Vesta Real Estate Corporation SAB de CV (VTMX) 2015 Q2 法說會逐字稿

Good morning. My name is Robert and I will be your conference operator today. At this time, I'd like to welcome everyone to Vesta's Second Quarter 2015 Earnings Conference Call. Vesta issued its quarterly report on Thursday, July 23, 2015. If you did not receive a copy via email, please do not hesitate to contact the Company at +52-55-59500070.

Before we begin the call today, I'd like to remind you that forward-looking statements made during today's teleconference do not account of future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance with IFRS and are stated in nominal US dollars, unless otherwise noted.

Joining us today from Vesta in Mexico City is Lorenzo Dominique Berho Carranza, the Chief Operating Officer; Juan Sottil, the CFO; and Iga Wolska, the Investor Relations Officer.

And now I'd like to turn the call over to Mr. Berho. Sir, please begin.

Thank you very much, Rob and good morning everyone. Thank you for your interest in Vesta and for participating in today's conference call. Vesta is deeply committed to maintaining our high rate of growth and achieving a sustainable competitive advantage by realizing the Vesta Vision 20/20 growth plan. We are therefore developing stronger internal processes and better products for our clients. We call this process Innovesting, which is where innovation and strategy meet at Vesta.

Having built an industrial real estate portfolio in the fastest growing regions of Mexico, we're now at the forefront of the industry's growth wave, and ready to capture this demand with more efficient and competitive solutions. Innovation is at the heart of this strategy. In anticipation of rising demand, Vesta is being proactive with world-class industrial facilities ready to lease that are adaptable to client requirements, well located and competitively priced.

Our Park-to-Suit development integrate necessary supply chain processes or cluster needs with the best infrastructure. Backed by our Vest in Class approach to customer service, we also provide an experienced legal framework, negotiating experience, development and planning and execution, and park management solutions. So our clients can focus on their core business.

In line with our Vesta Vision 20/20 growth plan, we're transforming our Company with a new corporate structure and long-term management incentive plan, underpinned by a strong balance sheet and track record of high client retention and satisfaction.

In the first half of 2015, our portfolio grew 1.4 million square feet, representing a major growth period in our history, to reach 18.2 million square feet overall. It is vital we maintain this momentum in order to have facilities available for future clients.

Very importantly, the recovery in the United States and the relatively stronger currency positions Mexico more competitively as a global manufacturing hub. Low inflation, a skilled and competitively priced labor force, proximity to the United States and ongoing implementation of energy reforms are attracting world-class companies to establish manufacturing facilities in the country.

From a broader economic perspective, as the United States economy continues to strengthen, interest rate expectations have risen, increasing volatility in capital markets. Nevertheless, the strong fundamentals in Mexico's industrial real estate sector underpin our bright outlook.

Foreign direct investment in Mexico has risen more than 30% to $7.6 billion, with the United States accounting for nearly 60% of this, according to the most recent first quarter figures -- according to the first quarter figures. The automotive sector represented nearly 54% of foreign direct investment, as the advantages that we have outlined triggered GM, Ford, Toyota, Honda, Volkswagen, Audi, BMW, Hyundai and Mazda to select Mexico as their manufacturing platform for North America and the world.

I am happy to share strong second quarter results, which are a testament to our ability to execute on our strategy. During the second quarter, our additional capacity with new properties saw an expansion in GLA of 3.68% versus the first quarter. As a result, our total vacancy rate rose to 14.9% with the same store vacancy rates declining to 10.2% as of June 30, 2015. Vesta has historically rented new buildings within approximately six months. We therefore expect vacancy rates to normalize in coming months.

Funds from operations increased more than 66% year-over-year to $10.9 million in the second quarter. Revenues increased 44% to $19.3 million. Net operating income rose 15.5% to $18.6 million, representing a margin of 96.5%. And EBITDA rose 21.7% to $16.6 million, equaling a margin of 86.2%.

We are proud to celebrate our third our third anniversary as a public company this month, noting growth of 60% in our gross leasable area and 44.3% in last 12 months revenues to reach $75 million as we improve our financial efficiency. This growth reflects our "Vest in Class" corporate culture, which focuses on building long-term customer relationships. We thank you for your continued trust and support, and look forward to building our strong track record of growth.

I will now hand the call over to our CFO, Juan Sottil for a discussion of our second quarter results.

Thank you, Lorenzo. Good morning, everyone and thank you for joining us today to discuss our results for the second quarter of 2015. We are pleased to report strong results for the period with solid expansion in our portfolio and double-digit growth across all key financial metrics during the second quarter.

Our total gross leasable area increased by approximately 630,000 square feet over the three months to June, to reach 18.2 million square feet overall. This expansion explains a period of strong growth in Vesta's history and is in line with our plan to double the size of the Company by the end of the year 2020.

