Good morning, and welcome to the 2023 Third Quarter Fibra Monterrey's Conference Call. With us this morning from Fibra Monterrey, we have Mr. Jorge Ávalos , CEO, Jaime Martinez, CFO, and Javier Llaca, COO. They will discuss our more important strategic, financial, and operating aspects of the quarter. It is important to note that the presentation related to this conference is available at www.fibramty.com, and recordings of the call will be available on the website of the company in the next two hours. If you are connected using our webcast tool, you have the option to download the presentation in order to move the slides at your own pace.
Let me remind you that the information discussed on today's call may include forward-looking statements on the company's future financial performance and prospects, which are subject to risks and uncertainties. Actual results may materially differ, and the company advises not to rely on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statement.
I will now turn the call over to Mr. Jorge Ávalos . Please go ahead.
Thank you everyone for your time, and I am glad to share with you Fibra Monterrey's highlights during this third quarter results. in September, we concluded the second closing of the Zeus portfolio for an amount of $45.2 million. This transaction included the acquisition of three industrial buildings and a land bank of approximately 800,000 sq m, primarily located in the Puebla market. Consistent with our business model, we are exploring various strategies for this land bank to generate additional cash flow. These strategies include, but are not limited to, expansions for existing tenants and land investment for development complying with Mexico's income tax law. During the third quarter of 2023, we received an unprecedented number of requests for expansions within our industrial portfolio. As of September, we have accumulated potential expansion exceeding $90 million with an average yield at a cost of approximately 10%.
Of these, $49 million are already signed and under construction, $19 million are in advanced negotiations, and the remaining $22 million are primarily in discussions. These expansions, once completed, are expected to increase our GLA by over 100,000 sq m with approximately 53,000 sq m currently under construction. This will also extend the current lease contracts maturity terms, enhancing the defensive fundamentals of Fibra Monterrey portfolio. As of this earnings release, more than $1.2 billion in possible acquisition transactions have been identified and evaluated for industrial portfolios. From our previous call, we have already signed an $83 million LOI for an industrial portfolio that Javier will address during his remarks. A significant progress is being made towards finalizing other agreements to buy an additional industrial portfolio and complete our LTV target, which is 35%.
Regarding financing, to strengthen our growth trajectory, we have arranged a bilateral credit line with a bank for an amount of $63 million in September. This credit facility is marked specifically for expansions and offers the unique advantage of an interest and principal payment upon each draw's maturity. This structure will allow us to strengthen our interest associated with these expansions and preventing the allocation of operational cash flow for construction debt services payments. The credit line features a variable interest rate with a credit spread of less than 150 basis points and due up to 18 months. Our strategy is to transition the utilized balances to long-term debt structures once respective expansions generate rental income. As we reach our 35% LTV target, we intend to tap the capital markets during the first semester of 2024 for the following reasons.
One, we're trading near NAV, and we're seeing an unprecedented interest in international investors to capture this nearshoring momentum. Two, the use of proceeds will be used to buy additional industrial portfolio, reduce our debt structure, and diversify our portfolio. Three, due to economies of scale and the combined cap transaction price, we can create AFFO accretion. Finally, as we intend to do a 144A and a Reg S issuance, our investor base will diversify, creating thus more liquidity for our stock and hence improve our cost of capital. Before concluding, I invite you to read our 2022 sustainability report. This report, endorsed by Fibra Monterrey ESG Commission , outlines our strategic sustainability plan for 2023 and 2025. It underscores our commitment to economic, social, and environmental stewardship, aligning our internal initiatives and processes with global sustainability trends and expected outcomes to foster continuous improvement in our trust performance.
In our pursuit of transparency and accountability, we sought limited independent assurances for this report. Furthermore, demonstrating our dedication to sustainability alignment at a strategic level. Fibra Monterrey participated in the 2023 CSA by Standard & Poor's, which results anticipated this November. In addition to our public commitments as a signatory of the United Nations Principles for Responsible Investment, we have submitted our annual report detailing our responsible investment initiatives. We expect the publication of the corresponding assessment results in the fourth quarter of this year. Finally, I am proud to acknowledge that based on the outcomes as of September, and reflective of our portfolio performance and the strategic initiatives deployed by our management, we are well-positioned to achieve the upper end of our guidance for a ninth consecutive year.
