Vesta Real Estate Corporation SAB de CV (VTMX) 2017 Q3 法說會逐字稿

Good morning. My name is Christine and I'll be your conference operator today. At this time, I'd like to welcome everyone to Vesta's Third Quarter 2017 Earnings Conference Call. Vesta issued its quarterly report on Thursday, October 26, 2017. If you did not receive a copy via e-mail, please do not hesitate to contact the company at +52 55 5950-0070.

Before we begin the call today, I'd 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 U.S. 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 Christianne Ibañez, the Investor Relations Officer. Also present on our call and available for your questions is Lorenzo D. Berho, Vesta's Chief Operating Officer.

I would now like to turn the call over to Mr. Berho. Sir, please begin.

Thank you, Christine, and good morning, everyone. Thank you for your interest in Vesta and for participating in today's conference call. Today, I am very pleased to report that our third quarter results build on Vesta's track record of excellence. This quarter, the effectiveness of our strategy was evident in the third consecutive record high for occupancy at 95.8% for our stabilized portfolio and a second consecutive record high at 92.7% across our total portfolio. This reflects the strength and dedication of Vesta's industry-leading business development team.

While the Mexican market has experienced volatility, our supply chain has demonstrated its resilience and relevance over the treaty itself, a dynamic reflected in Vesta's record results and one that bolsters our unwavering confidence in the Mexican investment case. Our management team is focused on capturing opportunities by establishing an efficient platform to serve new and existing clients, supported by a robust balance sheet and the most competitive debt profile in the industry.

Overall leasing activity was 1,400,000 square feet in the third quarter as Vesta signed new leases totaling 1,160,000 square feet, including 474,000 square feet of inventory buildings and build-to-suits for 684,403 square feet. In addition, Vesta renewed leases for 226,000 square feet of its portfolio.

Vesta keeps growing with its thriving client base, who represent 77% of our -- of new leases. We signed 4 new build-to-suits with TPI, BRP both in Juárez and Queretaro, and Nestlé, General Mills joint venture company CPW. We also leased our inventory space, further diversifying our portfolio with new and existing global clients, including Daimler, Plastic Omnium, HBPO, Vallejo, NKPM among others. Leases were signed across our different strategic regions where we continue to see strong demand.

In terms of financial -- for key financial metrics, revenues rose 23% while EBITDA was 25% higher versus the same quarter last year. Over 9 months, revenues increased 22% compared to the same period of 2016. Funds from operations, FFO, were up 7%, mainly due to higher revenues year-over-year. FFO per share rose 10% against the same period of 2016. Compared to the past 2 quarters, taxes have normalized to a rate more similar to historical average, giving us confidence in our expectation of higher FFO per share by the end of the year.

Regarding our capital structure. Our highly competitive cost of financing is supported by recent transactions. In September, Vesta executed an investment-grade bullet bond nonsecured private placement. This transaction was completed at highly competitive rates, which Juan will give more detail in shortly. Vesta's 6.8-year average debt maturity also provides important flexibility against its 5.4-year average lease maturity. As ever, we're executing our strategic Vesta Vision 20/20 plan, as we develop products that address the future needs of a global manufacturing and logistic client base.

Due to the combination of our focused management team, state-of-the-art facilities and strong fundamentals in the most dynamic markets, we continue to see a record-breaking trend in operational results in the upcoming months for a better-than-expected year-end 2017.

As we have noted previously, while uncertainty surrounding NAFTA remains, our confidence in Vesta's outlook is supported not only by our business' strength but a dynamic whereby Mexico underpins North America's competitive position. Our skilled and efficient workforce enables the U.S. auto industry, among others, to remain globally competitive, while over 5 million U.S. jobs depend on Mexican exports. As we look to the future, we remain cautiously optimistic that Mexico will continue to strengthen its position as a competitive global manufacturing hub.

In summary, Vesta has proven that challenges bring out the best in our business and from our team. Our infrastructure is robust, and our focus is unwavering.

Thank you, and I will now turn the call to Mr. Juan Sottil, our CFO.

