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spk02: Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fibra Prologis fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question at any time, again, press star, followed by the number one on your telephone keypad. Thank you for your patience. Ms. Violente, you may begin the conference.
spk01: Thank you, Devin, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings conference call. Before we begin our prepared remarks, I would like to remind everyone that all information presented in this conference call is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call speak only as of the date of this call. Our actual results, performance, prospects, or opportunities may differ materially from those expressed in or implied by forward-looking statements. Additionally, during this call, we may refer to certain non-accounting financial measures. The company does not assume any obligations to update or revise any of these forward-looking statements in the future, whether as a result of new information, future events, or otherwise except as required by law. As is our practice, we have 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 fibraprologist.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 Giró, 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.
spk05: Thank you, Ale, and good morning, everyone. 2022 was an exceptional year for the FIRA as our operating and financial KPIs have reached new high watermarks, surpassing our expectations. All thanks to our team on the ground. We have exceeded our internal objectives and completed our capital deployment goals. Let me discuss some highlights for the year. Our FFO and AFFO continues to increase year over year on a nominal basis, 11% and 9% respectively. The growth was driven by higher rents and acquisitions. Operating metrics were strong, highlighted by rental growth on rollover, a record of 20.5%. This is the main driver of same-store cash NOI of 6.5% and occupancy reach a record high of 98.9%. We raised around $400 million of capital through a subscription rights offering. This was the biggest capital issuance in Mexico in 2022 during a period of financial volatility. Our balance sheet is one of the strongest in the market. We have the lowest cost of capital and prudent leverage, which leaves us with ample firepower to be opportunistic during times of uncertainty. We acquire 1.4 million square feet during the year for $135 million. This property is fit our investment strategy of being located in irreplaceable locations built to the highest standards and leased to some of the best global customers. We have made substantial steps on ESG during the year, and I will let Jorge go into more detail. While we have consistently delivered strong results, it is time of uncertainty when our strategy shines the brightest. Our performance demonstrates the importance to focus on both manufacturing and consumption as owning the best facilities in key markets close to the end consumer, all while we have been able to outperform the broader economy. Real estate fundamentals continue to be very solid. Demand for space has doubled since pre-pandemic levels. This was mainly driven by manufacturing sector. led by companies making long-term decisions on supply chains as they become more regional, and this is a structural change. In Mexico, logistics and manufactured real estate recorded its strongest end of the year, accelerating its past performance from previous quarters. Near-shoring and receding local consumption drove the fundamentals, and we believe those trends will remain in 2023. We saw record demand in 2022 in our six markets, reaching 36 million square feet of net absorption, an increase of 10% year over year. Supply barriers remain very tight, preventing developers from catching up. Land is scarce, utility electricity are insufficient in certain regions, and entitlement periods are taking longer. Vacancy in our markets declined 120 basis points over 2022, reaching its lowest level of 1%. Border markets and Guadalajara are sold out, and the vacancy in Monterey is at historic lows. As a result of these imbalances, rents are accelerating. Market rental growth increased by 15% during 2022. For 2023, we expect this to continue and vacancy to remain at very low levels. Fever valuations came flat at the end of the year. Our market cap rate was 6.65%, and this is 50 basis points increase, which was offset by market rental rates. With the raise of interest rates, we expect a pressure of real estate valuations as we enter the year. Let me expand on what we're seeing on the ground. More than 50% of the projects were built to suit our pre-leasing. Customer sentiment is positive as they're trying to secure the few available spaces ahead of future demand. On the manufacturing side, nearshoring continues to be the most robust trend driving demand in our markets. We estimate three-fourths of demand came from these opportunities. Shifts in the supply chain is making companies make long-term decisions toward regionalization, relocating whole manufacturing process to our markets. Mexico is very well positioned to continue levering this opportunity in the years to come. Monterrey represented 30% of total demand due to its infrastructure and qualified labor, while border markets had record activity. Additionally, we're seeing an incremental activity of logistics in the manufacturing side. Inventory management services from local and multinational 3PLs have been increasing. One example is that during the year of our sponsor signed four business projects in border markets plus Monterey for 2 million square feet. We believe these firms will keep on growing and some of these companies are already our global customers. On the logistics front, customers including e-commerce, 3PLs and retailers had a positive utilization of more than 80% to face seasonal sales. and are trying to secure spaces ahead of future demand. Because of that, Mexico City recorded its strongest quarter, absorbing 4 million square feet in the same period, driving the vacancy rate towards 2%. As land scarcity gets more severe, we expect to see new projects