Fibra Mty, S.A.P.I. de C.V. (FMTY14) Earnings Call Transcript & Summary

Good morning, and welcome to the 2024 Fourth Quarter Fibra Monterrey's conference call. All information presented in the conference is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. It is important to note that the presentation related to this conference is available at www.fibramty.com, and the recordings of the call will be available on the website of the company in the next 2 hours. If you are connected using our webcast tool, you have the option to download the presentation in order to move the slides at your own pace. Let me remind you that the information discussed in today's call may include forward-looking statements on the company's future financial performances and prospects, which are subject to risks and uncertainties. Additionally, during this call, we may refer to certain nonaccounting financial measures. Actual results may materially differ, and the company advises not to rely on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statements. With us this morning from Fibra Monterrey, we have Mr. Jorge Avalos, CEO; Jaime Martínez, CFO; Javier Llaca, COO and CIO; Eduardo Elizondo, Legal Counsel; and Cesar Rubalcava, Investor Relations. They will discuss on the more important strategic financial and operating aspects of the quarter. I will now turn the call over to Mr. Jorge Avalos. Over to you.

Thank you, Ciko. Good morning, everyone, and thank you for attending to our fourth quarter conference call. I want to begin by expressing my deepest gratitude to our investors for their continued trust and support as we share the key achievements of 2024, the quarter that marked our 10th anniversary. Over the past decade, we have built a company that reflects the collective efforts of our investors, tenants and partners. Each year has brought new challenges and opportunities, reinforcing our belief in disciplined execution and innovation. As we celebrate this milestone, we remain focused on the future, continuing to drive value, capitalize on emerging opportunities and position Fibra Monterrey as a key player in the real estate investment landscape. Turning to the results for the 10th consecutive year. We exceeded the high range of the yearly guidance, generating an AFFO of approximately MXN 1 per share. This equates to an above 8% return calculated against last year's initial price. This achievement aligns with the commitments we made during our last equity issuance, which focused on three key areas: strategic industrial investments, office portfolio divestments and enhancing market liquidity. In the strategic industrial investment front, we strengthened our industrial portfolio through the acquisition of the Aerotech portfolio in Querétaro at the beginning of the year. And during the last quarter, we bought 6 out of the 8 properties from the Batach portfolio in Nuevo León. Additionally, we have signed expansion agreements totaling roughly $70 million, of which almost half has already been delivered and are generating revenue. These acquisitions and expansions account for an amount equal to the proceeds of the follow-on and represent more than 60% of our $700 million investment target. It is worth noting that the expected cap rate on these assets exceeds 8%, an outstanding level considering their price locations, tenant quality and lease terms. We remain actively engaged in further investments and are on track to fulfill our target in the upcoming months. At the same time, we successfully invested the office building previously occupied by Axtel for $15 million and signed a binding agreement to sell the Fortaleza property for MXN 360 million. We continue to explore structured and responsible investment opportunities for the remaining nonindustrial portfolios. All of these transactions, along with their strategic implications, will be further discussed by Javier. Lastly, our efforts to enhance liquidity have yielded positive results. Following our capital issuance, our average daily trading volume increased just shy of $1.5 million compared to $0.5 million in the fourth quarter of 2023. We remain committed to implementing strategies that sustain and improve our trading liquidity moving forward. Moving to our ongoing efforts to enhance shareholder value, we have maintained a disciplined approach to share repurchases, most of it using the divestment proceeds. In 2024, we repurchased approximately 1.5 million of our outstanding shares following our latest capital issuance. We remain confident that at this valuation level, buying back our own shares is the most accretive asset allocation, so we'll continue repurchasing our stock. Turning to our capital structure. We took a significant step in 2024 to optimize our financial position. We successfully refinanced our entire bank debt, achieving a lower financial cost and extended maturity profile. By year-end, considering our available cash and debt capacity, we have enough flexibility to fulfill our commitment with investors and capture additional growth without exceeding our 35% leverage limit. This positions us to further strengthen our portfolio while maintaining financial prudence and avoiding the need to access capital markets. Jaime will elaborate further on these key developments. Focusing on what's ahead of us, 2 weeks ago, our Technical Committee approved our 2025 guidance, setting a target range of almost MXN 1.10 per share based on an exchange rate of MXN 20.5 per dollar. This translates to a yield of more than 10% at yesterday market close, positioning us favorably against comparable investment instruments while offering defensive attributes against currency fluctuations and inflationary pressures, all of which represents an attractive entry point for investors, reinforces our buyback thesis. Regarding the border market, recent discussions about the potential U.S. tariffs on Mexican exports, they have caused some uncertainty. However, demand for industrial real estate in Mexico remains robust, supported by the country's competitive manufacturing costs, skilled labor force and strategic geographical advantages. Furthermore, the new administration has demonstrated strong support for the industrial sector, providing a stable backdrop for continued growth. We remain vigilant in monitoring developments while maintaining confidence in Mexico's continued strength as a strategic industrial investment destination. Before handing the call to Javier, I want to express my gratitude for your trust and support during our first decade. We are excited for what the future holds as we continue redefining the real estate profitability in Mexico. Javier, the floor is all yours.