Good morning, and thank you, everyone, for joining us. As Lorenzo mentioned, Vesta once again achieved record high occupancy along with strong financial metrics. This is evidence of our industry-leading position, close customer relationships and ability to capitalize on the ongoing global demand for best-in-class industrial facilities in Mexico. Our track record of double-digit growth in revenues and EBITDA continues, both over 23% as our vacancy rate fell.

For the third quarter, Vesta portfolio was 24.6 million square feet, with strong occupancy results on same store, stabilized and total portfolio. The vacancy rate for the total portfolio was 7.3%, down from 9% on the previous quarter and 9.7% a year earlier, reflecting sequential trends.

We signed leases totaling over 1,386,000 square feet, with existing tenants and new global companies across sectors. During the quarter, Vesta had over 2.3 million square feet in both build-to-suit facilities and inventory buildings under construction, which are expected to contribute around $11.8 million to rental revenues once stabilized. The return on cost from projects is expected to be 11%.

Regarding key financial metrics. Revenue grew over 23% to $28.2 million. As of the third quarter, Vesta has renewed over 87%, 70% and 20% of leases due to expire in 2017, 2018 and 2019, respectively. Net operating income was nearly 23% higher to almost $27 million. NOI margin was 50 basis points lower to 96.2 due to a time lapse between tenant improvements upfront payments related to new leases in the third quarter of 2017 and future rent inflows from the corresponding new leases. EBITDA was 25% higher to nearly $24 million and EBITDA grew 120 basis points to 84.7% year-on-year.

Total comprehensive income was $14.3 million versus $16.5 million in the previous year, due to a lower gain in revaluation of investment properties in this year's third quarter. Funds from operations were more than $50 million from just over $40 million a year earlier. This reflected higher revenue in the third quarter of 2017. It is important to notice that the tax expense provision has dropped compared to the past 2 quarters due to the peso depreciation during this quarter, giving us confidence in our expectation of higher FFO by the year-end.

As Lorenzo mentioned, during September, Vesta executed an investment-grade nonsecured bullet private bond. This consisted of a 7-year maturing placement of $65 million, with semiannual coupons at 5.03% and a 10-year maturing placement of $60 million with a semiannual coupon of 5.31%. In this year's third quarter, we also hedged the variable component of our interest rate, locking in at 6.55% express between our weighted average cost of funds at 4.49% and our weighted average cap rate on the asset side at 11%.

Regarding our balance sheet, cash and cash equivalents were $142 million. Operating activities as of September 30, 2017, generated cash flow of nearly $121 million. Investment activities were primarily related to payments for construction in progress of new buildings in Bajio, Ciudad Juárez, Tijuana and Puebla.

Total investment for the quarter were over $23 million. Our disciplined operating approach means our cost of debt remains low as Vesta maintains a strong and efficient balance sheet to support our ambitious growth plan. At the quarter end, we had an overall debt balance of just over $510 million, all related to long-term liabilities. Our debt is denominated in dollars and we can comfortably address any upcoming maturities.

Vesta, as Mexico's leading real estate company, continues to build on an outstanding track record for long-term, sustainable growth, as outlined by our Vesta Vision 20/20 plan. We look to the future with confidence and look forward to updating you in our progress.

We are all -- thank you all for participating in this call. And operator, can you please continue?

(Operator Instructions) Our first question comes from the line of Gordon Lee with BTG.

I have a couple of questions. The first on I guess, it's more on NAFTA, Lorenzo, which is, I guess you would agree that no NAFTA is probably better than a bad NAFTA. And I was wondering whether with the proposals that you have seen and that have sort of trickled through to the public, what of what is being proposed by the Trump administration would make you feel that, that would be a bad NAFTA and that no NAFTA would be better? And the second question, I guess, is somewhat related to that is, the last time that we were in a situation a little bit like this one, it was a bit more severe. But with the anxiety around NAFTA being probably overly priced in your stock, you decided to pull back a little bit on development and to direct more cash flow towards [buybacks]. Are you sort of thinking about that again as we sit here with this anxiety today?