beyond the toll booth emerging and the consolidation of last-dutch facilities. As an example of this last one, we recently secured one of our last-dutch spaces in Vallejo to a convenience store. We are seeing more traction in this kind of activity. Before concluding, let me discuss the 2023 outlook. We're optimistic as we start the year. I have never seen such market conditions in any time in my professional career, and we're very well positioned. On the internal growth side, Increasing rent is the main driver to higher cash flow with no significant investment. Our mark-to-market is 21%. This is a great opportunity to have another record year of rental growth as we push rent and turn. On the external growth side, we expect to be active and opportunistic. In addition to the Pellois pipeline of 5.3 million square feet, we will be patient and keep exploring third-party assets that align with our investment strategy. With your balance sheet as a major competitive advantage, the flexibility we have allows us to play more offense. Our team of real estate professionals proved why they are the best in class during 2022 with seamless execution despite a changing operating environment. Putting everything together, we're excited about 2023. Our hard work will carry to this year, where we expect our cash flow generation to be even stronger. We are increasing our distribution above 8%, sharing our success with our investors. With that, let me turn the call over to Jorge. Thank you, Luis.
spk04: Good morning, and thank you for joining us. As Luis mentioned, we ended the year with a section of results driven by stronger demand than supply, mainly due to nearshoring, which we see as an structural change and long-term frame. In 2022, we set many new records for the Fibra and in the sector, such as year-end and average occupancy, rent change, sensor cash, and gas NOI. This is a result of market dynamics and excellent operations from our integrated teams. As you can see, we have a portfolio in excellent condition supported by a blue-chip partnership. This combination will help us keep on delivering value to our investors. In line with this, let me walk you through our financial results for the quarter. SFO reached $41.5 million, a 15% versus last year, or 4.2 U.S. dollar cents per certificate, mainly due to rental growth and acquisitions we did, partially offset by last year's right suffering. A FFO was $32.3 million for the quarter, a 17% increase when compared to last year and above our expectations. Moving to operating metrics. Leasing activity reached 2 million square feet with a record period end and average occupancy reaching 98.9% and 98.4% above our expectations. Net effective rent change and rollover increased close to 25%, representing the highest since IPO. And for the last 12 months, it has been around 20.5%. In terms of same-store cash and GAAP NOI, we had a positive increase of 9.8% and 10.1%, respectively. These results reflect our portfolio rent growth, higher occupancy, and annual bonds for the quarter. We entered the new year in a position of financial strength, with the strongest capital structure in the sector, maintaining excellent metrics and financial flexibility for future growth. Let me go through the highlights. Don Tuvalu's 20%, which gives us ample liquidity, weighted cost of debt of 4%, weighted debt maturity of 7.5 years, debt to adjusted EBITDA of 3.7, and fixed coverage ratio of 5.2. Now, I would like to provide you our 2023 guidance. We keep on seeing high demand in our markets. In defense, we expect year-end occupancy to range between 97% and 98%. Following our strong leasing and record rent change in 2022, we expect same-store cash NOI growth to range between 3% and 5%. Annual capex as a percentage of NOI should range between 13 and 14%. GMA should range between $31 and $34 million. On the capital deployment front, we expect to acquire between $100 and $300 million. Asset disposition between $0 and $50 million. Putting all this together, We are setting our full year SSO per CBFI range between 17.5 and 18.5 US dollar cents. Given our excellent results, we keep on adding value to our investors by increasing our distribution 8.3% to reach 13 US dollar cents per certificate. Moving to ESG. Our efforts in 2022 can be summarized as follows. We have committed to net zero by 2040, along with Prologis. We have reached 54% of certified buildings and 77% of LED lighting in terms of area, our goal being 100% by 2025. We launched our solar initiative in 10 buildings. We were recognized for the second time as a sector leader by CRED. We continue to be part of Dow Jones Sustainability Index and the local S&P ESG Index. On the social side, we started our Prologis Workforce Initiative to help the communities around our portfolio to be employed by our time. Before I finish, I would like to talk about last year's tax gain and its effect on the distribution. Dividend guidance distribution for 2022 was $0.12 per certificate, which represents $112 million, and we will comply with this guidance distribution. In line with local tax rules, total taxable gain for 2022 will include an important portion coming from inflationary and FX gains on the debt. These two effects we'll make Fibra Prologis taxable gain for 2022 an amount above our guided distribution. Because of this, and in order to comply with Fibra's regulation, before March 15th, we will make a distribution in cash, which will comply with tax rules for 2022, but will be part of 2023 guided dividend. Let me be clear. Fibra Prologis will distribute in cash an amount which will represent around 45% of total 2023 guidance and the balance to be delivered in equal payments on the second, third and fourth quarter. I would like to finish thanking our teams on the ground who have made an excellent job and our investors for their constant trust and support. 2023 will bring new challenges and opportunities to our sector. Thanks to our strategy, unique position in the market, and strong balance sheet, we will continue delivering sustainable growth to our holders and are ready to take advantage of opportunities. With that, I will turn it to the operator for Q&A.
