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.
spk07: Ladies and gentlemen, thank you for standing by and welcome to today's FIBRA Prologis Fourth Quarter Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, Mr. Costa-Carmagnolas, Head of Investor Relations. Thank you. Please go ahead, sir.
spk11: Thank you, Katrina. And good morning, everyone. Thank you for joining us for our fourth 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 Ibarzabal, 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.
spk05: Thank you, Costa, and good morning, everyone. I hope you are all staying safe and healthy. 2020 was an exceptional year for fibroprologists, as our operating and financial results surpassed our expectations. We exceeded our internal growth objectives and completed our capital deployment goals. While our accomplishments were extraordinary, the ongoing health pandemic and the impact it has had on our country weighs heavy on our hearts. Let me discuss highlights for the year. Our FFO and AFFO increased 26 and 19% year over year respectively. The growth was driven by acquisitions made in the first half of 2020, higher rents achieved through our leasing activity, and non-recorded income, which Jorge will cover in greater detail. Operating metrics were strong, highlighted by a record leasing volume of 12.5 million square feet. This was approximately one third of our portfolio and importantly, minimize the leasing role to just 10% in 2021. We collected more than 98% of rent due in 2020. Not only is this a testament to our real estate professionals, but also our credit risk management that reviews the financial health of customers before we sign the leases. Our balance sheet remained strong, and we had an active 2020, which resulted in the lowest cost of debt in our sector. We also raised $730 million of capital through a subscription rights offering and a green bond issuance, the latter being the first of its kind for a real estate company in Mexico. We acquired 5.3 million square feet throughout the year, for $438 million. These properties fit our investment strategy of being located in irreplaceable locations, built to the highest standards, and leased to some of the best global customers. While we have consistently delivered strong results, it is during these times of uncertainty when our strategy shines the brightest. Our performance demonstrates the importance of focusing on both consumption and manufacturing, as well as owning modern facilities in key markets, close to the end consumer. All of which is why we have been able to outperform the broader economy. Consumption and manufacturing exports continue to drive demand for logistic real estate. A trend we expect will continue in 2021. Despite exceeding our expectations, demand outpaced supply by more than 2 million square feet, resulting in vacancy declining to 3.3%. Logistic demand came in at 17 million square feet flat to the prior year. Supply was constrained in 2020 with the lockdown limiting construction for several months. In Mexico City, land scarcity and a lengthening retirement process had limited completions. In our border markets, limited access to electricity has lowered new supply. Even Monterey, which historically has had a higher supply, was balanced. For 2021, we expect a balanced market with a market vacancy remaining below 4%, the cumulative effect resulting in higher market rental rates. Now, let me spend a few moments on what we're seeing on the ground. E-commerce. which changed consumer behavior around the world, has become a significant driver of logistics demand in Mexico. Adoption was further accelerated by the state home economy, with digital sales doubling as a percentage of retail sales to 8%. With e-commerce requiring three times the logistics space of a traditional brick and mortar retailer, the benefit to logistics real estate demand should continue for the foreseeable future. We saw two of our largest e-commerce customers take additional space from us in Mexico City while they analyzed expansion plans which potentially would include leasing under construction projects from our sponsor. A third company known for groceries and everyday household products is also growing their e-commerce business and has discussed leaving more space with us. While those conversations are just starting, I believe it is a leading indicator of demand. Manufacturing remains an important segment, particularly as the broader economy weakens. Proximity to the United States and cost of labor have always been a key competitive advantage and is being further fueled by threat tensions, geopolitical turmoil, and the health pandemic all converging. Evidence of nearshoring is real and will continue to grow. During 2020, we signed leases in Juarez and Monterrey with customers in the consumer electronics, sleep technology, and furniture industries. In other words, the tailwinds helping to drive the agroecological performance have a lot more room to run. Before concluding, let me discuss our 2021 outlook. We are optimistic as we start the year. We're expecting a rebound in the economy, which should be another catalyst to an already strong business. Logistic real estate continues to be the favorite asset class among investors. The combination of retail and office shutdown, as well as the strong industrial fundamentals, drove values higher. In fact, we saw meaningful cap rate compression in the fourth quarter, and we are optimistic this will continue this year. In operations, our focus remains pushing rent and maximizing lease term. However, our opportunity will be limited this year given the amount of leasing during 2020 and the available role. On the deployment front, we expect to be active and opportunistic. In addition to assets from the Prologis development pipeline, we're exploring third-party assets that align with our investment strategy. We view our balance sheets as a major competitive advantage. The flexibility we have allows us to play more often. Our team of real estate professionals prove why they are the best in class during 2020 with seamless execution despite unprecedented challenges. Putting everything together, we are excited about 2021. Our hard work will carry forward this year. where we expect our cash flow generation to be even stronger. We are increasing our distribution 11%, sharing our success with our investors. In summary, we remain committed to creating value for certificate holders. Our portfolio is resilient and built to outperform in any environment. With that, let me tell the Corps over to Jorge.
