Welcome to
the Vesta Second Quarter 2021 Results Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Instructions will be provided at that time for you to queue up for questions.
I would now like to turn the call over to your
host for today's call, Ms. Claudia Medina, Vesta's Head of Communications. Please go ahead.
Thank you, and good morning. Welcome to BEST's conference call to review our Q2 2031 results. On today's call will be Lorenzo Dominic Verrau, Chief Executive Officer and Juan Sofia, Chief Financial Officer. Our results were released yesterday afternoon and can be found on the Investor Relations section of our website, along with our supplemental package and the appropriate Finally, with the next speakers are exchanged. A replay will be available shortly at the conclusion of the call.
Certain comments we make during today's discussion will be deemed forward looking statements within the meaning described by the securities laws, including statements related to the future performance of our portfolio, financing activities, our pipeline Another investment. All forward looking statements represent vested judgment as of the date of this conference call and are subject to risks and uncertainties that can cause actual results to differ materially from our current expectations. Investors are seeking to fully review various disclosures made by the company, including the risks and other information disclosed in the company's filings with the Mexican Stock Exchange. In particular, uncertainty remains about the duration and contemplated impact of the COVID-nineteen pandemic. This means that this results could change at any time and they instead of COVID-nineteen, our company's business results.
Our outlook is the best estimate based on the information available as of today's date. Finally, Note that all figures included herein were considered in accordance with IFRS and are stated in normal U. S. Dollars unless otherwise noted. With that, I will now turn the call over to Mr.
Benoit.
Thank you, Claudia, And good morning, everyone. Thank you for joining us today. The Q1 of 2021 Was a positive, but tentative start to the year. And I'm pleased to say, we saw continued strengthening during the Q2. We reached a decisive moment having passed an inflection point as the unprecedented effect of the COVID-nineteen pandemic finally Show significant signs of recycling.
Demand for industrial and logistic real estate in Mexico is gaining momentum On the back of meaningful U. S. Economic recovery, Mexico's industrial real estate market Reached more than 800,000,000 square feet during the 2nd quarter with 34,000,000 square feet in available growth visible area. Today, BEST's tenants have also reached a comfort level where they're starting to make decisions, many who are expanding operations. Turning to our quarterly results, Vetha's Q2 2021 revenues increased to €39,800,000 an 8.6 percent year on year increase, while NOI and EBITDA increased 10.2% and 9.8%, respectively.
Our 2nd quarter performance was supported by the inflow Of our $229,000,000 equity follow on profit with strong Level 3 strategy execution and solid activity Due to close client relationships, strong sales and marketing and our country's outstanding reputation as a premier global industrial manufacturing hub. We saw demand for industrial space from high quality tenants and a wide range of international and local companies and sectors during the quarter, including Copco, The Home Depot and Samsung, among others. We pre leased a development building With income corporation that is currently under construction. Reviewing our portfolio stats at quarter end, leasing reached 1,300,000 Square Feet with 92.5 percent occupancy in the 2nd quarter, up from 90% in the Q1 of 2021. It's important to note that today, Vesta We have ultra low vacancy numbers in very healthy markets, particularly Northern Mexico.
E Commerce and Logistics represented 994,000 square feet during the quarter, 72% of our total leasing. Our success in this regard We expect continued e commerce focus as part of our nimble and adaptive level 3 strategy. With Tijuana and Puebla as 2 newly added e commerce markets for Vesta during the Q2. We also saw Promising lifting activity from the electronics, electric car components and energy sectors. Further, while construction costs have increased, Demand for Vestas Buildings remains strong due to our demonstrated ability to differentiate ourselves through Vestas' unique and compelling Products and offerings that tailor to our customers' specific needs.
Taking a closer look at regional dynamics, Automotive and logistics continue to drive future investments within the Bastille region, with strong performance in data center land purchases, tenant expansions And build to suit construction during the Q2. Demand for industrial space in the Mexico City metropolitan area continues to be led by logistics We also note occupancy increases with transactions for safety stock facilities. In Northern Mexico, the Monterrey industrial market remains active with the
highest half year net absorption in
the last 10 years. Similarly, demand is outpacing supplies in the Tijuana and Juarez markets. Tijuana and Gilar Juarez forty one percent of 2nd quarter leasing activity with Tijuana achieving a 12.6% increase compared with previous tenants in terms of rent. Inflation had a favorable impact And our company's uniquely dollar denominated rent during the quarter, an important competitive advantage related to our peers. Vesta's U.
