Good morning, and welcome to FIBRA Macquarie's fourth quarter 2023 earnings call and webcast. My name is Diego, and I will be your operator for this call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star followed by zero, and an operator will be happy to assist you. I would now like to turn the conference over to Nikki Sacks. Please go ahead.
Thank you for joining FIBRA Macquarie's fourth quarter 2023 earnings conference call and webcast. Today's call will be led by Simon Hanna, our Chief Executive Officer, and Andrew McDonald-Hughes, our CFO. Before I turn the call over to Simon, I would like to remind everyone that this presentation is proprietary and all rights are reserved. Presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell securities. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. Actual results, performance prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statements. These forward-looking statements are made as of the date of this presentation.
We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events, or otherwise, except as required by law. Additionally, on this conference call, we may refer to certain non-IFRS measures as well as to U.S. dollars, which are U.S. dollar equivalent amounts, unless otherwise specified. As usual, we have 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 fibramacquarie.com and download these materials. A link to the materials can be found under the Investors Events and Presentations tab. With that, it is my pleasure to hand the call over to FIBRA Macquarie's Chief Executive Officer, Simon Hanna. Simon?
Thank you, Nikki. Good morning, everyone, and thank you for joining us. On today's call, I will discuss our fourth quarter and full- year 2023 results, as well as our growth initiatives. Andrew will also provide an update on our balance sheet, robust capital position, and introduce our guidance for 2024. Our fourth quarter and full- year results are a product of the continued successful execution of our strategic initiatives, focused on value creation as we delivered solid growth in our industrial portfolio, saw a sustained recovery in our retail shopping centers, and advanced on our development program. In our operating portfolio, we continue to realize real annual rental rate growth, combined with strong occupancy driving higher NOI, while our development program shows solid progress and will contribute enhanced growth over time. All of this is underpinned by our long-standing track record of disciplined capital management.
In 2023, we delivered a strong set of results in underlying U.S. dollar terms, with full year NOI up 12%, supporting annual USD scheduled distribution growth of 19% on a per certificate basis. These results were a reflection of the strength of our platform, with a well-located, high-quality portfolio that is strategically positioned to benefit from nearshoring tailwinds. Furthermore, one of the key distinguishing features of our development program is our measured approach of prioritizing prudent capital allocation, balanced with achieving attractive yields in order to grow total returns on a per certificate basis. We currently have six active industrial projects, three of which we delivered during the fourth quarter, with one being leased prior to completion, and a further two buildings under construction.
These projects represent a total investment of approximately $126 million, and we are targeting a yield on cost of between 9% and 11%, which will provide a meaningful contribution to NOI upon stabilization. One of the many 2023 highlights included the execution of a lease with a leading e-commerce retailer in Mexico City for the first of our two building complex, which should fully contribute to earnings in 2024. During 4Q, we also delivered the second building in this park, which is now being marketed for lease with strong interest from a diverse range of customers. Continuing with the theme of our successful track record of development execution. In Monterrey, we executed the lease and are completing term improvements for a 210,000- sq ft facility, with occupancy and NOI contribution expected to commence later this year.
With the strong market dynamics, we are also progressing on the construction of a 200,000- sq ft property in our Apodaca park that is on track for delivery in the first half of 2024. In addition, during the fourth quarter, we completed construction on a 267,000- sq ft property in Juárez and a 144,000- sq ft project in Reynosa, and are currently marketing both of these buildings for lease. Turning to Tijuana. We are progressing with the development of our first building in this project, with an expected delivery in mid-2024. Importantly, several of these projects are part of a phased multi-building complexes in high demand markets and represents attractive embedded growth. I am excited to see these projects contribute to operational and financial performance in the coming years. Turning to our operational results.