spk02: At this time, I would like to remind everyone to ask one question with a follow-up. And to press star, follow the number one if you would like to ask a question. Our first question comes from Vanessa Corroga with Credit Suisse.
spk11: Hi, thank you and congrats for the yearly results. The question I want to focus on is about the contracts that you are signing currently. Any structural or more profound changes in how you are signing contracts or negotiating terms with tenants given the increasingly tight demand supply situation of industrial real estate in Mexico?
spk13: Thank you, Vanessa. Good morning, everyone. This is Hector. I would say, Vanessa, that customers have been evolving and they have now a much better understanding of market conditions than what we experienced probably in 2020 and 2021. Contracts have not been modified, to answer your question. The main difference is that the rent change or the increase in rent that they are experiencing customers are having is higher than what they have ever seen, but they are getting used to this situation. They understand the restriction between new products being launched out to the market, and I think the main difference that I see is customers willing to secure space even for more of what they need. In the past, they were trying to match their needs depending on the business or the contracts that they have. And now we see customers willing to have a spec space, that's the right way to call it, in order to secure future business. particularly logistic customers, they have learned that having a space is producing them good business and good margins with new customers, and I think that's the way the industry is evolving.
spk11: Okay, okay, so that means that they are seeing into the next, I don't know, five to ten years, I guess, when deciding the space that they want to lock in, right? Is that right? And I guess
spk13: Yes, they are aiming for longer terms. In the past, they were probably two to three years, and now we've seen logistic customers requesting three to five years. So that's an important difference.
spk11: Okay, I guess second floor industrial buildings will come soon. Thank you. Thank you, Arthur.
spk13: Well, hopefully if... In order for a multi-story building to be present in the Mexican market, our best estimation as of today is that rents need to increase about 50% of what they are. So, it's going to take a while until we get there, but, you know, let's see what happens.
spk11: Thank you very much.
spk02: Our next question comes from Nikolai Lipman with Morgan Stanley. Good morning.
spk16: Thanks for taking my question. Thanks for the call. Congrats on the strong 2022 numbers. Now, I guess I get to ask that guidance question. When I look at the same store NOI 3 to 5%, you know, it does look a little low. Can you talk a little bit about your FX assumption? Also, what are you expecting with regards to the evolution of your operating expenses? baked into this assumption. So that's my question. Thank you very much.
spk04: Thank you, Nick. This is Jorge. I'm taking for your question. In terms of a same-store guidance of 3% to 5% for the year, you have to take into account that ethics is part of that guidance. So we basically take a high range and a low range and that moves a little bit the range. The reason for the range to be in that level right now is that we do expect some increase in expenses due to inflation and other factors. Not all our expenses are increasing by inflation, and we take into account that. So we have some operating expenses that are increasing during the year, and that gives us this range. Please take into account, Nick, that we ended the year with a very high occupancy. So occupancy, for that matter, doesn't, given our guidance, is not adding more to defense or cash NOI. Okay? So it's increasing operating expenses.
spk05: Nick, I would just say that, you know, 2021 and 2022 broke our forecasts. And, you know, given the pipeline, there's a good chance we can break the forecast again, especially on market rental growth. If that is the case, the numbers will be updated in, you know, following calls.