S. Dollar denominated contractual rent increase index to the U. S. CPI were favorably impacted by inflation During the first half of the year, as the U. S.
CPI increased to 5.4% in June From 1.4% in January 2021. Further, looking back at prior periods Of inflation in relation to commercial real estate, property values and rent levels have increased overall. Given that these two items are primary drivers for real estate returns, a natural inflationary hedge is built into real estate investments, providing security in times of economic volatility. This has never been more evident than in the current environment. We maintain an unwavering focus on ESG excellence for which we were recognized during the Q2 when VESSA was included In the S and P Boston Mexicana Eduallores Total Mexico ESG Index based on the S and P's corporate sustainability assessment for the 2nd consecutive year.
In conclusion, following a strong start to the year, we have kept the ground running in today's We are as bullish as we have ever been on our outlook for industrial fundamentals And the strength of our market, and we foresee a continued strong trend in the quarter ahead with robust cash flow Outflows from new projects under development. Our concentration on the segments which thrived during the pandemic, E Commerce, in particular, proved to be a winning strategy. We are focused on expanding our e Commerce footprint into new markets Through strong relationships with high quality global clients in diversified industry sectors, while capturing the opportunities we're seeing Related to U. S. Clients' new shorting trends as well as exciting new Asian clients now re shoring to Mexico.
Properties in our warehouse and our markets continue to appreciate in value. It will be hard for them We need supply remaining constrained in our target markets and tenants looking for space to accommodate growth Let me now turn our discussion over to Juan, We will review key financial highlights for this
quarter. Thank you, Lorenzo, and good day, everyone.
Let me start and update our financial performance
for the Q2.
Beginning with our plan, Total revenue increased 8.6 percent to €39,800,000 mainly due to rental revenue coming from new leases It was partially offset by expiring leases That were not renewed in the first year of 20 15 and to address the lower rental rates On certain leases that we knew during the year. In terms of currency mix of the 2nd quarter revenue, 87.8 percent was dominated in U. S. Dollars, representing a significant increase from the $68,400,000 recorded last year in a comparable period. Turning to costs.
Total operating costs declined 9.2% 2,600,000,000 in this quarter. This was mainly due to lower cost from occupied properties, resulting from lower allowance for doubtful accounts from food collections during the first half of the year. As a result, higher rental revenues and lower cost From Occupied Properties, net operating income increased 10.2% to $37,200,000 with a margin expanding 141 basis points to 94.3%, while administrative expenses were up 24.4%. This was mainly explained by noncash expenses due to an increase in the company's long term compensation plan. In turn, EBITDA reached BRL33,700,000 in the Q2 of this year, an almost 10% increase Moving now to the P and L, the total other income reached $38,600,000 compared with $6,100,000 in the Q2 of 2020.
This increase was due to 91,000,000 Revaluation gain on investment property arising from better lease contracts term renewals, Improved discount rates and capitalization of the successful execution of businesses and building development in the quarter. In addition, we recorded a gain of $4,300,000 from the sale of land in Queretaro. This was partially offset by Higher interest expenses. As a result, we closed the quarter with a net income of 110,000,000 Converted $36,000,000 in the Q2 of 2020, while our pretax FX cost decreased 16% to $17,000,000 The decrease in FFO is further explained by the effect of the prepayment Of $250,000,000 of the previously contracted debt by the issuing of the new global bond In May, the prepayment costs a make whole payment of 3,600,000 Dollars. Without the make whole payment, the FFO would have been 20,900,000 representing a growth in FFO of 1.8% without the effect of the prepayments.
Now turning to our caustic and portfolio composition. We invest $22,400,000 in water, mainly the construction of new buildings in the Northern, Brazil and Central regions. At the end of the second quarter, The total value of the portfolio was EUR 2,230,000,000 comprised of 189 High quality industrial assets with a total GLA of 32,000,000 square feet and with 87.8 percent of Total income denominated U. S. Dollars.
Year over year, our EBITDA portfolio grew 5.6 percent to 31,200,000 square feet with the occupancy of 92.7 percent, down from 93.9% in the Q2 of last year. We ended the 2nd quarter Of 20.71, with a land bank of 37,500,000 square feet, Down 10.1% sequentially due to the sale of the block of land of Queretaro And the construction of the new inventory building. Moving on to our capital structure, Following the successful completion of our equity offering in the Q1 of this year, we closed our inaugural Real estate company to issue a sustained renmincy linked bond out of Latin America. The 10 year EUR 350,000,000 notes that were placed at a EUR 3.625 interest rate Allow us to pay down debt, as we mentioned. We extended the company debt maturity profile and together with the equity offering, Provide us with financial flexibility and a strong balance sheet to execute against our Level 3 strategy.