I wish to emphasize that the prevailing macroeconomic condition strengthened Fibra Monterrey as an attractive investment proposition featured by long-term U.S. dollars-denominated lease contracts, predominantly inflation-adjusted contracts. Similarly, the current interest rate landscape motivates development-centric firms to divest assets to meet ongoing market demand. In this environment, Fibra Monterrey stands with enhanced financial flexibility compared to other market players, ready to leverage these opportunities throughout our credit lines and, as I mentioned before, with additional equity issuances.
I will now let Javier walk you through our portfolio performance.
Thank you, Jorge. Good morning, everyone. I will start my piece of the presentation on page three with the composition and geographical distribution of our portfolio as of the end of the third quarter of this year. We have integrated all 46 properties of the Zeus portfolio, as well as the 9.5 million sq ft land bank in Puebla. Fibra Monterrey now manages 106 income-producing properties. Our footprint covers 15 real estate markets across 14 states in the Northern, Central, and Bajío areas, with a total GLA of roughly close to 18 million sq ft. Out of which around 15.5 million sq ft are industrial, 2.2 million sq ft are in office buildings, and 215,000 sq ft belong to our small retail portfolio. This is in addition to our land bank. Overall occupancy in terms of GLA stands solid close to 96%.
We have consolidated a strong presence in the markets with the most activity in recent real estate transactions, and will continue expanding in such markets, particularly in the Northern and Bajío areas. We will address that in more detail further in this presentation how the integration of the Zeus portfolio has been completed during these last quarters. On to page four of the material, we present a brief overview of our new key performance indicators as of the end of September and moving forward. In terms of percentage of revenues, these indicators remain similar to the previous quarter. 71.8% of revenue by asset class come from our industrial properties, while office and retail account for 26.7% and 1.5% respectively. By location, revenue from our Monterrey-based portfolio represents 41.4% of total income, followed by Guadalajara, Guanajuato, Saltillo, and Tijuana, which combined represent close to 34% of revenue.
Occupancy rate as percentage of potential revenue at full capacity stands close to 93%. Our dollar-denominated leases represent almost 33% of gross revenue, which could further expand if the peso exchange rate increases. Finally, lease maturity schedule and weighted average lease term is at five years, with around 39% of revenue will begin expiring in 2028. As we mentioned during our previous earnings call, we believe that during 2026 and 2027, we will be able to capture positively spreads on industrial renewals and new leases. On page five of the webcast material, we present the same property performance analysis for the third quarter of 2023 compared to the same quarter of the previous year. For purposes of this analysis, we use all 60 investment properties in our portfolio prior to Zeus, which represent a total GLA of 8.8 million sq ft.
Compared to the third quarter of 2022, gross revenue contracted in 6.9% or MXN 25.10 million, with a decrease of 7.6% or MXN 24.7 million in our net operating income, mainly due to negative FX impact following the third quarter of last year. NOI margin contracted in 70 basis points to 86.3%. The composition of NOI variance will be explained in detail in the following slide. Once we incorporated additional revenue from Zeus, the aggregated portfolio generated a total net operating income of MXN 523.4 million, compared to MXN 326.2 million in the third quarter of last year, an increase of 60.4%. Our NOI margin for the aggregated portfolio was of 90.4% for the quarter, above our target of 88%. The fact that the NOI margin of the Zeus portfolio is almost 97%, we continue to accomplish substantial economies of scale in the operation of the portfolio.
Slide six of the presentation explains in detail the MXN 24.7 million reduction in our net operating income, comprised of the following. MXN 44.7 million decrease due to negative FX effect between the third quarter of last year and the third quarter of this year. MXN 300,000 increase due to vacancies from certain lease expirations. MXN 13 million increase due to inflation escalations on lease agreements and new leases, and MXN 7.3 million increase due to savings in certain operating expenses. As you can see, once we included additional revenue of about MXN 221.8 million from the Zeus acquisition, we reached the MXN 523.4 million NOI in our aggregated portfolio.