spk02: Thank you Luis. Good morning. Thank you for joining us and I hope everybody is staying healthy. Before commenting on our results, I would like to note that this quarter we modified our reporting format of our financial statements. We are now showing revenues of positive numbers and expenses of negative numbers. Let me begin with our financial results. On a nominal basis, FFO for the quarter was $32.3 million, or $3.8 U.S. cents per certificate, which represents a 1.7% increase per certificate when compared to the same year last year. On an annual basis, SFO was $134 million, which includes benefits related to relied gains from earning hedges, withholding tax, and VAT reimbursement, which had a positive effect impact. Excluding these non-recurring benefits, SFO was $126 million, or 17% higher than 2019. A SFO was $23.7 million for the quarter, an increase of more than 69% on a nominal basis when compared to last year. On an annual basis, A SFO was $98.5 million, and 18% growth if compared to 2019. This increase was a result of income generated from acquisition of Targrante, as well as non-reporting realized gains recently mentioned. Moving to operation metrics. Leading activity was 1 million per feet for the quarter, which pushed occupancy 70 basis points higher from the third quarter to 97.1%. On a year-over-year basis, occupancy was down 50 basis points if compared to the same period last year. Net effective range change on rollover increased 12.4% on a 24-quarter basis, which is impressive given we live 12.5 million square feet for the year. This will result in higher cash flow from organic growth and value creation for our portfolio in 2021. Cash, same-store NOI, was negative 1.2% for the quarter and negative 4.7% for the year. The decline was mainly driven by concessions related to longer lead terms and a weaker peso, partly upset by higher rents. To give you some perspective, same-store NOI on a net effective basis, which averages the effect of free rent over the entire term of the lease, increased 2.5% in the same period. Moving to our balance sheet. Let me go over the main metrics of the quarter. Leverage was 29%. Weighted average debt loss was 3.4%. Weighted average maturity was 7.1 years. I am very proud of what our local team accomplished in 2020 from a capital market perspective. We were able to raise approximately $730 million between equity and debt in a very challenging year. As a result of our hard work, we have an even stronger balance sheet with respect to liquidity and debt maturities. In terms of guidance for 2021, we use an FX rate of 21.5 pesos for each U.S. dollar, which is the level we have paid to peso earnings. As a reminder, we use put options to protect from the downside, but participate in all of the upsides to the best of strength. We expect our portfolio year end occupancy to range between 95% and 96%. Following our record leading and terrific range change in 2020, we expect same-store NOI growth to range between 3% and 5% for 2021. Annual capex as a percentage NOI range between 13 and 14%. GNA range between $23 and $25 million. On the capital deployment front, we expect to acquire between $100 and $200 million and dispose between $20 and $30 million. Putting all this together, we are setting our full-year FTECH focus certificate range between 17 and 17.5 US dollar cents, which represents a 3% increase year-over-year or an 11% increase if you exclude the net non-recurring benefits received in 2020. Given our good operating results, flexible balance and stronger business, We are increasing our distribution by approximately 11% to reach 10.75 US dollar cents per certificate, which represents approximately 5% dividend yield in dollar terms at current value. All this together makes PIVA a prolonged and attractive investment from a risk and growth perspective. With that, let me turn to the operators of QMA.
spk07: Thank you. As a reminder, in order to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. During the Q&A session, we ask that you limit your question to 1. For follow-on questions, please press star 1 again to get back on cue. First question, we have Sheila McGrath from Evercore. Your line is open. Yes, good morning.