Hello, Gordon, and thank you very much for both your questions, and I'm happy to share with you. You were asking about NAFTA and we pretty much -- as we've presented in our Investors Day in June, we are convinced that the industrial systems is much more important than the treaty itself. The amount of investments in Mexico, the skill of our workforce and the competitiveness that Mexico has gained has helped North America is here to prevail. So we are tracking as everyone else the progress and we know that there will be ups and downs in the next rounds. And of course, it's up to the negotiation teams and of course, what they can achieve. And hopefully, they are able to renegotiate and have a good agreement for everybody which is the will -- I mean, which is the only thing that would make sense, is to have an agreement updated, which -- 23 years ago, this was the best agreement, commercial agreement in the world. Hopefully they are able -- by the way the 3 teams demonstrated very hard in the TPP to have TPP as the best agreement ever, and many of those things are the ones that they are trying to incorporate to this agreement. That's the outlook that we would love to see. A new modern and updated NAFTA 2.0, as somebody called it. Now what we would not like to see is especially what our negotiations are being confronting which is (inaudible) or have 50% manufactured in the U.S. in the auto industry or having the sunset clause. Of course, all that is unacceptable, and that's very clear. And I think that Mexico and Canada had a very strong position by the closing of the fourth round. Now related -- so we're positive in a general sense because we see strong demand in every single market, and companies keep looking forward with a long-term vision and [nominating] from the OEMs keep moving, and that's where we have been, at the peak level in every single place. Our diversified geographically and sectorial portfolio is showing that and the results not only this quarter, but permanently. Especially the last 4 quarters of this company since President Trump was elected, have been the best quarters ever in the company. So that is -- that's my comment related with your first question. In your second question, Gordon, I don't think that we ever mentioned that we were going to stop our [restoration] plan. We have been keeping up to that. And you can see that quarter by quarter as we're presenting that today. As long as we are seeing demand and there are no reasons to change the speed of growth and the leasing activity, that's what we would continue to do.

But I think at the beginning of this year, you channeled cash flows more towards buying back shares than you would otherwise have because obviously, the stock price overreacted to the anxiety about NAFTA. I think you could argue that the same is happening now. Would you consider sort of revamping that buyback?

The buyback program is a program that we have set even previously to President Trump's election. We had the program set up, it was approved by our shareholders. As with any program to buy back shares, it's a program that we use when we feel that it's the right time to use it and when we believe in the progress. And when the net asset value versus the market value makes the sense in order to act and to buy the shares. So if we believe that those are opportunities to buy, we have been buying. And that represents confidence we have in the company, the opportunity that we see and the [thoughts] that we have in Mexico's competitiveness industrial platform.

Our next question comes from the line of Adrian Huerta with JPMorgan.

Two quick questions. One is this new asset in Matamoros that you're going to build. Are you planning on getting more exposure to the Northeast of Mexico and other border cities within the Northeast, whether Reynosa, Laredo or other cities? And the second question is regarding the leasing activity. You mentioned that you have a little more than 100,000 of square meters of leasing activity to new clients. But when looking at the net absorption, it was around 40,000 square meters. So does that mean that you had a lot of leases expiring in the quarter that were immediately leased to new clients?

This is Lorenzo Berho, good morning. Regarding your first question, TPI, as you all know, is our client in Ciudad Juárez. We have developed 2 properties for them. In this case, and this is similar to other cases that we have previously done, we like to expand our operations with existing clients. And this is the way Vesta has partnered up in different other situations, and this is another case in which a client needs to keep on growing in a different region because it makes sense for their own business. And we, as partners, are developing these particular build-to-suit projects in Matamoros just because we want to follow their expansion requirements. Honestly, we have been focusing in being the leaders in each one of the markets where we are at. The case of Juárez, for example, we have been the most active developer in the last years. In the case of Tijuana, we -- also, we have been very, very active in the market where we have almost 100% leased of our properties, and it's a very strong, dynamic market. And in this case, I can tell you that we're only growing because the client needs to grow. We will keep on focusing in the strong border markets. And now talking about your -- now trying to answer your second question. Yes, we had roughly 475,000 square feet of -- in terms of leasing activity of inventory buildings, this -- we believe this is a pretty good number, particularly because in most of these cases, it has been in brand-new inventory buildings that we have delivered in Guanajuato and Aguascalientes. Definitely, our occupancy rates in these particular regions is also increasing and nevertheless, we -- this is only the reflection of the deals that we have been closing but we have still a very strong pipeline, which will -- in the end, we'll -- we will be accommodating some of the tenants in our existing inventory buildings. These are very high-quality, industrial properties in very strong markets. And we believe that the tenants are really identifying good opportunities by using our properties. Let me tell you that in other cases, what we have done is there's -- since we have a strong portfolio with a big client base, we're always accommodating the requirements of our clients. So we have done renewals when the clients need and sometimes, we do re-leasing with the existing clients whenever there is an opportunity to take a building, which is adjacent, for example, to their own facility. So we do these swaps very often in order to accommodate their requirements, and that's why we have been active in the re-leasing -- in our re-leasing strategy. It was 226,000 this quarter but during the whole year, we have been able to re-lease -- I mean, to renew 85% of 2017 expirations and 70% of the expirations for 2018. So looking forward, we have very few expirations in the upcoming months. And I can tell you, even upcoming years, which makes our expiration profile very, very strong in the next couple of years.