spk02: Our next question comes from Gordon Lee with BTG Pactual.
spk07: Hi, good morning. Thank you very much for the call. Quick question on the M&A front. First, on the deployment of cash, the $300 million guidance, I was wondering if you could give us a sense of how you think, broadly speaking, that will be distributed throughout the year, especially considering the fact that you already had some negotiations that, I guess, were stalled towards the end of last year with a whether you're seeing those coming back live. And the second question, just on the disposals, is that just sort of ongoing portfolios sculpting best practices type of decision, or is there something about those markets, and Reynosa in particular, that you've decided that you're less keen on? Thank you.
spk03: Thank you, Gordon.
spk05: Certainly, You know, we are targeting PLD and third-party acquisitions. As you can see in the supplemental, we have 5.3 million square feet coming from the sponsor, which is 55% leased. As of timing, I would have to say that we need to be cautious. You know, we have been seeing an environment of interest rates going up and certainly a higher cost of capital. There has been a gap between sellers and buyers, and likely assets will be pressured in value. So, you know, for example, in the U.S., you know, values have dropped around 5% to 10% this end of the year, and in Europe, more than 12%. So I think these times are, you know, to be patient. We need to see prices covered and, you know, let markets stabilize, and then just move forward. Have to say that we're in a great position. We have the best balance sheet in the sector with ample firepower, you know, and 20% loan to value. So we'll be able to take care of opportunities as the year comes. Referring to the, your second part of the question, which is what has happened to, you know, some of the assets that we had negotiated, you know, during the rights offering. So we were able to move forward with one of those portfolios. It was located in Tijuana, and this was coming from a U.S. pension fund. We were able to get a discount, and you saw a closing of $60 million. The additional portfolio that we were negotiating, we did not get an adjustment to market conditions, and for that reason, we had to drop it. So having said that, I think we feel very comfortable about how we can take opportunities, internal, external, and we just need to be patient.
spk13: On the disposition front, Gordon, we are selling some assets that we have in Hermosillo and some assets that we have in Laredo and Guantamoros. We're not selling anything in Reynosa. Reynosa is a market that we like and I think that this is for activities consistent to what we always do of trying to tune up and to reshape the portfolio. We're taking advantage of the good market conditions to get rid of these assets that do not fit with our long-term strategy.
spk02: Our next question comes from Rodolfo Ramos with Bradesco BBA.
spk12: Thank you. Good morning. Thanks for taking my question. My question is a follow-up on Gordon's. I mean, we have seen long-term rates in the last three, four months or so coming down. Just wondering if you, you know, if you continue to see, you know, some of these other conversations that you might be having coming back to the table and, you know, how confident you are on your acquisition pipeline. And, you know, tied to this question as well is, you know, you've seen all of these markets along the northern border being very tight, whether it's, you know, space, you know, energy constraints, et cetera, that make adding supply more difficult. Which other markets are you focusing on that might benefit from, you know, greater nearshoring demand, you know, given this tightness in the northern markets?
spk05: Thank you. Thank you very much, Rodolfo, for your question. And certainly, as we enter the year, we are hearing that there could be a soft landing. but nobody knows, still very uncertain. And we will see. And, you know, as a result, long-term rates are coming down. You know, there's 10 years at 3.5%. Having said that, you know, if you look at financing costs, you know, they're up very, very high. If you want to secure, you know, long-term debt for one of these acquisitions, it's just going to be, you know, a number around a 7%. even higher than the 7%. And, of course, you know, the market takes time to stabilize. So we feel that maybe in the first or the second quarter, you know, market conditions will, you know, settle. And, you know, once we feel, you know, the market has, you know, reached, you know, the right level, I think we'll be ready to act. So we see all transactions. We have a very healthy pipeline coming from the sponsor, as you can see in the supplemental. So we feel very comfortable to meet, you know, our guidance. And, you know, we see that there are more opportunities coming our way. We will always update it, you know, during our earnings calls every quarter.
