Vesta Real Estate Corporation SAB de CV (VTMX) 2016 Q2 法說會逐字稿

Good morning. My name is Selena and I will be your conference operator today. At this time, I would like to welcome everyone to Vesta's Second Quarter 2016 Earnings Conference Call. Vesta issued its quarterly report on Wednesday, July 27, 2016. 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 would like to remind you that forward-looking statements made during today's conference call do not account for 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 Berho, the Chief Executive Officer; Juan Sottil, the Chief Financial Officer and Iga Wolska, the Investor Relations Officer.

I will now turn the call over to Mr. Berho. Please go ahead sir.

Thank you very much Selena and good morning everyone. Thank you for your interest in Vesta and for participating in today's conference call. This year marks the second consecutive year that we have delivered on our aggressive expansion strategy, underpinned by Mexico's emergence as pre-eminent global industrial manufacturing hub.

Vesta achieved multiple milestones in the second quarter, which were critical to the execution of the Vesta Vision 20/20 strategic plan, as lease agreements established with prestigious global companies supported our strong growth. We are pleased to confirm that we will continue to expand our asset portfolio by 3.4 million square feet, having already delivered over 800,000 square feet. This will allow us to achieve our full year growth target in the first half of 2016, which is consistent with our long-term plan.

As the world rapidly evolves towards a new way of producing, a paradigm known as the Fourth Industrial Revolution, the ability to anticipate client demand will determine which companies are able to successfully adapt to this dynamic global backdrop.

Vesta's proven ability to anticipate has made us an agent of change and transformation, ensuring our Company and country will flourish in this scenario. Therefore, we continue designing manufacturing and warehousing spaces, working closely with authorities to ensure the appropriate infrastructure is available to support leading-edge technology that meets both clients and supply chains' logistical and communications needs.

Our ambitions for growth are also supported by compelling macroeconomic trends. Mexico is expected to be the world's sixth largest vehicle producer by 2020. According to the Mexican Association of Automotive Industry, and our close proximity to the US and more efficient labor cost structure are particularly attractive for manufacturers across all sectors.

During the second quarter, our leasing activity totaled 1.8 million square feet, and the Company renewed leases on approximately [600,000] square feet of its portfolio property. Significant lease agreements include those signed with Snecma Mexico, a subsidiary of France-based global aircraft engineering company Safran Group, which underscores our strategic commitment to expanding our relationships with existing clients, an area in which we are particularly very strong.

This quarter, Vesta also signed a lease agreement with automotive manufacturer Bilstein, a subsidiary of German multinational ThyssenKrupp, which encompasses 670 companies worldwide across diverse sectors. These agreements demonstrate key industry leaders' increasing global recognitions of Vesta's position as Mexico's leading industrial real estate developer, boasting some of the most modern facilities in the world.

In addition, Vesta completed the acquisition of 102 hectares of land reserves in Queretaro to develop a new industrial park, a strategically important acquisition for the Company in a region with strong demand dynamics. As we continue to invest for growth, global occupancy trends continue to improve as we target markets with robust demand generators. Both total portfolio and stabilized portfolio occupancy rate rose year-over-year. At same time, the same store occupancy rate moderated slightly.

I would like to note that this July, Vesta celebrates its fourth anniversary as a public Company and with operational success that illustrates an enviable track record. We have nearly doubled our gross leasable area to 20.84 million square feet, and have expanded our portfolio to 129 properties.

We're pleased to confirm that this week, we finalized our previously announced debt transactions, and our debt with Blackstone Group will be fully paid. These agreements enable Vesta to resolve all of its 2016 debt maturities, significantly reducing the Company's cost of debt and lengthening the weighted average term.

These unmatched achievements position us to accomplish our Vesta Vision 20/20 strategic plan and thereby double the Company's footprint. Our new asset management team's client-centric approach continues to bear fruit, with Vesta renewing 90% of its in-place rent leases set to expire in 2016 and 43% due in [2017].

As we look to the second half, we are confident in our ability to achieve sustainable growth as an innovative Company positioned to capitalize on the growing demand for industrial facilities throughout Mexico. We appreciate your continued trust and support.

I will now turn the microphone to Mr. Juan Sottil, our CFO.

Thank you, Lorenzo, and good morning, everyone. Thank you for joining us today. Vesta's state-of-the-art investment portfolio continues to produce strong financial and operating results, while lease agreements we signed with globally recognized names affirm the caliber of our client base.

As mentioned, the Company has resolved its 2016 debt maturity and corporate financing cost significantly with a longer maturity schedule, coupled with our solid pipeline and positive industry demand dynamics, we remain confident on the outlook.

