Corporación Inmobiliaria Vesta, S.A.B. de C.V. (VTMX) on Q2 2024 Results - Earnings Call Transcript
Mariana Dominguez - IRO:
Lorenzo Berho - CEO:
Juan Sottil - CFO:
Pablo Ricalde - Santander:
Gordon Lee - BTG:
Alejandra Obregon - Morgan Stanley:
Rodolfo Ramos - Bradesco BBI:
Jorel Guilloty - Goldman Sachs:
Isabela Salazar - GBM:
Andre Mazini - Citigroup:
Andres Aguirre - GBM:
Natalia Leo - JPMorgan:
Operator: Greetings, ladies and gentlemen. Welcome to the Vesta's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. A question and answer session will follow today's prepared remarks. And as a reminder, this call is being recorded. It is now my pleasure to introduce your host, Mariana Dominguez, with Vesta's Investors Relations Team. Please go ahead.
Mariana Dominguez: Good morning, everyone, and welcome to our second quarter earnings call. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer, and Juan Sottil, our Chief Financial Officer. The earnings released detailing our second quarter 2024 results was released yesterday after market closed and is available on the company’s website along with our supplemental package. It's important to note that on today's call management remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risk and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligations to update any forward-looking statements in the future. Additionally, note that all figures included herein were prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. All information should be read in conjunction with and is qualified and is entirely by reference to our financial statements, including the notes thereto and are stated in U.S. dollars unless otherwise noted. I will now turn the call over to Lorenzo Berho.
Lorenzo Berho: Thanks, Mariana. Vesta delivered solid second quarter results driven by the sustained strength of our high-quality portfolio and great execution by our professional team. Leasing activity reached 2.8 million square feet, 1 million square feet in new leases, nearly half of which were buildings under construction led by the e-commerce and consumer logistics sector as a result of strong demand we're seeing in the market. 1.8 million square feet of our leasing activity was in renewals, and real leasing spread reached 7.1% during the quarter. Consistent with last quarter and reflecting stable growth in rent in the overall market with low vacancy levels. We reached 42.5 million square feet of GLA, including buildings under construction and continue to see portfolio occupancy levels increasing during the quarter, stabilized occupancy reached a record 97.5%. Vesta's construction pipeline also continues to strengthen, ensuring we meet the demand we're seeing on the market. Our pipeline reached 4.7 million square feet during the quarter of which 38.6% has been leased to-date. Along these lines, 100% of the existing buildings within our Vesta Park Apodaca in Monterrey have been leased by second quarter cent. We also pre-leased a spec building in Monterrey during the quarter and began construction on the only 730,000 square foot large format spec building to have been built in Monterrey to date, anticipating the considerable demand we're seeing in Mexico's largest industrial market. Our business is led by two important drivers. First, Mexico's internal consumption and local and regional market demand. Deloitte estimates Mexico's GDP will grow 2.2% in 2024, then at a 2.1% average rate annually from 2025 to 2030. Continuing the country's current macroeconomic direction of this low and stable growth we've seen post pandemic. And according to the World Bank, remittances accounted for 4.2% of Mexico's entire GDP in 2023, a number that is certainly higher now. Mexico's purchasing power is therefore strengthening. And new shoring remains an important growth driver for Mexico. Last week, Pitch ratings appeared Mexico's sovereign rating at BBB minus with a stable outlook. Pitch cited a prudent macroeconomic policy framework, sound and robust external finances and steady debt levels. The agency noted that new shoring could continue to offer future opportunities for the country. Foreign direct investment into Mexico reached over $38 billion from January through May. According to Mexico's economic ministry, a 35% year-on-year increase with the heaviest investment during the period in the manufacturing industry accounting for 21.8 billion or 56% of FDI. Vesta’s second quarter revenues reached $63 million while adjusted NOI and EBITDA margins were 94.7% and 82.3% respectively. Vesta FFO reached $37.9 million, a 23.2% year-on-year increase. As our results for the quarter therefore reflect, Vesta is well-positioned to capture related opportunities. We're focused on the right markets, Mexico's most strategically relevant manufacturing hubs and our site remains on the long term. And as I have noted in the past, we're highly selective regarding the markets and projects where we'll continue to invest and grow. I'd like to reiterate Vesta's important differentiators. Our outstanding asset quality is second to none. We have a long track record of leveraging close client relationships to identify unique and accretive opportunities and a long history of exceptional execution and a deep understanding of industry dynamics and our market nuances and challenges. Our capital allocation decisions have been and will continue to be measured and prudent. Finally, and importantly, we have proven our success of quickly and nimbly adapting to both react and to anticipate with well-grounded decision-making. We'll therefore continue to focus on delivering strong and consistent results with both hands firmly at the helm and the wisdom and confidence built through more than 26 years as Mexico's leading industrial real estate developer. As a final comment, we released our sixth audited integrated annual report during the second quarter, about which we are extremely proud. Please find it on our Investor Relations site. With that, let me pass our conversation to Juan and I'll return for some brief closing remarks.