Along these lines, we closed the quarter with a total debt of $945,000,000 And a cash position that stands at $393,000,000 net debt to EBITDA was 4.1x and our loan to value 35.1 percent. Finally, the company's Annual General Shareholders Meeting Subsequent to quarter end, BESTA shareholders agreed to pay a $55,78,000 dividend In quarterly installments during this year, on July 15, we paid a cash dividend for the Q2 of 2021, Equivalent to ARS0.40265 per ordinary shares. With that, we conclude our 2nd quarter review. Operator, could you please open the call for questions?
Thank you. At this
time, we'll be conducting a question and answer
A confirmation
Our first question comes from Gordon Lee with BTG Pactual. Please proceed with your question.
Hi, good morning. Thank you very much for the call. A couple of questions. First, on the outlook for rents, A competitor of yours mentioned recently that they would expect rents in some markets to grow in dollar terms, this is contractual rents, Double digits year on year, which obviously implies not only a boost from inflation, but significant real leasing spreads. Is that an outlook that you would concur with that you see sort of maybe high single digit and in some markets low double digit contractual growth rates In rents?
And the second question is on the financial side. So I guess this is for Juan. Your interest expense in the quarter was $16,000,000 and been running around $9,000,000 to $10,000,000 quarterly prior to that. I assume that the $3,600,000 in the prepayment expenses are included in that expense line. And in addition to that, would there be issuance costs related to the debt issuance?
Or what would explain even beyond the $3,600,000 in prepayment expenses that jump in quarterly interest expense. Thank you.
Thank you, Gordon, for being on the call. I will take first question and the second one will be for Juan. Yes, we are definitely in this time where we are seeing ultra low They can see rates in many of the markets. We're starting to see big heights in terms of rents. As we mentioned, Only in Tijuana, we were able to sign leases with rents that are more than 10% above Previous rents, and I think that this is exactly this is very well reflected not only in our assets, but mainly in most of the market in Juana, where there's really the vacancy rate, I believe, could be even less than 1%.
And that's why it is important to have good land reserves Starting in buildings and I'm sure that the strategy would be to even pre lease the buildings before developing them. That similar trend in U. S. Dollars is happening mostly in Ciudad Juarez, Where we have also low vacancy rates. But in the Brazil region, which we see also that there's several dollar leases, What we're seeing even that the market is following Aracara, Tijuana and Juarez for the moment, we have seen a very resilient market with Pretty low vacancy rates, very disciplined developers approach.
And I'm sure that, That together with pent up demand will trigger into high High growth rents in most of the markets throughout Mexico. One of the things that we are seeing pretty much overall in all markets nationwide It's that developers have a very disciplined approach towards development and on top of many of them that do not have Land reserves and Pinoska's infrastructure in the land reserves such as energy, water, Utilities, solar utilities, and I think Vesta for Ongas is well positioned to capture some opportunities As we have been able to anticipate with good land acquisitions, with good infrastructure in our best parks, and that's clearly going to be a I see a fan that's looking forward for new projects that might be arriving from pent up demand that we see in many of the markets.
Regarding the interest, yes, the The quarter period was $60,400,000 if unicaled $3,600,000 in whole payments The refinancing of that portfolio, you will see the effect. And in terms of how that how the interest will increase, Please take into account that we increased the debt amount of the company $100,000,000 by means of the Issuance for the long term bond of $350,000,000 So net net, our interest expense On a normalized basis, we increased about $1,000,000 per quarter, dollars 900,000 per quarter. That would be the effect. Now, the overall Impact of the new borrowing is very beneficial for the company. The interest If you compare it with our average interest amount of the Existing the IFRS issuance plus 4%.
So all in all, I think the end of the rest It's a very strong signal, the market of perception and ability of Revuance, the global market. Now you also mentioned the issuance cost of the debt as is customary. Issuance cost of the debt summarize Over 10 years of the bond, so that's certainly considered on a quarterly basis on the interest expense.
Our next question comes from Javier Herro with GBM. Please proceed with your question.
Hi, guys. Good answer, Peng
and Juan. Thank you for taking the questions.
I have a couple. My first question would be related to Capital deployment. I just wanted to see what the company is looking at in terms It's CapEx throughout the year. And what are the main hurdles for that? So is it capital for the company, which I would expect Not only because of the risk and equity offering or is it the returns that we're seeing in the client, what is your investment committee Looking at this time, there's a bold sentiment in the market.
