Corporación Inmobiliaria Vesta, S.A.B. de C.V. (VESTA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our review of Vesta's Third Quarter 2026 Earnings Results. Presenting today with me are Lorenzo Dominique Berho, our Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our third quarter 2026 results was released yesterday after market close and is available on Vesta's IR 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 risks and uncertainties that may cause actual results to differ. For more information on these risk factors -- please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, please note that all figures were prepared in accordance with IFRS which differ in certain significant respects from U.S. GAAP. All information should be read in conjunction with and is qualified in its entirety by reference to our financial statements. including the notes thereto and is stated in U.S. dollars, unless otherwise noted. I'll now turn the call over to Lorenzo Berho

Thank you, Fernanda, and good morning to everyone joining us today. I'm extremely pleased with Vesta's results for the third quarter. This was an outstanding quarter for our company, reflecting record new leasing activity and substantial improvement in portfolio occupancy strong financial performance and important progress in the execution of our Route 2030 strategy. Importantly, our performance gives us the confidence to raise our full year 2026 guidance. Last quarter, I spoke about execution being clearly underway. I described how Vesta was converting demand into leases. Leases into occupancy and our land bank into disciplined development opportunities. This quarter, we delivered on that commitment. Our results demonstrate that the opportunities we have been discussing throughout the year are translating into signed contracts, higher occupancy, new construction and growing rental income. And we are accomplishing this while maintaining the financial discipline that has always been central to divest a strategy. Let me begin with the broader environment. The third quarter brought encouraging signs that industrial investment decisions in Mexico are gaining momentum. Following a period of caution and adjustment, we are seeing renewed investment in machinery and equipment, accelerating demand tied to electronics and AI-related industries. And companies moving forward with expansion plans despite continued uncertainty surrounding global trade. What is particularly encouraging is that this renewal activity is translating into tangible commitments. And Vesta is directly benefiting from these trends. As I've noted previously, Mexico is particularly well positioned in this environment. Its deep integration with North America, established manufacturing base and competitive advantages provide a solid foundation for continued investment. While uncertainty surrounding trade negotiations and the USMCA review continues to influence the timing of some investment decisions, we're encouraged by the progress in discussions and importantly, by what our customers are doing. Companies are continuing to invest, expand and make long-term commitments in Mexico. Recent U.S. trade data reinforces this point. According to U.S. Census Bureau figures, U.S. imports from Mexico reached approximately $60.6 billion in August a record level with Mexico accounting for approximately 18% of total U.S. goods imports. We're also encouraged by signs of recovery in investment in machinery and equipment following a period of slower activity. This is an important indicator because investment in productive capacity can translate into future demand for manufacturing and logistics facilities. Together with the expansion of electronics-related trade and the continued regionalization of supply chains, these trends reinforce our confidence in Mexico's industrial competitiveness. Mexican electronics exports have increased approximately 2.5x from 2024 to 2026. And reflecting the country's growing role in supplying the technology and digital infrastructure industries. At the same time, we are witnessing a significant transformation in the industries driving demand for industrial space. Investment associated with artificial intelligence and digital infrastructure is creating new requirements across the manufacturing supply chain. As we have discussed on previous calls, the opportunity extends well beyond the data centers themselves. It includes the production and distribution of electronics, servers, electrical equipment, cooling systems, components and other products required to develop and operate digital infrastructure. We're seeing how these requirements are translating into opportunities for industrial real estate in Mexico. Alongside continued activity from automotive, logistics, e-commerce, food and beverage and other established sectors. For Vesta, the significance is clear as manufacturing and supply chains become more sophisticated, customers increasingly require high-quality buildings with reliable energy infrastructure, access to labor and connectivity to critical logistics corridors. These are precisely the characteristics we prioritize in our portfolio and development strategy. And our third quarter leasing results provide compelling evidence that this approach is working. During the quarter, Vesta signed approximately 2.3 million square feet of leases, including a record 1.6 million square feet of new leases. This was an exceptional level of new leasing activity involving customers across electronics, e-commerce, logistics, automotive and consumer goods. What is particularly encouraging is the diversity of these transactions. We are seeing demand across different industries and regions from multinational companies expanding established operations to other businesses investing in their growth in Mexico. We are particularly pleased to see established clients such as BMW, DSV Logistics and Mercado Libre continued to grow with Vesta. These relationships demonstrate the value of our customer focused operating model. while the diversity of activity across industries and geographies reinforces the resilience of our portfolio. This is an important part of our strategy. building long-term relationships with high-quality companies while continuously broadening our customer base. Most importantly, these are not simply prospects or expressions of interest. These are customers making decisions, signing long-term leases and committing to best properties. It's why we have remained confident in our market positioning, even as brother industrial market conditions have been mixed. Our leasing performance translated into a significant improvement in occupancy. Total portfolio occupancy reached 93.9% at quarter end, an increase of 220 basis points from the second quarter. Stabilized occupancy reached 