In the second quarter, our portfolio continues to expand through strategic trade, logistics and manufacturing hubs in Mexico such as the Central and Bajio regions. During the period, Vesta's portfolio consisted of 129 top quality industrial properties and the Company grew GLA to more than 20.8 million square feet.

Vesta has strong pipeline and it is currently developing more than 2.6 million square feet in build-to-suit and inventory buildings, which are expected to contribute $14.4 million to rental revenue, once the projects have been stabilized.

In terms of occupancy, Vesta's stabilized portfolio occupancy rate increased by 80 basis points year-over-year to 91.8%. The total portfolio occupancy increased to 87.8%, while our same store portfolio occupancy rate moderated slightly to 94.7% in the second quarter of 2016 from the same period last year.

The Company saw a fall in total vacancy rate to 12.2% from 12.5% in the first quarter of this year. Over the period, Vesta signed leases totaling more than 1.1 million square feet with global companies across a range of industries, and renewed over 645,000 square feet of its property portfolio.

Turning to key financial metrics, revenues increased 14.8% to around $22 million, up from $19.3 million in the prior quarter of last year. Operating costs as a share of total rental income were 37 basis points lower year-on-year as property rental income growth outstripped rise in operating cost. Net Operating Income rose 15.3% to $20.5 million (sic - see press release, "21.47 million") compared with $18.8 million in the prior year period. The NOI margin increased 50 basis points year-over- year to 97% in the second quarter 2016.

EBITDA increased 14.4% to $18.8 million from $16.5 million in the second quarter of 2015. The EBITDA margin fell 30 basis points to 85%. The total comprehensive income loss of $7.5 million reflects the year-on-year impact of the foreign exchange variation primarily in WTN capital accounts. This is Vesta's only subsidiary using peso as its main currency. The result compared to a gaining of $16.4 million at the end of 2015 second quarter. Funds from operations rose 6% to $11.4 million.

Regarding our balance sheet, cash and cash equivalents were $114.8 million. Operating activities generated cash flow of $29.7 million. Investing activities mainly related to payments for works in progress on new building construction in Bajio, Ciudad Juarez, Tijuana and Central Mexico, total investments for the quarters were $55.76 million. As noted earlier, we have finalized debt agreements totaling $400 million. This enable Vesta to resolve it's 2016 debt maturities, reducing the Company cost of debt by almost 300 basis points and lengthening the weighted average term to six years.

The Company has therefore secure the resources to ensure our ongoing growth by strengthening our balance sheet with a reduced cost of debt and longer maturity schedule against a backdrop of highly competitive debt pricing conditions in Mexico.

At the end of the quarter, the overall balance of debt was just over $340 million of which 86.2% is related to short term liability and 13.8% is long-term liability. All debt is denominated in US dollars. For the second half of the year, we reiterate our forecast of between 13% and 14% growth in rental revenues, net operating income margin above 95% and EBITDA margin above 83%.

As usual, this assume broadly stable exchange rates, interest rates and inflation, supportive conditions in domestic real estate industries and continued expansion of the US and Mexican economy. As Mexico's leading the industrial real estate company, we look to the remainder of 2016 with strong balance sheet, growing demand for our premier industrial facilities, and our commitment to sustainable long-term growth for all shareholders.

Thank you all and I will open the floor for questions.

(Operator Instructions) Enrico Trotta, Itau.

Two quick questions, looking at the square feet of the total portfolio that is square feet vacant, we saw it remained fairly flat compared to the first quarter. Could you comment, I mean, what are your expectation for vacancy rates to head and how are seeing the leasing activity across different market so Central Mexico, Bajio, Baja California and Juarez?

And the second question, on your refinancing program you're mentioning in the release that interest rates could increase depending on the Company's leverage ratio. So can you further elaborate on that? What would be the loan-to-value limits to trigger these higher interest rates? That's it from my side. Thank you very much.

I think we can start by your second question related to refinancing and we then we come back to the market question.

On your question, basically the financing deals that we have are basically fixed rate long for 10 years with seven year grace, which -- well it is what it is and I think it's a fantastic transaction at 4.55%. On the syndicate of bank loans, we have two tranches; one is a five years note. That one has a LIBOR plus 200 basis points cost. If my leverage gets over 40%, I had an increase in margin and I believe it's around 25 basis points, if I'm not mistaken.

But there is a step-up; if I keep the loan for more than three years, then I will have a step up of 50 basis points in year three and another 50 basis points in year four. Clearly, the structure that we negotiated for these loans favors a refinancing of this facility within the next three years. And these step-ups were only considered to the balance in order for them to meet its capital requirements on longer-term assets I guess.

