of the shortage of labor hand. We're starting to see e-commerce operations on our border. And I think that some of the companies that are in the U.S. are having issues with this labor hand are seeing Mexico as a safe harbor to take advantage of the situation.

So the companies are expanding, companies are increasing activities. And on the overall what we are seeing is that the size of requirements is higher than what used to be in the past. Companies are investing more money. Some automatization is being part of their CapEx, and they are shooting to have longer terms. Rents are going up in markets like Juarez that traditionally has been a modest market on rent increases. Now we're seeing land prices going up. When price is going up, the requirements are getting higher, and the terms are getting as well more longer.

[Jorge Girault, executive]

And André, regarding your question on the occupancy of the [indiscernible] portfolio that we -- the 3 properties that we acquired, if you take into consideration the average occupancy of those 3 assets, it's 80%. We have about 200,000 square feet vacant. So will that change the vacancy or the occupancy of 4.2 million square feet that are leased at 97%? The answer is no. It's marginal that space that's not occupied today.

[Operator]

The next question is from Vanessa Quiroga with Credit Suisse.

[Vanessa Quiroga, analyst]

Luis, Jorge, Hector, Happy New Year, and congrats on that 2021 results. My question is on the 2022 guidance. And on the low end of guidance, the FFO per share growth that you are guiding seems on the low side, considering that same-store cash NOI is basically growing at the same rate that you're guiding for FFO per share. So I wonder why the FFO per share growth on the low end of guidance is not reflecting the acquisitions that the company has done in the last few months and also basically the accretion that we should see on the bottom line from these acquisitions?

[Jorge Girault, executive]

First of all, let me say that this guidance we think it's a solid guidance. Every fourth quarter, we try to give a solid guidance. And if I recall correctly, every time we get some comments from the bankers' community saying that our guidance is conservative. But we think it's solid. It's everything done at the beginning of the year. There are things that could happen. We depend a little bit on FX, et cetera. That all said, our '22 guidance, the low point of the guidance is based on the high point of last year, $0.175 per certificate and then to $0.185. Last year, if you see -- I'm just trying to compare it -- last year on a nominal basis, our FFO increased 8%, but we had 6% more in average of certificates. So the total increase last year on a per certificate base was 2%. Today, if you compare that to the midpoint, it's a 5.4% increase. So we think that's a solid number. It does include acquisitions, does include our additional debt that [indiscernible] acquisitions, and some other factors that we are -- for the year. And on those terms, we think it's solid. I hear you on [indiscernible] or looking a little bit low on your side, but we think a very strong and solid guidance for the year.

[Operator]

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

[Alan Macias, analyst]

My question was answered. But just another question is just if you can provide a guidance on timing of acquisitions and the percentage of acquisitions that will be or you expect to be made with your sponsor?

[Luis Gutierrez, executive]

Thank you, Alan, for your question. And certainly, it is more clear that the timing of the Prologis pipeline acquisition is under third party. So very directly, I don't know which would be the percentage of third-party to Prologis because it depends a lot on market conditions and the ability of us negotiating and closing on time. I think third-party acquisitions will be probably towards the end of the year as it always happens. And on the Prologis pipeline, I think they're probably evened out throughout the year.

[Operator]

The next question is from Adrian Huerta with JPMorgan.

[Adrian Huerta, analyst]

Congrats as well on the very strong results. Jorge, you mentioned that the U.S. dollar leases have a fixed bump. Can you tell us what is that average bump that they have per year? And there was a comment on the press release that says that the average term for new leases was up to 45 months. Isn't that much lower than the average term that you have for the rest of your portfolio? And if that is the case, that it's coming much lower, why that is that you're granting leases with a much lower lease term?

[Luis Gutierrez, executive]

Thank you, Adrian. The average fixed bump for the U.S. dollar leases is 2.5%. For the peso leases, it's CPI, whatever the inflation is. And on the term, I think...

[Hector Ibarzabal, executive]

An additional comment on this is that we're currently increasing this 6-month number. It's on a case-by-case negotiation. We all know that inflation rate is near 7%. So either we're moving our current leasing activity with U.S. CPI for this period of time until inflation normalizes, or we're getting a higher number than 2.5%. On the terms, what we are seeing is we do see that market trends will keep on increasing just because the natural ratio between supply and demand. So what we are trying is not to have longer leases to be in the ability of increasing rents. You know that all our energies all the time are working on the ground trying to increase leases, and this is a great opportunity because of current market conditions to do so. So we're working on that with that strategy on the field.

[Operator]

The next question is from Valentin Mendoza with Actinver.

[Valentín Mendoza Balderas, analyst]

And again, congratulations on the great results. My question is regarding the land bank that came in with the Frontier portfolio that you just acquired, what are your starts on this considering that you just mentioned that you're playing offense and the demand for industrial space is outpacing supply.

[Hector Ibarzabal, executive]

Yes, Valentin. We are currently working in one expansion with one of the customers that was part of the portfolio. I think that we have a very high possibility of landing that expansion on the following quarter, and that could represent putting that piece of land to work. And there's another piece of land which was part of the portfolio that effectively we're planning on developing it. Tijuana is a market in which we have ample confidence that things will keep improving. So they were part of the price that was paid for the portfolio. [ This land ] belongs to FIBRA. For these specific pieces of land, development will be funded by FIBRA, even though it's going to be executed by our sponsor.

[Operator]

The next question is from Juan Macedo with GBM.

[Juan Pablo Macedo Carrillo, analyst]

My question is regarding positive leasing spread in the north. And we were wondering if you could give us some more color on how you expect to implement them in the future.