Thank you, Jorge, and good morning to everyone. Starting with the commitments of our latest follow-on during the first quarter of 2023 and as a recap of what Jorge just mentioned, we have already committed more than $422 million in industrial investments and continue to negotiate additional transactions to reach our $700 million amount in the upcoming months. As Jorge mentioned before, by the end of the last quarter of 2024, we have reached 60% of our target, and we expect another $100 million in investments in the next few weeks to achieve about 75% of our goal. These transactions include acquisitions of last generation, high-quality stabilized assets located in top markets occupied by outstanding tenants as well as expansions for existing tenants across 5 Northern markets and Bajio markets. All of this is in line with our 8% weighted average cap rate target, which translates into a higher risk-adjusted return when compared to other transactions in the market and consistent with our current cost of capital. As for the development of underperforming office properties, we successfully closed the sale of the former Axtel building in Monterrey during the last quarter and have executed a binding agreement for the sale of the Fortaleza building in Interlomas, which we expect to fully close in the next few weeks. We have taken further steps for the rest of the non-industrial portfolio with a pool of institutional brokers while finalizing the market strategy. I will address this in more detail later during the call. As for the third commitment regarding the increase in liquidity, Jaime will address this later during the call. Moving on to Page 4 of the presentation. On December 11, '24, we announced the successful closing of the acquisition of the Batach portfolio in Monterrey. As you can see on the screen, this is a portfolio comprised of 8 Class A buildings in different submarkets in Monterrey with a total GLA of roughly 2 million square feet, less than 2 years old with an occupancy of 100% and a weighted average lease term of just shy of 8 years. As 2 of the buildings are still in the final stages of construction and will be delivered to the tenants soon, we closed a first tranche for 6 of the buildings for a total of $190 million, and we expect to close on the 2 remaining buildings in the next few weeks as soon as they're fully delivered and the lease commences. This second closing is estimated at about $73.4 million, driving the amount for the whole transaction to $192 million with an estimated in-place cap rate of 7.3%. This acquisition allows us to consolidate a strong roster of high-quality buildings and tenants like Mercado Libre, which is now our third largest tenant just after Whirpool in Monterrey and SIG in Querétaro. It also allows us to increase the industrial component of the portfolio from 82% to 83.4% and our presence in Northern markets from 58.3% to more than 61% both in terms of percentage of revenue. Also, given the nature of the properties, we have enhanced the logistics share of the industrial portfolio, which we believe becomes an even more attractive acquisition given the tariffs turmoil. The WAULT of our industrial portfolio grows from 5.4 to 5.6 years, in line with our investment guidelines for visibility and predictability of cash flow and will reduce the average age of our buildings from 13.5 to 13 years. Our pipeline for potential acquisitions as presented on Page 5 of the presentation spans in the Northern and Bajio areas and comprises a total of about $540 million. We're looking into 17 different Class A properties that are 9.3 years old, excluding potential identified transactions under valuation, with a total of 5.3 million square feet of GLA and 95.4% dollar-denominated leases. From this pipeline, we have $73.4 million under binding agreements, which is the second tranche of the Batach portfolio, $126.8 million under negotiations with agreed terms with the current owners, including the $100 million transaction I mentioned a few moments ago, and $340.3 million of identified properties that are currently under valuation. It is interesting to point out that more than 80% of our current pipeline are off-market deals originated by ourselves with a close and strong relationship with the current owners and potential sellers, which has been an important trademark in our inorganic growth. Having said that, and moving on Page 6 of the presentation, I would like to recap on our follow-on commitment for deployment as well as our current and potential firepower for additional growth. On one hand, and as we mentioned before, we continue to make progress on the deployment of $700 million with only $277 million left to achieve that mark. Once we reach this goal, we estimate that LTV should stand at 30%. I'd like to point out that the $21.8 million transaction we mentioned in the last call, we had some environmental findings during due