And my second question is related to Credit Suisse. And if you could give few questions related to Carexaro. And if you could give us a breakdown of what happened in that market in terms of landbank. As we mentioned, we know you sold some land, but we could imply that you've also acquired Higher market value ramps. So just a breakdown of what happened would be very helpful.
Thank you. Good afternoon, Javier, and thank you very much for being on the call. Regarding your first question on the Capital deployment, definitely the investment committee is very active looking at opportunities right now Throughout many of the regions, we believe that the upcoming quarters will be key For some ground up development start, returns are incredibly attractive. Even with some construction costs That have increased, we still see double digit return on cost for development. And that's a particularly important spread When you compare with not only with existing coverage, which are in the sub 7% Area, but also with interest rates, which are currently at close to 3.5%, which is Stated in the last fund offering that we did.
So spread investment is still going to be key for us. We're not And considering any acquisitions, we believe that for the pricing of acquisitions, which are pretty rich, We are able to develop at a spread, which in the end turns to be more accretive for our shareholders, and we're going to keep that same discipline Looking forward, and we are seeing many of the markets recovering. We closed important transactions with good tenants, As mentioned with Home Depot, with Kopel, with Samsung and some other logistic companies throughout Mexico, and We believe that for the moment, we're in a great position to start ground up development as we have done in the past, and it's going to be important to do Some combination of build to suit projects as well as spec buildings in some of the strongest markets at very attractive Returns. So that's something that we're going to be doing in the next upcoming quarter to start new projects. We already own land reserves in Juana, for example, we recently have bought land reserves in Monterrey, and we have some land reserves in other markets.
And for other markets, we're looking At new land parcels. Getting into and pipeline is incredibly strong, and we believe it's coming from Having very low quarters in the last economic cycle, but looking forward, we think that this is piling up very quickly With good quality tenants and strong demand in different sectors in different regions. Talking about Queretaro, what we did in Queretaro is we sold land and this time we sold it to a Microsoft, which is For data center, it was part of our strategy to sell part of the best of park to final users And particularly final users that are not necessarily in our same business, we decided not to invest in data centers. We have been selling land at very attractive pricing. And with that, we think that We are in Terrezzaro, the next phase is to keep on developing in the best of parks that we have already Put the infrastructure in.
There's no necessity to keep on selling land in Queretaro per share. And actually, the land that we still own is going to be good To keep on developing build to suit or spec buildings for the upcoming years. And that's kind of the strategy in most of the markets Where we own land, where we develop escapades to develop build to suites and spec buildings for the sectors that we cater. In other markets, we might be selling a little bit of land, particularly where we have larger land reserves And part of this study is to sell the land and to make a good profit on some assets, some land sales too. Thank you, Laurent.
That was very helpful. Congratulations
in the results and thanks for taking the questions.
Thank you very much, Javier. Good afternoon. Our next question comes from
the line of Pablo Montalves. Please proceed with your questions.
Hi, this is Liam. Thanks for taking my question. I actually have 2. The first one is kind of a follow-up from previous question. We have heard from competitors and other sources that construction costs have increased meaningfully.
What's your take on that? Right now, we know that you achieved 10% development yield. But What happens if construction costs increase 15% or even more? Can we expect lower Jills, going forward, that's the first question. And the second question is, again, similar to previous questions, Speaking, Jan, on El Guajillo, over the last couple of years, it has even underperforming the region.
Are we Close to an inflection point in terms of rents. I don't know what's your take on that? Thank you. Hola, Pablo, thank you very much for the questions. And I will start with the second one.
Definitely, we're seeing an inflection point Clearly coming from a good net absorption in some of the markets As it relates particularly with Queretaro and with Guanajuato, we are starting to see better demand. And I believe that a portion has come before rent increases. So now that we have, I believe, healthy Vacancy rates throughout the market because vacancies in Carrezza are going to have to be between 6% 5% 6%, it's really Not a bad number. And we believe that from there on, we're going to start to see more rent increases in many of these markets. Our focus is very clear.
We like to focus on the best companies and have great credit worthy tenants. And that's the case for, for example, Home Depot, where we leased 175,000 square feet facility in Queretaro, long term lease In your dollars, and that's something that we're going to keep on doing to have high quality tenants in good dollar leases, in long term leases. And I believe Looking forward, rents are going to start picking up. Also related to Increasing land values. Queretaro is one of the markets with the highest increase in land values.