Juan Sottil: Thank you, Lorenzo, and good day, everyone. Let me begin with a summary of our second quarter results. Starting with our top line, total revenues increased 22.4% to $63 million, mainly due to rental revenue coming from new leases and inflationary adjustments and rental properties during the quarter. In terms of current mix, 88% of our second quarter revenue was denominated in U.S. dollars, up from 86% from the second quarter 2023. Turning to our profitability, adjusted net operating income increased 19.6% to $57.8 million while the margin decreased 77 basis points to 94.7%. Higher rental revenue from our rental properties was partially offset by an increase in insurance, property tax, and other property costs, resulting in a lower margin. Adjusted EBITDA reached $50.2 million in the second quarter, a 20% increase compared to the same quarter last year, while the margin decreased by 188 basis points to 82.3%, primarily due to higher costs and expenses. Administrative expenses during the quarter were impacted by the peso appreciation relative to the same period last year, and the increase in auditing, legal, and consulting expenses driven from our equity transactions. We closed the second quarter of 2024 with a pre-tax income of $132 million compared to $108 million in 2023, which, again, this quarter benefited from higher gains on revaluation of investment properties and higher interest income. Vesta's FFO increased 23.2%, reaching $37.9 million as Loren described. Turning to our capital structure and balance sheets, cash and equivalents stood at $377 million, and our total debt remained on change at $914 million at the end of the quarter. Net debt to EBITDA was 2.8 times, and our loan-to-value was 22.9%. On the back of our discipline and prudent approach, we continue to maintain a strong financial position that enables us to keep on executing Vesta's strategic plan while delivering sustainable results. Finally, subsequent to quarter's end on July 16, we paid a cash dividend of $16.2 million for the second quarter. This concludes our second quarter 2024 review. Operator, could you please open the floor for questions?
Operator: [Operator Instructions] And we'll pause for just a moment to compile the Q&A roster. Thank you. Your first question comes from the line of Pablo Ricalde from Santander. Your line is open.
Pablo Ricalde : Hi, good morning, Vesta team. I have two questions. The first one is about expense line. You mentioned the significant expenses were due to these audit expenses and because of the issue. I'm just trying to understand how should we see this line going forward? That's my first question. Another one is for the [indiscernible] project. We saw the project was delayed. I'm trying to understand why, what are the reasons why it was delayed?
Juan Sottil: Pablo, good morning. I'm going to break the first part of the question. On the auditing expenses, indeed, they have come up. As you know, we listed at the New York Stock Exchange and auditing expenses, in fact, a couple of other lines as well, have become more expensive as our obligations under the PCAOB numbers require a more expensive auditing reviews. So that's kind of the explanation. So that's basically what happened on that line.
Pablo Ricalde: But should we expect it to remain at this level going forward or this is more like just one kind of audit expenses?
Juan Sottil: No, the auditing expenses will continue to be as stated because of the expensive review that we have to comply with on the New York Stock Exchange.
Pablo Ricalde: Okay, thank you.
Lorenzo Berho: Thank you. If I may add, can you hear me well, Juan?