diligence which slowed down the process, and we might ultimately decide not to proceed with the closing. As for the potential acquisition capacity, if we consider additional leverage capability of close to $200 million to achieve our 35% LTV cap, we could have firepower near to $0.5 billion without any additional proceeds from the recycling of the office portfolio. If we add these potential proceeds, estimated at about $373 million, we could have a total firepower of just shy of $850 million, which would allow us to potentially acquire the pipeline under negotiation and under valuation for $105 million and $340 million, respectively, having left close to $400 million for additional growth, all this without any need of raising additional equity. As always, I'll be more than happy to address any questions you may have during the Q&A section of the call. I want to take a moment to briefly talk about some of the market highlights as of the end of 2024 from the year-end market outlook report from CBRE for the 13 primary markets in Mexico shown on Page 7. Although we have seen an increase in the vacancy rates for some of the border markets, overall vacancy rate stands at a tight 3.7%. Juarez out stands at the most challenging market with a vacancy rate above 10%, driven mainly by scarcity of energy even for finished and under construction inventory buildings. We believe that it will continue to be the case for the next few quarters, although rare opportunities might arise for us in the market. As of today, we have no exposure to the Juarez industrial market. As for Tijuana and Reynosa, these markets have experienced a slowdown in demand since the second half of last year with new supply and new construction of the equivalent of approximately 2 years of net absorption, similar case to Monterrey and Saltillo, although with less vacancy rates. Saltillo has barely 1% of available space, making one of the tightest markets along with Guadalajara and Mexico City. As vacancy rates continue to increase, our portfolio becomes more defensive given the length of our current WAULT, allowing us to face potential turn on the cycle as we can secure cash flow generation on the shift of such cycle. Let's talk for a moment about the performance of the portfolio for the last quarter of 2024 in comparison to the last quarter of 2023, shown on Page 8 of the material. On a same-property basis, we increased our NOI for the quarter in close to MXN 94 million from MXN 525.5 million in the fourth quarter of '23 to MXN 646.4 million in the last quarter of 2024, a 23% increase. This variance is explained by a decrease of MXN 12.1 million from net vacancies, an increase of MXN 30.3 million from inflation adjustments and new leases, an increase of MXN 11.4 million from rent commencement on expansions, an increase of MXN 65.5 million driven by the appreciation on FX and a decrease of MXN 1.2 million from other items. Our NOI margin for same properties decreased slightly from 91% to 90.7% compared to the last quarter of '23. Once we fully integrated the Aerotech and Batach acquisitions, we added MXN 61.3 million to our NOI and a reduction in cash flow of MXN 0.5 million from divestments, resulting on a total NOI for our aggregated portfolio of MXN 707.2 million for the quarter, increasing our NOI margin in 20 basis points from 91% to 91.2%. On Page 9 of the presentation, you can see how our operating income look like at the end of 2024. We continue to gradually increase the share of our industrial portfolio with close to 77% of total revenue. The Monterrey market accounts for 41% of revenue, followed by Guadalajara and Querétaro with 21% altogether. Occupancy rate in terms of full revenue potential stands close to 95%. Our dollar-denominated leases account for 84% of total revenue, and the weighted average lease term for the combined portfolio is 5 years with more than 44% of our income starting to expire in 2030. During 2025, we have 8.3% expirations, 5% for industrial and 3% for office. We expect little turnover and therefore marginal potential lease spreads. As mentioned in previous calls, '26 and '27 account for 20.7% expiration for industrial, representing a higher revenue growth and revaluation potential. On Page 10 of the presentation, you can see an overview of the geographical presence of our portfolio, industrial and office combined. 