And as I stated earlier, we have 3 very clear signals of that 3 sales, land sales Close to the $100 per square meter. Secondly, we think that the increase in prices and cost In construction costs, that will also trigger an increase in rent. And I believe that even that Cost of construction costs are increasing. We believe that the gasoline deals are still very appealing. In the past, we were able to do deals at 10% to 11% return on cost.
So even with increasing construction costs, I think that returns are going to be incredibly attractive even if we will have to reduce a bit our yields, Let's say, 50 basis points. I think that it's worth doing. It's worth developing to a spread. And still, I mean, we can be developing in the Brazil region at $45 a square foot, give or take, $15 a square foot for some Viosoce project and that's compared with acquisitions which could be in the 75 $70 to $80 per square foot range, I think it's worth considering development still and attract great companies to Great buildings instead of acquiring at low returns.
Thank you. Thank you very much.
Our next question comes from the line of Zoh Tan with Columbia Threadneedle. Please proceed with your question.
Hi, this is Zoe. My question is, with I saw headlines with the new Biden administration. Are you seeing any change in terms of the enforcement of the 75% regional content requirement? And are you seeing that affect kind of the auto industry and the signing of new leases on that end?
Great. Thank you, Zoe, for being in the call and talking to you. Definitely, there have been several headlines coming from the auto industry, Particularly given the large disruption globally that there is in that sector, we believe that the main driver of it It still has to be North American competitiveness. And on that regard, we feel very positive with the new Biden administration that That's exactly what they want to achieve. And to get competitiveness in North America, we believe that the integration Our supply chain between Mexico and the U.
S. Has to be closer narrower, and It's going to be every time more relevant. That creates a good opportunity for facilities not only To keep producing in the U. S, but to expand the supply chain in Mexico because this is where they are they become competitive. And I believe that now with the Biden administration, for the first time in many years, we're starting to see Large announcements from American companies in Mexico, and I will give the example of General Motors.
They did an announcement of $1,000,000,000 investment roughly a couple of months ago. We never heard of those $1,000,000,000 investments from American companies in the Trump So I see that as a very positive sign, not only because it shows that companies feel Comfortable in Mexico, but also because there's a big disruption now with electronic vehicles and companies are looking into Mexico for that particular sector. So I think that the USMCA will have its own adjustments. There's a 3 year period where companies and automakers have to adapt to the Regional content regulation, but I think it's good timing to adjust and that will clearly favor Mexico, in order to attract more suppliers in that in a particular industry, the current Secretary of is currently actually in Washington talking about This particular situation in order to get to better agreement, Santander. And we see this as a stable sector now, Not only because of Biden, but also because of the disruption in the pandemic and geopolitical challenges.
Right. So I was on the call with CBRE in Mexico and they mentioned that it seems like this is causing a delay because companies are Trying to structure, like maybe having a main plant in the U. S. For the supply chain in Mexico, are you seeing is that what you're hearing, like that's Causing some delay of signing leases or is that has that not been an issue where you're continuing to see companies moving To Mexico despite what is going on in Washington? Like is it a way and see approach?
Or do you think that Companies already making the decisions right now.
No, I think the main delay was the pandemic. So clearly, the pandemic brought opportunities. And actually, right now, we are seeing a very strong pipeline. And remember that these investments are long term investments in the auto sector with good high quality tenants. And that's why sometimes they take a bit longer because of how their approach towards long term investment.
But actually, we're seeing Some of the companies, Tier 1, Tier 2 companies, global companies in multi regions expansions throughout Mexico. So it's not only one region, but Some of them are opening several operations. So this is a huge opportunity. And but of course, I think that Many of these companies, they do large investments in automation, in robotics, in machinery, in equipment, And there have been some delays. But looking forward and thinking long term, I think Mexico will be well positioned for them to establish operations over time.
Thank you.
Thank you.
Our next question comes from Vanessa Quiroga with Credit Suisse. Please proceed with your question.
Hello. Good morning, Lorenzo, Juan and the rest of the team. I wanted to ask about land bank and the land values. We can see in your supplemental information that the land value for Queretaro per square foot Increased by almost 170% quarter on quarter while Tijuana declined about 35%. So I wanted To get more color on why I mean, the reason for these drastic changes in these specific markets.
The other one is some outlook regarding In your land purchases, so you said that you are looking at different land parcels, so should we expect land acquisitions from Besta In the coming months. And finally, maybe just more details about the increase in interest expense funds. Thank you.