spk01: Your sponsor has experience around the world in logistics and e-commerce. And I'm just wondering if you think things will play out similarly in Mexico, logistics, real estate, or any lessons learned with last touch facilities that might change your strategy in Mexico. And where does your sponsor view Mexico in the rankings around the world? Is it among the top market globally?
spk05: Thank you Sheila, and good to hear you. So yes, the sponsor in fact had its earnings and its report last Tuesday, so a couple days ago, and we saw the results there. So what I can tell you what is happening around the world is logistic real estate remains the main preferred sector in real estate. We've seen very strong operating metrics occupancy. We see a strong rent change, a good balance between supply and demand, and I'm mostly a business that has been very resilient, especially in these COVID times. This is not only in the US, but this is mainly across the different regions. Ecom has been a major driver around the world and in the US, Ecom sales represent 20% and this is compared to Mexico. This has fueled the last touch strategy around the world and that has been accelerating. Certainly, the level of service that economies provide with a 20% penetration has to be higher. Mexico at 8% is in a lower phase but increasing. So as e-com sales become larger as a percentage of total sales, the Last Touch initiative will be keeping on increasing. And I would say that Mexico is one of the best positioned in terms of yield. So Mexican cap rates are among the most attractive if compared to the ones globally. And lastly, values around the world have increased and cap rates have decreased as a result of this trend.
spk07: Next question, we have Nicolás Lippmann from Morgan Stanley. Line is open.
spk08: Thank you very much. Good morning and congratulations on the numbers and thanks for taking my question here. My question is on pricing in the Mexico City metropolitan area. And sorry for being so specific, but I think on page around 49 in the release, you have this overview of regional trends. If I compare fourth quarter to the third quarter it looks like Mexico peso pricing went from on per square foot basis 130 to 120 and it's kind of flat in dollar terms at 602 the same time we can see that you're very active on the leasing front so you could have had a couple three months there's a lot of things going on can you help us to handicap the the pricing trend numbers in Mexico City and also maybe address what you're expecting in terms of that area for the next couple of years.
spk13: Thank you very much. Nikolai, this is Hector. Good morning, everyone. Thank you for your question. The way we look at leases is always based in dollar terms. The difference that you are referring to is linked to the FX fluctuation between the third quarter and fourth quarter. On the third quarter, FX was at 22 pesos and for the fourth quarter, the average was more on the 20 pesos level. This is why you see this differentiation in pesos because it's just an FX conversion. What we saw in 2020 in Mexico City was a very strong demand, important net absorption. In Mexico City, rents are trending to be in pesos. We see between 10% to 15% increase in peso leases. In dollar terms, rents remain probably flat. You need to incorporate in this analysis the effects volatility. The way we see at Mexico City market, we see our position as leaders in this market. We have important projects. The sponsor has important projects in the pipeline. There's no way Mexico City rents could go downwards. Mexico City is going upwards because of the increase of demand due to these online sales that are going to keep on growing. And we do expect additional demand from the current players and from those players that are rapidly catching up, understanding that they need to increase their online business. As of today, Mexico City, hand by hand with Tijuana, are the two best markets that we have, and we are positive about it.
spk07: Thank you. For the next question, we have Francisco Chavez from BBVA. Your line is open.
spk03: Hi, thanks for the call and congrats on the strong results. My question is regarding the acquisitions and divestments of assets implied in your guidance for this year.
spk13: Can you give us some color on when can we expect the acquisitions to materialize and in which markets? Also, if you can give us some color on the asset sales, please.
spk05: Thank you very much, Francisco. It is time to play offense. We are in great shape. During 2020, we prepared the company for growth and to give us flexibility in comparison to the competition. Our loan-to-value is 29%. We have enough capacity in our credit line. And this is just a great shape. We have two sources of external growth. One is the PLD pipeline. So the PLD pipeline is around 1.6 million square feet, around $150 million. So we will be acting in about half of that pipeline, which is three buildings in Tijuana, Monterrey, and Juarez. And this will be probably happening in the first quarter. Our sponsor will also put land to work, and eventually this pipeline will grow and of course the sponsor pipeline is a source of competitive advantage. And then we will be opening third-party sales. So CDRE estimated $900 million in investment sales in 2020 and will be keep on growing in 2021. We believe some institutional investors will close cycles and also try to strengthen their balance sheet and they will be selling some 4040s. So we will be receiving some of this in the market and of course participating and we believe we'll be successful doing this. I would say valuations, real estate is the preferred asset class as I was mentioning and it's a good time to tap into the markets. We believe those values are right in a relative basis.