But we'll remain confident that within the next 36 months we will be able to access all secured debt capital markets to refinance these loans. So basically, I think that these two transactions represent a very solid step forward for the Company. We lower our cost of debt by 300 basis points or even a slightly higher amount and I think it's a fantastic step forward for the Company.

And I'll take on your question related markets. The way we see, we see a very strong year in basically all the markets in which we are present. I believe that because we know the amount -- the internal pipeline and the pricing and the negotiations that we keep going are maybe at the highest level in these four years that we have been a public company.

If we start at the Bajio region, first of all, I would like to point out that -- maybe for the first time in the history of Vesta, we're looking more build-to-suits than inventory buildings. We have 55.5% of build-to-suits and 44.5% at inventory buildings. And this is a great number because inventory buildings are, according to our market intelligence and those decisions are taken up on [gut] and build-to-suits is difficult to predict because of compliance we are going to write.

But basically we have been very effective, we build-to-suits from Juarez to Guanajuato to Queretaro and that's a positive. Now Juarez, we probably are the most [effective] developer right now with the bigger deals both TPI to finish BRP and we are starting the second phase of TPI, which is the build-to-suit that we announced.

Then in the other markets, we have seen very good activity. Maybe some slow activity in the beginning of the second quarter due to the fact that some of the OEMs delayed their nominations according to what they had expected Audi being one example of those and Nissan in Aguascalientes also had slowed the process, but it's just part of their process. But on the other hand, we see Daimler accelerating the nomination process in Aguascalientes. So that means that we will see good impact in the next quarters in those regions.

We are happy also, I mean, the Toluca market had some effect during the construction of the highway and the train, but definitely these kind of investments are investments that will increase activity within the region. I mean, I don't know, but if you know that last week the highway was opened, all the part of the highway which is completely new dynamics to that region. It will shorten the distance, increase the activity and reduce the logistic costs.

So I'm very happy with the activities that we're seeing. I think there have been a 12% of vacancy [write-down] in the portfolio in a company that is growing more than 3 million square feet is a great number. Of course, if we can lower that, that would be even better and the leasing activity, I'm hoping to get better in the next quarter in some of the regions, which as I told you the nominations from some OEMs were postponed for some months and right now they are taking place.

Javier Gayol, Grupo Bursatil Mexicano.

I have just two questions. The first one would be, if you could comment on how do you see the dynamics on Queretaro? We saw the acquisition of land and under some analysis, we'd find that the markets are -- it's reaching its peak. But I think you guys can give us a much better color on that market because you know it so well? So, maybe you could just comment on that.

And the second question is regarding the political situation in the US, have you guys seen any changes on the dynamics of your tenants and have you seen them a little bit more worried into expanding their contracts or something like that? If you could just comment on that that would very helpful. Thank you.

Sure. Thank you very much Javier and thank you very much for being in this call. I would like just to comment about a couple of things, first of all Queretaro. Well Queretaro -- to be honest, Queretaro was one of the best promoters of the neighboring states like Guanajuato and that doesn't mean that Guanajuato is not doing a great job in promoting.

But unfortunately because there was no land available anymore in Queretaro, some companies, especially the ones needing large scale of business had to move to other places or select other places, because they didn't see the infrastructure being there right now.

So, if you try to measure market peak that means of what is available right now, but the problem is what is not available right now. So, it took some time, but we found this great property which is exactly in the middle of the airport of Queretaro and the 57 highway. And we believe this is going to be -- I hope we had gotten this before, but I think that we were finishing using our own reserves in the region.

So, the way I see it, I think that the next wave to Queretaro will keep coming very soon. I had the opportunity to be in Farnborough couple of weeks ago in the Airshow, seen a lot of activities; some of these companies peaking suppliers or increasing or expanding their plans in Mexico, like we just announced the one with Safran Group, but we were close to Bombardier and other wins.

And I think this is the first time that the Governor which has been in place for a few months was also at the show in England and also the Mayor of Cologne, which is a municipality with most dynamics in the aerospace also was there. So, I'm really positive about Queretaro. That is something I'm [happy to].

Related with the political situation, maybe in Vesta we see opportunity when other people see risks and this is why we are trying to focus on our long-term strategy and try to see the world one year from now and see the impact of companies, because companies have not stop making their decisions. So, especially OEMs keep nominating and people need to be establishing and expanding in a very fast and dynamic way.