spk13: The second question was also that you made. regarding how the activity in the border is performing. You know, we are 100% occupied in Juarez, 100% occupied in Tijuana, 99.8% occupied in Reynosa, 98.5% occupied in Monterrey. So these numbers speak for themselves. Monterrey is being one of the big, important winners of this nearshoring trend. It was a record market in absorption with 13.6 million square feet. And, you know, our sponsor made the largest bet on land on Monterrey 18 months ago. I think that this initial trend somehow is ratifying that our views and strategy on the markets that we have selected is the right one. You mentioned it is every day more and more difficult to supply new space in the markets that I mentioned. The energy is the most important challenge. And I think that these are very positive news for the current holdings of Hibra. This represents a higher challenge to grow organically and to supply new space. But I think that Prologis is better positioned than competitors to surpass these challenges and to be able to supply space in these markets. This trend about customers requesting space is there. There is a pipeline, there is a waiting list. This high number of occupants is the evidence of this. So we need to work hard and we need to surpass the infrastructure and the challenges to supply new spaces. And in the meantime, we need to take advantage and we need to be doing a good job working with our customers, making them understand current market conditions and being able to achieve rate increases as we have always have been doing.
spk02: Our next question comes from Gerard Giotte with Goldman Sachs.
spk15: Good morning. Thank you for taking my question. I wanted to focus on the leading spreads and try to understand a bit of the breakdown because they did increase sequentially to 27%, but when I What I wanted to understand is, is this as true for consumer-driven markets as it is for manufacturing-driven markets, or is it led more by one or the other? And then connected to that, I just want to understand, what is your expectations for leases, Brett, going into 2023? Do you expect this pace of high 20s, perhaps 30s, to continue increasing during this year? Those are my questions. Thanks.
spk13: Gerard, this is Hector. Thank you very much for your question. I think that this question relates to one of the main points of fibroecology and the potential that we have to keep on creating value within our portfolio. The best view that we have as of today is that the lesser threat that we have for market that we have in place and for market range is about 20%. This is at the beginning of 2023. My best expectation that I have, and these are realized depending on each one of the markets, Tijuana and Mexico City are at the top of this list, but you know, I wouldn't be surprised if market trends in these two markets go above 20%. This represents a unique opportunity for us to keep on growing organically without making any additional investment. This doesn't have to do if the facilities are manufacturing or logistics. I think that as of today, the main problem that we have is the challenge, as I was mentioning in the previous question, the challenge to supply new space. The vacancy is at a peak. In all of the markets in which we participate, rents are at peak and rents will keep on increasing. So supplying the space is very difficult. The current space will be creating important rent growth going forward.
spk02: Our next question comes from Pablo Montesvalles with Barclays.
spk06: Hi, Tim. Thanks for taking my question. I have two quick questions. The first one is, if I recall correctly, you have record numbers in 21, record numbers in 22, and seems like 2023 will be record as well. and yet valuations in the market hasn't been reflecting the true value of your portfolio, perhaps until now. How do you see the cap rates and the valuations trading in 2023? Do you think that finally we are in this positive environment to see valuations reflecting the positive trends that we're seeing? That's number one. And the second one is regarding that Given that your portfolio is mainly focused on logistics, and yet you see a very strong boost on the light manufacturing side, would you reconsider shifting the years to do more light manufacturing in the next two, three years?
spk05: Thank you. Thank you, Pablo. This is Luis, and yes, early, you know, the pandemic, created, you know, great conditions for the real estate markets. And, of course, you know, this is not only in Mexico, it's globally. But, you know, the current trend has to do very much with the structural changes in the manufacturing sector in which companies are making long-term supply chain decisions and shifting their manufacturing to Mexico. And this is a driver that only the manufacturing countries have. And we have seen our country, you know, take advantage of that, you know, in comparison to other more developed markets. As a result, 2021 and 2032 demand has doubled from pre-pandemic levels. We saw, of course, you know, the era of cheap money, and we saw cap rate drop. cap rates coming down very, very importantly. But now, you know, with interest rates going higher, we are seeing, you know, values stabilize. And we have seen, especially in the second half of last year, values to go up. As I was mentioning in the call, we have seen adjustments in the U.S. of around 5% to 10% and in Europe between 10% and 15%. In Mexico, year-on-year on 2022, we have an expansion around 7%, and values came flat in the fourth quarter. So we believe that real estate values will come down in Mexico, as they have come down in the U.S. and Europe, and this will be a function of how market rental growth is related to this cap rate expansion. So this is something that's going to be price discovery. It is probably not going to go as much as it is going down in the U.S. and Europe because, you know, also on the upside, it didn't go much as up as it did in those other countries. So we'll need to see. Certainly, there is a lot of excitement on the nearshoring trend. You know, we did the rights offering at 52 pesos. We're currently trading above 60. So we are trading above NAV. Our NAV is currently around 58 to 59 pesos. So this is around a 5% premium. Certainly, the portfolio and our strategy is very flexible. So we have chosen the best industrial markets. In the times of e-commerce expansion, we had a lot of growth in Mexico City. and we were prepared to do that. Now that we have this structural change in manufacturing, we have great presence in the border markets and Monterey, and we're taking advantage of it. So I guess what I'm saying is we're flexible, and we will be moving where the demand is. Certainly we see a better growth on the manufacturing sector in the next two to three years, and eventually if the winds change, we are ready to take advantage of it.
