This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Ladies and gentlemen, thank you for standing by, and welcome to the Fibre Prologis Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star, then 1 on your telephone keypad. Please limit your questions to one question, and if you do have a follow-up, please press star 1 to rejoin the queue. If you require any further assistance, you may press star zero and an operator will come back on to assist you. I would now like to hand the conference over to your speaker today. Mr. Acosta, Carmen Lois, please go ahead.
spk06: Thank you, Amy. Good morning, everyone. Thank you for joining us for our second quarter 2020 earnings conference call. Today, we will hear from Luis Gutierrez, our CEO, who will discuss our strategy and market conditions, and from Jorge Giraud, our Senior Vice President of Finance, who will review results and guidance. Also joining us today is Hector Ibarzabo, our Managing Director. Before we begin our prepared remarks, I would like to remind everyone that all of the information presented in this conference call is proprietary and all rights are reserved. The information has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call are subject to a number of risks and uncertainties. Our actual results, performance, prospects, or opportunities may differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are current as of the date of this call. We take no obligation to publicly update or revise any forward-looking statements after the completion of this call, whether as a result of new information, future events, or otherwise except as required by law. Additionally, during this call, we may refer to certain non-accounting financial measures. As is our practice, we had prepared supplementary materials that we may reference during the call as well. If you have not already done so, I would encourage you to visit our website at fibraprologist.com and download this material. With that, it is my pleasure to hand the call over to Luis.
spk15: Thank you, Costa, and good morning, everyone.
spk12: Before I begin, I want to say that our team here in Mexico all completed the work remotely. We remain committed to doing everything we can to help our employees, customers, and communities through this difficult time. I hope you and your loved ones are staying healthy and safe. Our second quarter operating and financial results exceeded our expectations, demonstrating our portfolio resiliency. I would like to take this opportunity to thank our operations team for their impressive work at keeping our portfolio sound while delivering terrific results. Let me highlight the operation results for the quarter. We lead a record 5.1 million square feet with an average term of 79 months. Our operations teams are actively contacting customers with expiring leases this year and next. We advance dialogue on renewals, providing rent concessions today in exchange for extending term and increasing rent over the life of the new lease. Effectively, this creates a win-win situation. Through the first half of the year, we have addressed 64% of the 2020 expirations. We collected 98% of rents due in the second quarter. And as of yesterday, we have collected 86% of the rent for July, which is ahead of date. We set last year by 10 percentage points. To date, We have granted rent deferrals totaling 1.9 of annual revenues. We expect to recover 85% of those rents before year-end and the remainder in early 2021. Occupancy remained elevated at more than 95%, but decreased due to no move-outs in Mexico City. Releasing spreads exceeded double digits in four or six markets.
spk15: On the capital deployment front, we acquired 10 properties over two transactions.
spk12: The first was Prologis Parque Grande in Mexico City from our sponsor, which comprised eight Class A buildings over 4 million square feet. The customers of this park serve consumption needs throughout the country and include global e-commerce players such as Amazon and MercadoLibre. The second was two urban last touch facilities from a third party in a cell lease bank. Over time, proximity to the end customer will be critical for our customer success, and Fibra Prologis will be at the forefront of this trend. Turning to the broader real estate environment, demand exceeded our expectations in the second quarter, and development activity was muted, except in Monterey and Ciudad Juarez. Market vacancy remained at a historical low for our sixth market at 3.4%, while vacancy in the border markets was less than 2%. Net absorption for the quarter was in line with completions, and our revised forecast for the year calls for a balanced market. Despite yield-wise positive operating conditions, market rental rates declined marginally during the quarter, primarily in Mexico City and Guadalajara, and this was largely driven by a weaker test. Let me spend a few moments on what we're seeing on the ground. Customer sentiment has been resilient. Despite expectations for a weaker economy in the second half of 2020, there is a lot of pent-up demand. Utilization remains high, and given the need of separate workers for safety purposes, more space is required. Currently, 99% of our customers are