Great. Hola Vanessa, thank you for being on the call. In the Queretaro transaction in land, the increase comes from having a mark to market on the land, Considering recent market transactions. And secondly, what we did also is We previously, we had the land as well land value, and we had an infrastructure component to it. And now the land that already has the infrastructure because it has already been improved, it shows reflect that value of having Improved land, and that's why the increase is a combination of infrastructure as well as market conditions.
However, and that's the 3rd party appraiser that does the appraise on the land value as well as the rest of On the property, yes, we're going to be buying more land in other markets. However, as you know, we are very disciplined in trying to All sorts and thresholds in terms of land. But clearly, we think that Vesta has the ability of Buying land, improving it, and the most important thing is anticipating to potential demand. And I think that since We're finding great opportunities. We did it in recently in Monterrey in the last mile location where we acquired land And we developed and we recently closed the deal with corporate for e commerce and the same in Guadalajara, we acquired land.
We developed the first anchor project for Mercado Libre, and I think that a particular anticipation It's giving great results, and that's exactly what we're going to keep on doing. And regarding the inter and yes, we have to also we already have some land. We need to do improvements on some of the land, for example, in Tijuana, Where we are going to be able to develop more than 1,500,000 square feet in one particular project. The good thing is that The line is already ours and we bought at the trucking price. And the same in Monterrey, where we're going to where we also acquired More than 30 hectares, and we are going to start putting the infrastructure in place this year.
And regarding the insurance expense, I believe that what is important to understand is that this particular quarter, we paid down the debt for a MetLife 7 year loan that we have, and we paid down the debt for the syndicate loan. And both of them, Together with the make whole breakage fees as well as prepayment of interest, that gave us a total expense of approximately 3 point $4,000,000 So that particular expense on interest is only for the quarter since this was the quarter when we Issue the bond as well as pay down the and refinance the or yes, pay down the debt that we had. So that's why We had a major expense on interest for this particular quarter, which is not going to be happening in the upcoming quarter period.
Thank you very much. All that information is very helpful. So just a follow-up, Lorenzo. So every land that you plan to buy to acquire, do you expect to be able to anchor it like you did in Monterey Discover
Regularly, yes, there is an anchor to the project. So normally, the VESTA price we develop is we have we do build to suits as well as tech buildings. And sometimes, we have a new business language we call spec to suit, which is we start the spec building. And while we are in pre marketing stage or with prior construction, we lease up the building. But instead of being only according to the terms of the client, it's a spec building, which we really like because they are flexible.
They are they last longer in terms of the design. We develop them to our needs, And I think that that's exactly what we're going to see looking forward. We're going to start speculating, but however, in the process of Marketing, we're pretty sure that we're going to be able to pre lease some of the buildings. So yes, many of the projects were normally would have an important anchor like the one that you mentioned of
Our next question comes from Andre Mazani with Citi. Please proceed with your question.
Thanks, Manuel and Eduardo. Thanks for the call and congrats on the results. So the first question would be on the current tax Liability, so we can look at it both on a quarter over quarter I'm sorry, 2nd Q 'twenty one versus 2nd Q 'twenty And also the 1st 6 months of 2021 versus 1st 6 months of 2020, there was an important increase, right, in the current tax. So Has anything changed in the tax rate, the tax rate that you guys have to pay? I remember a while back, there was some discussion in Mexico About property tax, I don't think that went through, but any structural change for the higher current tax bill that you guys Are we continuing this year versus in 2020?
And the second question, a broader one, on the new From the follow on, of course, the market is pretty hot. If you guys could remind us again about The timeline for VIVA proceeds, I think, something around 12 to 18 months was something that you guys had in mind But the market has with the GM, huge investments that we're talking about, the Rules
of origin
and companies having to accommodate more production in North America. So Anything changed and then we will proceed maybe a little bit faster. Your take on that.
Thank you so much. I can address the first question. Regarding the taxes, Look, nothing has a structural change. So please bear in mind that I mean, This quarter, we paid, roughly speaking, in current taxes, dollars 13,500,000. In 2019, we pay a similarly high amount.
I mean, this is the normal run rate of I mean, nothing structurally has changed, But current taxes are significantly affected by flows in exchange rates. So this particular year, exchange rate was More stable on this particular quarter, and therefore, the operational taxes were roughly what they showed. Current tax is quite volatile in Vesta because of exchange rate fluctuations. And but that's about it. And nothing particularly changed on our
That's clear. Thank you, Juan.