We delivered another strong print across our portfolio with positive metrics in occupancy, lease spreads, and retention, all contributing to solid NOI growth. In our same- store industrial portfolio for the fourth quarter, consolidated NOI was up 4% year-over-year in underlying U.S. dollar terms, and 8.6% for the full year. We increased both our GLA and our occupancy as we delivered new buildings and executed leases, which set a strong foundation to our earnings outlook in 2024. Occupancy grew by 26 basis points sequentially and 47 basis points year-over-year to 98.1%. Total leasing volume was approximately 1.5 million square feet as we achieved solid retention and welcomed new customers to our properties. Our re-leasing spreads on commercially negotiated renewals were a strong 18.6% in the fourth quarter. Highlights of our new leasing activity included an electronic equipment manufacturer in Mexicali and an auto parts logistics operator in Saltillo.
2023 was an active year in terms of leasing, signing 6.4 million square feet of new and renewal leases. As a demonstration of the broad-based strength of our portfolio and the industrial real estate market in general, this is the first time in FIBRA Macquarie's history that we achieved closing occupancy of more than 90% across all 16 of our industrial markets. Of these markets, we were fully occupied in several core geographies, including Juárez and Tijuana, to name just a couple, and believe we should have the opportunity to continue to realize rental rate gains with approximately 15.2% of our lease book up for renewal in 2024. In our retail portfolio, we delivered improving metrics throughout the year, including occupancy gains, stronger retention, an extension to average lease term, and higher rental rates. Collectively, this contributed to a 37% year-over-year growth in retail NOI.
With an ongoing recovery, the performance of our necessity-based shopping centers is continuing to enhance returns across our consolidated portfolio. Occupancy improved both sequentially and year-over-year, ending the fourth quarter at 92%. Over the last 12 months, weighted average lease term remaining increased by 15%, alongside an increase in average rents of 5%, reflecting improved leasing conditions. During the quarter, we signed 74 new and renewal leases totaling 19,000 sq m across a diverse range of tenants, including restaurants, dark kitchens, banks, and merchandise stores. With this strong leasing activity, the retail portfolio benefited from a high retention rate of almost 90% over the last 12 months. As we enter 2024, we remain encouraged by the backdrop of Mexico, which continues to provide a very favorable environment, especially given our portfolio positioning. Nearshoring is driving ongoing demand, and we are seeing continued activity.
We believe Mexico will continue to be an attractive destination for companies seeking to reduce supply chain complexities whilst maintaining competitiveness, with particular interest coming from auto part suppliers, electronics, and machine manufacturers. We are also seeing an encouraging picture for foreign investment in the country, and the market dynamics should continue to be favorable, with low vacancy rates in our key markets, including Juárez, Monterrey, Tijuana, and Mexico City. While demand remains strong, we also recognize that supply side constraints, including energy infrastructure challenges, could impact companies' capital decisions to make new investments in Mexico. As we look ahead, we will maintain the same balanced and disciplined approach to growth that we have consistently demonstrated, being prudent in both our sources and uses of capital.
We intend to commence new buildings in our existing projects thoughtfully, and we will pursue selective land acquisitions to maintain a growth pipeline with a high number of quality opportunities under exclusivity that are currently being evaluated. In 2023, FIBRA Macquarie delivered a total shareholder return of 45% in U.S. dollar terms, which is supported by a governance structure that we believe provides strong oversight as well as alignment with invested interest and value creation incentives. Our management and performance fee is unique in the industry, as it is linked to share price performance and total certificate holder returns, providing alignment between manager incentives and our investors. In conclusion, I'm deeply proud of the efforts of our team in delivering on our strategic initiatives, which is reflected in our strong 2023 results. As we look to 2024, we remain optimistic regarding our outlook and are encouraged by the market backdrop.
With our best-in-class platform, we believe we are well positioned to continue to build on our sustained and disciplined track record. With that, I would now ask Andrew to discuss our financial results, balance sheet, and liquidity position and guidance for 2024.