operations. With USMTA officially signed and enacted by all three countries, any uncertainty around manufacturing has dissipated. As tensions between the US and China continue, nearshoring operations to Mexico is a viable solution that we expect more companies to pursue. We have seen evidence of this in Ciudad Juarez, Monterrey, and Tijuana, which bodes well for future demand. We're still engaging customers on expansions. as we have over the past several quarters, particularly in Tijuana, where the outlook for growth remains stable and market rents continue to grow. E-commerce, which is a growing part of the portfolio, as well as an important structural drive for logistic real estate, continues to accelerate. Mexico still trades other developed countries in terms of e-commerce adoption, meaning there's a lot of room to grow. In addition, As more consumers migrate toward digital consumption, we expect to see traditional retailers add more space to hold inventory for their online platforms. This has played out in other parts of the world, and we expect to see this in Mexico, too. We have worked hard to build a company that is resilient during uncertain times. Our results are the direct outcome of our investment strategy, which has been consistent since day one. And this is to invest in the best market in Mexico, to own the highest quality properties, to serve a diverse group of customers across various industries with the highest level of service, and maintain discipline, particularly when others do not. While we're cautiously optimistic in our outlook given the pandemic, we believe T-Roc Logic is an attractive investment opportunity. given our stable distribution in U.S. dollars relative to the low interest rate environment, and future upside due to our exposure to near-shoring and e-commerce. We remain committed to creating value for certificate holders while serving our customers and communities. Before turning the call over, I would like to highlight two key items. In late June, VRAP logic was included in the S&P BNB Total Mexico ESG Index, a new index launched by S&P Dow Jones and the Mexican Stock Exchange. And I also want to highlight that we started reporting FFO as defined by Amethebra. This metric was developed from contributions of all Amethebra members to achieve transparent results that are easily comparable. Adoption is voluntary, although a standardized financial metric will help move FIBRAS forward as an investable asset class. Jorge will go into more detail. With that, let me turn over the call to Jorge.
spk13: Thank you, Luis. Good morning. Thank you for joining us, and I hope everybody is staying healthy. Before starting with the results of the quarter, let me update you with certain key events that happened since late June. On July 13th, Petro Prologis received a reimbursement of 1 billion pesos. related to the VAT paid on the acquisition of Pac-100 last April 6. This refund has been used to pay down our existing line of credit for approximately $30 million and to fund the current distribution. As we've mentioned, at the beginning of July, Amesibra published a definition of SFO, which you can find under ESG at the Amesibra website. The white paper took SFO as defined in other regions such as the USA and Europe as a starting point and adjusted it to fit the Mexican market. Beginning with second quarter results, Fibra Prologis is using this definition along with SFO as adjusted by Fibra Prologis. Going forward, we will report both methods. Let me highlight the two main differences between AMESIBRA and our definition of SFO. And the FIBRA definition excludes any incentive fee paid in certificates and excludes any deferred financial costs. For avoidance of doubts, my prepared remarks will be based on FIBRA Prologis assigned SFO. Having said this, let me go to our financial performance. SFO for the quarter totaled $33.2 million, or $3.8 U.S. cents per certificate. which represents a 12% decrease compared to the same year last year. Excluding the impact from non-operating items on both quarters, SFO per certificate decreased 20%. ASFO was $23.4 million for the quarter, plus relative to last year. This is due to higher straight-line rent and capex. In particular, CAFEC expenditures were $6.9 million or 40% higher than the second quarter last year, driven by timing on tenant improvements and increased leasing commissions given our volume. Now, before going into operating metrics, let me update you on account receivables. Last quarter, we said that our account receivables would reach approximately 3% of gross rent for the full year. Given conversation with our customers and rent collection achieved, we now expect our account receivables to reach 2% of annual gross rent. Living activity was almost 5.1 million square feet, or about twice the volume we had in the first quarter. New living volume was the largest in the last five quarters, reaching 737,000 square feet. Quarter-end occupancy declined 110 basis points year-over-year to 95.5%, in line with our expectations, as we have no move-out in Mexico City. Despite weaker PESO and in line with our strategy to push rents higher, creating value, net effective rent change and rollover for the quarter increased 