[Luis Gutierrez, executive]

Sorry, Juan, your first question was what's the leasing spread in the north. And your second question was...?

[Juan Pablo Macedo Carrillo, analyst]

No, it's one question. We see increasing leasing spread in the north. If you can give it to us, it would be great too. And how do you expect leasing spread to act during the year? Do you expect these great prices or no?

[Hector Ibarzabal, executive]

Let me try to provide market by market. They are very similar. But in Juarez, we have 7.1% in place to market. In Monterrey, we have 7.4%. In Reynosa, we have 7.5%. So that's the snapshot of the current market conditions. We do see rents increasing. So on the renewals, we could probably expect 200 to 300 basis points above the numbers that I mentioned. And the healthy ratio of vacancy that exist in these markets make us to be 100% confident that the rents are going up in the border markets.

[Operator]

[Operator Instructions] The next question we have is Naoki Otsuka with GBM.

[Naoki Otsuka, analyst]

I was wondering if you could give us some color on the hike in the property improvements during the quarter.

[Luis Gutierrez, executive]

Hike in property improvements.

[Hector Ibarzabal, executive]

What we regularly recommend is analyzing the CapEx investment in our portfolio is that the size of the portfolio is such that it's better to look at it on the 4-quarter trailing numbers because it does provide a better sensibility of what's happening. There's nothing going on in that regard. I think that we have the discipline. And this number that we have of investing between 13% to 14% of our NOI in the buildings is the number that you should use as calculating your model?

[Jorge Girault, executive]

It's hard to have every quarter the same number. It depends on the needs that you have every quarter. But on an annual basis, as Hector said, you have to take into consideration our guidance, which is anywhere between 13% and 14% for 2022 and last year was about 13%. So lower than that. So that's the number you should see and it's easier for you. Thanks.

[Operator]

The last question we have is Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

Just a follow-up question on potential changes to the fee structure that you guys have, any news that you may have for this year?

[Jorge Girault, executive]

Thank you, Francisco, for your question. This is Jorge. We are not looking at any change in the fee structure for now. Let me give you a couple of points on this because I've seen the reports and everything. If you add the asset management fee and the third-party fees that we pay to auditors, legal, tax, CMDB, et cetera, if you add all that, our average is 80, 84 basis points on AUM. The market average is almost 100 basis points, including, in some cases our peers have payroll. So if you include those 3 things, third-party, AUM fees, and payroll, in our case, we don't have payroll, the average of the sector is 100 basis points rounding numbers. We are at 84 basis points. And we don't have acquisition fees. We don't have other fees and [indiscernible] fees for G&A purchase. So just wanted to compare it to the market.

In terms of our guidance, we think we're going to be in the low end. If you take into consideration the $3.4 billion that we have currently, you take the midpoint of the acquisitions and you apply the 70 basis points and you add third-party fees, we paid $2.7 million last year. Add inflation, we're going to be around $3 million. You can see where our guidance is coming from.

[Hector Ibarzabal, executive]

In addition to this, Paco, I think that it's important, as a reminder, that we have full real estate teams in all and each one of the markets in which we participate. We're a customer-focused company. So we have been increasing our headcount with people taking care of our customer base. This is one of the strengths that we have being close to our customers, having permanent conversation, understanding the concerns, and the expansion plans that they have. So part of these fees are reinvested importantly on the ground, and they are the origin of us to be in the ability to keep on presenting this occupancy and these rent change rates that you're seeing.

[Jorge Girault, executive]

And please remember that Prologis has a sponsor who receives these fees, has 47% of FIBRA Prologis. So they have skin in the game. So they don't want to shoot themselves on the foot, you know what I mean.

[Francisco Suarez, analyst]

Sound answers. And we have another follow-up with Valentin Mendoza with Actinver.

[Valentín Mendoza Balderas, analyst]

Yes. My follow-up question is on your debt. I see that this $70 million credit with MetLife, I'm assuming it comes from one of your acquisitions and it has a higher interest rate. My question on this side is whether you're planning on doing something with this as it could be somewhat dilutive for your bottom line otherwise?

[Jorge Girault, executive]

Yes, good point. This is Jorge, Valentin. Thank you for your question. As we acquired this portfolio in December '15, we assumed $70 million of secured debt financing that is attached to the portfolio. Point number one, we did a mark-to-market on the debt in terms of the negotiation of the Price acquisition. So there was an adjustment because of that. Point number 2, yes, the weighted cost of that piece of debt is 5.18%, higher than our average which is in the 3.8% level. And the plan is, as soon as it comes to par in terms of prepayment, we will refinance that secured debt. By the way, that's not the only secured debt that we have. We have another one also with MetLife and Prudential, which are not open for prepayment. When the time comes, we will refinance with some of the vehicles that we have used in the past. So yes, our plan is to have a more efficient balance sheet when time comes and a more attractive cost. Thank you, Valentin.

[Operator]

And there are no further questions at this time. I will now turn it back to Mr. Luis Gutierrez, our CEO. Thank you.

[Luis Gutierrez, executive]

Thank you, everyone, for joining us and for your interest. So I just want to say to end this that this is probably the best year of my professional career. These are really unprecedented conditions. And also, I think this is a great opportunity and a big economic driver for Mexico to grow and to create quality jobs. And it's also very good to be part of it as we modernize our country. I think FIBRA will have a fantastic year, and I look forward to seeing you soon. Thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you again for joining and have a wonderful day. You may all disconnect.