During the quarter, we signed new leases for inventory buildings in Toluca, San Luis Potosi, Tijuana, Silao, Aguascalientes with global companies and industries, including medical devices, automotive and logistics. We've also renewed or re-leased more than 1 million square feet of our portfolio, which equate to 68% of leases expiring this year. Looking ahead to our expirations for 2016, we also renewed about 14% of the leases that expire next year. The increase in our portfolio size saw a rise in our vacancy rate to 14.9% from 12.4%, due mainly to the completion of inventory buildings in Queretaro and Tlaxcala. We expect to lease these buildings in the coming months, as demand for industrial real estate in Mexico remains strong. It is vital for us to stay ahead of the needs of our customers and we expect our vacancy rate to soon normalize. In the second quarter, we made progress in the construction of nine buildings, representing a total GLA of more than 2 million square feet and investments of $108.5 million.

Regarding our financial results, we achieved strong growth in revenues, net operating income, EBITDA and funds from operations during the quarter. Revenues increased 14.4% [year-over-year] to $19.3 million, as we were successful in renting new properties. As more than three quarters of our rental contracts are in the US dollars, the majority of our revenues are protected from the peso decline versus the US dollar. Most of our costs, on the other hand, are in pesos. These dynamics have helped to boost our margins. More broadly, the peso ongoing decline continues to make Mexico appealing as a global manufacturing destination for offshore companies.

Vesta's lean cost structure is reflected in low operating costs, which rose over 1% on the second quarter against the prior corresponding period. Vesta's Board of Directors is committed to strong corporate governance and practice and set very challenging targets for our executive management, based on shareholder returns. On the mark-to-market of [these] compensation metrics, total expense was lower in the second quarter, benefiting administrative costs.

Net operating income rose 15.5% over the same period in 2014 to $18.6 million, with economies of scale helping to lift the NOI margins 90 basis points to 96.5%. For the second quarter, EBITDA rose 21.7% to $16.6 million, while EBITDA margin increased 520 basis points to 86.2% from 81% over the second quarter of 2014.

Income before tax doubled to $44.1 million from $22.1 million in the same quarter last year. This results in a net operating profit of $20 million for the quarter, up from the $15 million in the year ago period. Similarly, the second quarter funds from operations were robust, rising 66% year-over-year to $10.9 million.

Regarding our balance sheet, Vesta cash and cash equivalents were $275.8 million at the end of the second quarter. Operating activities generated cash flow of $15.8 million during the period. The overall balance of debt as of June was $349.1 million. As a reminder, all of our debt is denominated in dollars.

Vesta's strong second quarter results are a testament to the success of our business model. We are confident on our ongoing expansion as we execute the Vesta Vision 20/20 growth plan, against a backdrop of Mexico rising appeal as a manufacturing hub. We are focused on the fastest growing markets in Mexico and are strengthening our bond offering through sustainable projects and value-added services. Our track record is providing high quality facilities for clients. Our strong financial base put us in a unique position to capitalize on the demand for the industrial growth market of Mexico. We're excited about our growth opportunity for the second half and we'll keep you updated on our progress.

Thank you all. I will now open the floor to questions and answers. Operator, could you please make us ready to answer any questions.

(Operator Instructions) Ariel Amar, Itau BBA.

Congratulations on the results. I have two questions. The first is regarding basically vacancy. Aside from the opportunity because of not having the rent, obviously, how (inaudible) for vacant building for you guys, especially now that you are obviously delivering a lot of inventory building and you're going to have to carry it for a while. Do you lease it? I just like to understand a little bit in more detail what is, for example, the cost per square meter per month of having a vacant building, just so I can model it better and understand a little better as well. That would be my first question.

My second question is regarding your debt renegotiation plans. If I were to guess and taking into consideration the Company's profile, I would say you want to go for a long-term fixed rate debt, which would most probably qualify as a bond. Could you comment on that? I mean is that what you are thinking about? How are you going to -- are you actually planning to renew the GE debt? How are you going about the renewal of the debt that expires in 2016? Thank you very much.

Let me first answer the second question and then we will tackle the first one. The second question, look, debt renegotiation, they taint our debtors. I don't know if you've noticed that, but GE has stepped out of the business now. Our debtor is Blackstone. And look, basically what we are going to do is we're going to access, either the private debt markets, or the public debt markets sometime in the last quarter or first quarter of next year. We are going to basically issue debt and pay off the outstanding balance of the current debt.