13.2%, which was above our expectations. that same-store NOI declined 11.4% and was mainly driven by concessions related to longer lease terms, lower average occupancy, and a weaker PES. I would like to point out that even though we contracted a hedge to cover our cash flowing dollars, which has had a positive effect in 2020, it does not impact our same-store cash NOI. Moving to our balances. With no debt maturities until 2022 and no capital requirements for development for land acquisitions, our financial strength and flexibility gives us optionality in this current environment. We ended the quarter with 29% loan-to-value, below our internal target of 35%. Our weighted average debt cost was 4.4%, weighted average maturity was 3.2 years, and we have $284 million of liquidity through our unsecured credit facility. As credit spreads are narrowing, we are starting to see more refinancing options for our 2022 debt expirations. We will keep you posted on our progress. Moving to guidance. We are adjusting some of our ranges, even our performance and conversation with our customers. I will only comment on the metrics we are updating For more details, please go to page 7 of the Supplemental Financial Information. Our forecast calls for 24 pesos per U.S. dollar in the second half of the year. Starting with SFO per certificate, we're increasing the low end of the range 1.5 cents. Our new range is between 15.5 and 16.5 U.S. dollar cents. Moving to period end occupancy. Given our focus on proactively reaching our customers in advance of expirations and having little role left, we are narrowing our range by increasing the bottom by 100 basis points. We expect our portfolio year-end occupancy to range between 95% and 96%, ending with same-store cash MOI. Due to a weaker peso, which drives around 400 basis points of our results, We're updating our cash same-store NOI to be between a negative 5 and a negative 3% for the year. As mentioned before, the positive effect of our hedge does not impact our same-store cash NOI. To wrap up, we have now experienced a full quarter with the COVID pandemic, and while economic impact remains unknown, The combination of what we see in our property data, the state of rent collection, and dialogue with our customers gives us more positive outcomes. This, together with our balance sheet, makes us feel great about our business going forward. With that, I will turn it to the operator for Q&A. Thank you.
spk09: At this time, ladies and gentlemen, if you would like to ask a question, I would ask that you press star then one on your telephone keypad. If you would like to withdraw your question, you may press the pound key. Again, please limit your questions to one question, and if you do have a follow-up, please press star one to rejoin the queue. Your first question today comes from the line of Sheila McGrath from Evercore. Please proceed with your question. Yes, good morning.
spk05: Could you describe the reasons behind the known move out? Was it higher rent? And how is your progress going to release those recent vacancies?
spk15: Sheila, can you repeat your question, please?
spk13: You were a little bit off. Sorry.
spk05: Oh, I'm sorry. Could you describe the reasons behind the move out in Mexico City? Was it higher rent? and how your progress is going to release those vacancies.
spk03: Thank you. Thank you, Sheila. Good morning. This is Hector. As we mentioned in his opening remarks, this decree that we presented on occupancy was respected and was included actually since pre-COVID when we prepared the 2020 budget. We have a couple of spaces in Mexico City, one of them in our Iskalli Tree Park with a logistic operator, and the second one in our Central Park. The two of them have 550,000 square feet. We have a space left in Guadalajara with IBM, 80,000 square feet. Mexico City is in good shape. We are in the process of leasing the space in the country. The country is in the state of the art park, and we have three or four prospects. And federal setting e-commerce activity as well as creating some sorts of demand. The space in the IDN is a little bit slower, but we will go for something that will achieve our other consequences.
spk05: Thank you.
spk03: The reason for ATL leaving the space was that they were looking for a cheaper space due to a condition required for the cost.
spk09: Your next question comes from the line of Nicola Lipman of Morgan Stanley. Please proceed with your question. Hi.
spk11: Thank you. Good morning, gentlemen. Hi, everyone. Thanks for the call and for taking my question. This is a little bit embarrassing because I'm afraid I might ask the same question that Sheila did. I just could not hear. The connection wasn't great. So my question is that you're moving up the maturities. And a bit, if you can give us color on a couple of things there. Should we, typically that's something you do to kind of buy protection because you went from maybe optimistic to cautiously optimistic. So are we reading that right? And can you provide color on which parts of Mexico this is happening, including Mexico City? And I'm sorry this question overlaps with the prior question.
spk15: Thank you. Thank you. Thank you for your question, Gordon.