Thank you, Simon. For the fourth quarter, we delivered AFFO per certificate of MXN 0.6363 or $0.0362 , which represents a 5.4% increase on a dollar basis from the prior year. Our balance sheet remains well positioned with prudent leverage metrics and strong liquidity to support our growth strategy. As of December 31, our real estate net LTV was 31%, and our net debt- to- EBITDA multiple was 4.9x . Taking into account committed undrawn credit lines and surplus cash, FIBRA Macquarie has available liquidity in excess of $350 million. These balance sheet metrics are supported by a record high NAV per certificate of MXN 44.6, which in part reflects the contribution of gains recognized upon stabilization of our development properties, as well as a healthy uplift in our portfolio valuation year-over-year.
At December 31, 2023, FIBRA Macquarie's independent valuations reflect an NOI cap rate of 8% for our industrial portfolio and 10% for the retail portfolio. For the fourth quarter, we declared a scheduled distribution of MXN 0.5250 per certificate in line with guidance, taking full year 2023 ordinary distributions to a total of MXN 2.1 per certificate, also in line with our full-year guidance. As we have previously discussed, full- year taxable results for FIBRA is subject to minimum distribution guidelines, which include FX gains and inflationary impacts on foreign currency denominated debt. For FY 2023, our fiscal results subject to distribution exceeded our regular paid and declared distributions. Therefore, in addition to our scheduled distribution guidance, we will also be paying an extraordinary distribution of approximately MXN 2.27 per certificate, expected to be paid prior to March 15.
The extraordinary distribution is expected to be paid in a combination of approximately 70% certificates and 30% in cash, allowing us to maintain a strong balance sheet with ample liquidity to fund our growth CapEx program. As is usual for this part of our reporting cycle, we are initiating our 2024 guidance. The full- year 2024 AFFO guidance equates to a range of MXN 2.55-MXN 2.6 per weighted average certificate, or $116 million-$120 million , representing an annual increase of between 6% and 8%. Our per certificate guidance range takes into account the anticipated stock issuance, which is expected to be completed as part of a March extraordinary distribution. We are currently estimating an increase in certificates on issue of 4.8% that will be distributed to holders on record in March. Importantly, our FY 2024 AFFO guidance and per certificate metrics take this issuance into account.
Our scheduled cash distribution guidance is also subject to a similar dynamic. The FY 2024 cash distribution guidance equates to approximately $97 million, representing an annual increase for scheduled distributions of 8% in underlying USD terms and a prudent 82% AFFO payout ratio. After taking into account the expected March certificate issuance, we are initiating FY 2024 per certificate guidance for cash distributions of MXN 2.10 per certificate, which is expected to be paid in equal quarterly installments of MXN 0.5250 per certificate. Our outlook anticipates solid NOI growth in both our industrial and retail portfolios, which will be partially offset by a combination of the continued impact of peso appreciation relative to the U.S. dollar, as well as the financing cost of near-term investments in FIBRA Macquarie's industrial growth CapEx program, which we expect to meaningfully contribute to additional revenue and AFFO over time.
We believe Mexico is well positioned to capture growth opportunities arising from global and regional trends, and we expect FIBRA Macquarie to be a key beneficiary as we continue to invest in a disciplined manner and create value for our certificate holders. Along with Simon, I want to thank all of our stakeholders for your ongoing support. With that, I will ask the operator to open the phone lines for your questions.
Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from Alan Macias with Bank of America. Please state your question.
Hi. Good morning, and thank you for the call. Just a quick question on renewals. Your expectations for increase this year, should we be thinking around 15%-20% increase on renewals, or is there a potential for higher increases? Thank you.
Hi, Alan. Thanks for the question. Look, I do think that we have a good outlook with regards to rental rate spreads this year. I think probably looking at low double- digits is fair. We would love to get the 15%-20% you mentioned. We actually got that in 4Q. We got 18.6% on our renewals. So that was actually right at the top of where we were over the last eight quarters or so, FY 2023 averaging around, I think it was 14%. So really solid in terms of a consistent double-digit renewal spreads. We have 20% of the book rolling in FY 2024, and I think it is fair to expect to see something similar in that low double-digit range.