59% of our total revenue comes from the Northern markets and the remaining 41% from the Central and Bajio markets, which translates in terms of GLA to 62.3% and 37.7%, respectively. Our geographical footprint with our pipeline continues to be consistent with our business plan. An update of the status of expansions, along with recent pictures of most of them, are shown on Pages 11 to 18 of the presentation. Of the 7 expansion projects, broken down on Page 11, we have delivered to the tenants 3 projects for a total of close to 314,000 square feet of GLA, a total investment of $24.2 million with a yield on cost of 9.9%. We have partially delivered one project in Aguascalientes for close to 7,000 square feet of GLA, a total investment of $6.6 million with a yield of cost of 10.6%. And finally, we have 3 projects underway for a total of around 467,000 square feet of GLA, a total investment of $37.1 million with a yield on cost of 9.2%. Altogether, these 7 expansion projects account for 850,000 square feet of GLA, a total investment of close to $68 million and a weighted yield on cost of 9.6%. We continue to make progress on the negotiation of additional 760,000 square meters with a potential investment of $57.3 million. We feel optimistic on being able to close most, if not all, of these new projects in the next few months. We have had very positive feedback from our tenants regarding their intentions to move forward and continue to expand their operations in Mexico. Jumping to Page 19 of the presentation, we show the variation of the appraisals of our investment properties portfolio comparing the fourth quarters of '23 and '24. The valuation of the portfolio increased MXN 10.8 billion, which is explained as follows: MXN 1.3 billion increase due to gains in valuation criteria from our external appraisers given the performance and enhancement for the same properties portfolio from the last quarter of 2023; MXN 100 million increase on capital expenses invested in the portfolio during '24; MXN 600 million increase on delivered expansions during the year; MXN 3.5 billion from new acquisitions net of dispositions; and MXN 5.3 billion boost due to FX depreciation between year-end '23 and year-end '24. The current valuation of our investment properties portfolio stands at MXN 38.1 billion at the end of '24, and we estimate to exceed the MXN 40 billion mark with the potential short-term acquisitions and expansions that I explained previously. To finish my piece of the presentation, we want to share with you our take on how to organically grow our revenue moving forward, as shown on Page 20 of the webcast material. To our view, there are two different approaches when it comes to the lease structures and their impact on both cash flow and valuation of the portfolio: the core variable or traditional lease structures and additional services or value-added services in the lease. On core values, we see three traditional structures and their scenarios in terms of NOI and AFFO. On an inflation pass-through lease structure, revenues increase over time with an almost elastic increase on operating expenses and CapEx. Therefore, NOI and AFFO increase in line with inflation, leaving margins untouched. On a net lease with inflation escalations, revenue increases over time with a lesser increase on operating expenses, and most of these are taken care of by the tenant. NOI increases and so does NOI margin. CapEx remains stable and AFFO increases slightly more in this type of lease structure when compared to the previous one. In a traditional structure, it is possible to eventually capture lease spreads at the turn of the lease cycle, improving NOI, NOI margin and AFFO. Now on the added value structures, additional services are provided to the tenants at an additional cost of the tenant. These services might be maintenance of the facility or even tenant improvements that are reimbursed to the landlord with a financial enhancement. When you provide a tenant with maintenance services, operating expenses slightly, but at the cost of such maintenance, is reversed by a tenant. NOI increases in absolute terms but NOI margins get distorted, as you can see on the example at the bottom of the page, meaning that a lower NOI margin does not necessarily translate in a lack of P&L growth. On the other hand, with added value services present in the form of tenant or property improvements, these are usually recovered by the investors throughout the lease with a financial premium. This translates on an increase on NOI and AFFO. Naturally, CapEx as a percentage of NOI increases when compared to traditional lease structure. Added structures do not only allow to grow revenue, but they also provide the ability to do so prior to the scheduled expiration of the lease, helps stretching the term of the lease and nurture a long-term relationship with business potential with the tenant. Having said that and, as transparent as we have always been to the market, the revenue growth in this strategy should not be confused with a quarterly spread and should not be expected to be a pass-through to bottom line results as OpEx and CapEx do increase, just not in the same amount. We are currently evaluating potential implementation of added value services structures across our portfolio, and we will keep you updated as this idea progresses. I'll be happy to address any questions during the Q&A section. But for now, I will turn the call to Jaime. Go ahead, Jaime.