spk03: Mexico City is our largest market. And since day number one of the COVID situation, we started a very tight conversation with our customers. The most of our activity is related to logistics and e-commerce. 35% of this activity is related to this market. And as we have noticed, e-commerce activity has increased. We don't have the financial news about this, so we expect that e-commerce activity has increased up to 50% during the second quarter. This is saying that some economy has caused, as a consequence, a decent percent increase. And I think that most of these customers are going to remain buying online from now on. Our conversations with them are not only to keep their operations as they are, but to increase in space in the future. We are working hand-by-hand with two of the main e-commerce players in order to try to achieve the plans that they have to serve their customers. Service has become very important, and we are very well positioned to take care of these needs. The market that we see with a downward pressure on rent is the Guadalajara market. This is a situation that was happening even pre-COVID as supply to Guadalajara has been important compared to demand that has been kept aligned to what it was before this supply started to hit us. And on the border markets, we see an important activity. We're near 100% occupancy in the free markets, and we see additional demand coming from near-sharing activities. So on the overall, we understand that we're about to start an important challenge because of the recession that Mexico is living. But on the overall, I think that the sectors in which we are participating, the activity and the type of facilities that we have as well as the relations that we have with our customers, shifting the resilience of our portfolio.
spk12: Yes, so you asked about the maturities. So we had a record leasing activity, 5.1 million feet, which advanced some of the rollover that was in the second quarter and 2021. So I think we have been risking the portfolio importantly, And we only have 5% of the portfolio roll in 2020 in the second half and only 12% for 2021. So we feel very good about keeping a strong operating performance because we have the risk of the portfolio in the second quarter importantly.
spk15: Okay, thank you.
spk11: It's a little bit difficult to hear. I don't know. I think especially Luis is easy, but Hector and Jorge, it is a little hard. But thank you very much for the answers.
spk15: Thank you, Mick.
spk09: Your next question comes from the line of Gordon Lee with BPG. Please proceed with your question.
spk07: Hi, good morning, everybody. Thank you very much for the call. Two quick ones. The first on the leasing spreads that we saw for the quarter. I was wondering how much of that you would attribute to below-market leases coming closer to market rates, and how much would you attribute it to an actual tightening of underlying rental conditions in those markets where you saw the renewals? And the second question is on the comments, Luis, that you made with, you know, as far as some evidence, some traction on the near-shoring thesis in some of the northern markets. I was wondering if you could tell us what type of industries you're seeing considering that near-shoring. Thank you.
spk03: Thank you. Thank you for your question. The increased market rent that we used to have has been shrinking, and this is not a surprise for us. We kept capping in the previous cycle. When a devaluation like the one-way experience happens, it usually takes some time. I would consider it from 12 to 18 months for petrol leases to catch up with the new market trends. So I could say we experienced 23% devaluation. Probably petrol leases have increased 50%, but they're still lagging from the previous levels that we have before the devaluation. So the market rents in pesos are today a little bit lower because of these conditions, but in the same situation that happened in previous cycles with this one, we will keep on seeing peso market rents to keep on going up to catch up with the previous market rents. This situation happens in the Mexico City and Guadalajara, which are the two markets in which we have incidents from peso leases. Regarding your question about nearshoring, we have seen particularly in Tijuana and in the Juarez market, we're working in two big projects, and the reason behind it is that there is a shift in the strategy. Previously, everybody was chasing efficiency, and it was important to save some nickels from dimes in the supply chain. The name of the game today is Resiliency and Geographic Diversification. So we have seen companies from Asia going into the markets that I mentioned looking to find a safe harbor in which they could have better reliability to keep on supporting the supply chain. We are working in a couple of tactics, one of them related to the automotive industry, the other one to electronics. and I have had the opportunity to be in contact with the owners of this project, and it is impressive at the velocity that they have and how they are focusing Mexico as a good place to do this. I do expect from now on the demand on the border markets, including Monterrey, for these nursery projects to be probably between 20% or 25% of the future demand.
spk15: That's very helpful. Thank you very much.
spk09: And again, ladies and gentlemen, if you would like to ask a question, please press star, then one on your telephone. Please limit your question to one question, and please rejoin the queue for any follow-up. Your next question comes from the line of Vanessa Caroga of Credit Suisse. Your line is open.
spk08: concessions that you mentioned were granted in exchange for longer lease terms and higher rents. Can you quantify the impact of that or provide more details as possible? Thank you.