So there will be distractions, there will be a lot of issues from [impact and] the potential goodwill [aids] to the benefit of the US and the competitive of the US, the partnering and deepening the partnering with Mexico, that's the way I see it.

And really, there will be a lot of noise as we have heard in the past days, this is normal, maybe a little worse than other years, but we believe that whoever is the next President of the US has to team up with Mexico and Mexico is strongly positioned in a very competitive situation to gain at this.

Just recently, we just got an increase, the pie onto -- almost 14% of all imports from the US now come from Mexico. So that means that we are strongly positioned, but also Texas exports more to Mexico than many other countries. So I think that we are in a good position and we're trying to focus on what we do best, which is keep brining multinationals and strong companies to our country in the most competitive way possible.

Vanessa Quiroga, Credit Suisse.

I have a question regarding two topics; one is if you can explain the reason for the lower occupancy in central region versus last quarter? And also regarding the very important renewals that you have been obtaining, even in some cases renewals of contract that would expire in 2017, is that a strategy that you're following right now, because of how you're seeing the market or what's driving these early renewals? Thanks.

Thank you, Vanessa. Thanks for being here in the call again and thanks for always your interest in Vesta. Let me start by the second question, and I think that this is part of our strategy that we announced early in 2015. Remember when we said, a part of our Vesta Vision 20/20 plan was not only about growth; it was about financing, it was about important decisions including our change headquarters and investing in the team, but also our organizational structure.

And at that particular time, we did some strategic change which was to separate and create a new division called asset management, which we didn't have in the past. In the past, as probably you remember, our own regional managers which are now Vice Presidents of new business were the ones doing both -- approaching new opportunities and taking care of the business and renewals.

As we were able to grow our portfolio there was a time in which this was no more sustainable. We decided to create this division with a completely new team, completely new heads and with local people, which are both focusing and being even closer to our clients in terms of understanding their needs and facilitating and/or anticipating the renewals and I believe -- I'm convinced that that strategy is the one that is helping us to make such a good progress not only in the renewal of 2016, but also to anticipate to their from service to physical contact and that explains also why 50% of our growth is with existing clients.

That's the importance of having local offices, local people, and being very close to your clients and that explain the 1.8 million renewals that we have had and especially the ones going in the next year. And I also want to highlight that we have been getting -- some people their way to operate company has to do with the potential growth or increase in the price of rents and I don't blame (inaudible) for that. But our way has been also trying to make sure that our clientele keep both increasing their competitiveness.

And if you see the prices in which we have closed, we are getting a better returns with those prices, because we have lower our cost of equity and we have bid in a much competitive way by the scale that we are developing. So from Vesta's point of view, even with the close to same rates in some cases, in some other cases we have been increasing according to inflation, we are getting much better returns. And I think that's important for value creation.

So, I'd now turn to Juan to try to explain the occupancy in the central market.

Vanessa, nice to see you here in the meeting. Thank you for the questions, first of all. The Queretaro market remains very strong and I'm pleased to remind that in the Bajio region, a couple of the buildings have been developed over the past -- I'm sorry, I was just being corrected, the question is not regarding -- are you referring to the occupancy in the Bajio region right? Or is the Central region? Okay let me just move on. Well, in the sense --

I was referring to the Central region occupancy? I think you've got [down 300] basis point quarter-on-quarter.

Basically, in the Central region, we are gathering -- well occupancy in the Central region. I'm sorry Vanessa, what I think we reported on the Central region is basically the same number of square feet vacant; 885,000 square feet from last quarter to this quarter.

There is a slight -- occupancy in the same-stores portfolio, I guess you're right, drop to 97.4%. I believe that it has to do with -- not any clients that have vacated our buildings. I have to check or I think it is related to the projects in Tlaxcala that were removed from the development portfolio to the -- from the lease-up portfolio to the stabilized portfolio and perhaps that was bringing the noise.

But our demand in the Toluca region is quite strong and we have one building on the new Vesta Park, Toluca II, which we haven't occupied. And that's not a problem, it is basically strategy. This is a larger building in Toluca that remains and we're targeting that building to suitable clients. We are holding back partitioning the building to smaller occupant.

In the other part of central region that we are targeting, the Audi projects, as Lorenzo has mentioned; Audi is beginning to step-up nomination for suppliers and that is why we have two buildings in the region that we were keen to occupy as our supplemental package indicates. And we'll remain very optimistic on the inventory projects that we are developing in Poligono.

Alan Macias, Merrill Lynch.