On page seven of the presentation, I would like to address the variance in the valuation of our investment properties portfolio, in which we have seen a negative impact of about MXN 2.1 billion in FX change alone during the last 12 months prior to September of 2023. Some CapEx expenses, as well as improvements in the operation and market conditions, current investments in expansions, and integration of Zeus portfolio boosted valuation from MXN 17.8 billion to MXN 28.4 billion at the end of the third quarter. It is important to point out that sequential FX effect for the third quarter was positive for valuation purposes for the first time in the last seven quarters, although we are still carrying an overall negative impact year-to-year.
Moving on to page eight of the presentation, we are happy to inform that the integration of all 46 properties of the Zeus portfolio was fully completed by late September. Our operations and accounting teams have done a phenomenal job in terms of administrative work with our tenants and property managers to secure 100% invoicing and 100% rent collection. The second and last closing of the portfolio was executed on September 20th, and is scheduled to be paid on October 31st of this year. The land bank in Puebla, as Jorge said, is being already marketed with a very positive perspective for the sale of at least a significant percentage of it, along with the possibility of development as the demand in the automotive industry in the region is picking up momentum. Also, we have already received some RFPs for new build-to-suit projects at that location.
We have already executed 125,000 sq ft expansion in one of the Aguascalientes properties, which comes along with a blend and extend list of the previous and new facilities together. As Jorge also mentioned during his opening remarks, we have executed four agreements for certain expansions in our industrial portfolio, which are highlighted on page eight of the presentation. The construction of these expansions is already on the way. This expansion in certain properties in San Luis Potosí, Monterrey, Querétaro, and Aguascalientes, with a total GLA of more than 0.5 million sq ft, will represent a total investment of close to $50 million. These expansions will generate additional NOI of $4.6 million. This is a yield on cost of 9.3% net on investment in tenant improvements, which are amortized throughout the lease term.
These expansions also will allow us to extend the term in another 10 years with an attractive blend and extend lease rate close to market and above our current rates. These expansions will increase the size of our industrial portfolio in close to 4% in terms of GLA. It is also relevant to say that all required energy for these projects has been already secured. More expansion on our industrial buildings are well advanced in negotiations, as Jorge said, and are expected to be executed in the next few weeks. It would drive additional GLA of another 0.5 million sq ft with an investment of around $41 million at a similar cap rate than the four previous mentioned. Finally, I would like to point out that positive lease spread observed during this last quarter stood above 8.3% above inflation for renewals, new leases, and expansions.
Finally, and moving on to page 10, Jorge also mentioned some of our underwriting activity during the quarter. We have executed a letter of intent to acquire an industrial portfolio for $83.2 million, which we expect to close in early first quarter of 2024. Details on the transaction are not yet ready to be disclosed, but we will keep you posted as the transaction progresses. It is important to mention that this transaction, as well as any others on the pipeline, are still subject to corporate and governmental approvals, such as Cofece. Talking about potential future acquisitions, and as Jorge mentioned earlier, we are currently evaluating more than $1 billion worth of industrial properties in the northern, Bajío, and central regions. We continue to focus on those opportunities that are consistent to our investment profile and guidelines.
Again, we strongly believe that our current firepower could be committed before the end of the year, including expansions and acquisitions. At the end of today's presentation, I will be more than happy to address any questions you might have regarding operations and acquisitions in our real estate portfolio.
But for now, I will hand the presentation to Jaime Martínez . Jaime?