Thank you, Javier, and good morning to everyone. I would like to begin my presentation by highlighting the significant improvements that we made to our entire bank debt structure in 2024, which played a key role in achieving our yearly guidance. Throughout the year, we successfully maintained our weighted average interest rate below 5% and extended our debt maturity profile. These enhancements not only strengthened our cash flow generation but also improved our marginal cost of debt for the future investments. As of year-end, our balance sheet remains solid with a gross loan-to-value below 26% and a net debt-to-EBITDA ratio of 2.3x and an average debt maturity of nearly 4 years with no material maturity until late 2027. In addition, we maintain our debt 100% unsecured and U.S. dollar denominated. This strong financial position provides us with firepower of $600 million for industrial investments without exceeding our debt internal ceiling of 35%. It is also worth mentioning that near the year-end, HR Ratings upgraded our global scale credit rating to BBB+, while this Fitch Ratings reaffirmed its BBB- rating. Both ratings are considered investment grade, reflecting the strength of our capital structure and our disciplined financial strategy. Now moving on the next slide. The main positive variation year-on-year in the cash flow results come from organic growth, the financial results due to higher cash investment mainly because of our latest follow-on as well as the income generated by the Aerotech and Batach acquisitions. It is worth mentioning that the current financial income will transform into additional NOI as we continue to carry out our acquisitions, further improving both our NOI and EBITDA margins. Having said that, I'm pleased to share that Fibra Monterrey surpassed the upper range of its 2024 guidance of MXN 0.9716 at an average exchange rate of roughly MXN 18.5 per U.S. dollar. As of 2025, AFFO soared to MXN 1.14 per share. As part of our commitment to maximizing investors' value, given that the market price of our certificate does not fully reflect our cash flow generation capacity, we allocate the excess cash flow above guidance for the repurchase of our own certificates, aiming to permanently increase the cash flow and book value per certificate for our investors. In this regard, and proceeding to the next slide, using both the excess cash flow above guidance and the proceeds from the office properties sold previously mentioned by Javier, we repurchased nearly 40 million shares in 2024, which represents approximately 1.5% of the shares outstanding after the follow-on. We still have enough firepower to continue executing buybacks if this market distortion persists. We remain highly convinced that this currently represents the most efficient asset allocation. It is also worth mentioning that we are in the process of canceling around 5 million shares that already met the 12-month period since they were originally bought back. This process could replicate going forward with the remaining shares that we have bought back in this year. Turning to the next slide. Last week, the Technical Committee approved the yearly guidance for 2025 considering the estimated organic growth driven by rental increases and occupancy, inorganic growth supported by the integration of announced expansions into our portfolio and the deployment of our firepower, along with the orderly divestment of nonindustrial properties. The targeted distribution for 2025 stands at MXN 1.95 per share at the upper range based on an exchange rate of MXN 20.5 per U.S. dollar. This represents 10.1% dividend yield based on the price at the beginning of 2025, which, as I already mentioned, stands at an attractive entry point and represents an opportunity to carry more buybacks. Now to conclude with the webcast. It is important to highlight that our AFFO as shown in the last slide and, consequently, our valuation should be adjusted for FX fluctuations, as shown at an exchange rate of MXN 20.5 per U.S. dollar. And the trading price of MXN 10.80 at year-end, we are trading at above 20% discount to book value and nearly 10x AFFO per share, translating into an AFFO yield exceeding 10%. As the dollar continues to strengthen against Mexico peso, so will our share NAV valuation and cash flow generation. On top of that, current market and geopolitical uncertainty reinforces the importance of long-term inflation-linked dollar asset leases, which are included in our business model. With that, I would like to open the floor for Q&A. Again, thank you very much for your time and continuous trust in Fibra Monterrey.