Part of the reason of raising the $50 million of debt on February this year was just to assure that we have alternative sources of funding from the private debt markets that operate in Mexico in dollars, and given the success of that offering, I don't foresee any problem, even if we were to issue private debt with a property collateral. However, as we have told in the past, I believe that Vesta is uniquely -- is very well positioned to issue bonds in the public market. I think that our asset quality is second to none. I really believe that the profile of maturities on our leases, the quality of our portfolio, I won't hesitate to issue public debt, and the conditions of the market and the pricing for such an infrastructure is more convenient for the Company. So I don't foresee any problem in renegotiating and rolling over that debt with the best available structure in the best market that is convenient for the Company. For the first question, Lorenzo, our COO is going to answer you.

Thank you very much, Ariel for your questions. And this gives us also an opportunity to give more clarity in terms of our operations. The way we see our occupancy -- our vacancy is fully -- what we like to compare is the same-stores vacancy, particularly because it could be sort of misleading the numbers that we give in terms of occupancy, basically because immediately when we finish an inventory building, we put it on top of the whole portfolio. Therefore, it might seem that we have increased vacancy, but the reality is because we're adding new inventory buildings to our portfolio, In this case and this quarter for example, we increased in Tlaxcala and Queretaro, which we see it as an advantage to most of our competitors and also an advantage to capture and to attract new clients at the right time.

So therefore, I believe that -- regarding your question on how we expect the rents to be done for these -- for the upcoming months, we have always been able to close at-market rent and we are going to be still doing so. We want to achieve our returns, our hurdles and that's why we are very cautious on first of all hitting our returns. Secondly (technical difficulty) type of clients we want to have to our complete portfolio and in the end to really add value through our development strategy. So, Ariel, at the end of the day, the way I think you should take into consideration our vacancy is every time we do an inventory building, we basically assume six months vacancy. We are very aggressive in the accounting of our inventory buildings. We don't delay the hiking of our GLA. So that's why we put an upfront. Our cost per square foot is still between $45 and $50 per square foot and the rent depends on the rent per square foot in the markets that those inventory buildings were added, and we are confident that we will lease them off in the second half of the year.

Vanessa Quiroga, Credit Suisse.

My question is regarding your current vision on the markets where you operate and if you can provide a little bit more color on why you decided to delay the completion of some of the developments that you have in your pipeline and tell us whether you sense some kind of temporary over-supply in markets like Toluca, for example, that is experiencing some of these delays. Thanks.

First of all, I'd like to talk a little bit more about the market dynamics. I believe that real estate fundamentals are stronger than ever. We have, in general terms -- well I like to see more regionally, talking for example about the north part of Mexico, which is for us Tijuana and Ciudad Juarez. It's incredible how much the vacancy has dropped in the last four years. It came from double digits from approximately 12%, 13%, and today we're facing vacancies of 5%. This is 5% in Tijuana and 7% in Ciudad Juarez. This is for Class A buildings. It is very strong. On top of that we are seeing that the market rents are increasing, so this gives us a -- this is a great sentiment in order to be able to develop inventory buildings in the north part of Mexico. That's why we have started a strategy of developing in Tijuana and Ciudad Juarez, as you know now.

Bajio region has the highest absorption in whole Mexico and vacancy rates, as you know, are below -- close to -- even below 5% in certain markets like Guanajuato, Aguascalientes, even San Luis Potosi. Therefore, we still see that the fundamentals are still very strong and that's why our strategy of still developing inventory buildings in these markets.

Now Toluca, in this case, Toluca -- our portfolio, I could say that besides the inventory buildings that we developed recently is almost fully leased, fully leased, it's almost 100%, and the market is also very strong, particularly because of the logistic sector and automotive industry growing in Toluca. It is -- demand is very strong. We have a very good pipeline and the delays have nothing to do with the market. Actually the delays in -- particularly in this -- the two delays that we announced for the S5 and S6, it has more to do that we today have a -- we are currently developing the Vesta Park II, which is six buildings. We have already developed four of them in which we are in the leasing process of two of them, the S1 and S2. And the S5 and S6, we were able to move a little bit the timing in order to have them ready for the end of the year, so that we can fill off the existing space in this semester, while we are constructing the S5 and S6. But bear in mind that even that the buildings are infrastructure in process and they will be finished by the end of the year, we are already marketing those buildings. Why, because we are seeing a strong pipeline and we see that we could be close to our future clients even today.

If I can speak on that, and so would you be comfortable in guiding us for a shorter amount of time -- a shorter period of time that S5 and S6 will remain vacant after completion?

Every time we submit -- the Company is pretty conservative, Vanessa, as you know. Every time we complete an inventory building, we take six months to fill it up. Mind you, our quality of disclosure, it is truly aggressive. That is contrary to what most of the RIETs in the US do and some of our peers in Mexico. We do add the GLA of inventory buildings right away. We do that not only because it's fair to our shareholders to know how much building and GLA we have outstanding, but it is also a good measure internally to guide our management of our people into the leasing process, which is a key part of our business. So, this aggressiveness has a consequence. We're very open about the empty space. It helps our shareholders know what's our vacancy is and what is the opportunity cost, asked the previous question, another line. What we did on the S5, on these two buildings is -- look we do have some inventory buildings in that Park without payment. It's been proven to us to -- both our resources in infrastructure, in developing -- the expansion of that Park, rather than continue full speed ahead on these two buildings. As Loren pointed out, we're marketing those spaces already and we're confident that once these buildings are delivered, it would take us the usual six months to fill them up.