Our next question comes from Adrian Huerta With JPMorgan, please proceed with your question.
Hi. Thank you. Good morning, Juan and Lorenzo. My question has to do Also related to Javier's question on capital deployment. The pace of our new construction so far year to date has been, Education, we're on 60,000 square meters of new Gile.
Why given the Strong demand that we're seeing in many markets. Why we haven't seen yet a faster pace of new construction? Is that related because You're preparing the land for that, for example, in the case of Monterrey, and I don't know if that is the same case for Tijuana. And so what you did mention That some new plays will be approved probably in the coming quarters. Can we see this pace of the new construction accelerating significantly already in the second half?
You can give more details on this. Sure. Adrian, great having you on the call. Thank you. Yes.
When the development pipeline that we show is only a picture in the quarter, But I think you have to exactly start considering that, yes, in the next quarters, we're going New construction and there's a lot that is we have been working on our decks in terms of design, in terms of Evaluations in terms of our bidding processes and there's a huge work that is being done. But normally, we presented On development pipeline, when we really start construction of it, that's an important milestone the way that we report. So clearly next quarter, So we are currently under approval stage, but clearly, the next quarter, that particular pace will improve. Now that we have raised the capital, Now that we have actually increased by an important amount Occupancy, now that we see that net assertion is really happening, this is exactly the right timing to start Doing more specs and we are already negotiating some build to suit. So definitely, we're going to see a way larger, Stronger pace in terms of development in the upcoming quarters, Adrian.
And that's something that we not only we start, we want to start stronger, But also, we will monitor very closely according to how we see each of the markets, and that's something that we have done in the past. We can accelerate when required And when we need to stop also, we know that this company can stop when needed. But currently, conditions look like favorably for The company with a strong balance sheet, with good land reserves, with well marketing leaders in each of the regions And a strong pipeline, so everything looks favorable for us. And that's something that we're going to be giving more clarity in the upcoming quarters. And most of these new construction that we could see over the coming quarters, is that going to be highly concentrated in these 2 markets, Tijuana and Monterrey, basically?
I think that it will be in pretty much all regions, also even Some in the market, some in the back end and there could be more land acquisitions in other markets too. So But yes, clearly, we see good demand in Tijuana. As I mentioned, we have a 30 hectare plot of land where we can develop 1,500,000 Square Feet. It doesn't mean that we're going to develop everything at the same time, but we have good land reserves For a good timing, the same with Monterrey where we acquired 30 hectares in Afobaca. At Juarez, we started a new inventory building.
And actually, in Juarez, we started a 250,000 square foot facility. And as soon as we see the ground, we signed a long term lease with Econ Corporation. So those are exactly the examples that we want to repeat. And I think that we're going to be able to repeat all of those in many of the markets that are favorable at the moment. I would assume that you're looking for land in places, no?
Because we basically run out of land in that market. Is that a market that we're going to be looking for to invest in land? Yes, that's a good point. And you got it right. The way we work is we acquire land.
And when we Finalize developing it, that's when we acquire more and that's exactly what we're going to be doing. As mentioned, Juarez has been a key market for us. We have been developing a very attractive spread, developing attractive cost. So Just I recently read an acquisition, which was recently $80 per square foot. Well, I'd rather develop at $50 per square foot than acquire at $80 per square foot.
So that's why for us it's important to keep acquiring land And developing to hire a special, and there's going to be huge value creation for our shareholders. And in Juarez is a good example where we can create that particular value.
Great. Thank you, Loren.
Our next question comes from Francisco Suarez with Scotiabank, please proceed with your question.
Hi, good morning. Congrats on the results and for taking my question. The question that I have relates to a follow-up made by Sony on supply chain reconfiguration. To what extent decarbonization across supply chains in the auto industry is also another huge driver To get more net absorption in your facilities, assuming that your facilities are the right way to be delivered at. Or to what extent that is actually a risk given your overall exposure that you have to the auto industry?
Thank you.
Thank you, Francisco. If I get it right, Regarding carbonization, do you mean that the shift towards electric vehicles? Is that
Yes, a shift towards electric vehicles, but also to decarbonizing the supply chain, mainly Reducing your carbon footprint regardless if you engage in EVs or not.
Okay. Okay, good. Well, that's an important point. So probably the way I would approach your question is by saying that We recently raised the 1st public ESG bond for a real estate company in Mexico, and I think it was in Latin America. And one of the objectives that we have is that we develop with Green to green standards, all of the projects that we have currently under construction and we are Going to increase our GLA in terms of green certified buildings.