Hi, good morning and thank you for the call. Just a follow-up on average rents. It's my perception that perhaps your aggressive leasing and the reflection in lower average rents is perhaps greater increase in the competitive landscape in the industrial segment. Are you seeing a pickup in competitors and having them being more aggressive in terms of leases? Thank you.

Yes, well we have our own strategy in the quality of buildings and the target companies that we approach and we are very strict. So, if I can remind you Alan and thank you very much for your interest and your question, is that Vesta's position at the top-notch of the multinationals and the quality of buildings. That's why we have, today, the best quality portfolio in Mexico and the most modern one.

Now, having said that, industrial buildings; if you have the land and infrastructure ready, it will take you really six months to seven months to build. So market by market, it is difficult to predict what exactly is our competitors will do in each specific market. But what I can tell you is that little by little the companies have been able to differentiate the quality and go more for quality than just for price.

And there are some places, sometimes we use some deals because we want to keep our building to hold it to the specific industry that will match our quality portfolio than just close it faster and try to show that we've lowered our vacancy, sacrificing either the quality of the tenant or the price of the rent. So sometimes, we just let it go, we let the tenant go, have the competitor with different quality and different pricing take that client and then we keep the property and we probably are the only one with that size of building in that particular region, and that's the way we approach it.

But, I would highlight that if you see the supplemental package, we have been maintaining, we announced 10.9% of average return on these project on the development and that is the combination of increasing or maintaining our quality, lowering our cost of debt, building with larger scale and finding good properties at a very competitive pricing and giving all these value to our shareholders, and that's how we, without increasing price too much, we can maintain being very competitive and keep our aggressive growth program.

Thank you and just one follow-up question, if you can remind us your main competitors, who do you see as your main competitors? Is there a national competitor at the national level or is it more by region? Thank you.

Yes, when we talk about competition, we have to admit that we compete in two different levels. We compete for capital and we compete for capital worldwide in order to create, and reinforce and deepen our investor base. We compete basically with FIBRAs and especially industrial FIBRAs, which as you know them, they're very good competitors and experienced people, whether it's Prologis, Terrafina, Macquarie that we compete for capital or we compete in the debt market sometimes.

But the real competition for us is at the local level, mostly with local developers which are not pretty much known and some of them are very good developers and we have to make sure -- that's the reason that our Company is very well known for the expertise that we have and the contact that we have at the local bases from Tijuana to Juarez to Bajio region to Queretaro, the CEOs (inaudible) very strong local player but with multinational standards and that's the strategy that we have hold and we are very happy with that.

This explains, as I've mentioned, why we have 50% of our growth keeps being with existing clients, repeat business for us. When a client does know that they will have multiple plans in different states, they would rather choose not the local developer, but go with somebody that they can partner for the long run.

Marimar Torreblanca, UBS.

Hi guys, thanks for the call. I have a brief question. I'm sure that I've seen in recent data the manufacturing activity in Mexico seems to be slowing down. So I wanted to ask you if you could comment on what has happened in your occupancy and your rent levels or anything that's relevant for your business in previous economic cycles when this has happened or how fast you could pass through and if you're worried at all about this indicator?

Marimar, welcome back, and so glad to hear you back. Look undoubtedly, Vesta sits on the industrial landscape in Mexico, but please bear in mind that in the specific place that we sit on, which is export-oriented industrial-led part of Mexico, quite contrary to the general statistics that you can read economy-wise, what we have is a substantial demand on new business.

I can tell you that the pipeline that we have basically underlined by the number of leads that we are managing is that we have never had the number of building that we have to-date not only for renting our inventory business, the one that we have and the one that we plan to do but to do actually build-to-suits.

As Lorenzo mentioned early on the call, the need that you have on the projects under construction is, by majority, are build-to-suit demand of our product and this gives us a lot of comfort. The number of leads related to specific build-to-suits projects in the Central and Bajio regions, we have never had them in the past.

So I relate to your question that Mexico, why do you see a slowdown in industrial activity? But if we were to have a measurement of industrial demand for export; that would certainly paints a very different picture and that's what we feel first and foremost.

Francisco Suarez, Scotiabank.

Thank you. Good morning guys for the call. Just want to clarify the proportion between spec and build-to-suit and I'm referring to the page number 14 on your supplement information. Just wanted to make sure which one of the projects are build-to-suits. I mean, for instance, in the Bajio region the (inaudible) should be considered spec. But you mentioned, if I'm not mistaken, a 55% mix on build-to-suits and the numbers that I have here based on this slide is roughly 48%. So if you can guide me through that.

And also, a follow-up question on the Bajio region, also on your slide number 12, we see the total rental revenues in Guanajuato were falling 5%. So if you can comment on that?