Juan Sottil: Thank you.
Lorenzo Berho: If I may add, we did experience a couple of delays in a couple of buildings, nothing material. I think that it just took us a couple more months of one of the buildings to be delivered, was supposed to be delivered in the quarter. But now we are aiming that final project will be delivered at October, minor construction delays. I think another important part of the expense side is that we also experienced some maintenance expenses and energy expenses that we believe might be a one-off for the quarter. And at some point, that particular cost will stabilize and improve our margins too. Thank you, Pablo, for your question.
Operator: Thank you. Your next question comes from the line of Gordon Lee from BTG. Your line is open.
Gordon Lee: Hi, good morning. Thank you very much for the call. Just a quick question on your land bank. If I look at the land bank, it looks like at this point, you only really have land in the La Jolla region. So I was wondering how quickly you think you'll be able to refill land either in the Northern regions or in the Central region, in the Mexico City region? Thank you.
Lorenzo Berho: Good morning. Thank you for being on today's call. Definitely, land acquisition is a key part of our strategy. We have a very strong pipeline of land that is building up. We select very carefully. Besides, we acquire urban infield, which being one of the most important attributes with locations where we can have good access to infrastructure, labor, and differentiate ourselves as we have done in the past. Sometimes it takes a bit longer, but we have a strong pipeline and we aim to be able to buy and replenish land reserves in the North and Central Mexico in the upcoming quarters. And that's going to be very helpful for the strategy going forward which is based on development. We will continue to do the same as we have done in the past. Fortunately, the reason why we, let's call it, we ran out of land in some of the markets, it's because our development pipeline accelerated even more than we estimated. That's the case of, for example, Monterrey. As you could see, we just started a new building -- I'm sorry, we just started our final building in the Apodaca project. With that, basically, which even though it will take some months to be developed, but with that, we are out of land. Now, what we have now is buildings under construction that we still have to market and lease. Nevertheless, with the strong market performance that we see, we think that this type of projects we're going to be very well absorbed. But definitely part of our strategy is to continue buying land in great locations in the markets where we have presence and continue growing in these sites in the next stage of the company.
Gordon Lee: And would you say, in terms of land prices and how they're developed and looking at that pipeline of land bank that you've built, would you still think that when you look at that versus rents in the market today, that you would still be underwriting projects that sort of 10% development yields?
Lorenzo Berho: Yes, absolutely. So more than getting into detail into each of the markets, Gordon, because all of the markets have different land cost basis. I think that the main driver of Vesta is to continue focusing on spread investment. Spread investment where we can have a higher margin to acquisitions, mainly 300 basis points. So yes, we can still achieve returns of around 10%. If you look at the construction pipeline that we have right now, we have a yield on cost in average of 10.4%. So that will continue to be our main driver, our discipline, and our main differentiator to other players that focus their strategies on acquisitions, on low yield acquisitions.
Gordon Lee: Perfect, thank you very much.
Operator: Your next question comes from the line of Alejandra Obregon from Morgan Stanley. Your line is open.
Alejandra Obregon: Hi, good morning, Vesta team. Thank you for taking my question. I was just hoping to get some color on the buildings that you currently have under construction. So you mentioned close to 5 million square feet that is under construction in Aguascalientes, Puebla. I was just hoping if you can comment on the dynamics that you're seeing in these key markets, and more specifically, if you have received specific interest from potential tenants for these buildings, anything on the speed and dynamics of the market where you're expecting to drop these assets that would be very good. Thank you.