Our next question comes from the line of Vanessa Quiroga with Crédit Suisse.

I have a couple of questions. One is also on the NAFTA topic. One of the concerns of the scenario -- in the scenario of NAFTA being canceled would be the reciprocal taxes that Mexico could impose on imported goods and products and that could include trucks, which would increase the production cost in Mexico. Do you have any view or have you heard any feedback from the industry about what could be done if this is the case under that scenario? And the other question that I have is about the Toyota announcement. Did you see any reaction from your suppliers in the Guanajuato or the Bajio area or any change in the pace of requests for proposals after the announcement of Toyota cutting the expected investment for the plant in Guanajuato?

Vanessa, this is Lorenzo again. Regarding the second question, Toyota did adjust its plans on production for the Guanajuato project. As you know, this project is still under construction and it will be -- it will start operations, I believe, in 2020. To be honest, what we have today is a very strong automotive cluster particularly in the Bajio region. We have -- Toyota is one of them, we have Honda, Mazda, Nissan, Mercedes, BMW and many of them are starting in the next couple of years. So in the end, the strategy of Vesta has not been to only be developing industrial buildings for the supply chain of one particular client. We are doing them for the whole industry. And the whole industry is considering OEMs in Mexico and even OEMs that are abroad and suppliers that want to take advantage of the competitive position of the Bajio and the competitive position of Mexico. In the end, we welcome new investments and we understand that the OEMs might have their own changes. And I believe their investments in the end are for the long run. So any adjustment they will do today, it's going to be minor compared to the rest of the investment that we foresee in the upcoming future. So in the end, we want to have -- we want to keep on attracting potential suppliers. We have been doing so. Our pipeline is, I can say, very robust. It's the -- for the next quarter, it will show the same, similar results to what we have done during the year. So we're very confident that we are developing in the right markets at the right time.

Hello, Vanessa, and thank you for your questions and your interest in Vesta. Together with your first question, again, with NAFTA, many of these things it's too early to tell. I mean, we are tracking as everybody else and right now, it's important to understand that the most tension that we see is inside the U.S. between Congress and the White House and even with the private sector. So all this tension is reflected in the [switches] and the positions but you never know exactly what is going to prevail. We know that we have flexible systems. And this is where Mexico have strong institutions from being a democratic country. And having such strong institutions, we have to react to whatever we can when time comes, not before. Just to give you an example, we were able to see the pulling out of Ford, assuming that they would want to produce their Focus in the U.S. It ended up being produced in China and now, they're exporting cars to the U.S. and they're paying 2.5% for the whole car. And all the components made in North America, North America meaning Mexico, the U.S. and Canada were lost to China just because of that decision. So we just need to wait. We know we have strong institutions and we have flexibility to adapt. Also, the most important part is, I believe, is the World Trade Organization is very strong on the positions. We know that our tariffs are very low and Mexico is very competitive.

Our next question comes from the line of Marimar Torreblanca with UBS.

I am changing gears a bit. I wanted to know about your FFO conversion because this quarter, it was very good and mostly, this is due to the reversal of the FX effects on your taxes. And I want to see if you could give us some guidance on what to expect for the 4Q and going forward. Is your exposure to FX still going to be still visible in taxes and therefore, in your FFO?