Thank you, Javier, and thanks everybody for joining the call. I would like to start my speech with a quick overview of our balance sheet. As you can see on slide 11, our outstanding debt fundamentals remain virtually the same since our last call. We kept our debt 100% unsecured with an interest rate well below 5%, and U.S. dollar denominated. Also, the average debt maturity stands at 4.6 years, with no material debt maturity until late 2027. Furthermore, our balance sheet remains strong with our loan-to-value around 25%. This results in greater financial flexibility to size market opportunities of more than $250 million, including the expansion Javier mentioned a moment ago. The same flexibility remains true when looking to our net debt to EBITDA, which stands below 3x .
Moving on, we have more than enough gunpowder in available credit lines that account for 20% of our assets. As Jorge mentioned in his initial remarks, during this third quarter, we secured a bilateral credit line with Scotiabank for $63 million. This line bears a single interest and principal payment at the majority of each draw, simplifying the identification as the financial cost of the development and preventing the allocation of operational cash flow for construction debt service payments. The credit line accrues interest at a floating rate with a surcharge of less than 150 basis points and has a term of up to 18 months. We aim to replace the drawn balance with long-term debt following the beginning of the rental revenue from each expansion.
Starting to talk about bottom-line results, as shown on slide 12, this was the first full quarter without the revolving credit lines we used for the Zeus acquisition. Nonetheless, an even stronger peso kept as a constraint in our AFFO once translated into Mexican pesos. It is worth mentioning that isolating these FX variations, our AFFO per share would have grown around 10% on a year-on-year basis. I'll emphasize this matter later in the call. As shown in the graph on the right side, when looking into the main variations in cash flow against last year's AFFO, the main driver is obviously the Zeus acquisition, which was partially offset by same-store NOI variations that Javier already mentioned. Lower cash investment balance and higher interest expenses paid to finance the acquisition, also by larger administrative expenses due to inflation and non-recurring expenses related to the Zeus acquisition.
Nonetheless, AFFO increased above 35%. On the next slide, you will find the same analysis, but compared to the previous quarter. The main variation was a lower financial expense, given that this is the first full quarter without the revolvers used to acquire Zeus and having the benefit of the 60 basis point compression in the credit spread of our $150 million credit line, which we announced last quarter. This benefit was partially offset by same-store NOI, given a stronger peso when compared to the second quarter, and larger SG&A expenses due to higher expenses in projects, mainly in the finance, ESG, and tax departments. Both effects influenced both NOI and EBITDA margins when compared to the second quarter 2023. Especially the effect variations, given our highly dollarized revenue and mainly peso-denominated expenses, both on the operational and the administrative front.
As previous quarter, on slide 14, there is selected information to compare and contrast our main financial indicators on the last 12 months to facilitate your analysis. Finally, on slide 15, I'll emphasize the effects relevant for our local investors. As you can see in our graph on the left, this quarter AFFO per share stood at MXN 0.94 on an annualized basis at an FX rate of just shy MXN 17 per dollar. Sliding to your right, you'll see different FX scenarios ranging from MXN 18 all the way to MXN 20.23, which was the third quarter 2022 FX rate. Once isolating this effect, our AFFO per share increased 10% on a yearly basis when accounting for the two equity issuance we did in the last 12 months. Our focus as management stays the same, to keep improving our cash flow per share performance on a regular basis.
Having said that, I would like to end my speech by remembering Fibra Monterrey's strong fundamentals as an appealing all-weather investment vehicle. First of all, we keep almost 75% of our revenues in the industrial sector with a strong presence in other markets, mainly in Monterrey and Saltillo, which are the most active markets in nearshoring activity. Fibra Monterrey stands as the best-in-class Fibra in the market, endorsed by Standard & Poor's in its CSA evaluation. We are the most active issuer in the market, having grown our portfolio more than 10x while continuously increasing our shareholders' cash distribution and keeping our balance sheet prudent and strong.
Our firepower capacity, organic potential in the office space, and industrial expansions pair with our strong lease fundamentals such as highly dollarized revenue stream and inflation escalation. Considering current market activity and the potential reduction in our cost of capital, given our market cap size and investment grade status, AFFO per share has more upside potential that will be materialized going forward.
That would be all. Kevin, please continue with Q&A section of the call.