Lorenzo Berho: Hola, Alejandra, and thank you very much for being on the call. Definitely, I think that one of the main attributes of Vesta is our ability to develop. And as we have stated in the past, we will continue to find opportunities that drive profitability. And I think we think that current construction pipeline is counted probably the highest number we've seen at 4.7 million square feet, total investment of above $400 million of projects that we have just under construction. And we have pretty much projects in all of the markets, in most of the markets where we operate. Talking about the north, we continue to see strong demand in Ciudad Juarez. In Ciudad Juarez, out of the projects that we have under construction, one of them is lease, and the other one is still under development and with a good list of potential clients, clients in the electronic sector, as well as auto sector. Monterrey, we have now four projects under construction. We did an important lease to a very important e-commerce player that while we had the building under construction, we were able to pre-lease it. And this will help us to continue to grow in this particular market and we can start other projects. Actually, Monterrey, we are well diversified between consumer goods, e-commerce, and manufacturing. So this is a good example of how well diverse our projects might be. The Bajio has also been, we have seen good demand with rent increases, particularly in markets like Queretaro and Aguascalientes, Aguascalientes where we were able to sign a couple of leases for the auto industry with some Japanese firms. And additionally, in Aguascalientes, we have been able to renew several of our leases that were post-expiration, which shows another important commitment on companies that want to extend their presence in Mexico. And talking about central region, of course, Mexico City is very hot, very strong. We were able to lease last quarter to a major e-commerce player, but we see good pipeline and particularly rents going up also pretty quick. And we're benefiting from that, from anticipating to the market. That's why we will continue to acquire land, develop, as long as we continue to see rents going up, we think that will continue to be the main driver of growth. So this pipeline is a good example of what we will continue to see in pipeline, where we have not only spec buildings, but also buildings that are pre-leased. Almost one third of the products are pre-leased, but the markets are still strong, that where we feel comfortable that as long as we continue delivering inventory buildings, demand coming from good quality companies will continue to be there.
Alejandra Obregon: Got you, that was very clear. Thank you very much.
Operator: Your next question comes from the line of Rodolfo Ramos from Bradesco BBI. Your line is open.
Rodolfo Ramos: Thank you. Good morning, everyone. So just wanted a little bit of a follow-up on the previous question from Alejandra. Wanted get a sense of your commercial conversations? If you have seen a shift at all after Tesla's announcement in Monterrey, and whether this has had any impact on clients potentially that were looking at Monterrey or at Bajio, if there is any type of cannibalization going on, you know, if we were to see more slack in the Monterrey market, if the Bajio region could suffer as a result, or you see completely different dynamics? So that's the first one. And just secondly, if you could give us an idea, if you have any exposure to EV suppliers to the EV market currently? Thank you.
Lorenzo Berho: Thank you, Rodolfo, for your question. I think it's worth talking a little bit about the announcement from Tesla. The announcement from Tesla that the plant will be put in pause is not necessarily -- it's not a positive signal. However, it's interesting to see the drivers of that particular decision, which happens every now and then. Clearly, some of you follow the results from Tesla. Their sales volume have dropped dramatically. They have entered other industry sectors on robo-taxis and automated driverless systems and whatsoever. So definitely using the political statement to pause the plant is something that some of us actually were kind of expecting. The Tesla project is a major project. And many of the type of clients that we have are not necessarily related to Tesla in Mexico. I think that most of the type of clients we have, they are well diversified among different industry players in the EV, electric vehicle industry, as well as internal combustion that is still happening. And therefore, we think that this should not have a major implication for other industries. And even for the auto industry, that is already a part of the supply chain in Mexico and the U.S., this should not have any effect. Bear in mind that in order to manufacture cars, whatever it is, EV or internal combustion, in order to be profitable, you got to be in a -- production, has to be in a region where companies can be profitable and you can have reduced costs and can have integrated suppliers. And that's why even in the toughest times, companies where they most expand in Mexico is at tougher times where there's more challenges. So that's why we actually think that we were going to see even more suppliers in the industry coming to Mexico. Many of them are already in Mexico and they're just expanding operations. And particularly on Monterrey, Monterrey is the largest industrial market, has currently a very low vacancy. I would say that very few companies that were established in the last period in Monterrey were related to Tesla. Actually, the largest portion of them are related to complete different industries and complete different supply chains of other sectors. Actually, our project is in Apodaca, which is contrarian to the site of Tesla. So it will be interesting to see the evolution after the news, but I think that Monterrey is a thriving city. We had our last Board meeting in Monterrey and we were able to see the strong dynamic that that particular market has, not only because of industrial sector, but its services, quality of life, education, its location, also closer to the U.S. So we feel very comfortable to continue investing in Monterrey and other markets like Bajio where auto industry has had a strong presence.