Marimar Torreblanca, UBS.

I have a question on -- how do you think we should expect the deployment of your money or your cash position and your leverage potential in terms of timing? After what you've seen in the recent months, what do you think we should be thinking of?

Look, basically, the Company will continue to develop in a prudent fashion. So in terms of cash conversion into buildings, we will continue to develop as we see our vacancy rate drops. Just to point out, Marimar, in the third quarter last year, our occupancy was above 90% overall for the Company. That's why we started all of these inventory buildings buildout. We reacted to the strong demand in our properties. Today, as we see our vacancy rates -- overall vacancy rates of the Company of 14%, we will be prudent and combine and slow down a bit our conversion of cash into buildings. Bear in mind that our same store vacancy is very attractive, I think it is clearly under control. So, we will balance these two stances of prudent developing and control of vacancy. It doesn't help the Company a lot to develop buildings, if we already have current buildings in the markets that we operate. So, we're prudent in that respect.

In terms of leveraging the balance sheet, first of all, we need to tackle the debt renegotiation, the debt rollover. And then in the next 24 months, we will access the debt markets to increase leverage, as our cash drops below $175 million, somewhere around there, given our pace of investments, then we will begin to lever the Company appropriately.

And what do you think are the chances that we see a new build-to-suit project, like the Nissan Park you have? Do you think that we're -- or have you been in negotiations that suggest that in the next 6 to 12 months, you should be seeing projects of this kind?

Well, I believe as I said, I think that the market fundamentals are very strong. There is a strong pipeline coming, particularly from the automotive industry and there is a strong pipeline also from the aerospace industry. So therefore, we're always marketing, not only our inventory buildings, but also build-to-suit projects and also park-to-suit projects. So that's the line of our business and I believe that it's -- I think some of these projects take -- they take a lot of time sometimes. We are currently are tending this strong pipeline. And therefore, I think we're pretty much in line to what we have been doing in the past and what we're going to be looking forward. So, as long as we see a strong pipeline, I think that our business is going to be working and it's going to be done as usual.

Adrian Huerta, JPMorgan.

My first question is, what is the level of GLA that you're expecting to open, or to have [it ready] for lease in the second half of 2015 and the GLA for 2016, and if some of that is already leased? And the second question, somewhat related to that one is at what point you'll just roll down construction of new GLA in terms of overall occupancy? I mean you're already closer to [15], you're opening even more in the second half, and it's not rented out. I mean where could we see the overall vacancy peaking in a worst case scenario before they slow down?

Look, we're very open about our construction and development pipeline. So, we will end the year somewhere in the [19 million -- 19.5 million] square feet. We do have some inventory buildings coming on line in the second half. We do have a strong pipeline of leasing. Clients have slowed down the closing of leases; it has taken us a little bit longer to close the leases, but the pipeline has not weakened. So, we will continue to guide you, saying that it takes us six months to lease the building. Now, as I have been answering, it doesn't help the Company to have several inventory buildings on the same market, it doesn't add value to our shareholders. In Vesta, we grow accretively. It doesn't add any value to my Company to have too many inventory buildings, more than one per market, it really doesn't. So, a growth plan should be dynamic and should reflect our ability to lease in the markets we operate. I think that 15% vacancy with our aggressive reporting on inventories completion date, it should be peaking, should peak, and that's the way our investment committees is managing the Company. We need to lease off these spaces and then we will resume growth. Again, one year ago, 8% overall vacancy, today 15%, because we've got ready to continue our expansion. When the 15% drops to 12%-ish, 11%-ish, we will continue to be locked and this is dynamic and this is the way we operate. We put our prudency over growth all the time.

And a second question, you guys have a lot of experience to different cycles in this industry. Given your experience in the past, what has been the impact of a drastic move on the FX, on the peso, especially on rents? On the one hand, obviously it becomes more attractive for the US companies to come to Mexico. But then on the other hand, given that not all industrial assets are dollarized, there has to be some type of pressure regarding rental prices denominated in US dollars. I guess with the small movements on the FX that doesn't happen, but with larger ones, I wonder what happens.