93.9%, while same-store occupancy increased to 95.5%. This is an important milestone, reflecting the strength of our commercial execution and our ability to lease high-quality space in strategically selected locations. We also completed approximately 700,000 square feet of lease renewals with a weighted average lease term of approximately 5 years. Our trailing 12-month weighted average leasing spread remained strong at 10%, demonstrating the continued value consumers place on our properties. Vesta's competitive advantage is a combination of deep local market knowledge, long-standing customer relationships and exceptional commercial team and the ability to deliver high-quality properties in the locations where our customers want to operate. In industrial real estate, it is not enough to be present in an attractive city. Success depends on owning and developing properties in the specific corridors where customers want to operate. and our long-standing focus on these locations is paying off. Let me highlight a few examples from the quarter. In Monterrey, we made substantial progress leasing our existing Vesta Park and [ Podaca ] properties. This progress has supported the next phase of growth at our new Vesta Park Monterrey. Our success in leasing existing properties has provided a strong foundation for advancing the infrastructure and construction required to serve future customers in this strategic market. In the [ Bajio, ] we're also encouraged by leasing activity involving established industrial companies, including BMW in [ San Luis Potosi. ] This reflects the continued importance of Mexico within the North American automotive supply chain, while reinforcing the value of our long-standing relationships with multinational customers. Diversifying our customer base across industries is an important element of our approach to managing risk and creating a resilient portfolio. In Guadalajara, we delivered a building ahead of schedule during the third quarter. Together with a building delivery in Queretaro, both properties were fully occupied upon completion. These deliveries demonstrate our ability to coordinate development and commercial execution while meeting our customers' operational needs. Across Vesta, we're encouraged not only by the amount of leasing achieved, but by the quality of our customers. The diversity of demand and the improved visibility these contracts provide, and this is what distinguishes our performance from broader market averages. Industrial markets do not necessarily recover at the same pace and conditions can differ significantly between submarkets, as I have noted in the past. Let me now turn to development and capital allocation. Strong leasing performance, together with our strategic land investments has enabled us to significantly accelerate development. During the third quarter, we initiated approximately 1.9 million square feet of new construction across 5 inventory buildings, 3 in Monterrey, 1 is [indiscernible] Following these starts and the delivery of 2 fully occupied buildings, our development pipeline reached approximately 3.3 million square feet under construction. Representing an estimated investment of $282.5 million and an expected yield on cost of 10.2%. This represents an important milestone in the execution of Route 2030. We are translating the strategic land positions we secure into infrastructure, new buildings and opportunities for future rental income. Our most significant development priority is Monterrey, where the successful leasing of our existing [ Apodaca ] property has enabled us to advance development at our new Vesta Park Monterrey. We're also investing in infrastructure and development in [indiscernible] Guadalajara, Mexico City and other selected markets where we see attractive long-term opportunities. This is a natural progression of our strategy. First, we identify unsecured exceptional locations. We then develop the infrastructure necessary to support our customers' operations and progressively build new capacity as demand materializes. And our approach remains disciplined. We're not developing simply to grow the size of our portfolio. We're focused on projects where the quality of the location, customer requirements, infrastructure and expected returns supports sustainable long-term value creation. Following quarter end, we also acquired an additional land parcel in Mexico City, comprising approximately 689,000 square feet. This investment further strengthens our development capacity in one of Mexico's most important logistics markets and advances around 2030 land requirements. Equally important, our growth strategy is supported by a strong and increasingly flexible financial position, as Juan will discuss. Together with our successful equity offering earlier this year, these actions have strengthened our ability to fund development, infrastructure and future product opportunities while maintaining a prudent balance sheet. We believe this combination of development capabilities and financial discipline is especially important in the current market. From a financial perspective, the third quarter was also very strong. with rental revenue increasing 10.8% year-over-year to $77.5 million. Adjusted NOI increased 10.4% year-over-year to $72.9 million with a 94% margin. Adjusted EBITDA increased 9.2% year-over-year to $65.2 million and an 84.1% margin. Vesta FFO for the quarter, excluding current income tax totaled $47.1 million, a 0.7% decrease compared with the third quarter of 2025. These results reflect the contribution from newly leased properties, continued revenue growth and our focus on operational efficiency. Importantly, this performance has enabled us to raise our financial guidance for 2026. Juan will share these details shortly. We're extremely pleased with our performance and the progress we have made during the first 9 months of the year. At the same time, we recognize that the pace of investment decisions and leasing activity can vary from quarter-to-quarter. Our confidence is grounded in what we have achieved, the quality of our portfolio and the long-term opportunities ahead. As we enter the final months of 2026 and prepared for 2027 we remain focused on sustaining strong operating performance, advancing developments that create value and maintaining the financial flexibility to respond to attractive opportunities. We have built a company with the assets, customer relationships, expertise and financial strength to succeed across different market conditions. This quarter demonstrates the effectiveness of the strategy. I would like to recognize our entire best team for their exceptional work and thank our clients for continuing to place their trust in us. With that, let me turn the call over to Juan to discuss our financial results in greater detail.