Where we are today, 20% rolling in FY 2024, and I do think that momentum is there for sure on renewal spread, just given what we are seeing with demand supply fundamentals still being very tight across the board. Thanks, Alan.
Thank you. Our next question comes from Rodolfo Ramos with Bradesco BBI. Please state your question.
Thank you, Simon and Andrew, for taking my question. I just have a couple here on my side. Just wanted to understand this extraordinary dividend that is to comply with the higher fiscal income. I do not understand the share portion. Are these going to be shares that you have in treasury? I just want to understand if this is possible for regulation and what the dynamics and mechanics is behind that. Secondly, you spoke about your fee structure being very much aligned with investors' interest. We have seen a lot of, about some people going internal and some planning to go onto the market, internal structures. If something that you might considering or any changes whatsoever on the fee side. Thank you.
Thanks, Rodolfo. We will let Andrew take the first question there.
Sure. Happy to. On the extraordinary distribution, I think in simple terms, it is permitted by regulation, yes. in December of last year, we went to certificate holders to amend our trust agreement. We had overwhelming support with more than 97% of shareholders voting in favor of the amendment to allow for this distribution, really recognizing, I think, the disciplined capital track record to date. Importantly, recognizing the ability to better utilize those funds to fund growth initiatives and create value for investors. It was something very positively received in those interactions we had with investors. As of today, we have got 94 million shares remaining in treasury, and so more than enough to cover what is required. Perhaps you are referring to a comment within the press release that references some pending regulatory approvals.
Those simply are administrative approvals and sign off with respect to the CNBV, and we are not expecting any delay or issues, and they are simply procedural matters. So very much on track for that, and we think it is going to be a positive result with respect to being able to maintain our capital position and healthy balance sheet.
Thanks, Andrew . Just picking up the second question there, Rodolfo. Look, I think in short, we are reaffirming our business model. No intent to change. I think when it comes to this debate about internal, external, really what is core and central to it is the good governance and getting the alignment right between the management and minority. We think we have that, a very strong alignment, whether it is on the fee structure, which is 100% shareholder return. We are unique in the market with having a base fee link to share price performance, not asset value. So no one else does that, and that is really good alignment. Skin in the game is there with a 5% stake. It is actually worth close to $100 million . So, very material in terms of that skin in the game from a manager or sponsor point of view.
Third, there is no conflicting mandates. FIBRA Macquarie has priority investment rights for all its investment mandate, full stop. That's very clear as well. We think that we've got those building blocks right from a governance and alignment point of view, and you see that being translated ultimately into performance and our outlook. I think the capital management track record we think is good. It speaks for itself. 45% U.S. dollar total return for FY 2023. That's more than respectable, I would say. We're getting to a record NAV per certificate and share price is tracking that with a bit of liquidity pickup as well. That's good to see. I think our capital management track record reflects how we've built the business model, if you like. When you think about our growth outlook and what we're seeing ahead with that same business model, we see it as positive.
We're seeing approximately an 8% U.S. dollar increase, and whether that's in our AFFO line or our distribution line, that's on an 82% payout ratio, which gives us a little bit of a retained AFFO as well. Importantly, from a balance sheet point of view, LTV of 31%, that positions us very well for growth. We have a great growth CapEx pipeline, 5 million square feet of industrial GLA that we're either are stabilizing or can still get started on and capacity to do more. Look, I think we're definitely monitoring what's going out there from a market dynamic point of view. But we also do think that we're very well positioned with the current business model to take advantage of those growth opportunities that's in front of us.
Thank you.
Thanks, Rodolfo.
Our next question comes from Alejandra Obregón with Morgan Stanley. Please state your question.
Hi. Good morning, Macquarie team. Thank you for taking my question. I wanted to ask on your pipeline. Given that you have delivered NOI yields that are well above 11%, I am wondering if your range of 9%-11% NOI yields for your new projects on the pipeline could be, let's say, a touch conservative. I am just curious if there is some upside to these numbers in your view.