Rodolfo Ramos: Thank you.
Operator: Thank you. Our next question comes from Jorel Guilloty from Golden Sachs. Your line is open.
Jorel Guilloty : Thank you for taking my questions. I have two. So the first one is on leasing spread. So we noticed that your trailing 12-month leasing spread came at 7.1% this quarter. It was 8% in 1Q '24. And I was just wondering, are you, what sort of leasing spread trends are you seeing? Are you seeing a leveling off to a lower level? Is it accelerating? It was what happened in 2Q, just a once and done sort of situation. And then the second question is around your pipeline. So you have a pretty extensive development pipeline, nearly 12% of current GLA. And about all of it is on spec. So what I was wondering is when you are thinking about the potential lease up for this pipeline and what you've been seeing so far in the last six months here today, are there any changes in expectations on how quickly you can lease up those properties? Is it, are you seeing that window of leasing up becoming shorter? Are you seeing it become longer? How are the negotiations for, or how do you expect the negotiations to go for these new assets? So those are my two questions. Thank you.
Lorenzo Berho: Thank you, Jorel, for being on the call. I will start with the second question. We actually see no -- we have no changes on expectation towards our underwriting of each of the projects on spec. The process is we start, we analyze the market. We see how the demand and supply are behaving. We start a spec building and we have some time to lease up, maybe six months, 12 months after that. And that's when we underwrite a project at certain returns. Of course, in the process, sometimes we're able to pre-lease these buildings. And this is quite convenient because while you're under construction, particularly in strong markets, when you're under construction, you can be able to lease up. And that's what currently represents approximately a third of the projects. But for the rest, we feel very comfortable with the market dynamics. There is little supply of good quality assets like the ones that Vesta develops in the locations where we're at. And that's why even if we develop -- when we finalize the project without signing a lease agreement, we have some good time of marketing where we can push even prices and rents to our benefit and take advantage of having good projects available on the market and anticipate to many of the clients that normally require the buildings. And when they take a building, they're already late on their projects. And that has been a key strategy of Vesta. Actually, what we have seen is rents and spreads, interestingly, going up. If you look at the numbers of previous quarters, we had some returns, let's say closer to nine, between nine and 10. And now we're seeing even returns even above 10%. This is a result of higher rents, limited supply for good quality assets, and our ability to close better transactions. And of course, all of them at dollar rents, long-term leases adjusted to inflation and keeping the same standard going forward. As to your first question, I think that yes, we will continue to see rent increases and net effective rent increases on the releasing spreads. And every quarter is kind of different depending on the amount of leases that you got. But if inflation in the U.S. is, let's call it close to 3%, we will continue to see maybe a spread between getting closer to high single digits in terms of rent spreads overall. And the reason being high single digits is a combination of existing, some expiring leases that take effect with CPI increases, or some of them that we can be able to take to market. And we have seen in some markets, some increases between 20%, 30%, and even 50% rent increases depending on the market. So that's going to be a dynamic that we foresee in even the next, I would say even the next years to come, as long as some leases expire and we're able to take releases up to market.
Operator: [Operator Instructions] Your next question comes from Isabella Salazar from GBM. Your line is open.
Isabela Salazar: Hello, thank you for taking my question. I was wondering what your general feeling of the new administration is regarding their willingness to facilitate access to infrastructure and energy and water that is crucial for development. Thank you.