Thank you, Lorenzo, and good day, everyone. We delivered another strong quarter, continuing the momentum we built since the start of the year. Given this consistent performance, we are raising our full year 2026 guidance, as Loren noted. We now expect revenue growth of 11.5% to 12.5%, up from our prior guidance of 10% to 11%. Reflecting higher-than-expected rental income from properties added this year. We also now expect adjusted NOI and adjusted EBITDA margins to reach 94% and 84%, respectively, by year-end, up from our prior guidance of 93.5% and 83%, underscoring our continued focus on expense control and on delivering strong results. Now let me walk you through our third quarter results. Starting with our top line. Total revenues increased 9.9% to $79.6 million while revenues, excluding energy, reached $77.5 million, a 10.8% increase year-over-year. This growth was primarily driven by rental income from new leases and inflationary adjustments across our portfolio. In terms of currency mix, 89.4% of our third quarter 2026 rental revenues were denominated in U.S. dollars, unchanged from the same period last year. Moving to profitability. Adjusted NOI increased 10.4% to MXN 72.9 million our adjusted NOI margin decreased 33 basis points year-over-year to 94.1%, reflecting higher operating property costs relative to rental revenues in the quarter. Adjusted EBITDA totaled $65.2 million, up 9.2% year-over-year, while the margin contracted 123 basis points to 84.1%, primarily due to higher costs and administrative expenses during the quarter. FFO, excluding current tax, was relatively flat at MX 47.1 million in the third quarter. Pretax income was $104 million compared to $52.4 million in the third quarter 2025. The increase was primarily due to higher gains on the revaluation of investment properties, higher interest income and higher other income, partially offset by higher interest expense, higher other expenses and a foreign exchange loss. Turning to our balance sheet and capital allocation. We ended the quarter with $240 million in cash and cash equivalents and total debt of $1.1 billion. Net debt to EBITDA stood at 3.3x and our loan-to-value ratio was 22.3%. During the quarter, both Standard & Poor's Global Ratings and Fitch Ratings upgraded our long-term issuer credit rating to BBB with a stable outlook. From BBB- with a positive outlook. This upgrade validates the quality of our portfolio and the strength of our balance sheet, and they should support a more efficient cost of capital going forward. Also, aligned with ensuring balance sheet strength, we took decisive steps this quarter to further strengthen our capital structure. We announced a prepayment of $105 million under 2 private financings, retiring both well ahead of maturity. As a result, we have no significant maturity over the next years. which gives us greater flexibility and allow us to stay focused on growth. Finally, on October 15, we paid a cash dividend for the third quarter, equivalent to MXN 0.37 in pesos per ordinary shares. This concludes our third quarter 2026 review. Operator, could you please open the floor for questions?