Marimar, thank you for the question. Look, I -- in this -- what we do in the year is estimate our tax account that we will have to pay at the end of the year. Regretfully, the tax account is somewhat a function of the exchange rate in the sense that from the tax authority's point of view, what we have is a peso company and a dollar liability. And therefore, if the peso depreciates, we have a tax loss carryforward; but if the peso appreciates, we have a taxable gain. And what has happened over the last -- over this year is at the beginning -- at the end of last year, we basically converted our tax loss carryforwards because the peso moved from MXN 15 a couple of years ago to MXN 20 last year. We converted that tax loss carryforward into depreciation by doing some asset sales between subsidiaries. Now what we didn't expect was that the peso was going to appreciate from MXN 20 to a low of around MXN 17.80 as of the end of the second quarter. That's taxable gain and I underline taxable gain, because there is no cash flow involved. It implies a substantial assumption on the payment of taxes as of the end of the year. As the peso has depreciated from the second quarter, right now, at the end of the third quarter it was MXN 18.2. Today it's MXN 19-point whatever. Our expectation of tax payment has decreased substantially, and this indeed affects our FFO. But I will invite you all to look at the trend of FFO. Last year, our FFO was around $0.0775 per share. Without the tax effect, I believe that this year we would -- without the tax effect, I underline, the FFO of this year will be pretty close to $0.11 per share, and that very strong trend over the next years will remain. Now there is a tax component on this particular year which is one off. One is that is mark-to-market at MXN 19 and whatever. The only way that the tax will [repeat] itself is if the peso appreciates. So I believe that the underlying strength of our growth in sales, our very high conversion from sales to EBITDA and our incredibly attractive invest profile with very low interest rates will imply that our FFO will substantially grow over the next year. And I don't believe that these tax exposures will be significant looking forward.

If I could add, Marimar, and thank you for your question, I think that another important component of the FFO is the fact that Vesta will not have to dilute our shareholder base for the rest of the Vesta Vision 20/20 plan. And this was a strategy that we had in order to get, let's say, [the hit] first, by doing our second follow-on early in 2015. Get a very strong balance sheet. And now only with debt, we will be able to fund the growth program that we have according to the plan. And that translates to a very strong position going forward in FFO per share.

Our next question comes from the line of Alejandro Lavin with Citi.

I have a couple of questions. The first one on occupancy; obviously, you have had a very strong occupancy lately. How do you see that evolving over the next couple of quarters, especially as you have developments coming online? And the second question would be on rent. How do you see Vesta's rents compared to the markets in the 3 regions that you're operating? Do you think they are roughly in line? Or do see some opportunity to catch up to the market?

Alejandro, this is Lorenzo Berho, again. Yes, we think we're very happy with the results, particularly on the occupancy level. As you know, we have, since 2015, we have tried to give a fair view on the 3 different portfolios. We honestly think the stabilized portfolio is the one that really reflects what the occupancy of the company should be, since the total portfolio has many new inventory buildings. We have increased 200 basis points from the end of last year until today, from 93.8% to 95.8%, which is a very healthy number. Looking forward, we believe that occupancy levels will be still very healthy, particularly because the projects where we are -- the inventory buildings that we are currently developing are in very, very strong markets, which are Puebla, in Ciudad Juárez, in Queretaro and in Tijuana. And of course, every time we have an inventory building under construction it's because we know how the demand is for each of these markets. We are very close. We have leading positions in these regions. We are very close to existing clients and potential clients. And our plan is, as soon as we develop -- as we finish the buildings, that we can stabilize the buildings pretty soon. So that, combined with the size of the portfolio, we think that is going to hold our occupancy levels in very high levels. Regarding your second question on rent. Let me tell you that we think that our clients are really appreciating the type of buildings that they're getting. Therefore, they are paying pretty good rent. In some cases, market; some cases, even above market, because they can differentiate our buildings to other ones that are in the market. And that, together with the low vacancy rates in most of these regions, is helping us not only achieve high rents in -- even above what we were doing in the last years, and that translates into very high returns of investment. And some of these cases are above 11%, even -- and sometimes closer to even 12%, if you consider also the final numbers to each of these properties. So in the end, we like the returns, we like the rent and the market fundamentals are in a position where we feel very comfortable doing some inventory buildings in certain markets.

Our next question comes from the line of Armando Rodriguez with Signum Research.