Thanks very much, Alejandra. Look, I think 9%-11% is realistic. I guess that is actually where we were pre-COVID, as a target range, and coming out now to 2024, we are seeing all the factors are going up, whether it is land price, construction cost, but importantly, rental rates. So in the overall mix, when we put that through the algorithm, we are still seeing a 9%-11%. And, we are being very happy that we have actually struck above that, in the last couple of developments, 11.8%, 11.9% area. That is fantastic. We are not necessarily saying that we are going to get that all the time. So, when we think about particularly land prices going up in some of those core markets, and we are targeting core industrial markets, we do think 9%-11% should be the realistic outcome over the long term.
Gotcha. And maybe a follow-up here. Is there any region in particular where land plots are increasingly more expensive and perhaps even more than pre-COVID?
Look, I think it's the usual suspects. I think Mexico City and Tijuana, which are the most constrained markets, from a geographical point of view, and the high-demand markets there. They're probably the two markets which we've seen the highest increase in land costs. To be fair, land prices have gone up across the board. But where you have a bit more availability, markets like Monterrey and Juárez, they haven't gone up anywhere like Tijuana, Mexico City, for example.
Gotcha. That's very clear. Thank you very much.
Thanks, Alejandra.
Our next question comes from André Mazini with Citi. Please state your question.
Hi, Simon and Andrew. Congrats on the results. The question is on nearshoring demand. Is nearshoring demand taking up light manufacturing warehouses only, or do you guys also see it going to logistics as well, lifting also the logistics boats, not just the light manufacturing boats? In terms of geography, is it happening, in terms of nearshoring particular, just the northern markets, or has it started to trickle down to the middle part of the country, Bajío or central regions, so on and so forth? Thank you.
Thanks, André. Look, I think the good thing about nearshoring, it's very broad-based from both a geographical and sector point of view. Fair to say that, I guess we have the highest exposure in the northern part of Mexico. Those core nearshoring markets, if you want to call it that, places like Monterrey, Juárez, Tijuana, we're certainly seeing important demand there. Obviously, a lot of that's on the manufacturing side. To be fair, with the manufacturing, you get a lot of B2B logistics requirements as well, and you could throw packaging into that as well. We're seeing, I think between logistics and packaging, a lot of support, sort of logistics type infrastructure required to meet that manufacturing that's definitely coming into the northern part of the country. We are seeing it towards the south as well.
We are seeing places like Guadalajara, for example, on the electronics, et cetera. That's definitely moving in the right direction. I would say that logistics is definitely coming along, particularly B2B, in a similar vein to what we're seeing with the demand on the manufacturing side. From a geographical point of view, as I say, our focus is on the north. That's where we are seeing it. Probably fair to say that it is the strongest in the north, but still seeing some benefit in the center of the country. With regards to then sort of expanding into other segments, I do think it's a fair theory to say, although industrial is the tip of the spear, we should be seeing it benefiting across the broader real estate segment.
You could throw office into that, but I would also like to flag that retail also should have some important trickle-down effect as well as we think about the improving environment from a macroeconomic point of view, jobs, et cetera, in Mexico.
I think perhaps complementing that, Simon. The fact that the retail consumer in Mexico is extremely well positioned. We have seen record levels of remittances, healthy growth in wages remain well capitalized, so not just the support for the ongoing retail sales sector, but also e-commerce logistics is a beneficiary of that growth as well. We are seeing that in those core industrial or should I say, consumer markets around Mexico, places like Mexico City, Guadalajara, Monterrey, also an important factor in the demand drivers in those markets.
Perfect, guys. Thank you.
Thank you.
Our next question comes from Gordon Lee with BTG. Please state your question.