spk13: An additional comment on this, 60% of our portfolio is logistics and 40% manufacturing. Number one, logistics and consumption are not in bad shape. I think that there is a perception because Amazon announced last year that they were giving out in some of their facilities that this was a very negative condition. I think that what happened last year is that the logistic growth is getting into a wrong rate, feasible rate. In the pandemic, the numbers that logistics and e-commerce reached were spectacular. Today, we keep on experiencing in Mexico an increase near 15% on e-commerce and this type of activity, which is a wrong rate that could be sustainable. So I don't see an issue going up with this part of the portfolio. A second comment is that in Prologis, we do spend a lot of time in the product design. And even if we are developing border, you know, the type of product, we do a lot of work with our customers, even in the build-to-shoot projects, because the facilities that we develop are either to be used in manufacturing or logistics. So it has both components. They are flexible. They are hybrid. And I think that that does represent an additional advantage to us.
spk02: As a reminder, to ask a question, press star and then the number one on your telephone keypad. Our next question comes from Francisco Suarez with Scotiabank.
spk13: Hi, Tim. Hopefully, you can hear me well. Thanks for the call and sharing your insights. That's very helpful. The first thing that I have is on the overall pipeline that I see. Basically, this guy commenced, starts at 4 million square feet last year. They think that they will be having completions 4.3 million square feet this year. Their overall language starts out mostly at 14 million square feet as well. So my question is, it seems that PLD is not reducing their overall pipeline on the ground in Mexico. So linked to the previous question, the question that I have for you is that you will be asking the same discount to PLD as well in the portal that are sterilizing. Thank you.
spk03: Thank you for your question, Francisco.
spk13: Let me tell you that we have never been restricted by PLD regarding their investments in Mexico. On the site of geopolitical conditions, Mexico has always been a country where PLD has shown appetite to people investing. On a relative basis, the business in Mexico to PLD as they have grown importantly on the U.S. is below the big numbers that we used to have. So that represents an opportunity. I think that the challenge that we have here conducting the business of Mexican Prologis is to present the right opportunities with the right returns, and if we do so, we will have upward support from corporate. Having said this, development has not stopped at all from our sponsor. We keep on chasing the right land in the right markets. I think that an additional barrier of entrance is that Today you need to anticipate and from the moment you buy land until the moment you can receive the first check from your customer could be between two to three years. So this cycle is much more bigger than what it used to be and this represents a barrier. We see a lot of new competitors jumping to the market. And this situation is different from what it was in the past. You need to anticipate. You need to buy land. You need to work infrastructure. You need to start investing a lot of money before you start receiving the first mistake. And this is a new condition that the market has, and we do not anticipate this situation to be different in the short to mid term.
spk05: So, Paco, one last comment. So what is our 2023 plans on the sponsor pipeline? I think number one is to replenish land in some of the markets, especially, you know, Tijuana. And then I think you can expect that, you know, the parent will at least put to work three million square feet of additional, and most likely a lot of this will be built as the market conditions. And this is just a great advantage to have FIRA for the pipeline.
spk04: Yes, I'm sorry to jump in for the long answer, Paco, but remember the FIBRA process on these acquisitions with TLDs through a third-party appraisal. So there is no negotiation on the value. That said, as we've mentioned, that year we were going to do some acquisition from Prologis. values were coming in through the appraisals, and we decided to stop and wait a little bit more, given what you just mentioned. So there's not a must-give, must-take. We are not obligated to buy. Prologis is not in the position of pushing these assets to us. We can decide, and the value comes from the appraisal.