spk13: The dispositions that you are about to do are some properties in Guadalajara, which are in a park, and we have an institutional seller interested on buying them, and these transactions should be happening before the end of the first quarter.
spk07: Thank you. Next question, sir. We have Andre Mazini from Citigroup. Your line is open.
spk04: Good morning, Luis, Jorge, Hector, and Costa. So the question is on the retention rates. It was a little bit down compared to what you had in the last 12 months. But on the other hand, period and occupancy was up consistently since the second Q of 2020, right? So can we describe this? Occupancy going up and retention rates not as high in the past as new tenants coming in. And if that's the case, I mean, if there's new customers, would they be mainly from nearshoring, e-commerce, as you just mentioned, or flight quality? And then a second quick one on the same store, cash and OI, it also has been increasing since the second Q. Can you describe the increase in cash and OI to lower customers? free rents on new leases? It's a tight market, so I would imagine maybe the market is converging to lower free rents. Thank you.
spk13: I would take the first part of your question, Andre. The way we look at retention is always compared to occupancy and to rent growth. I think that a matter to be concerned when you have a low rotation, is when you are losing, importantly, occupancy and when you are having negative rent spreads. In our case, a retention of 89% is above 80%, which is the benchmark that we regularly have. If you compare this retention with the important rent change that we experienced, as Luis mentioned, 12.4%, I think that we're in pretty good shape. Actually, what we are doing is getting more value from the properties. This increases the asset value of the properties. Near-shoring is a phenomenon that we're experiencing now in our own portfolio. In this quarter, we were able to close two important transactions, one of them in Juarez and another one in Monterrey. Even though we need to mention that an important demand or nearshoring has to do with companies willing to own the real estate, I think that there's an important driver for us as landlords trying to lease with the good institutional companies these facilities. It's a new type of companies. You need to play smart as you structure in the transactions, but we do feel that this is going to be an important driver on our border markets that the two of them are at 100% occupancy.
spk02: Well, Andres, this is Jorge. I hope you're okay with all this pandemic and everything. It was hard for me to hear well your question on same-store cash and NOI, but what I heard, and I think it has to do regarding the increasing NOI in the year and related to free rent. given the concessions or what happened last year derived from the high volume of renewables that included free rent. That free rent is burning up in 2021, a part of it, and that's why Semistro Cash NOI, we are projecting a higher number, we are guiding to a higher number than what we had in 2021. So it's that the question is regarding free rent, you have most of it in this year, 2021.
spk07: Thank you. Next question. We have Vanessa from Credit Suisse. Your line is open.
spk06: Thank you. Hi, everybody from that team. My question, the first one is regarding occupancy guidance. It's a little bit down. Can you tell us what markets are driving the lower expected occupancy, which is still strong, obviously, but just curious about what markets you expect to decline in terms of occupancy. And then on the acquisitions, I was wondering regarding your – your expectations on leverage? Do you expect to fund most of those with debt? And up to what level are you willing to bring leverage for your balance sheet? Thank you.
spk13: Vanessa, good morning. And I will take the first part of your question. Yes? Yes, I will try to answer the first part of your question. At the occupancy levels that we are experiencing, it's very natural to have a frictional vacancy. I understand that we, and I would love this to happen, to take it from 97 to 98 to 99, and even to go to 110% occupancy, but that's impossible. About 95%, what happens is The nature of the portfolio, you have some customers expanding, you have some customers reducing. What is important is that at the overall, we see all the markets with very strong reliability. What we are seeing on the field, and I need to mention this, is an additional competition happening in Guadalajara and Monterrey. Guadalajara and Monterrey are some markets which will have good participation. We are seeing institutional players that in the past were leaving this market to local competitors appearing in Guadalajara and in Monterrey. Our strategy is different. We try to capture the high quality customers that are ready to pay a higher lease because they have a better product and higher service. Guadalajara is probably the market in which rents are not growing, rents are keeping flat because of this additional supply. But we do see as well Guadalajara being benefited by the increase on the online. I don't see any of the six markets facing difficulties or being weak. I do see inclusive Reynosa that is going to be very active this year and it's going to be presenting new development starts. So, in the overall, I feel very positive about this. I will pass it over to Jorge to answer the second part of the question.