Lorenzo Berho: Hola, Isabella, thank you for your question. We have high hopes that the new administration will take action on what matters most for the industrial sector and manufacturing sector, which is a great opportunity for Mexico with a new sharing opportunities. I think they have identified very well the importance of industrial parks. They actually, Claudia Sheinbaum is the first candidate now President that has had a plan in place even before taking office. She commands to have more than -- she has a hundred industrial park projects, so she knows how important this is in order to attract investments, how important it is to generate well-paid jobs, generate also the opportunity to bring in better infrastructure. So we have high hopes that the energy sector will probably show a shift to what we have seen previously. As well as some other infrastructure requirements. In that regard, we through the Association of Industrial Parks, as well as other business councils where we participate, we have been in very close contact with the new administration and some of their key officials in order to make sure that we can support the growth opportunities for the country and that the industrial and manufacturing platforms is strategic for this new administration. So in that regard, we think that they understand well, they know what Mexico has to do, and hopefully we can also support them in order to be able to facilitate the improvements that are required particularly on energy and other logistic infrastructure.
Isabela Salazar: Okay, thank you very much.
Operator: Your next question comes from the line of Andre Mazini from Citigroup. Your line is open.
Andre Mazini: Yes, thanks Loren and Juan. So actually my question would be a follow-up on this statement from the government that they want us to support the construction of 100 industrial parks. What exactly do you think they are meaning here? Would be, -- I don't think it would be like government money for industrial parks themselves, right? It would just make regulation better, maybe lower taxes. What are the concrete measures they could take for this so-called 100 parks construction, would you say? And on the other measures, in terms of like energy, do you think they could open up the monopoly in transmission and distribution away from the CFE to have private money? Because I think this would be the measure that would really assuage the government [technical difficulty]
Lorenzo Berho: Thank you, Andre. You broke a little bit at the end, but I think I got your question as well. Mexico needs heavy investment in energy and it's mainly on, particularly on distribution and also some in so-and-so transmission distribution and in some ways also generation. Definitely the government has its limits in terms of spending. And that's why the private sector will have to play a role in energy. I don't know exactly the details on how they want to open up. Hopefully they can generate a plan that is helpful for private sector, but not only for energy, but also hopefully they can conceive renewable energy. We think that with the lead of Claudia Sheinbaum, there will be an opportunity on renewable energy. And this has an important impact on the plan of 100 industrial parks. I don't think that the government will be supplying money directly to the parks. I think that it's more about giving support to whoever develops the parks in different regions of the country, that making sure that there's a good interaction so that the parks can be overcoming certain challenges on infrastructure, on energy, also working in close connection with local governments and local authorities, because this does not come necessarily only from the federal government. So I think this is a good plan. It's good for them to understand what the park developers might need. But also the other part of the opportunity is attracting foreign direct investment. I think the Secretary of Economy understands this well, also the office that links the business leaders to the government led by Altagracia Gomez. I think she's doing a fantastic job on this regard. And I think that it's also a good part of us as to how far we can take the country and how far we can make this an important plan. But I think that actually it's interesting that we don't need funding from the government to establish opportunities. We just want them to understand the opportunity and keep supporting it. We can find ways to invest and hopefully this could be a great year to continue attracting investment in the manufacturing sector.
Operator: Thank you. Your next question comes from the line of Andres Aguirre from GBM. Your line is open.
Andres Aguirre : Hi, thanks for the call and congrats on the results. After the recent election and financial volatility, have you seen any changes in customer demand for space? Are customers more cautious or is the demand the same? And also, are you exposed to any Chinese tenants? Thank you.
Lorenzo Berho: Are we exposed to what, sorry?
Andres Aguirre: Any Chinese tenants.