spk03: Thank you for your question, Vanessa. Once again, This is not the first time that we see a change in the cycle. The last one in 2008 and 2009, we have very clear the strategy that we pursue in those days. And actually, in those days, it was very successful and we are just replicating. We create win-win structures with our customers. We were able to have 21 cases of this Blend and Extend program that they represent 2.6 million of rent concessions. It is important to highlight here that these rent concessions are not due to the COVID situation. The rent concessions have not increased, and they are linked as part of the market conditions to every rent that we have. In the case of Mexico City, for example, when concessions go from 0.5 to 0.75 of a month for every year that the customer engages with us. So we have been able to enlarge an important number of contracts. As I mentioned, 21. Nine of them have been in Mexico City. Five of them have been in Guadalajara. And we have been able to get a good ratio in turnover costs, a good extension in terms, and a very important rent growth behind this. So even though we document them and we need to present them as rent concessions, I want to reiterate that they are not a COVID additional concession, but it's part of our customary business every time that we enlarge or that we renew our lease agreements.
spk08: Thank you, Hector. Just to follow up, do you expect additional impacts from these concessions in the third quarter, or do we see all of the impacts in the second quarter?
spk03: It has been a very active quarter, Vanessa. We have 337 contracts. And we have been able to contact all and each one of them. So we think that we have a good visibility of everything that is happening with our customers. And I think that 95% of this activity is behind us. Of course, we have in front of us, and this is where prudency needs to come, a very important recession that has never been in Mexico. So far, because of this COVID situation, understanding current conditions of our customers, I think that the very heavy lifting, 95% of this job is behind us.
spk08: Okay, that's great to hear. Thank you, Victor.
spk09: Your next question comes from the line of Fraulein Mendez with JPMorgan. Please proceed with your question.
spk01: Hi, guys. Thank you very much for taking my question. So I was actually a little bit amazed that the dividend pressure guidance wasn't changed, not even to catch up to the revised guidance on FFO, which implies an even lower payout ratio than before. How should we think about this? Is this a new strategy from the company to limit the distribution in having a lower payout ratio than in the past? or is this only something exclusively of this year because you are being prudent? Can you give us some more color on that?
spk15: Hola, folks. How are you? This is Jose.
spk13: We didn't... You're correct. We narrowed some of our guidance, as I've said in recent opening remarks and mine. We have seen a stronger first half of the year. That all said, we haven't seen the end of this pandemic. We don't know where it's going to end and what are going to be the final effects, in particular for Mexico, if you want to put it that way. And in that sense, we're being prudent. And for now, we're keeping our distribution guidance at 9.7 U.S. dollars per certificate.
spk01: So we should expect next year to see a more normalized payout ratio, more close to the 90s versus the 75, 80 that is implied today in the guidance.
spk13: That would be the idea, Troy. It all depends, as I said, on where this pandemic ends. It has worked on to end. It depends on the vaccine. There is a lot of around the vaccine. It's going to be easier next year. So it depends on that part of the pandemic. The pandemic and its economic effects have a lot to do with it. So answering your question, if everything is normalized, we probably will see that.
spk12: This is Luis. So this is something that we will review every quarter and we will assess. You know, we came into March And we had the emergency, and we needed to review our guidance. Now, the first quarter after the pandemic is the second quarter, and we have updated a lot of stuff, which is a higher FFO. We have a lower AR than we had anticipated. So things on the ground seem to be coming out a little better than what we expected coming into this. So what I can tell you is, you know, one of the aspects is to remain prudent and also to keep the equation. We don't want things to crisis. At this point, we will see how the next quarter goes, and then, you know, we will assess each one of the metrics one by one as this unfolds.
spk01: Okay, understand. Thank you, guys.
spk15: Take care. Thank you.
spk09: Your next question comes from the line of Louis Yance with Compass. Please proceed with your question.
spk10: Hi, guys. I hope you're doing well, and thanks for taking my questions. Just a question on e-commerce, just to explore a little bit more that opportunity. If you could talk a little bit about what your clients are telling you in terms of their e-commerce needs going forward, whether some of this increased demand we're seeing could be temporary as well. as lockdown measures are still strict and whether that sort of normalizes down going forward. And in terms of your exposure right now, about 15% is e-commerce related. Where do you guys think that will go in the next year or two, whether you can accelerate that exposure via M&A and whether that growth It's mainly from existing clients, you know, the Amazons or the MercadoLibres of the world, or whether you're seeing kind of clients, new clients that are actually trying to venture into this sector. Thank you.