Hi. Thanks very much for the call, and congrats on the results. Just a couple of quick questions, thinking a little bit about the pipeline. I think it is interesting that given how tight the markets are, that not a greater share of the projects that you are delivering are pre-leased. I am wondering whether that is on purpose, whether you are holding back inventory because you want to give it the benefit of the passage of time on leasing terms, or are you seeing a little bit of difficulties in some locations leasing up those properties? Then the second question, just wondering sort of capital allocation on that portion of the FFO that you retain. Should we expect more to be geared towards land bank this year, just given that you are progressing on the pipeline pretty steadily? Thank you.
Thanks, Gordon, for p icking up those questions. Look, we like doing our construction on a spec basis. What we want to do is design our buildings, not necessarily with, if you like, a built- to- suit or pre-lease basis, just because that could sort of introduce some functional obsolescence potentially. So in general, having our prototype, which by the way, is top of the class from a LEED point of view as the regular shape box, et cetera. That gives us the best chance for a high-performing asset over the long term, and so we are very comfortable, and Mexico is generally a spec market where we do that. So comfortable sort of starting it off on that basis. Look, I think we have seen a couple of the developments in the last couple of years where we have actually done leasing through construction.
We tend to see a bit more demand pick up once the tenants can actually see the building actually come to be a reality. Hopefully that is the case for a couple of ones that we are currently doing. But in any event, we are actually very happy. We have just delivered a few of these properties, and we are well within our underwriting budget, if you like, where typically 6 to 12 months is what we aim for as a lease-up. So well inside of that, given that we have just delivered those buildings. I think when we think about our prospects on all those deliveries, we like the backdrop. I think leasing prospects look favorable, I would say. So I would be expecting lease-ups to come through during the course of this year in accordance with our underwriting assumptions. So hopefully that answers that first question.
On the second one, absolutely, when it comes to our growth CapEx allocation, definitely we have a lot there going towards the CapEx on the ongoing constructions. But we are envisaging also looking to add to our land bank. We have spoken about the five core markets that we would like to be increasing our exposure in, Mexico City, Guadalajara, Tijuana, Monterrey, and Juárez. We have a number of exclusive opportunities with regards to well-positioned land banks in some of those markets that we are currently assessing. So I think hopefully getting to the pointy end to some of those negotiations. But certainly, I would like to see a few land bank acquisitions come in through the course of this year.
Perfect. That is very clear. Thank you.
Thanks, Gordon.
Our next question comes from Juan Macedo with GBM. Please state your question.
Hi, thanks for taking my question. We saw strong dynamics in the retail sector, related to the recovery. We were wondering if you could tell us your view on this. Do you expect this trend to cease soon or maybe the macro environment could boost these results and continue for a longer time?
Thanks, Juan, and look, I think Andrew touched on some of the favorable points as we're seeing in the backdrop. Look, retail's been a fantastic story over the last 12 months or so. When we think about where we are from a rent rate point of view, all the way down to NOI, indeed, having an 18%, 19% pickup in NOI for retail, that's been great to see. Definitely coming back in a nice gradual way. Actually, when we think about the full Q 2023 print for NOI, we're at 92%. Fair to say pre-COVID, if you take, say, full Q 2019, I guess, as the last normal quarter. On a same-store basis, when you just look at nominal NOI, we're actually up about 21%, full Q 2023 versus full Q 2019.
Now, if you adjust that for inflation, we're sort of break even, which is not a bad result given that we've seen the gradual recovery out of COVID. Actually, bit of a quiet achiever, retail, but that NOI story is actually coming on quite nicely. But we also just need to keep in mind we're only at 92%, pre-COVID we were a couple of points above that. So that's why we do believe that there's upside opportunity when we think about FY 2024 and beyond, just because we know the well-positioned nature of the portfolio, necessity-based anchors, with locations in the key consumption markets of Mexico. It's very well positioned. Then from a macro backdrop, as Andrew said, whether it's record employment, you've got stronger remittances. We're seeing wages go up. Obviously, the minimum wage increase will flow through to consumption. That longer-term trickle down from the assuring.