This is an excellent question and I am happy you bring that up, because it really allows us to shine, quite frankly. Please look at our balance sheet and look at our accounts receivables. They haven't moved. Isn't it amazing that the peso has gone through basically a 20% devaluation and our clients are able to meet rent payments. That peek into clients and that's really managing the credit process at Vesta. Let me compare -- let me put this into perspective. When the real estate market crashed in the beginning of the 2010 period, there was also a very strong foreign exchange movement. At that time, we did see a lot of pressure on rents. That is not only our accounts receivables grew, some of our clients went bankrupt, some of our extraordinary clients asked for total rent relief, which is not the case right now. And it was a challenging period for a real estate developer. I (inaudible) that with the current situation. The peso has weakened significantly, we have a strong client demand in our pipeline. We don't have rental pressure because there is not a lot of vacancy in the markets we operate and as long as we continue to pick up good clients, do long-term leases and really wary about the credit rating, as I keep telling in all our meetings, concern number one of my investment committees, do business with good clients, don't do business with lousy clients, because when the volatility comes to market, it's really the good clients that let you sleep well at night. And I think that's what you are seeing in our balance sheet. So, in the markets we operate, Toluca and Bajio, we had a strong demand, and we continue to market our buildings in dollars at the ongoing market rate, which is not dropping. And the same can be said for the markets we operate in the north, and the same can be said in Toluca, and so we just move ahead.

I guess that's a very good example, and I guess the biggest difference is that in that crisis, growth in the US came down significantly, which is not the case this time and that we're seeing the currency depreciating, so --

Exactly, the growth in the US is really helping the our side of the Mexican economy, which is manufacturing base and that allow us to keep our pipelines strong, that allow us to keep our pricing solid, and our companies are meeting their financial commitments -- our clients.

But I guess, overall rental prices on average, considering that you have a certain percentage of your leases denominated in pesos, the average number in US dollars will be coming down a bit.

Well, of course. I mean part of the effects of the peso weakening, of course we do have 25% of our leases denominated in pesos, and the peso value has shrunk in our dollar accounting. And that one we didn't foresee at the beginning of the year. So, part of the reason that we're at [14.4% against 14.5%] is that well my leases from my peso clients are not really helping me. But, again, that's an externality -- that volatile externality that the Company cannot foresee. What we can control is good clients, but we can control is looking for strong pipeline and those things we are under control.

Ivan Enriquez, HSBC.

Congratulations on the results. And my question has to do with; we saw this margin expansion -- EBITDA margin expansion basically on the back of a reduction of 23.4% in administrative expenses. And this was basically to management, you said that management achieving some targets, can you please elaborate a little bit more on what are these targets and give us more color on the delays (multiple speakers)?

And again I think this is a very good question and I am very happy that all of you analysts keep us sharp. Look, our Board decided to tie the compensation scheme for management to the total returns that we deliver to our shareholders. Vesta is unique in (inaudible), not only in the real estate industry, but in any public company. And the concept of that is first comes the shareholder and then comes the management. And we'll be meeting that. So if the shareholder has a good return, management should be compensated, a good measure of all returns. And the measure is total return, dividend plus stock appreciation. On that scale, Vesta performance in December 31, 2014 has not been better. And we are concerned, not only because it is our duty to excel in providing results to our Board as well as shareholders, but because it bites on the management compensation. And so, what we do is we mark-to-market the management compensation on a quarterly basis. On this week's Board, the Board is thinking about, if we should mark-to-market our management compensations on a quarterly basis, because we throw you off. Last month -- last quarter we were basically at target and this quarter we're very well below target. And that puts volatility in my admin costs and it throws all of you analysts and shareholders to see what's going on. So we may want to revisit this addition, how to -- during the year how to express our admin costs. But for the time being, they were mark-to-market, because total returns were not very good, they were very worst. And therefore management compensation, and we are talking about 15 employees out of 40. So management compensation tied to shareholder results got this into the compensation of most of the top managers and -- let me rephrase it, all of the top managers and a third of our, or a fourth of our middle managers. So look, that's why our (inaudible). So, please take a look in the note in the financial statements, and you will see the reserves we created last quarter, we submitted reserves we created this quarter and this will be [helpful] in how accounting for compensation runs into the company's books.

I certainly understand this total return based compensation, but my concern is that, how can we [estimate] that the management execution, let's say, and also the impact that the share price is going to have due to other staff like -- the perception of higher interest rate, because I mean not only you, but also the (inaudible) clearly underperformed, but it's basically, or had some explanation on the interest rate concern. But here you are like -- I mean hurting or not necessarily doing a bad management execution and you are certainly reducing the compensation.