Well, just considering this strong leasing demand and your occupancy levels, you mentioned that you are forecasting maybe positive rents over the next quarters. But what about the operating margins, for example, EBITDA margin? Do you feel comfortable with these levels this quarter? It was outstanding levels.

Armando, thank you for the question. Where EBITDA -- well, as you know, our EBITDA guidance is 83%, and we're comfortably above that. And again, we have a very high conversion from revenues to EBITDA due to the fact that we don't have any fees -- payout for our activities. All of those are employees of the company, therefore any gain in sales, we can translate to a gain in EBITDA quite easily. I will invite you all to take a look at our development portfolio. Again, this year, we have around 30% of our development are build-to-suits. So guidance next year is going to be pretty good, and I will provide guidance as soon as possible. But you can figure it out. Now if you look at over Vesta in the long term, I do believe that we have achieved certain administrative economies of scale. And I think that over the long term, I can see that EBITDA will comfortably grow from 83% to a higher number. And we will see that as Vesta achieves this 2020 goal of more than 34 million square feet. I think that at that time, EBITDA will comfortably be above 84%, 85%. But it will take a couple of years. But EBITDA conversion is quite high for the reasons that I stated. And EBITDA outlook over long term is very positive in my opinion.

Our next question comes from the line of Eugenio Saldana with GBM.

I have a couple of questions. The first one is regarding your announced expansions this quarter. I was wondering whether you have identified more opportunities like this within your current clients. And in case -- I mean, how much GLA could it represent? And the second question is regarding the cash that you raised from the private bond. Are you going to hold this cash in peso or in dollar and/or in a mix? And in case you decide to keep the cash in dollar, is this going to offset the tax effect of your dollar liability?

It's a good question, Eugenio. Thank you for it. Let me answer first the easy one. Yes, so the private placement is kept in dollars. Our dollar position in cash is quite high at this time. And yes, if that cash were to be held for a long period of time, it will offset our liability position. The reality, however, is that, that cash will be converted into building over the next, let's say, 12 months -- 12, 15 months. And we will be converting those dollars into pesos. As you know, our building costs are basically denominated in pesos. We have not seen any increase -- any significant increase in cost per square feet. So I will be converting those dollars into pesos into buildings. And we can stabilize them. We -- that the company will continue to grow. But for the time being, indeed, my cash position is held in dollars. And I will turn over to Lorenzo to answer the first part of the question.

Great. Hi, Eugenio. This is Lorenzo Berho, again. Definitely we're seeing that our -- many of our clients in different industries are still expanding. In the case of the build-to-suit projects and the expansions that we announced this quarter, Nestlé expanded their cereal operations and their distribution center in Jalisco. This was an expansion that we were working during the year, and we started construction this month. BRP, as you know, has 2 facilities, 1 in Juárez and 1 in Queretaro, and these expansions were also -- were planned during the year, and this is a reflection of how confident they are on Mexico and how confident they are on the competitiveness of their operations in Mexico. And TPI is the same case. Strong demand in their industries, and again, expanding to try to tap the demand from their existing clients. So in the end, this is the trend that we are still seeing, even in other regions and other markets. So looking forward, our pipeline is very strong with existing clients and with future potential clients. It's either for build-to-suit projects or taking inventory buildings that they did this quarter in the case of Vallejo, who was expanding their operations with us, and in the case of Pirelli, or well, (inaudible), who is a logistics operator for Pirelli. So in the end, that's why for us it's very important to have the right buildings at the right time so that we can accommodate the needs of some of our clients when they need to expand. So looking forward, we think that we have a very well-defined strategy. We think that the Vesta 2020 plan is in very good track. It's -- we're only a few years ahead of that. And in the end, I think that the demand of the markets and the expansions of our clients will align to the same objective. And we'll have very good news looking forward.

Our next question comes from the line of Froylan Mendez with JPMorgan.

I just have one query. Have you ever had a situation when a build-to-suit contract expires, have you ever struggled to place that property again in the market? I mean, since should be a specialized property, maybe not on the overall standards of the market, have you had that experience? Can you give us a little bit more color on that?