Lorenzo Berho: Okay. Great, well, thank you for your question. Well, we don't actually -- the election, the result of the election was something that somehow international investors and international companies that are established in Mexico were looking to establish in Mexico. It was kind of a default scenario that Carrier Chairman would win. So for that reason, I think that many of the projects actually did not have a major impact before doing a little after the election, after a couple of months, it has been. So in that regard, we don't see any major, we don't see any major changes and they have already considered that Carrier Chairman might take office. Maybe the only thing that I think some companies might be just more cautious is on the elections in the U.S., which is understandable. And I think that on that regard, we think that many companies understand well, what Trump -- how Trump plays because he has been President in the past. Now with a new candidate, potential candidate from the democrats, it's a little bit of kind of the same what we have seen until today. So importantly will be the revision of the USMCA in 2026. And for that, I think that there's a good expectancy that the negotiation is going to be tough as always, but the outcome is going to be positive just because it's a great agreement that has sometimes to have its own tweaks. So for that reason, I think that's something that just the companies might consider a closure. But in the end, I think that there's no other place better than North America, the integration of the three countries has had a great result, has had great results in order for the U.S. to be able to reduce the deficits to other parts of the world. That has been the example in the Chinese companies where the U.S. clearly has reduced deficit materially. And thinking about the Chinese companies in Mexico, well, we're very careful, regardless of the nationality of our companies that we have companies with very solid, with high credit ratings, very solid finances, and strong reputation in the industries where we operate, even regardless of the nationality. So in that case, I think that many of the Chinese companies that haven't arrived in Mexico, it's hard for us to pass on many of the type of companies they are. So that's why we have very few Chinese players. The only ones that we have are pretty much larger corporations that are more like global companies. TCL, for example, in Tijuana, doing flat screens and electronics. We have a few others in the other sector that were German companies that are owned by the Chinese capital. So, but have had a huge track record in the sector. So we are very selective. So we will continue to see a very well diversified portfolio and we're going to continue seeing a strong discipline on Vesta, how we select our clients. Chinese companies are still coming and they might be going to with other developers and we think that's fine. And we will focus on our own portfolio to have good quality.
Operator: And your next question comes from the line of Natalia Leo from JPMorgan. Your line is open.
Natalia Leo : Thank you. Good morning, everyone. And thank you for taking my question. Mine is more related to the cost per square meter of your development pipeline. So it increased around 7% sequentially and like 41% year-over-year. And especially in one of your developments in Mexico City, I think it was the impact. So just wanted to understand if it is more related to construction costs or land and how do you take into account land to determine the yield?
Lorenzo Berho: Great, thank you for your question. Well, yes, definitely Mexico City is the place where land is most expensive. And that's why overall costs, holding costs per square foot or per square meter is the highest particularly compared to other markets in Mexico. However, construction costs have also had an increase in cost, particularly materials have increased maybe 10%. And also somehow the exchange rate, which was below 17 have had an impact in some of these costs now at over 18 clearly things are different, but our underwriting is on the conservative side and not on the current exchange rates. So for that reason, we see higher costs. However, particularly in Mexico City, we are seeing rents that are now in the $11, $12, $13 per square meter range. This is much higher than any other market throughout Mexico, particularly for high quality buildings like the ones that we're developing. And so that increase in rent offsets the increase in costs that we have seen. That's why if you look at the projects we have in Mexico City, Punta Norte for example, we have returns about 10%, which is great, particularly in a market which has a greater barriers of entry, we have urban infill locations. Projects that are very hard to replicate and replace. And that's why sometimes we rather pay a bit more of a price in land, but knowing that there's going to be long-term value to it. And yes, sometimes it might be a higher cost per square foot or per square meter. But as long as it makes sense in terms of returns that we think that the spread investment on returns will continue to be key in our capital allocation strategy.
Natalia Leo: Perfect, thank you. And just to be clear, your leases in Mexico are in dollars or in pesos in Mexico City?
Lorenzo Berho: Thank you for the question. Definitely our leases in Mexico City are in U.S. dollars. So you're seeing returns at 10% in U.S. dollars. And I think that explains well the discipline that Vesta has in taking good companies, making the leases in U.S. dollars, and continue to drive long-term value for our portfolio.
Natalia Leo: Perfect, thank you so much.
Operator: Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Berho for his concluding remarks. Please go ahead, sir.
Lorenzo Berho: Thanks, operator. And thank you everyone for joining us today. Vesta's second quarter results are consistent with our long-term strategy and focus on continued value creation. Today, we're in a position of strength and forward momentum. We'll maintain our strong financial position, which enables us to further execute on Vesta's strategic plan, which sustains results strength, leveraging our company's ability to create value. I'd again like to thank the entire Vesta team for their important contribution to our performance.
Operator: Thank you. This does conclude today's conference. You may now disconnect your lines. Thank you for your participation.