And lastly, the third question, on your competitors, you mentioned that locals are the ones that -- local developer might be one of the strongest competitors, but I'm not sure to what extent guys like the private equity guys of advanced real estate might to be a threat for you, because they have the funding and also they seem to be very knowledgeable of the region since 2007. So thank you.

Okay Francisco let me just -- thank you very much for your support and your question again. And I'd like just to start with your last comment, which is the threat from the locals. I had the opportunity to be and the honor of being the President of the AMPIP Association for two years and I've been always very close at the Board and we work in committees. And believe me, competition is what makes you stronger.

And we were once a local player and we know what it takes to be good local players. And that's what we took to the next level to become a national player. So, I really recognize those guys, I know them all, I'm very close and we listen and sometimes we learn from some of thing. So, having said that, I don't see why they have a benefit in their regions where they operate to what Vesta has.

But if they are founded, we are founded; if they have skills or people, professionals around, we do have that; and the other elements that we do have, that's something that probably they do not have. So, in the niche of the market that we're participating, competition is welcomed, that keeps us honest and improves every time.

But there is nothing I can see as a threat unless that we keep -- take somebody out from someone [close in] local office or something, I really see that's business as usual, but we're very happy to be look at that. On the contrary, I feel that some people really feel the threat and (inaudible) they decides to go into that market. So that's my feeling.

Relating with the percentages, the ones that I have here, let me just walk you thought some of build-to-suits. We did mention about TPI, which is 358,000 square feet for phase 1 and then 339,000 square feet for phase 2 which we just trigger and announced that it is being built, you can see the date, that's early next year for phase 2, but October 16 is the finishing for phase 1 and it's a beautiful building, I was there last week.

Then Snecma, which is the subsidiary for Safran Group, that is 338,000 square feet and it took long to negotiate with them, but it's a beautiful building that is going to be doing the blades for the new Engine 356 which is going to be the engine that will -- the most sold engine and that will replace the larger fleet in the world from both Airbus and Boeing.

Then the other build-to-suit is Thyssen for Bilstein in Guanajuato in San Miguel de Allende, that's a 205,000 square feet and that's also crucial -- ThyssenKrupp, we all know what kind of company they are. And those are the ones that we view at the [most] that would represent 55.5% compared to the 44.5% that have been raised to the -- of the summary of the portfolio that we have developing in different part.

I have also -- I have to also include Oxxo in Veracruz that has been delivered during this year, 121,000 square feet and also at Gestamp. Gestamp started as inventory building but early in the process, when we were in the maybe one-quarter of the construction was transformed into build-to-suit and that's 279,000 square feet. So all those build-to-suit represent thus 55.5% compared to 44% of inventory building.

We also have inventory buildings and that has been key in our strategy because those are, when you do that with the smart intelligence -- market intelligence, you have really the plot when company's really need it, and we just (inaudible), so we reduce a lot of the risk and the time to market for those companies.

So now finally we'll talk a little bit about Guanajuato. My first approach of that, let me tell you, it's important to look at the average cost of rent but what is difficult to compare is really when do we inventory building we (inaudible) you never know if that building is going to cost less than the inventory buildings or more than the inventory buildings and that's why average are not everything, in terms of cost and in terms of. What is really important is the returning cost that we get in each specific project.

And in that regard, our investment community is very disciplined. Actually, one of the members of the investment community is here with us today, can here for yesterday's board and they are very discipline in the way they led the projects, making sure that both we have good tenant, quality buildings, long term leased and good return on cost which is quite exciting for us.

Cecilia Jimenez, Santander.

Just a follow-up maybe on the vacancy, you have done a great job keeping vacancy under control considering the pace you're growing. So in that regard, I would like to know how has been the leasing activity particularly for the properties that were included in the portfolio at the end of 2015. You've closed last year over 1 million square meters on [1Q]. So how has that been going and whether you see a potential pick up in vacancy towards year end? That's my question, thanks.

You're referring to our San Miguel de Allende building I guess and look, let me remind you what the strategy for the San Miguel, what's the [big picture] for taking this particularly important. We expect to keep controlling vacancy in the Company. We're very careful about initiating new buildings and we initiate buildings if and only if we feel the strong demands for potential clients in the inventory buildings. And we are very disciplined and we've always been very disciplined in the past.

Now the San Miguel de Allende buildings represent a particularly good opportunity for us. So let me remind you the competitive landscape in that area. Industrial park of Queretaro is one of the premier industrial parks in the country and we basically develop all of the land that Vesta has in that park. That is not one of our parks, we purchase that land, we made a strategic alliance in 2006/2007 with the park developer. We bought most of the land reserve or the land that he had available.