Well, look, there's two sides of the same coin. I believe that the performance management wise -- management of the Company, sorry for the regression -- is very good. I think that we have had management wise a good first half of the year. There is some spot we should concentrate. Leasing clearly is one of them. We have to close leases appropriately, but besides that I think that we have done a pretty good job. The share price doesn't reflect that. And well the alignment of interest [displays] our compensation [offers]. All of us, all of the 15 people understand that, and that only makes us work well. So, in that respect, I am very happy about what's happening. Now, you're also touching another topic, which is the impact of interest rates. And there, I have a disagreement with the market. I believe that given the type of company we are, a developer in a dynamic sector of Mexico, in the right place of the Mexican economy, export-led growth, given that the US is growing substantially and therefore they have to hike rates to keep their economy healthy, I think that the impact of interest rate is not that a strong investment. I have no comment on my peers, you are the better judges of that, but in the case of Vesta, I don't think that interest rate should have a huge impact on us, not only because our -- the base business, the real business remains strong, but also because we are active, the debt capital markets (inaudible) for a 10 year transaction in the fourth, or first quarter of next year, and so the impact of interest rate in the particular case of Vesta should be pretty well minor.

And finally, in terms of the guidance, do you have any NOI guidance for revenue for the end of 2015?

For 2015, we haven't given it. (inaudible) a lot of it, it has to do with exchange rate fluctuation, like 25% of peso leases, and of course, our need to close off leasing of our vacant space. (inaudible) I think that we are meeting the margins more than comfortably and I took into account the expected level of compensation of management. So there is nothing that prompts me to say that I'm not going to meet the guidance on those metrics. In fact, I'm quite comfortable with the growth of FFO and which is really what we -- at the end of the day we follow the cash and FFO is a good measure of our cash generating ability.

Francisco Suarez, Scotia Bank.

Basically my question relates to your guidance on your FFO margin. Currently, you gained 56% FFO margin, for sure you could [set up] lower funding costs and we are able to see that improvement in the next year once that you are able to refinance your current debt. But assuming that the overall cost of funding remains flat, I am sorry to bounce you with another question related with absorption rates on [spec] property, but what may happen to overall FFO margins if vacancies are still high on spec property going forward? What can you guide us for? Any color will be very much appreciated.

Okay, let me -- if I (inaudible) so let's answer and you remind us what we're missing, because we don't want to leave anything on the table. First, Francisco, nice to talk to you. We do not give guidance on FFO, please remember that. We do give guidance on EBITDA, but I will be very open about FFO. FFO clearly is strong, basically as expected -- as we expected internally, and the feature on this quarter -- on this first half of the year, I should say, is that the fact is, came out -- cash [factors] came out significantly lower. Please be remembered that in the case of Vesta and I think that we should talk about an adjusted FFO because we do pay taxes and that cash outflows are truly considerable, but because of the foreign exchange movement, we're not going to pay most of our tax bill in the coming years if the peso remains at the level they are today. Now, given the [nice piece] of the tax implementation in the interim of the years, we do have to pay some taxes during the years, but the final tax value, most probably will be adjusted. But again, taxes when you're paying, so FFO benefits greatly from that. Please remember that on FFO, all of these extraneous items like management compensation, which is not cash flow, is not there (inaudible). That's why we like FFO. The foreign exchange fluctuation, the appreciation of the value for our properties, all of these things [matter}. We follow the cash, cash is very strong, but taking (inaudible) don't pay taxes, but to make numbers comparable, you have to make a guess of what -- how much taxes shareholders pay and if you were holding -- to make the FFO comparables. Or convert the -- add back the taxes to my FFO to make those comparable, or whatever suits your need. So that's one positive.

The other question is on absorption, but perhaps Loren can comment on absorption rate and then you remind me with the question that I forgot.

We can actually talk on your EBITDA margin guidance figures. My guess here is that, if the current absorption rate actually deteriorate and for some reason, your overall vacancies on the spec property continue to deteriorate in the future. If that actually happens, that may affect your overall EBITDA margins and what could be your guidance on EBITDA margin for this year?

Well, okay, look we're not changing guidance at this point, because we see a very strong pipeline, Francisco. Our level of concern is that because we account for development immediately after the building is available. We don't have it -- when our properties are going to impact our GLA and we use that as a metric internally and we share that metric with you. That's why the vacancy came up. And we strongly believe that we will be able to lease our buildings within our expected rate. And therefore, given the pipeline that we've, we will not change guidance during the second quarter. If we believe that -- that if we were to see that pipeline decreasing, then we will talk about changing guidance. The guidance we give will hit our revenue line and therefore, the rest of the metrics will be affected. But so far, I am confident in our ability to reach the target.

Absorption rate, the market absorption rate remains strong. Customers are taking longer to close the leases. Was that due to volatility in the markets globally? Was that due because of election? Was that due -- I wouldn't have known, but we are talking to a lot of clients, new clients pop up very often and we follow them on the [suspect] level to the closing level and we remain confident on our ability to close and on this pipeline that we're seeing coming up from the regions we operate.

Alvaro Garcia, BTG International.