spk03: Thank you.
spk02: Our next question comes from Adrian Huerta.
spk14: Thank you. Hi, everyone. My question has to do with the dilution that you had from the equity offering. How do you guys see that dilution that you had, and when are you expecting to be back to the levels that you had before this? I mean, if you look at the FFO guidance, I think you're guiding, I mean, let's say in peso terms, somewhere around 3.4, 3.6 pesos. And if we look at the 3Q analyzed was a little above 3.8. And considering the guidance that you have on M&A, it seems like it will take a while for that dilution to close.
spk04: Thank you, Adrian. This is Jorge. Let me divide it, and I'll just focus on FFO and to give you a crisp answer. First of all, if you look at our FFO on a nominal terms, if you do the math, we are increasing at the flow year over year in 2023 about 20%. So there is an increase in nominal basis. On a per share basis or per certificate basis, we added 20% more of certificates due to the right offering we did last year. So basically, we are erasing the dilution. We're being flat year over year. So what we said last year is that it would take us about 18 months to neutralize the dilution, if you may, it is taking us 12 months, one year. So six months in advance. Regarding our applications, most of our applications, the way that we see them, the way that we model them, we model them more to the end of the year. It could happen before. But for valuation terms and guidance, we do that because there are things like antifrost, entitlements, and some other factors that we do not control that we account in our model for. Hopefully, this answers your question.
spk05: So, Adrián, the dilution has gone better than we have expected, as Jorge said, 12 months. And I think the main driver of it is... you know, higher cash flow coming from rents. That is mainly the driver that is, you know, closing the gap on the dilution front.
spk14: If we don't look at it on an annual basis, and let's just take the 3Q number, which was the last quarter that, so that we don't incorporate the 1Q and 2Q into the equation. Again, at somewhere around 3.8 FFO per share. Is that a level then that you could be achieving then by the fourth quarter of, of this year then, three, four quarters of this year.
spk04: I mean, you're looking at, you're comparing three quarters to four quarters without the new certificates, that's what you're saying? Well, if that's what you're saying, I mean, we would be 20% above the third quarter if you take away the certificates.
spk03: Okay. Thank you. Our next question comes from Renata Cabral with Citibank.
spk09: Hi, good morning, everyone. Thanks for taking my question. You mentioned a lot about the M&A front, but I have a question here about the long term. Do you think that now we have Mexico has lot of opportunities related to nearshoring and the reason why the M&A front will be related to that. But in the future, how do you think Prologis will have the portfolio? Because today it's more linked to logistic tenants, let's say, and do you think that in the long term, I don't know, in five more years, it can shift to manufacturing or you are be opportunistic, then we see that only in the future. Thank you.
spk05: Thank you, Renata. And certainly, yes, as I was mentioning, three-fourths of demand comes from manufacturing in 2023. Having said that, demand doubled pre-pandemic levels, and even logistics demand is in pretty healthy levels. It didn't double as manufacturing. but it's pretty healthy. So we're very confident in our drivers. We are being opportunistic, and we believe there's going to be high growth on the manufacturing side. So we could easily see that in the next five years, the manufacturing sector may represent more than 50% of our portfolio in the next three to five years. But eventually the drivers change, And we will be, you know, taking advantage of where the market goes. So at this moment, we feel very comfortable and we're very well positioned. I think we have the best portfolio in the sector.
spk03: Our next question comes from Alan Macias with Bank of America.
spk08: Hi, good morning, and thank you for the call. Just two questions. Just to give an idea of how competition for acquisition is developing in Mexico, what are you seeing, and if you are seeing new players coming into Mexico to acquire assets, and what are you looking at at cap rate acquisition levels? Should we expect something similar to the fourth quarter acquisition? 6.3, or should we expect something higher, perhaps? Thank you.