And four years after the IPO, we basically develop all of the land. I think we have one plot left. The price per square foot of the remaining land within that park has shoot up through the roof. If I have taken you to the Queretaro industrial park and when you see around, these are lot of land. So clearly there was no need for us to buy more land reserves within the park.

We found out the excellent park 15 minutes away in that important highway. Let me remind you that, that highway links San Miguel de Allende to the Industrial park and to the national highway and a lot of the workers that comes to the industrial park, to the Queretaro industrial park live in San Miguel. So that park developer had a clear vision of developing a park in a very strategic place within that region.

We purchased most of the land in that Park and that's what we call the San Miguel Industrial Park. Within that Park, we have developed two build-to-suits and one of the new projects that we have closed is also within that Park, the ThyssenKrupp building for Bilstein.

So there is a strong reminder to the point that that is a good Park. Now like what we do in [next step], we don't take risk, that's what you want us to do and we develop a couple of buildings and we just signed one of the buildings to [VRK] which is a very important client and we will continue to develop inventory buildings within that park, because we perceive that the demand for space, for industrial space in that region remains very strong and if you checked our land prices, vis-a-vis the industrial park, you will find out that the acquisition of that land was particularly attractive and an opportunity not to be missed.

Okay. And could you foresee towards year-end a little bit pressure on vacancy due to the latest or the buildings that were acquired or included in (inaudible) considering they will be already one entire year within the portfolio?

Well, that's a good question, one of the beauties of opening up our total portfolio in the three block of same stores, stabilized portfolios and total portfolio is the fact that you can have all information and see what happens to the portfolios as my investment committee does when we take the decisions.

If within that framework, what we expect is to have same stores occupancy very strong. Let me remind you, that represents the core earnings of the Company and it is that motor that allow us to take some risks, some measured risk on growing the portfolio with new inventory buildings where needed.

I don't expect any significant change in the same portfolio rating. Some of the buildings that we have developed in the past will migrate to the stabilized portfolio and we have a strong demand and I think that that portfolio will also show good results. However, on the margin, the total portfolio vacancy, I don't expect any insignificant change.

But parts of the management of the Company as we have talked so many times in the past, is the fact that we do take development risk total portfolio occupancy does fluctuate, which is why we gave you the clarity or showing you a very strong core earnings, by the same-store, relatively solid and stabilized portfolio. And on the margins, some investments that we believe will pay off in time. I don't foresee any problem however, by year-end (inaudible) was very strong for Vesta.

Froilan Mendez, JPMorgan.

Guys, thank you very much for the call. Could you elaborate on the increasing administrative expenses, why would we need to expect forward should this normalize at current levels we saw in this quarter? And also, could you remind me if you pay double interest during this quarter, given any overlap from previous debt before the refinancing?

And also regarding the mix between build-to-suit and inventory, I know, Lorenzo you mentioned now having 55% of the development portfolio, but as this mix change along the history of the Company and what would be your outlook if there is something there?

And also, sorry for so many questions; and in the Toluca project that you mentioned, how much of the vacancy does this particular asset represents and would you ever considering to break it down into a smaller GLA, just to have it rented more rapidly. Thank you.

Let me take one at a time and I may ask you to repeat the questions, I'm going to go bottom to top. On the Toluca building, look, this is truly a tactical decision. This building is 150,000 square feet give or take a few. We have three buildings in that park. We rented one by business; the second one we decided to partition in half to allow one large client to take one half buildings and the other half we keep it in order to be break it out. That's how you develop inventory buildings, very flexible buildings.

If you see the competitive landscape within Toluca, there is lack of large buildings and we decided to hold on one building because we believe we're screening the top of the market. It is a tactical decision. We think it's a good tactical decision. What is needed, we will split it out. It's not an issue. So we believe it is a good bet. The prior question what's related to debt. On debt, and I believe your question, but correct me if I'm wrong, have to do, if we have a (multiple speakers)

No. Look, we manage these carefully. What we did is, on April we signed committed lines and I have two very strong bank commitments for divesting basically $250 million by the end of July, $150 million for long-term notes and $100 million for revolver. That plus my cash would allow you to pay-off my debt. At the same time, we negotiated a deal with MetLife base on property that is a bit more complex. They have to do due-diligence on each and every one of the properties we leverage and that deal is lengthier. But with the commitment, we basically [done it] so we paid that today and that's what we have been doing. So we avoid double interest and --

Let me correct you Juan, we will face two days of interest, of double interest.