spk02: Hola Vanessa, how are you? This is Jorge. Just clarifying a quick point on the frequency. Remember, we're guide for year-end of frequency, so the frequency could have, because of movement, because dynamic, for example, you could have someone leaving at the end of the year. and that's why we have an impact of that. We feel strong about occupancy during the year. That said, in terms of the question on acquisitions, our target leverage or our feeling, if you may, from our own perspective is 35% of what we have. We have about more than $200 million of available liquidity in our line of credit. So we can use that for any procedures we have.
spk07: Thank you. Next question, we have Gordon Lee from BTG Pactual. Your line is open.
spk00: Hi, good morning, everybody. Thank you very much for the call. A couple of questions related to the capital deployment topic. The first, I guess, is a little bit of a follow-up from Vanessa's question, Jorge, which is, and you discussed this a little bit in the supplementary information and the remarks there, but with the effective elimination of the regulatory loan-to-value limits, I wonder whether that has changed in any way the LTV levels that you would be comfortable with. And maybe perhaps if you could also remind us what LTV covenants of any you have on your outstanding debt, And then the second question is more on cap rates, which is it looks like cap rates may be marginally compressed, very little, during 2020 in the M&A market. And I was wondering what the view is on how much more cap rate compression you think we can see in 2021. Thank you.
spk02: Hola, Gordon. How are you? Thank you for the question. Let me answer the second part of your question. You can see it on the page 17 of this Implemental Financial Information. You will see the test covenants that we have under the bond that we raised a year. I won't go through the numbers, but it's pretty comfortable vis-à-vis what we have in our bond covenants. Regarding your question on the changes on the CMDB, as I said earlier, our internal target is 35% or internal ceiling. The changes on the CMDB are basically they're keeping the 50% loan-to-value on an average for that ratio. And on the liquidity front, they're asking to have a liquidity of 1 on a 12-month forward basis. from an 18-month forward, which was the previous one. We are going to keep those from an institutional perspective. These have to be approved at the Holder's meeting, but we're keeping those, the 50% and the 1.0 in the company. They don't affect us really because we have the 35% internal, but we're keeping those from an institutional
spk05: And then, Gordon, your second question on cap rates. We believe values are going up in industrial real estate around the world, and Mexico is not any different. We're estimating cap rates have compressed around 40 to 50 basis points, given all the new activity in the quarter. We had our evaluations, third parties, and our FEBRA assets are up 4% quarter on quarter. I would say cap rates around our portfolio are now down to 6.8%, which Mexico City would probably lead at 6.5%, and maybe some spread in Tijuana and Monterey around 50 to 50 basis points, and Juarez and the other markets around 75 to 100 basis points. But that is kind of our view. In spite of that, the spread to the US is around 240 basis points, which I believe it's a very healthy spread on a relative basis.
spk07: Thank you. Next question, we have Adrian Werther from JP Morgan. Your line is open.
spk12: Thank you. Good morning, everyone. And thank you for most of my questions were already answered. But given the outlook that you guys have been explaining, what can we see, what kind of big changes can we see in three, five years from now on the industrial real estate market? Can we finally start seeing rental prices in U.S. dollars increasing at a much faster pace? Can we start seeing some markets differentiating more than others? What do you think at this point that could be the big changes over the next three to five years?