spk13: Thank you. Thank you, Alan. This is Hector. I would divide the competition in two different sectors. You know, the big investors are willing to take advantage of Mexico industrial real estate with big portfolios, the nearshoring, all that wave, I think that profile of big names that are not yet in Mexico keep on being interested, but they have the same approach that we have as this volatility and this lack of price certainty is bringing to them. I think that they will be back, and I think I'm expecting them to have a different situation on the second part of this year once that interest rates have settled and we have a better panorama of what's coming forward. The second sector of competitors, you know, it has never been as big as it is today. We have been observing a swift increase from other types of asset classes, developers, office developers, shopping centers developers, residential developers. We see a lot of interest and they are welcome to the sector as the sector has big opportunities. But I like to mention all the time that almost 70% of the business that we do, we do it with our own customer base. So in this business, it's very important to have this type of business relations to create confidence with customers so you become their partner on their growing future. This is the way I see competition. Regarding cap rates, my best forecast that I would have for this year is that we will still have some pressures to compress cap rates, not much, probably between 25 to 50 bps. But I think that, importantly, the market rent growth that we're expecting will offset a lot of this cap rate expansion. As interest rates and volatility settles, cap rates potentially will recuperate. Luis mentioned in the previous answer, in the U.S., there was much more dramatic upside and downside on cap rates. Mexico has been more moderate on this. So, I don't anticipate a big fluctuation on that on 2023.
spk03: Our next question comes from Lucila Gomez with Compass Group.
spk10: Hi, good morning. Thank you for taking my question. I have two questions. The first one is, looking at the 2023 outlook and guidance you mentioned, and following on a little bit on all the near-sharing questions you've had, I just want to ask, does the 2023 outlook include additional opportunities that could come from nearshoring or are you just taking into account, for example, current negotiations and current clients that have been looking around? So are you expecting like the guidance includes some possible additional nearshoring or only what you are currently seeing in Mexico? And my second question is, sorry, I missed the NAD number you gave. So, if you could mention it again. Thank you.
spk05: Thank you, Lucila, for your question. So, I guess, you know, we guys in this year, we take into account, you know, all of the circumstances. Certainly, as you mentioned, the nearshoring opportunities are all there. You know, we are working in several third-party acquisitions, and we also have, you know, the 5.3 million square feet pipeline coming from the sponsor, which will be available for Fibra to acquire. So having said that, you know, we need the market to stabilize. And if we have it stabilize sooner, I think, you know, eventually we could – revise our guidance, you know, up or down. But we feel very comfortable about our guidance, and certainly I hope it proves to be conservative and we outpace it. But that would have to be announced at a later date.
spk04: And Lucila, this is Jorge. You made a question about NAD that you missed the number. We didn't give a number on NAD, by the way. We don't give a number on NAD. You have the different pieces. You have the valuation of the portfolio, which is basically flat. In our balance sheet, you have the number of shares and our debt. So you can do the math and take your pick on the ethics. So we can discuss this in another call, but we don't give NAD numbers.
spk02: Our next question comes from Rodolfo Ramos with Prodisco BBA.
spk12: Thank you. Just a follow-up on, I mean, you touched on the Mexican peso during your earlier comments and how it affects guidance. We just wanted to see, you know, we've seen the peso is giving up some gains, but it was around 1850, back to 19. It's certainly been stronger than perhaps we were expecting not too long ago. How does this affect, in your opinion, commercially, talks with potential clients going forward? I mean, is this a real source of concern? Have you seen customers perhaps trying to change rent or lease denomination? How should we think about a very strong peso impacting your business going forward? Thank you.
spk13: Thank you. Thank you, Rodolfo. We have happy customers. I mean, all the people that pay, I mean, some of our customers that do pay dollars and they have this exchange rate, it's a lower risk cost to them. The most of the peso component, we have it in Mexico City because they are multinational companies doing operations in pesos. So for the fibra, it does represent a higher revenue from the component that we have pesos that could be probably around 3% will remain at this FX. So I think that a strong peso does not create anxiety to our customers. We never change forces. I mean, dollar leases are dollar leases until they expire, and peso leases are peso leases until they expire. I mean, I think that we have a clear understanding with customers about this, and we do not experience a lot of conversations in this regard.
spk02: There are no further questions at this time. I turn the call over to Luis Gutierrez for closing remarks.
spk05: Well, I want to take the opportunity to thank everyone that connected to this call. 2022 was an outstanding year. And as I said in my remarks, I have never seen such good conditions in industrial real estate. So we're hoping for a great year as well. Please feel free to reach out. Hopefully we can show you our properties. And thank you very much and see you on your next call. Thank you.
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