[Operator Instructions]

Our first question comes from the line of Juan Ponce with Bradesco BBI.

Congrats on the results. So you've highlighted the AI-related industries as an emerging source of demand for industrial space in Mexico. How large do you think this opportunity could become over the next few years in terms of GLA?

Juan can you repeat the -- what do you mean with the demand?

The AI-related injuries mentioned that it's an emerging source of demand for industrial space in Mexico. I'm just trying to get a sense of like how big do you think this opportunity could become in the next 2, 3 years, let's say.

Juan, thank you very much for your question and for being on today's call. Definitely, we have seen a tremendous increase in demand related with data center industries as well as AI related. We have -- in the previous years, we have been very close to the electronics sector. As you may know, some of our clients include Foton and others that are currently being contractors for data centers, producing servers and data center-related equipment, but also we have seen equipment in the cooling system, a baker conditioning, ventilation, electric switches. This is -- we believe that this could be pretty big. As you can see, the export numbers in terms of electronics from Mexico to the U.S., they have increased dramatically in the last couple of years. today's export represent in the electronics sector represent the majority of exports to the U.S. probably right now, already exceeding the experts to the -- in the aerospace -- I'm sorry, in the automotive industry. So we think that as long as this continues to accelerate, we will continue to see demand. And we believe that we will have strong demand coming in markets such as Guadalajara, where we are well positioned Suarez, where we have seen also this particular trend. And if you look at the exports of [ Jalisco ] as well as Chihuahua, particularly coming from [indiscernible] it is very much linked to these companies, but also in other markets such as Tijuana, Monterrey and maybe some later on in the Bajio region, particularly for electric switches and panels. We don't have an estimate on GLA. But if you track closely on the closings on Vesta not only this quarter but in the previous years, this particular wave continues to increase. So we're glad to see that Vesta is well positioned with the industrial parks that have not only available space, but many of these buildings require energy and we're well positioned in terms of energy in many of these projects, like Guadalajara and [indiscernible] So we think that this particular trend will continue as long as we see these billions and trillions of dollars being invested in AI data centers and hyperscalers among the industry. Thank you.

Our next question comes from the line of Rodolfo Ramos with Bradesco BBI. Rodolfo, your line is open.

Lorenzo, Fernanda. My question is a bit more long-term oriented. I mean now that the U.S. and Mexico trade negotiations are progressing, but not yet closed. The e-commerce logistics arm of demand has been an important factor there, many of the likes of Amazon at Calibre having already built out this massive national and regional distribution centers. And perhaps now there'll be more focus on developing that last-mile fulfillment centers infrastructure, if you will. That requires fewer square feet. So I just wanted to get your sense more long-term thinking about that aspect of demand how you see it evolving? And how reasonable do you think is that we see that development pipeline of yours accelerating in that scenario and also with, of course, with USMCA coming through?