spk05: Well, Adrián, this is a very good question. When we started the pandemic, we did not know how the industrial logistic real estate was going to behave. It was a big period of uncertainty at the middle of last year and we have close 2020 above our expectations. 2021, we are very optimistic and mainly, let me talk about Mexico. We believe our two trends will drive the Mexican economy. Number one, manufacturing. I think Mexico has a great opportunity to take advantage of this near-shoring event, and of course Mexico can also be the manufacturing source for U.S. So I think this will deepen. It will be outside of the auto sector. I think there's just going to be other sectors. And we have leading companies which will bring all the new technologies And Mexico, of course, I believe will be a winner. And I see also e-com penetrating. We've seen other economies which already have 20% of e-com sales, and this is just accelerating. We've seen some of the e-com players keep on doing investments. They were now doing their big shopping, their big distribution centers. They're now expanding to middle cities and then they will expand to the last touch strategies. So I think Fibra Prologis is very well positioned in both on the manufacturing side and on the logistics side. I think if there's a company that has competitive advantages in both trends, it's Fibra Prologis.
spk13: If I may add one comment here, the sector is going to be evolving rapidly. What we saw in 2020 is a revolution on digital transformation of the business. Today now we are able to lease and to show the space being remote. The customer has the ability to understand and to see all the market possibilities in a better manner. We need to have innovation to present our products and in the structure. Automatization is going to be happening What I can say is that Prolo is being the major logistics supplier in the planet. We have a direct access to the global customers, which are the ones really setting the trend on the evolution of the product. I wouldn't be surprised if in the future, buildings are more vertical than horizontal. That's one potential thing that might be happening. What I can assure you is because of this close relation with these types of customers, we're going to be the first one getting the trends and understanding where to lead our investments. It's a good point of view, understanding that the sector is not staying the way it is, but it's going to be evolving, and it's going to be evolving very rapidly within the few years. And I think that it will be evolving for good.
spk02: And Adrian, this is Jorge. And just adding to what Hector said, I think that ESG is going to be big in this sector or bigger. Just to give you a couple of examples, solar, lightning, solar energy, getting a bigger footprint in Mexico and other parts of the world. Efficient lighting, lead lighting, more certificates from BOMAC, which have to do with operations or LEED and have to do with development or design. You will see that from a real estate perspective and add to that community workforce that we have working with the communities, better governance, more FCPA kind of training for everybody. That's something that is in everybody's mind. Those kind of things are going to evolve and that will also include data mining. look at the real estate as a fountain of data and you get a lot of data from your customers and that's something that will also be evolving in the future. We see that, we see those trends around the world.
spk07: Thank you. Next question we have from JP Morgan. Your line is open.
spk10: Hi, guys. Thank you for taking my question too. So your DPS guidance implies a lower payout ratio of around 85% versus 95% in 2019. So can you guide us through your rationale to retain AFFO? And if this implies you could start to be active in the buyback market? And additionally, how should we think about the breakdown between capital returns and fiscal returns for your 2021 distribution?
spk05: So 2020 cash flow was strong. FFO grew 25%, AFFO grew 18%, and we're expecting growth of cash flow in 2021, mainly generated by internal growth of leasing volume and rent change of 2020, which will be in 2021, the additional revenues generated by the acquisitions, and very importantly, the lowering of our cost of debt to 3.4%. So we are increasing our distribution 11% and sharing this cash flow with our investors, which I believe very few companies are doing this after the pandemic. So we will continue to share this additional cash flow with our investors, but we don't want to take our payout ratio to the maximum of 95% as we would like to retain some flexibility because we can see some unevenness in the economy. You know, we still are in some red lights. We have the Mexican election, and we would like to retain some flexibility should the environment change.
spk02: And regarding your question on the breakdown between fiscal and return of capital, Freud, let me just say that for 2020, everything, 100% of the distributions that we're going to take, that we're going to make, come from taxable profit. and that has to do with the ethics, obviously, or has a big component. In 2021, the quick answer to your question is it depends. It depends on where the ethics ends. There have been some changes on the fiscal front regarding rules, so we have to adapt to those. So I cannot answer that part. If the PESA stays where it is, we're going to have a distribution that is most likely fiscal return. If there is a devaluation, there could be some capital return, depending on the size of the devaluation and the new fiscal rules. But that's the best answer I can give you in 2021.
spk07: Thank you, sir. Next question. We have Pablo Monsivius from Barclays. Your line is open.