spk03: Thank you for your question. I think this is very interesting to analyze how e-commerce has been evolving in Mexico. And I think that it's completely linked to the appearance of important players and the competition that now really exists head-to-head in Mexico. Before Amazon entered into the market, e-commerce represented 1.6% of total retail sales. By the end of last year, e-commerce in Mexico was 4%. And we're estimating that in the second quarter, this potential increase participation of e-commerce jumped to double, so close to 8%. When Amazon started its appearance in Mexico six years ago, it was amazing the jump that it was difficult to break the inner sea, and geographically went from 1.6% to 4%. When Mercado Libre started competing to Amazon, you know, this competition had as a consequence a higher participation of e-commerce in the total retail sales. And I think the two stronger players are having a great business, the two of them, because they have probably been competing against each one of them, but most of the business that they are taking from is from the traditional Greek motor business. What we see going forward as this figure in the States has well increased. In the States, it was 14%, and now it's probably near 20% of total retail sales because of this public economy. What we should expect going forward in Mexico is very dynamic growth, a growth that has not been presented in the past. And it's interesting to understand where this demand is coming from. Players that concentrated at the beginning in Mexico City, they're going to be going out to some other markets, as we already seen. Guadalajara and Monterrey are in the following list about the operations that they want to have. Service is going to be the key point of this competition. So, last-ditch facilities are going to start gaining a very important role as what they want to have is the best service because that's the way to catch your customers. We are one position in the two aspects. We have strong operations in Mexico City, Guadalajara, and in Monterrey. We have serious and strategic conversations with our customers. Amazon is the largest customer that Prologis has worldwide. Prologis is the largest landlord that Amazon has worldwide. And MercadoLibre is the first big facility we offer in Mexico City. So the combination of our current backlog And the knowledge through these conversations with our customers of where the trend and where the need and what type of product is coming represents a very important competitive advantage for us. I do see two important taboos. One of them, for sure, and probably the most important one, is this e-commerce trend that the COVID is going to accelerate and it's going to incentivize. And the other one has been mentioned already in this Q&A, that is related to the near-sharing activity. So on the side of the environment that is tough, I think that Sudra Prologis is privileged because of the sector that we have and because of the strategies that we have developed and that Luis mentioned in his opening remarks.
spk12: Luis, so this is Luis. And in addition to what Hector mentioned, there is another trend that is brewing that could be a great tailwind for the logistics sector. And one is that it's resiliency over efficiency. So it seems that in the pandemic, we saw a lot of supply chain disrupt. And now companies are beginning to hold up more inventory in order to make sure the delivery times are met. There are some calculations that companies may probably have about 8% additional inventory to meet this resiliency against efficiency. If you add up that additional trend, besides the two that Hector mentioned, this could also be a positive for logistic real estate. It could also be a balance to the lower consumption that we may see as a result of a lower economy.
spk15: Great. Thanks a lot, Hector and Luis, for the color. Appreciate it.
spk14: Thank you, Luis.
spk09: Your next question comes from the line of David Soto with Principal. Please proceed with your question.
spk15: Hi, good morning. Thanks for taking my call.
spk02: Just a quick one. If you could provide some color about the percentage of U.S. and perseverance that you have on Mexico City and Guadalajara, it's more focused on the breakdown. Thanks.
spk03: Thank you. Thank you for the question. Sixty-three percent of our leaders in Mexico City are specially nominated already, while in Guadalajara we're a little bit above 50%. We do not see a very important increase in pesos on the overall portfolio because I think that our customers that are already in pesos, they will keep on pesos. And every time that there's a devaluation, you know, the anxiety increases and the request for pesos starts increasing. But, you know, the volatility that we experienced this year, there were some parts in March on April where FX was at 25 pesos. Today it's at 22.50 on an average basis. So customers taking decision of moving to pesos at 25, now they're experiencing an issue because it has been a 10% reduction on the FX. FX is very hard to predict. Our customers are sophisticated. they have a good financial divisions and they know what is more convenient for their operations. Usually a Peso lease ends up providing more money to the virologist compared to other denominated leases. Peso leases are more expensive. And what companies look when they request Peso leases is to avoid a mismatch because these companies generate pesos, so they would like to have a peso denominator. But bottom line, we don't see an important substantial increase on the peso deficit moving forward.