They're all positive factors, we think, in terms of same-store sale increase, and ANTAD is reporting that as well. So, we like retail , if you like, on an outlook basis for NOI. It's not necessarily going to be linear every quarter, just as we go through different leases, et cetera. But over the medium term, we think there's upside opportunity for retail to keep it flowing.
That's very clear. Just a quick follow-up. What is your strategic view considering these dynamics in the retail sector?
Sorry, Juan, would you mind repeating the question?
What is your strategic view for the retail sector considering this trend? Are you comfortable with your current operations?
Got you. I think the question there was on the strategic view of retail. As I say, I think we really like what we own. We think that it is a high-quality portfolio that will continue to perform, whether it is short, medium, or long term. I think that is our starting perspective. Our focus for the time being, therefore, will be, as I said, to continue to focus on maximizing inherent potential of the portfolio from an occupancy and NOI perspective. That is our focus for this year. I think, we will obviously monitor what that means from a strategic point of view as we continue to get closer to maximizing the inherent potential of the portfolio.
That is very clear. Thanks for the call.
Thanks, Juan.
Our next question comes from Francisco Suarez with Scotiabank. Please state your question.
Hey, gents. Thanks for the call and congrats for the superb execution made on the past few years on capital allocation. That is great. I guess my question is a follow-up from Alejandra in the sense that it does seem to be quite conservative, your overall views of the yields that you may get out of the property development based on what you have delivered. But in addition to the land-constrained markets that you explained very well on Mexico City and Tijuana, can you elaborate a little bit further if you think that there is the risk, in addition to overall replacement cost, to the investments that you may need to do on either infrastructure in energy, water, whatever? Any specific things that allows you to maintain this conservative guidance on property development yields? And the second question, if I may.
The overall increases in TIs that we have seen. Please correct me if I am wrong, but I think that those correlate perfectly well with the overall expectations of rent growth going forward. Just to fine-tune my models, do you think that the levels of TIs that we have seen in this quarter, those should be maintained on a forward basis, on a square foot basis? Thank you.
Thanks, Paco. Very clear. On the first one on, I guess, the target yields, 9%-11%. I think we would say it is realistic rather than conservative. When we see what others are doing around us as well, I think sort of in that 10% area is about right. So 9%-11%, I would say is realistic rather than conservative. I know that we have had a couple of prints in high 11% range, and I say we will take that every day of the week, but we do not necessarily think that is sustainable over the long term. So let us consider that it is realistic rather than conservative, from my point of view.
When you think about building on the cost side, and addressing some of the energy infrastructure challenges, certainly it is only getting harder, with regards to underwriting and making sure that we have a clear path there for new land investments. It is definitely something that has always been front of mind, getting that underwriting right, having a clear path in terms of cost and timeline for all the infrastructure. Not just energy, but water, other park infrastructure, et cetera. So what is key there is what we have always been doing, is having a very diligent approach to our underwriting assumptions when it comes to the type of energy infrastructure that we would typically be used to investing in. Whether it is to do with substations, whether it is to do with grid reinforcement on poles or wires, et cetera.
So I think it is a case-by-case basis as you look at each land parcel and the specific infrastructure needs for that local area. Some are easier than others, and it is about just getting that diligence right, as we have done in the past and to date so far.
Perhaps, Simon, if I could complement. I think one other element there that we have not spoken about so much is that the broader backdrop in these markets in terms of rental grade remains extremely constructive. We have still seen very strong levels of rental rate growth, particularly in, if not more so, those land-constrained markets. As Simon mentioned, getting the underwriting right, perhaps there are some elements of cost increases that will flow through as a result of that. But I think the risk to that return profile is really limited because we see the continued momentum, attractiveness, and strong backlog of demand that will drive that rental rate growth over time to continue to deliver sustained development yields.