[Operator Instructions] the first question comes from Jorge Vargas with GBM.

Congratulations on the results. Just two quick questions from my side. We've noted a softening in occupancy rates in Northern Mexico, particularly in border regions. Could you provide color of the dynamics in these markets? And my second question would be given that Fibra Monterrey is approximately $300 million short of its $700 million investment target by March 2025, what specific assets or markets are being prioritized in order to close this gap?

Of course, Jorge. Yes, we have seen two phenomenons. One is a slowdown on the demand and the other one is the continue of new construction, particularly on key markets like Monterrey, Tijuana and Mexico City. What we think is going to happen is that we're going to have kind of a low year in terms of net absorption this year given all the turmoil and a lot of companies that are on a wait-and-see basis for their future operations in Mexico. But having said that, in the specific case of [ Monterrey ], as I mentioned during the call, we don't see an impact on our own portfolio given the defensive aspect of it because of our long WAULT. It is important to point out that even though vacancy rates have increased, they are still very healthy with less than 4% overall for the 13 markets. And while net absorption in Monterrey has shown sign of stabilization in '24 after record-breaking figures through '22 and '23, we do not see immediate concerns about oversupply in the market. As of the last quarter, vacancy rate in Monterrey remains a very healthy position with 4% and even at an 8% would be considered healthy. We believe that the market will still be within this healthy range, allowing for more natural sustained demand. We're reaching pretty much, you could call it, an equilibrium point on the cycle. Additionally, the years of inventory indicator, which reflects supplies relative to demand, remains at a relatively low level of 1.4 years in the last quarter. And furthermore, construction activity is expected to slow down throughout '25, which should help maintain a balance supply/demand geography. What it remains to acquire, as you've seen on the presentation, we have a pipeline of close to $540 million. We have remaining the $73.4 million on the second tranche of the Batach portfolio. We expect that to happen within the next 1 to 3 months depending on delivery of the premises. We have under binding agreements -- well, agreed terms close to sign binding agreements of about $100 million. We expect that to happen within the next few days, and closing is going to be most likely dependent to antitrust and COFECE approvals. And identified under valuation, we have about $340 million. To be honest with you, Jorge, we continue to receive and to find more opportunities almost on a daily basis. We are being very thorough and very disciplined as always on evaluating these alternatives. And what we think is going to happen is that you might find some additionally motivated sellers in the marketplace in the next few months. We don't see cap rates moving too much. If any, we believe that in some markets, caps might expand a little bit because of the willingness of these private owners to sell their income-producing assets. So we're going to be very, very careful and very patient on what opportunities to dedicate time to, and we're going to be very disciplined on pricing these opportunities. We feel confident that we're going to have plenty of opportunities throughout this year to achieve the $700 million mark and to continue for additional growth, as we explained, up to 35% LTV cap.

The next question comes from Carlos Peyrelongue with Bank of America.

Congrats on the results. You answered a bit my question already. I wanted to get a sense of the cap rates for M&A, if you had seen some softening there considering the uncertainties related to potential tariffs and slightly higher vacancy rates. So if you could just comment if you think there are certain areas in Mexico where these opportunities become more attractive, or is it more wide across the country where you're seeing this? Or is there specific states where you might get better opportunities? In addition to this, the properties that you mentioned during the call that you're looking at, in terms of occupancy, can you provide us just a rough idea of are these properties in the 90% occupancy? So just a rough idea of where they are in terms of occupancy.