Thank you very much, Rodolfo, for your question. As you well know, Vesta has a strong bet towards e-commerce and logistics related to e-commerce. And Vesta has made a strong bet particularly in these metro areas like Guadalajara, Monterrey, Mexico City, and we believe that the demand in this particular sector will continue to increase. We have seen major growth from these companies. Mercado Libre is currently Vesta's largest tenant and continue to grow. We recently closed an important transaction, again with Mercado Libre in Monterrey. So we think that if you analyze carefully the countries with advanced adoption of of e-commerce. The e-commerce represents more than 30% of total retail sales. While Mexico being still an early adoption has definitely accelerated since the pandemic but we are still at 17%, 15% of total sales. And if you look at the public numbers from companies such as Walmart and liver pool, they are way below what they could be doing in other markets. So we continue to see strong demand in the long term. And then you mentioned this well. We think that there could be a strong demand also for last mile operations for reversion logistics, reverse logistics. So that's why our strategy will continue to tap those markets. We recently did a land acquisition in Mexico City, again, trying to be closer to the demand driven by these large e-commerce companies. So we are excited of of the trends in our sector related to e-commerce too. Actually, I think that some of these e-commerce players. We will continue to expand not only in the large metro areas, but also in other markets that have a large population and are well positioned. And logistically, they all need to supply quicker, competition is tough. But I think that all these players are understanding better the Mexican consumer habits, which are rapidly changing, too.

Our next question comes from the line of Jorel Guilloty with Goldman Sachs.

My first one is around the development pipeline. So it grew materially quarter-on-quarter about 80%. One thing that we noted is the majority, if not all, it continues to be on spec. And one thing that I wanted to understand is how -- do you have any preliminary conversations around potential tenants for these assets? Or do you have some tenants in mind that could be coming into these assets, just to understand how the potential lease-up for these assets, some that will come in the first quarter of next year, how those are shaving up? And also, the other thing that I had a question on was on your land bank. So I wanted to understand how you think about the composition of the land bank right now. Looking at it, you already used up all your Mexico City land. So I was just wondering, are you looking to expand? Or are you looking for more land in Mexico City? Or is there any other areas that you're looking to buy land as well .

Excellent. Jorel, thank you very much for being on the call and for making these questions. I will start with your second question regarding land bank and competition and Mexico City specifically, we believe that Vesta has made smart decisions by being able to identify the markets where we want to continue growing. These are markets with a strong dynamism and markets that we believe will represent a higher demand and that's why Vesta has acquired land in the last quarters in the last cycle in Monterrey, in Juarez in Tijuana, Guadalajara and Mexico City. And particularly Mexico City, we recently did an acquisition, which where we're going to be able to develop approximately 700,000 square feet. This together with a project that we have under development, also in the Mexico City CTT corridor, but we continue to look into Mexico City so that we can have different alternatives in the different Mexican city -- in the different submarkets. We're focusing strongly in the urban infill locations with higher buyers of entry, and that's why we have a sharp shooter strategy in Mexico City and we have some great case studies and successful cases. Like the one in Punta Norte, the one in La Viga, where we were able to get record high rental rates in great locations, great buildings with outstanding investment-grade tenants. That's why we will continue to buy land in Mexico City. For the other sites, we believe that we have pretty much the land that we require in order to execute our long-term plan, the Route 2030 strategy will give more detail at our Investor Day -- but we're very happy to today have a larger pipeline. And the pipeline is actually a result of stronger leasing activity. And let me use one example, Monterrey. Monterrey, starting in the year, we had 3 buildings that we developed on spec, we had on lease-up stage. And as of today, almost at the end of the year, we have -- we are almost fully leased in Monterrey. With tenants in different sectors, which relates to your first question. We have tenants in the e-commerce industry, AI-related industries as well as other logistics and manufacturing. So this is a very well diversified base of tenants and if we look forward, we started 3 buildings in the new Vesta Park, Monterrey, which is right next to the airport on the same best Apodaca corridor and the Apodaca road to the airport. So we started 3 buildings -- 2 of them are kind of our, let's call it, bread-and-butter buildings, multi-tenant buildings that we can accommodate different type of tenants in the 200,000 to 300,000 square feet range. And we also develop another larger format, like the 1 we did in Apodaca, which was very successful, we have got actually several awards worldwide in terms of our development specifications the larger format will be an 800,000 square foot spec building. So even that we start them on spec. Our strategy is to eventually what we develop to lease up and hopefully get some of the potential tenants signing leases before we finalize the buildings. But we feel very comfortable with the strategy. Returns are attractive, rents in those markets are holding well. So we can still make returns in the double-digit range, 10% return on costs. And for that reason, we believe that Vesta has the right strategy to start building on spec, while we have already some pipeline, and we have already that contact with potential clients. Many of our clients are the ones that will -- we believe will continue to expand. And by starting the spec, we anticipate to potential demand of clients who want to be in the best assets in the right locations in the best submarkets in many of these regions. We have currently a pipeline of projects in Mexico City. [indiscernible] We recently started a building in Port internal Sbajilo, Monterrey, Sadara and Tijuana. Markets where we have a strong leadership and a strong presence and contact with the market. I think I covered both of your questions.