Most of my questions have been answered, but I just wonder if you could drill down maybe a little more on S1 and S2 in Toluca, maybe you can give exact examples or -- I don't know how much color you could give exactly, but maybe has it not been leased, maybe if you're looking for a tenant with a longer timeframe or are you looking for a particular type of tenant there? Any sort of color about S1 and S2 would be very really appreciated.

Absolutely Alvaro and let me tell you, first of all, I would like to take the opportunity also to share how the market is moving again in Toluca. In Toluca, we have 4 million -- approximately 4 million square feet of leasable -- leased area, and it's actually fully leased. So, we're very confident as we need more space in order to be able to rent and to help more of our existing customers. S1 and S2, those are buildings very similar to the S3 building, is approximately 150,000 square feet each. Let me tell you, the S3, we -- in this last quarter, we leased it up with two existing clients. One of them being Ryder Logistics, which was already our client in Queretaro and in Toluca, so we are repeating business with them. The other one is Recall, who is doing business processing outsourcing and we leased already a property with them in Toluca. And we are getting long-term leases. I am talking even in some cases, even above 10 years.

So, first of all, we're growing with existing client base and we're leasing up our only two available buildings. And therefore, we want to be very careful on trying to maintain the same kind of clients and the same kinds of leases looking forward. So, as long as we -- we're marketing the existing two buildings and therefore we're very confident that we're going to be very -- I think we're going to be successful in the S2, S3 -- S1 is S2 and also in the S5 and S6 that we're currently under construction. Another important item about Toluca is that, today, if you go to Toluca and try to find land to develop an industrial building, it's very scarce land and prices have increased dramatically. So this gives us a big advantage on the land that we acquired some years ago and that we're currently developing.

Just one last thing. I was wondering if you could provide a little color on the plot of land you bought in Aguascalientes as all. I noticed that was the biggest jump in your land reserve this quarter. Any sort of color there would be greatly appreciated as well. Maybe with regard to the land prices in Bajio relative to what you mentioned now, about how land price in Toluca has increased. Thank you, guys, really appreciate it.

About Aguascalientes, you know we have the DSP Park of Nissan. Nissan is -- will start the construction of their new manufacturing facility together with Infiniti and Daimler, Mercedes-Benz, right next to the DSP Park, and therefore we believe that demand is going to come very strong in the upcoming years. Therefore, we are taking advantage of a market that we already know, and we are very well established and we are buying land before we start off marketing more buildings and we are doing it in the proximity of the Nissan Park, because we know that the demand is going to come in this same area. So that's why for us it's very important to secure the land in advance, so that we are in a more advantageous position in the upcoming future.

And regarding the land pricing?

Regarding land prices, that's why for us it's key to buy land. And not only we are acquiring land in Aguascalientes, actually we're going to still be acquiring land in Aguascalientes and we are going to still be buying land in the Bajio, because we believe that securing land is going to give us a big ability to market buildings, and we know that if we buy land today we can even get it at a discount prices to what we see the trend is going in the upcoming future. Land prices have also increased in Bajio region, that's why tying off land for us is going to be key in order to be able to get to the growth plans that we have in those regions.

And again, from an overall perspective of the balance sheet, land reserve for our more than $1 billion portfolio of relative properties, should not be higher than $90 million or $100 million, not more than that. We are currently [$66 million-odd]. We are prudently buying where we think demand will be important.

(Operator Instructions) Javier Gayol, GMB.

Congrats on your results. My questions both are on the development side. I mean, with this lower peso, do you think that your investments should -- currently for your ongoing projects should be lower, I mean, because you're showing it in US figures? And if it's the case, how much -- I mean do you going to benefit in terms of development cap rate or something like that in these projects going forward? And the second question is -- with this price that you've pushed forward, I mean is there any kind of penalty that you have to pay to your contractors or something like that?

Let me start by the second one, because it's an easier one. No, no, we didn't have any penalty from our contractors. I mean they're working very hard on our Toluca Park II, providing the infrastructure. So it was a matter of redirecting them to secure the infrastructure of the Park rather than erecting the walls of the buildings, but nothing more dramatic than that. But they're going to erect the walls, continue to do the infrastructure, it was just that. So there is no penalty.