Absolutely. I think that -- hello, Pablo (sic) [Froylan], this is Lorenzo, again. Definitely, every time we develop a new build-to-suit project, we know that there will be a situation which we'll have to negotiate with our client in order to either renew the lease, sometimes we do early renewals. And in this case, I think Vesta has a very well-defined strategy. We have local teams in each of the markets, which are very close to our clients. And we understand in advance what their requirements will be. So we try to anticipate. And let me tell you, the case of BRP is one of those examples where we not only do an expansion for them in a somewhat specialized building, but we extended the existing lease agreement. In the case of Ciudad Juárez, we extended it for 12 more years starting next year. So the expiration will be 2030. Early this year, we had a large -- had an early renewal for Nestlé, which was expiring in 2018. We renewed early this year and we extended the contract for additionally 7 or 8 years. So in the end, these are the situations in which we really collaborate with our clients in order to understand their needs in advance, keep on growing with them and try to mitigate any type of risk of vacating a building. As you can see, we have very high occupancies. We care a lot about our occupancy. And as long as they are good clients, which is that almost 100% of our clients are great clients, we want to be close to them. And these are the type of advantages that I think a developer or a partner like Vesta has compared to other [funds].

If it eventually gets vacated, would you require additional CapEx to put it at markets [on this], to lease it to any other tenant? Or it hasn't happened yet. Or has ever -- has that situation ever happened?

Right, right. And you know what? I think that, yes, we have had those situations in which buildings are vacated. And honestly, I think it's very minor CapEx we have to do. I think it has to do more on the marketing side where we have to find another company. Again, I think the quality of the buildings, regardless of it's a build-to-suit or an inventory building, the quality of our buildings is very good, even with -- in some cases -- we care a lot about having buildings where we can accommodate a new tenant easily, even if it's a build-to-suit. So actually, let me tell you that we have been able to accommodate in different buildings, different clients, and even increased the rents in some cases. So sometimes, (inaudible) turns to an opportunity. Now let me tell you that in the next couple of years, we have very few buildings will be vacated. And honestly, those buildings, some of them are -- the build-to-suit projects, they have very minor specialization. In many cases, the clients are doing most of the investments, it is sometimes 2 or 3x the amount of the investments that we are doing. We do the shell of the building. And just to finalize on your question, let me just comment that, this week, we're having an event with our -- with the broker community. So in the end, we try to understand -- we try to be very close to the broker community because, in the end, they are the ones that lead us to define the standard of the buildings, the characteristics of the buildings in order to have very easy-to-market properties. So we feel very confident on the type of properties we have, and it's a risk that we think is -- might be a minor issue.

Our next question comes from the line of Pablo Ordóñez with Itaú.

I have 2 questions. First, on your balance sheet, how much debt do you need to take in order to fund the rest of your growth plan? And where do you see leverage in terms of loan-to-value in the medium term? And my second question is regarding your land bank. It's just a good size, but it's particularly concentrated in Queretaro. Do you think that you will need to add some land? Or are you satisfied with the current land bank?

Let me again start with the second one. This is Juan Sottil, and thank you, Pablo, for the question. Alan, I'm sorry.

No. Pablo.

Pablo, I'm getting confused. In any case, on the leverage, look, we will increase leverage from the current level to 40% and over the rest of the Vesta Vision 20/20. From the $500 million rough numbers that we have today, we will comfortably increase it to around $750 million over the rest of the plan. That's a very conservative leverage. Leverage will be 40% loan-to-value. Again, that's not a high number. It's (inaudible) comfortable. And that -- and the retained earnings factor that we can have, because we're not a (inaudible), will give us enough flexibility to execute the plan, to build up the company to around 34 million square feet without the need of diluting during this period. That was our commitment that we have in 2015, and that's what we will do. We have enough room to achieve that. The -- I can only underline -- I know you know it, but it never hurts to say it again. We have the lowest cost of funds of any public company and the longest duration of any public company today. And we have the longest duration of our asset class. So really, we have locked in quite a substantial spread between the assets and the liabilities. And so we're somewhat immune to the (inaudible) on the current portfolio to the increase on rates. Now on new development, we, of course, have that exposure, but long -- strong demand remains and we continue to develop new buildings at cap rates of 7.5%, 11%. The spread is there to sustain the [operations on the integrated] market. So I really believe that this last funding is really important. And the fixing of all of our debt maturities is very, very important. The fix rate that we have on a lot of it, because of the lock-in spread that we have achieved on the current portfolio. And on the other question about land reserves, look, I think that the level of land reserves that we have is quite comfortable given the size of the portfolio. Yes, we have some concentration in Queretaro. We will buy some land on other markets. I -- we believe that a land reserve of $120 million, given the size of our portfolio, shouldn't surprise anyone. And we will cautiously add land. Land is a raw material that we expect to place within an 18- to 24-month period. And we will add this raw material as we see fit. Clearly, there's some markets that we need land and we will be actively looking for it. And we will be moving the land that we have in the Queretaro, in the Aguascalientes market -- with judiciously, and with good buildings and, of course, focusing on very high-quality tenants.