No, very complete. One quick follow-up, if I may. It's about a [indiscernible] you mentioned it's fairly large, it's 811,000 square feet. So why is that 1 particularly so much larger than all the other projects you have? .

Well, this is actually very much in line to what we recently did in Apodaca last year and that we leased this year. This is a format that accommodates very well for e-commerce players as well as logistics as well as light manufacturing -- so that's why -- and this pay out very well in Apodaca. We have done this also in Mexico City, and we have done it in Guadalajara. I think this is -- these are very flexible buildings. We can make -- we can have subdivisions in the buildings, but we can also accommodate whenever there comes a large transaction, and we already have the building. Remember that there have been several transactions in the, let's call it, almost million square feet range, particularly from logistics, e-commerce but also some in the light manufacturing sector. So with this, I think that this is a good example that Vesta has identified a good opportunity. And not only the buildings are large, but what is important, the type of Vesta parks that we are developing are unique. There's no other parks that have the energy in place, the accessibility to logistic corridors, accessibility to labor, which is important for light manufacturing and at the same time, have a large format building where companies can rapidly access and they can do their own tenant improvements and start a ramp-up stage quickly.

Our next question comes from the line of Pablo Ricalde with Itau. Pablo.

Maybe a follow-up on the leasing activity we saw in the quarter. I don't know if you can provide more color on the per se basis. We have seen Tijuana quite weak the Mexico City standing out with better dynamics. But what are you seeing that fully on the ground maybe as we approach the year-end? And if you see a recovery in Tijuana and when do you expect it?

Pablo, thank you very much for your questions. And yes, we can give you some more clarity as to after the market. This particular quarter was outstanding because of several reasons. One of them, not only we saw some sort of a turning point in terms of demand, but also we were able to see demand coming in different regions. And I would like to highlight the regions where we close leases in this particular quarter. [ San Luis Potosi, ] which was a slow market for some quarters or a few years, has recovered, particularly driven by auto industry with electric vehicles with BMW, with being maybe the highlight of the transactions, but high BMW-related suppliers. [ Silau, ] another electronic company taking from Europe, taking an important space. Tijuana with companies in different sectors, one of them related to food and beverage and the other one related to manufacturing. Monterrey, as mentioned, e-commerce as well as manufacturing. [ Puebla auto industry, Queretaro, auto industry, Sudad Juarez, logistics and electronics. ] I think this is a great representation on different markets that are little by little thriving coming back and probably represent the strength on many of these markets. For that reason, I think that going forward, we still think that there could be demand coming from different sectors. As you may recall, even that we have seen electronics growing rapidly. Mexico is well positioned among different sectors in different regions, and all of them, we believe, have shown resilience in this particular couple of years which on the geopolitical side have been challenging. So Mexico still represents an opportunity for many of these companies to continue to be competitive. And this particular quarter was an example to that. Perfect.

Our next question comes from the line of Alejandra Obregon with Morgan Stanley.

Lorenzo, you mentioned during your remarks that Vesta is developing where the economics are making sense. So I was hoping if you can talk about how you measure that today and more importantly, where whether there are markets where returns are starting to look more or less attractive than others? And how does that determine perhaps a pecking order of the development pipeline that you have announced. .