spk15: Great, thanks.
spk09: Here, our next question comes from the line of Francisco Suarez with Scotiabank. Please proceed with your question.
spk04: Hi, good morning. Congrats on the results. A question on when you are extending the leases and when we see the pressure on overall rent because you are extending the life of the leases. Just to make sure, that doesn't mean necessarily that the overall rates of return on that lease is declining if the rent is decreasing, isn't it? So the question is, can you provide us a little bit of examples of how to make sure that in those circumstances when you are trying to extend the life of the lease and in exchange you decide to cut a little bit your rent, how we make sure that the overall rate of return on that lease is not affected or if this time is different? Thank you.
spk13: This is Jorge. You caught up at the beginning, but I think your question is on the economic value of the leases. When we renegotiate, do we lose value on the leases? I mean, that's why we report the NER, net effective rent change, because it reflects the economic value of the leases that we have. As you can see in the past history, it has been positive. This year, this quarter, sorry, in particular, was 13.2%. So, I mean, that's a quick answer to your question. I mean, the value of the lease is increasing in economic terms, bringing value to our shareholders.
spk03: But giving a little more of a color to what has happened, In the 21 transactions that we have done, leases need to be renewed at market. And we used to be around 5% of in-place to market in the past. So some of these extensions had incorporated a lease increase as rents were a little bit below market. And I would say those represent probably 80% or 85% of the blended expense that we did. We did a few ones in which leases were above market. Once again, if that's the case, you need to take that lease into market, consider what time is remaining left in the contract, and then do a lender, and end up with a new lease at the end of the day. I think that the rent growth that we're presenting in this Lend and Extend program, which is 13%, represents that we are really creating value for our customers. Whether we should have weighed two years from now if this could have been higher, we're lagging this crystal ball to make sure that that's the case. But in this uncertainty that the environment is providing, I think that it creates additional value to our certificate holders to provide additional stability and to take away the renewal risk, which is an important risk in this case.
spk15: Perfect. Thank you so much. Congrats.
spk09: Your next question comes from the line of Armando Rodriguez with Signum Research. Please proceed with your question.
spk00: Good morning, everyone. Thank you for taking my question. And congratulations again for these outstanding results. I have a quick question. regarding the asset recycling program. I can see there's no guidance behind that. And I would love to hear your comments on the sale, the dispositions on the supply side. I know there's a little bit pressure on the supply area. I would love to hear your comments on the exit coverage, maybe from your comparators. That's my only question. Thank you very much.
spk12: Thank you, Armando, for your question. This question gives me a chance to give you a little bit of a broader topic which relates to valuations and our capital deployment strategy, which of course has taken into consideration the active recycling. So I think, you know, values in the short term have come down marginally, maybe, you know, between 0 and 3%. And I believe in the medium term, valuations for the logistics sector will remain stable. I think with a lower interest rate environment, you know, valuations will probably, you know, recover from, you know, the slight decrease. And we've seen also interest from investors to come into the sector. We have not seen price discovery yet, so in that sense we will remain prudent and we want to see where the market comes. So I guess number one, for the additional pipeline that we have, we will remain on the standby and we will assess acquiring the 1.7 billion feet of property that we have in the pipeline from Prologis until we see more private coverage. And then, you know, answering more specifically your question, I think this year could be a good year to make the additional dispositions. I think there's a good market. As I said, valuations may be stable, given the interest in the logistics sector. And this is something that we will assess. It also has to do with a tax impact on those dispositions. So we'll keep you updated as the forests come. But that was a very good question. Thank you.
spk15: Thank you very much, Louis. Very helpful. Thank you very much.
spk09: And there are no further questions in queue at this time. I turn the call... Sorry, we did have... No, sorry. I now turn the call over to Mr. Gutierrez for any closing remarks.
spk15: Well, I want to thank you, everyone.
spk12: for being on this call and for your interest in fever biologists. So we are now almost four months into this pandemic, and we still have some uncertainty as it unfolds. But after this time, we feel good about our business. I think it has performed much better than what I expected, and most especially compared to other sectors. I think we are very well positioned for the future, I also believe this will pass, and I also am looking forward to see you in person.
spk15: So thank you very much.
spk09: And this does conclude today's conference call. Thank you for your participation in today's call. You may now disconnect.
Disclaimer