Sure, Carlos. Yes, of course, in terms of geography, we're going to keep our focus on Northern and Bajio and Central markets. We might find some interesting opportunities in the Mexico City area which, as you know, we have kept a little far from that. But as we continue to increase the share of our logistics portfolio, we might find interesting opportunities in Mexico City. Right now we're seeing a lot of opportunities in Guadalajara. Monterrey, of course. Bajio, Querétaro and San Luis Potosi are becoming very interesting. Saltillo is a tough market because of the very, very low vacancy rates that you have and it's a natural spillover market for Monterrey. So it's being a natural market for us, but I would say it's tougher to find opportunities. Cap rates, we believe are going to remain, let's say, in the range between 7% and 8%, depending on the market for the 13 key markets. We are seeing some peso-denominated leases that might be appealing to us but that involves a different approach on valuation and underwriting. But we don't take for granted not to go into a peso-denominated contract. And something that is also happening is that most of the stabilized portfolios that we are evaluating are pretty much 100% occupied. That's good for the defensive part of the business. But we also like to look and we're looking for portfolios that are stabilized around 85% to 90% because you can have a very good upside on that vacant space as long as those spaces are well located, have the energy in place, even second-generation properties that have less remaining WAULT. So I think for us, business is going to be pretty much as usual and opportunities keep arising. As I mentioned during the call, 80% of our current pipeline are off-market deals. So we have proven and we continue to have a strong origination capability within Fibra Monterrey, and that's going to continue to be the case.

The next question comes from Jorel Guilloty with Goldman Sachs.

I have two. One, I wanted to refer to a comment made earlier. It was said that, and I believe this was for vacancy, that we're at the equilibrium point of the cycle. Does this imply that you do not expect vacancies to rise any further, perhaps for the North or for Mexico industrial in general? And then this year, you don't have that many maturities coming due. It's about 7% of total. But next year, you have 20% of total coming due. And so I just wanted to get a sense of your conversations around those renewals. Have they started perhaps earlier than expected? Is there much pushback on to potential rent increases? Any other -- are people asking for more TIs? So I just want to get a general sense of the color of the conversations particularly for the 2026 maturities.

Of course, thank you for the question. On your first question regarding potential increase of vacancy rates, yes, we believe that vacancy rates are going to continue to increase slightly this year because of the combination of a slowdown of the demand on a wait and-see basis from some of the tenants. But new construction is going to slow down at a lower rate. So we're going to have more offer and less demand this year. So I would expect vacancy rates to increase all across the board, but still under 10% in most of the markets. So yes, we should expect probably an increase on vacancy rates, but it's going to be within this equilibrium period that I mentioned and you referred to. On the second question regarding...

Maturities.

Yes, our maturities. We have 7% this year. It's very small. On the 10% average that we have in '26 and '27, yes, we have been talking to our tenants, I would say, 12 months to 18 months in advance. Some of them have reached out to us to try to start negotiating renewals. We don't see a pushback from the tenants. We haven't got a single call at least on material leases expressing their intentions not to renew or to relocate or to shut down nonetheless. So I think that we could capture some added value during '26. It's going to be probably tight in terms of the percentage of the leases that we have that are open to mark-to-market renegotiation at expiration. So I don't see a lot of shift on the maturity schedule, at least for '25 or '26. '27 probably is a little bit too far in the future and it's too early to say. But we do have the opportunity to capture some increases in '26. '25 is going to behave a lot like '24 in terms of positive or lease spreads on the renewals. And the last part of your question, we have been talking to most of our top 10 tenants and, I would say, to probably 1/4 of our tenant base, and they remain positive about their expansion plans. Just in the last 2 or 3 weeks after January 20, we have been talking to at least 3 out of the 20 top auto parts manufacturers in Mexico, and all of them have plans to expand and to consolidate part of the operations. So so far, we haven't seen anything from our tenants specifically that would make us think that we have a more challenging environment of what it already is.

Our next question comes from Felipe Barragan with BTG Pactual.

My question is on the office portfolio. So you had said before that you were open -- sorry, that you were going to sell only the underperforming assets, and this quarter, there was something about the whole office portfolio. So just curious on what your thoughts are on selling the whole portfolio, including your flagship properties, La Perla and Oficinas en el Parque. Just want to hear your thoughts on what you guys are thinking there.