I agree. The second question, Paco, on TIs. I think you shouldn't be expecting any great deviation from run rate when we think about FY 2023 result. The way that we look about it's really sort of maintenance CapEx, TIs, and leasing commissions as our normalized items below FFO. We did see a couple percentage points increase over the year, as you would expect. But the key ratio that we look at, you mentioned on a per square foot basis, and we're at around MXN 0.95 per annum for GLA, for industrial portfolio there. But when you translate that to a percentage of NOI, we think that's the right metric to be looking at. We're around 15% of NOI, and that's actually comparable to international benchmarking. For example, if you look at U.S. industrial percentage of NOI for REITs there, it's in that 15% area.
We think that should be where we'll be aiming for and tracking over the coming year. Obviously, we're seeing a little bit of cost increase as well when you think about some of the supply chain pressures, et cetera. Inflation, that's fed through in the last year or two. We've also just done a hell of a lot of leasing, whether it's new or renewal leasing. So that normalized element on TI has also picked up. But getting to 98% occupancy and sort of focusing a lot more on renewals rather than new leases, I think we're looking at, you could say, steady type of deployment across those line items as a percentage of NOI.
That's perfectly clear. Thank you so much for that. And congrats.
Thanks, Paco. Thank you.
Thank you. Just a reminder, to ask a question, press star one. To remove your question, press star two. Our next question comes from Isabela Salazar with GBM. Please state your question.
Hello. Thank you for taking my question. We understand that excluding the land for your current pipeline, you have enough land for 2 million square feet of GLA. Does this land already have the necessary infrastructure in place for development, and would you expect to make use of all this land in the visible future? Or are you strategically choosing when and where to develop?
Thanks, Isabela. L ook, the 5 million square feet of land bank that we have on a GLA basis, 2 million square feet, if you like, has either just been delivered or is under completion construction. So that is all accounted for, including from an infrastructure requirements perspective. The remaining 3 million square feet, as you would expect, particularly for some of these large park developments, we have, I guess, underwriting and budget assumptions to build that out over time, particularly in accordance with construction of those parks. So I think from, I guess, an execution point of view, we have a very good visibility in terms of what is required and the investment requirements over time to build that out in line with our underwriting assumptions.
Perfect. Thank you.
Thanks, Isabela.
Thank you. Our next question comes from Francisco Chávez with BBVA. Please state your question.
Hi, Simon, Andrew. Thanks for the call. My question is regarding your debt structure and particularly your cost of debt. Do you have any liability management plan in order to reduce your cost of debt? Seems to me that your cost of debt is higher than that of your peers. Any plan to reduce it? Thank you.
Thanks, Paco. Appreciate the question. I think, we've had a very stable cost of debt throughout the cycle and since inception of around 5%-5.5%. It has stepped up a little bit over time. However, we're very comfortable with the 5.6%-5.7% level we're in at the moment. In fact, we've been able to hold that pricing steady with doing roughly $1 billion worth of refinancing and new financing activity over the last 18 months. Which has also positioned us to not have any expiries or liability management coming through either this year or next year, to particularly protect us from any volatility in the market. We've seen recent prints, I guess as recently as yesterday, north of 7%.
I think we've really gotten ahead of the market to be able to manage it efficiently and be able to maintain high levels of liquidity of more than $350 million to be able to fund the development program. I think definitely we're always looking to make sure the balance sheet is well positioned, with the current leverage level we have as well. Probably more than $300 million-$400 million of capability to deploy, without going over the mid 35%-37% type LTV ratio, which really positions us with healthy firepower, a very attractive cost of debt and a strong business model and capital structure to execute on our plan.
Thanks so much.
Thank you. There are no further questions at this time. I would like to turn the floor back over to Simon Hanna for closing comments.
Thanks, Diego, and thanks everyone for participating in today's call. We do look forward to speaking with many of you over the coming days and weeks, as well as updating you again very soon at the end of the first quarter. Thanks, everyone.
Thank you. That concludes today's conference. All parties may disconnect. Have a good day.