Maybe -- Pablo, it's also important to note -- to point out that, even if you track our development record, which is what we pointed out in our Vesta Vision 20/20 plan, if you just think about it, when we took the company public, we had 11 million square feet. Finishing what we have under construction, it will take us to 30 million square feet. 2.5 million of development is a very, very minor component of the total portfolio going forward. So that means that the development component is very small compared to the size of our current portfolio. I just wanted to point out that, and that represents the opportunities and how consolidated our strategy has been.

Our next question comes from the line of Alan Macias with Bank of America Merrill Lynch.

Just a follow-up question on the land bank, if you can provide us what percentage of your land bank has licenses and if during the last quarters have you seen any delays in the process of obtaining the licenses, just related to either stricter environmental regulation or stricter regulation regarding construction regulations, regarding natural disaster.

Alan, this is Lorenzo. It's a good question. As you all know, we have tried to acquire land, mostly in industrial parks, that already have the infrastructure in place, that already have the zoning in place and already have the licensing in place, so that we can pretty much acquire land and start construction and focus on marketing buildings so that we can lease them up or to use them for build-to-suit projects. That's pretty much most of the cases that we have developed. In some other cases, we have acquired very good land at very good cost, and in some cases, we need to do all the zoning and licensing, too. In this process, we have been very successful because in many cases we try to mitigate many risks. We like to work a lot with local authorities, local government. In the end, I think we align our interests with the ones from the government since we all want to attract foreign investment and we want to generate jobs through the creation of new logistics or industrial buildings. So in the end, we haven't had any major challenges in this regard. As you know, we have a -- today, we have very strong operating portfolio, and that has been the result of a very good and very disciplined development process. So in the end, we're very comfortable because all of the land that we own today is -- has been private land. So it's not that we are converting, for example, the community land, [the hills], to private ownership. It all has been private land, and we think that in the upcoming future, we like the strategy of acquiring land inside of industrial parks or land that already has the zoning, so that we do not have to struggle too much in that area and really focus on attracting new companies or growing with our existing clients and develop as soon as possible and try to focus on the, let's say, 6- to 9-month development period of each of our buildings.

And just if you can mention if you have seen any cost pressures, either in increase in the price of land or in the increase of construction materials, for example.

Sure. Definitely, land prices have increased and they have been increasing in the last 4 years. Nevertheless, we try to identify good opportunities for land acquisitions. Of course, we don't want to over pay for any of them, and I think we have been able to put together a very important strategic land reserve in different markets at very attractive prices. And I think that, that combination with our development skills have led us to have very competitive construction cost, regardless of some increases in steel and some increases in cement. I think that it has been offset by the devaluation in the peso. So that -- so in the end, we are developing somewhat at a lower cost in U.S. dollars. And if you compare that to the rents, which are pretty much in line or even higher than in the last years, returns are very attractive for development. That's why we are close to our development pipeline, because having returns of 10.5%, 11%, 11.5% are very, very attractive in U.S. dollar long-term leases and with a strong global company. So we're very comfortable still with our development pipeline.

We have no further questions at this time. Mr. Berho, I'd now like to turn the floor back over to you for closing comments.

Okay. Yes. Thank you very much to all of you for your interest in Vesta, for participating with us in this conference call. We look forward to speaking with you again, whenever we release our fourth quarter results of 2017. And in the meantime, as always, if you have any questions, please do not hesitate to contact our Investor Relations Department. And thank you very much. Have a great weekend, and goodbye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.