Certainly. Ladies and gentlemen, to ask a question, please press star one. If you're connected using our webcast tool, please write your questions in the chat section of the platform. Once again, you can either press star one to verbally ask your question, or if you're on the webcast tool, please write your questions in the chat section of the platform. One moment, please, while I pull for questions. Our first question is coming from Hugo Grassi from Citibank. Your line is now live.
Gentlemen, thank you for the space to make a question and congratulations on the results. My question is regarding the nearly 820,000 sq m of land you acquired, mostly in Puebla. Can you, just to be clear, lay out what the game plan is regarding that land? Can we expect you to develop yourself, which you historically have rarely done? Or do you plan to call in a third-party developer or even alternatively, you plan to sell the site? So I guess, which of the three options do you have in mind? That should be on my side.
Thank you, Hugo. The short answer is two of the three options. We are not going to develop ourselves. If we were to invest in development of that site, it would be through a third-party developer. What most likely is going to happen is a mix of a sale of at least a portion of the land, and the land that could be developed would be developed through a third-party developer. We would only contribute equity in the form of the land and work in capital. That would be performed by a specialized industrial developer with a good track record.
As we mentioned during the presentation, we have seen a pickup in the momentum on demand from automotive companies in that area because of a recently announced new production line of [Audi]. The site is across the road from the Audi complex, and we are seeing a pick in momentum. We are already working on a couple of RFPs, requests for proposals for two build-to-suits. We are discussing with this developer the possibility of developing a speculative building. Still early to give you more details, but it would be a combination of land sale and development through a third-party developer.
That is loud and clear. Perfectly answered. Thank you very much.
Thank you.
Thank you. Next question today is coming from Anton Mortenkotter from GBM. Your line is now live.
Hi, guys. Thank you for taking my question, and congrats on your results. I have two quick questions. You mentioned you are looking into $1 billion of potential investments. Given the current competitive landscape, with many vehicles coming out and so many eyes on all the industrial real estate, how much of that $1 billion would you say you are the main bidder? Or how is competition there, and what would you say is your main edge on that?
Okay. Thank you, Anton, for the question. Yes, the $1 billion that we are evaluating, it is comprised by a bunch of portfolios. I would say that we are always a competitive bidder. We proved that with the last Zeus transaction. The execution capacity and the ability to closing that we have proven to the market and to the developers is well known. So that is a very attractive and appealing aspect of closing with us. Obviously, we have limited firepower right now. If you take into consideration that we are close to around $90 million on expansions and this LOI that we signed last week, we are close around $170 million with our current firepower. That leaves us with roughly $100 million to deploy before reaching or closing to 35%.
We are very selective on this pipeline. We are being very surgical, if you will. Jorge mentioned the potential need for tapping the markets again to rebuild this firepower. But the ability that we have on closing either a single building or a portfolio of several buildings is second to none in the market, so we are very selective. What is the percentage on that pipeline that we think we could be a successful bidder? That is hard to say. I can tell you that all potential sellers are very serious with us. We are very serious with them. We are making progress, and we will let you know as this progresses. I think that would be the best answer I can give you.
That is great. Also good that you mentioned the expansions. How much additional expansions have you been able to pinpoint using your current portfolio? Or most of it just comes out as a request from your current tenants?
Well, I think we explained that, but we have about eight-nine expansions in the works. Four of them are already signed and being developed as we speak. The other ones, when you talk about expansions, the success rate is really high because these companies need to grow close to their facility. All of these expansions have a reserve land considered for potential expansions, some of them from the beginning. The success rate is really high. If you would ask me the success rate on that million square feet that we have in the works, I would be surprised if we do not close all of it. We depend more on the business plan and the ideas of the tenants, but we are ready to shoot for those expansions. I believe the success rate on this $90 million is really, really high.
Perfect. Thank you.
Thank you.
Thank you. As a final reminder, please press star one at this time to be placed into question queue. With no questions in the queue, I would like to turn the conference over to management at this time.
Well, thank you everyone for your time, and we will speak to you next quarter. Have a great week.
Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.