And that's exactly our approach Towards development and towards our ESG exposure, particularly when it comes to sustainability and To green building, and that's actually for all of our buildings, for all of our sectors. We think that there's every time more Requirement from companies on these type of facilities, we see more value in these type of facilities. And that's not only In the auto sector, I think that we're seeing in different markets. Many of the projects that we're currently developing like the one in Mercado Libre, which an e commerce project, it's actually a LEED certified building. So in that case, I think that looking forward, And you're right, it's not only about there's not only going to be electric vehicles looking forward, there's also going to be internal combustion still for And what is definitely the trend is that everybody at some point wants to get to next year emissions.
And I think that by doing green certified buildings, we will contribute positively to that.
Perfect. Thank you. And if I may, a follow-up on that. Considering the unfriendly Policies towards renewables. Do you think that might be at risk OEMs to reconsider further relocation to production to Mexico?
Or do you think That is not going to be an issue.
Sure. The positive news Is that Mexico is part of a global environment. And I think that if you look at Political leadership in the U. S. And other countries is actually the other way around.
So everybody is looking at considering more renewable energies, Considering more net zero emissions in sectors and industries and even in Mexico, if policies We're not necessarily looking there looking that way. I think that there's We are more part of a global environment, and there's definitely opportunities for Mexico in that regard. So OEMs are having its own challenges globally. OEMs are having its own challenges in Mexico. And it is unfortunate that the current government is not supporting more renewable energies.
However, I think that it's going to be a matter of time that they access more renewable energies, And they're going to see that there's really no other alternative but to have more Cost efficient energy and cleaner energy and that at some point they will figure out that that's going to be a requirement. But for the moment, I think there's too much Political noise on that regard, no?
Got you.
Thanks so much. Congrats again.
Thank you. And please go.
Seeing that we reached bottom of the hour, our last question will be from Armando Rodriguez with Sigma Research. Please proceed with your question.
Good morning, everyone, and congratulations on the solid results. So my question, it's about your inventory buildings that nowadays represents Like 1,000,000 square feet in the market, for example, in Tijuana, Ciudad Juarez and Guadalajara. So my question here is Considering your strong net absorption on these markets, so if you feel comfortable with this share Sorry, Armando, could you please Repeat your question. Yes, sure, Lorenz. My question is about your inventory buildings That represents more or less 1,000,000 square feet at the 2nd quarter.
So my question here is, You feel comfortable with this share of inventory buildings compared to your total portfolio. Okay. So inventory buildings, you mean the ones that are pointing in the development, right, on the development pipeline? Yes, that's right. Particularly in
Tijuana, Ciudad Juarez and Guadalajara.
Absolutely. Absolutely, yes. Actually, this is exactly where we believe we can create the most value by developing an attractive returns, 10%, 11% return on cost. We have 3 large projects. Actually, out of the 3 of those, one of them has already been leased to the one in Ciudad Juarez To Ethan Corporation, long term lease, U.
S. Dollars, good quality tenants, which matches perfectly to Vesta. And Tijuana and Guadalajara, we see very favorably, particularly because Tijuana, there's really no building in this site. And actually, even before start, we already have a good lineup of potential tenants for that particular building. So we feel very comfortable.
And actually, if we lease up that building throughout construction, we will soon start a second Inventory building. And the same for Guadalajara. Guadalajara is a strong market. We have leased up More than 800,000 square feet with the Mercado Libre. We see good demand.
There was record demand In record leasing activity in the last quarters in Guadalajara, we found that we had, we didn't have a building available. So that's why it was important for us To start construction, and we feel very, very confident that that's going to be leased up at some point. And again, If we're able to lease up part of that in the meantime, we're going to start construction soon of another inventory building And to keep with that, VirTra's development circle. Thank you, Loren, and congratulations again. Thank you very much, Armando.
There are no further questions. I'd now like to I'll turn the call
back over to Mr. Berra for concluding remarks. Please go ahead, sir.
Thank you, operator, and thank you, everyone, for joining our call today. We are very excited about the 2nd quarter results, And also, we're very excited by the upcoming opportunities that the Q3 and Q4 might represent for us. Vesta has passed an important inflection point, which clearly resonated in this quarter's key operating and financial metrics. Today, we are in a position of strength And forward momentum, and we will leverage our company's ability to create value based on decades of experience of real estate operators. I would like to thank the entire BESTU team for their important contribution for their performance.
Thank you all. We look forward to providing further updates on our Q3 call in October. Goodbye, everybody.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.