spk09: Hi, good morning. Thanks for taking my question. I have a quick one. And it's kind of a follow-up to Nikolai's question. You discussed that market dynamics in Mexico City are strong, that demand is performing quite nicely. And we have seen demand in general performing very nice over the last few years. And it seems that new supply has been subdued because of U.S. elections, Mexican elections, you name it. But going forward, do you think that finally competition will become harder in a sense of, I don't know, private competitors putting more land and more projects as trying to capture some additional demand from e-commerce players? Or how do you see new supply for the next two years? Because supply has been kind of slow and demand quite strong. But probably if demand continues to be strong, likely that some other competitors will start to build new properties. How do you see the supply side of the equation? Thank you.
spk07: Mr. Guralt, your line is now open. Please proceed.
spk02: Yeah, thank you. Sorry, Pablo. We didn't hear your question. I apologize for these IT issues.
spk09: Oh, okay. Well, basically, Jorge, I was asking about the supply side of the equation. Demand has been strong. and supply over the last few years has been kind of weak or more cautious, but probably that will change for next two, three years or probably longer. How do you see supply, for example, in Mexico City looking like?
spk13: Thanks. Supply in Mexico City is complicated because, you know, land scarcity is a peak. Practically impossible to get a large piece of land to develop the kind of facilities that the market is requesting. We do see as well a complexity and additional complexity that has been enhanced with the pandemia on all the process. It's taking much more time. It's becoming more expensive. So I think that you need to think in advance and you need to plan according to these conditions that I have just explained. Our sponsor has very clear these challenges and actually has been working on large components of land since several years ago. And I think that, once again, we will be in a better position than competition to supply the kind of products in the kind of parts of competition that the market is requesting. This is same condition. The complexity that the border markets are presenting is more linked to land scarcity in markets like Tijuana and to energy supply. Energy supply has become an important challenge in our development. On the other hand, the barriers to supply additional space are there. We need to recognize that there's interest from new investors to jump into this market. But, you know, all these processes take long periods of time. And you're in a position in which you need to invest important amounts of money, day number one, and then do a lot of work to get to the final product the way it is. And there's not a lot of players that have this opportunity. Perfect.
spk09: Thank you.
spk07: Next question, we have Armando Rodriguez from Signum Research. Your line is open.
spk03: Thank you, everyone, for taking my question. Just a quick one. Considering your sponsored comments recently that inventory to sales ratio should drive leasing demand at least for this year, I will appreciate your view on this. particularly on Mexico numbers. Thank you very much.
spk02: Armando, this is Jorge. Can you repeat your question? You cut off and it was hard to hear you.
spk03: Sure, Jorge. Just considering your sponsor comments recently that inventory to sales ratio should drive demand, particularly in the US. I will appreciate your view on this in Mexico. That's my question. Thank you very much. Okay.
spk13: Yes, this question is a good question. I think it's a fundamental for business. Last year, we experienced in our six markets a net absorption of almost 18 million square feet while new supply was only 15.8%. So I do see that the restriction of the challenges, which is a the fundamental part of our business, we only participate as a reminder in those markets that have a near entrance, so they provide the ability to have a challenging supply, and these help us to be able to drive rents up. Mexico City is very challenging. Tijuana is very challenging. We are working in all of the six markets of replenishing our land bank, Guadalajara and Monterrey. are experiencing new competitors. That's additional supply. But that supply is not necessarily where the main market is. So it's like a chess game between supply, the right product, and the right location. Monterrey and Guadalajara, they have different markets. And Apodaca, for example, which is where we have 100% of our holdings, is the market where land is more constrained and where 80% of the activity takes place. So this supply and demand gain is linked to the ability to increase rent and to increase the value of our assets on the overall.
spk05: Armando, if you're thinking about our customers' inventory, I think what will happen is that they want to be more resilient and will increase their inventory. And this should increase demand for space. So I think we are seeing a very active market as we begin 2021 with good demand, which is mainly a perspective on our clients increasing their inventory levels.
spk07: Thank you. I am showing no further questions at this time. I will now turn it back to Mr. Luis Gutierrez. Thank you.
spk05: Thank you, everyone. for joining today's call. 2020 was a transformational year for FEBR Ecologies. We meaningfully increase our footprint while delivering on key internal growth objectives. We have an exceptional balance sheet that allows us to play offense. We expect 2021 to be even better and we are excited to show you what we can do. Thank you very much and please feel free to reach out should you have any questions. Have a good day.
spk07: Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.
Disclaimer