Two days -- we pay two days of double interest. So we time it, because we plan it with a very carefully drafted commitment letter from two various source from Mexican banks. So, I think that pretty good.

And Froilan regarding your question with the percentage build-to-suits versus inventory, that percentage is a consequence of investment decision, and it have never been a target certain percentage. We can either do more inventory or more build-to-suit as we decide that is crucial in some of the regions.

So it's good to monitor people, some people perceive less risk when you do build-to-suit. I personally love inventory business when they are a problem of an analysis and as market intelligence or market opportunities regionally. But I would say, in the past, we closely got to a one-third of build-to-suits, for example, just to monitor, today it went to 55, it would be reasonable to go to one-third again. But within that range I would say, that's again the consequences of some investment decisions and taking opportunity.

And just on the administrative expenses that we saw increasing this quarter. Do we see this moving going forward?

Yes, I would say that, if you check out we have been quarter-by-quarter very strictly on the discipline of the Company and making sure you can see our margins are slightly higher NOI, EBITDA margins are higher than guidance, and with a 13% growth of the Company, which is consistent with what we've have planned. But at the administrative level, remember that last year we moved to new office, which of course represents some important expenses and I'm glad we did it because at the same time we have been hiring more people to give a better service in all the opportunities that we are receiving from pricing to purchasing to project managers.

So those are simply the reflection of the growth needed for Company's healthy growth and company -- making sure that the percentage and the margin remain, but making sure that we give every time better service and get the opportunities that come regionally.

Ivan Enriquez, HSBC.

When we look at the project you have under construction, this projects have a GLA that represent close to 12% of that Vesta's operating GLA and actually 10 out of the 13 are expected to be completed in the second half of this year. So my first question would be, how confident you are that these buildings will be completed before the year-end or at the end of the year?

And the second question would be and I think it's more importantly how confident you are about fully leasing this building. Of course, you have now a new asset management investment team that has very good credentials, of course we know Guillermo, we all know him. But can you assign a timeframe of all these inventory building to be fully occupied? Is it 2017? Thank you.

Thank you very much for your question Ivan and thank you for your interest. Let me tell you, first of all how confident we are in finishing on time? 100%. I'm 100% confident because of kind of team, because of the procedures we have ISO-9000 procedures, the selection of contractor and how our project managers monitor those projects. Believe me, understanding the kind of tenant that we have aerospace and automotive industries, there is no chance that we can't meet their finish time, the completion time.

We really had -- they're working just in time and just in sequence production systems and it's important to just be there on time as we have always done. So I'm very confident of on that. Some of them are in early February 2017, the TPI that was just completed in the last weeks and we were able to star right away with the contractor we have in place. So I was personally checking those buildings.

TPI 1 is going to be exactly finished on time. TPI II, I have no doubt and because I have no reason to think that they could not be delivered on time same as Safran and the same as -- actually I think we announced that Oxxo in Veracruz was delivered a few days before and same as Gestamp. So I'm very confident that the construction -- that we are good at monitoring and managing the construction as well as the construction cost. So that's crucial.

The other question was about the leasing activity and believe me what I can tell you is, that as we have told in the past, usually in the inventory buildings, our investment committee understands that it would take us six months to build those and approximately six months to lease them. And as we just mentioned, in some of the buildings where we have been, like an example we were able to lease them a little before some of them close to the six months.

So that would be the timeframe. I will stick to that and there is no meaning that it could change on that when we may either anticipate one event or sometimes taken even longer in one of them. That's part of business as usual and I think that the average is what's important and if you check them all that's why it's important to have these inventory buildings in different markets, not in the same place, if they were concentrated in one region, that would be a completely a different answer.

Thanks Lorenzo basically all the inventory buildings that are expected to be completed by the end of 2016, should be, of course there can be some instances but should be fully occupied by the end of 2017, let's say.

Yes if you take the termination date, if you have to play a little bit of the analysis take six months from that date and that's the time that they should be leased. Not in the case of build-to-suites, which we have -- you know they commence the rents.

This was the last question. I would now like to turn the conference back over to Mr. Berho for closing comments. Please go ahead.

Okay, thank you very much Selena. Just in behalf of Vesta, once again, thank you very much for being with us today. We look forward to a very strong third and fourth quarter 2016 and we'll be approaching you or we open all our team -- Investor Relations is open for any further questions that you may have. So thank you very much again and have a great summer and a great day. Bye-bye.

Ladies and gentlemen, this conference is now over. Thank you for participating. You may now disconnect your lines. Good bye.