On the first question, the first question is very sharp. Construction costs haven't increased and our construction costs are denominated in pesos. Of course, at the end of the day, what we're -- and that is the reason why we have a peso balance on our checking accounts. It is because pesos -- a cash bases are buildings for the future. As construction costs have not risen, because the devaluation is not trickling down to inflation. I mean steel, cement, the basic raw materials of our buildings are not rising in price. We keep our money in pesos to match those expenses. When we calculate -- when we approved these buildings in the investment committee, we committed to a certain hurdle return. We spread the hurdle returns, which is an IRR type of analysis, we spread that return in terms of cap rate. We committed to 11-ish for inventory buildings and we're confident that we will achieve that. As our revenues are mostly denominated in dollars, the [price and process] values our buildings in dollars. So, these inventory buildings are being valued as soon as we start construction in dollar terms. And the mismatch between our valuation of the appraisal and our commitment of the investment committee and the peso cost give us leverage to -- on the pricing stance. Mind you, it is the same leverage that any other developer in the area has. We're basically, in that regard comparable. So, at the end of the day, the devaluation does not allow us to price more aggressively, but certainly we keep an eye on that. In the appraisal process, buildings that have rents in pesos are appraised in pesos and we adjust the appraisal process to take into account that. Again, if you go to the note on the appraisal, you will clearly see the impact of the peso-dollar fluctuation for those buildings that are being billed in pesos. But the appraiser also considers that the buildings that are under development, we've dollar rent, because that's the currency where the majority of our rents are denominated. I don't know if I covered what you wanted to listen to in the question.

Cecilia Jimenez, Santander.

I have two questions. First could be about Innovesting. I would like to know if these could have an impact, an implication on the maintenance CapEx investments you are doing today and going forward? That will be my first question in the properties I mean.

Thank you for the question Cecilia, nice to hear from you. Look, in Vesta, we take innovation very seriously. We really want to put very hard marks on how to guide the Company. That's why we changed our compensation procedure. And I think it's very innovative. We restructured the Company and we're continuously trying to be very innovative in the way we do business. Yes, one of the things that our task force that we can set up in the Company focuses on how to achieve maintenance -- how to keep maintenance costs as small as possible. And I think we're doing that. I think that's one of the things that we're focusing on. Apart from the reason that we favor concrete buildings is because buildings tend to last for a long time and concrete buildings are very easy to maintain and don't demand so much maintenance CapEx from us or from our clients. And that's part of having the newest building portfolio -- investor portfolio in Mexico. But certainly, Innovesting means that we are trying to reinvent ourselves every year. It's really having as a goal to be best-in-class, not only in the way we do business, in the way we treat our clients, in the way we select the clients, in the way we report to all of you, but also in the way we manage the portfolio and we have set up different leaders in each of these fields to try to innovate and to try to look at how should things be done in the best of fashion. And that is what Innovesting means to us in the Company.

Okay, but we should see the same, let's say, percentage of CapEx -- maintenance CapEx of what we have seen so far, we shouldn't see that increasing or should we?

No. Maintenance CapEx is what we do in our projections is, when leases mature, we assume that we have to invest around $0.50 per square foot. If you average that out in our portfolio, it comes to around $0.10 per square foot a year, somewhere around there, sometimes less, sometimes more, but that's a good working figure of maintenance CapEx. And obviously part of our focus is to how to optimize that and how to minimize those impacts with a lot of corrective measures, with a lot of the way we should do business on the ground. We are very used to seeing that we just have to focus on doing cleaning the roofing, painting the buildings, build (inaudible) of our customers, so that they do their part of the [portion] as quickly as possible and that's [critical]. All of those bills will lead us off to a low maintenance CapEx. But again, the way we forecast our numbers is as I just mentioned.

And then the second question is regarding prices and I wanted to see if you see stable prices in dollar terms or if you have seen so far negotiations with your tenants, trying to lower the price due to the FX appreciation so far or do you see them as stable?

No. The prices -- in the markets that we operate, the prices are quite volatile, I should say, using that financial expression. There is not a lot of rented space in the Toluca region. So, prices are being maintained. There is high competition. Some of our clients or some of our potential clients are naturally peso-based clients and well, what we do is we look at our alternative clients that are based in dollars. Unfortunately, at [MXN15] per dollar that makes those challenging to get peso clients, and that's the color I will give you. My dollar clients, we have some specific prices, dollar-based clients are well leased and prices are not coming down, then the effect is that if -- 12 months ago I was able to seek out high-quality customers that are peso based, mainly because they are local logistic operations. Right now, it's a hell of a lot more challenging to go after them and that's the reality. That is a real effect of the devaluation, I guess.

I think for the clients that are dollar-based clients, it hasn't had any impact. I think that the rental prices move more correlated to the supply and demand, and we believe that the certain markets supply is low, therefore, demand is stronger and therefore we can maintain the same prices in US dollar, particularly for manufacturing companies.

There are no further questions at this time. I'll turn the call back over to Mr. Berho for any closing remarks.

Thank you, Rob, and thank you all for participating in Vesta's second quarter 2015 conference call. We look forward to speaking with you again when we release our third quarter results. If you have any questions in the meantime, please do not hesitate to contact our Investor Relations department, Iga Wolska Thank you and have a great day.

This concludes today's teleconference. Thank you for you participation, you may disconnect your lines at this time.