Sure, of course. Just to clarify, our intention is to sell everything, not only the underperforming. We started with the underperforming assets and nonproductive assets because those are the most accretive sales that you can make with that type of properties. We already have mandated approval of institutional brokers to sell the whole portfolio, yes, including the jewel of the crown, which is La Perla. As a matter of fact, we have had some initial offers for some of the unproductive and not performing properties that we decided not to entertain because we didn't like at all the pricing. Some of the investors, particularly the private investors and some family offices, might perceive this as some type of distressed assets, which is not the case because they're performing. So we want to take as long as we need to do a reasonable and attractive sale of the performing assets, and it's going to take probably some time. But the idea and our commitment with the investors is to become a pure industrial vehicle, but it's going to take as long as needed to do it right and to do it responsibly.

The next question comes from Chris Pitcher with Redburn Atlantic. As there is no response, I move to the next participant. The next question comes from Edson Murguia with [ Summa Capital ].

First and foremost, congrats on the tenth anniversary of being public. And my question is regarding on this portfolio recycling, that you are really in the process of doing it. I know that you already mentioned that you're doing profitably, but how long is it going to take regarding on the pipeline that you have and regarding on the liquidity targets that you want to have at least for 2025 or maybe just historically what you've done in 2024? And my second question is regarding to administrative expense.

Sorry, let me interrupt. We don't understand anything you're asking. So if you could go slower or you can put your telephone closer. Or you can even write down the question, that would be greater for us.

Sorry for that. There's a very bad connection on your side.

No, it's okay. Probably it's my line. Do you hear me okay? Better now?

Not so much.

Edson, may we request you to use your handset, please?

I'm using my handset. I'm going to the question. Regarding on the recycling, do you have any specific timeline we can expect?

Let me start answering to make things easier for everybody. The recycling, on the timeline, as I said, it's going to take as long as we need to make the most out of the price of those assets. If I were to guess, I would say it's going to take anywhere between 4 and 8 quarters, probably longer. We're going to do it as fast as possible, but our premise for the recycling program is to safeguard price. That's on the nonindustrial part of the portfolio. We do have a recycling that involves also some industrial properties. We're starting to evaluate the sale of a few buildings on noncore markets. We're still early on that game to give you more color, but you're going to see a continuous recycling of assets not only for the non-industrial but for some of the industrial assets. And that's going to start happening on the non-office industrial as soon as probably before the end of this year, probably next year. That's your first question.

Okay. Regarding administrative expenses, could you remind us the thing about the administrative entity that you have? Because you mentioned in the earnings release that it came from 5% to 10%. If you can give us a little bit more color about this?

Sure, Edson. Thank you very much. This is Cesar. So the increase from 5% to 10% on the margin for the administrative expenses was just to -- it was a result of a study of transferring expenses done by a third party. But those margin is returned on the AFFO on a yearly basis. So it doesn't have any cash flow effect for investors. It's just to be within the rule of transfer prices. That's it.

Actually, you're going to see in the next year how those amount comes back to the distribution for investors in order to be more transparent.

Okay. And last but not least, you mentioned about focusing on markets like Mexico City. But my question is the occupancy rate in the buildings that you have in Mexico City, it's 54.9%. So I was wondering if you can give us a little bit more color about the occupancy rate in Mexico City and why. Because we compare the occupancy rate in the last mile with other peers, I mean, it's kind of difficult to understand why you have a lower occupancy rate.

Yes, sure. Let me just clarify. We're not going to focus on Mexico City. We are evaluating some alternatives in Mexico City on industrial. The only property that we have in the Mexico City area is an office building that is Fortaleza. That building is already under a binding agreement for its sale. It's going to fully close in the next few weeks. It's only dependent upon some certificates on the leases, but that building is already under a closing process for its sale. We do like the Mexico City market, but we're going to keep our focus mainly on the Northern and Bajio and Central markets on which we already operate. But some opportunities have arised particularly on the logistics sector within the Mexico City area, and we are evaluating some of them. But we're not going to focus in Mexico City. We're going to be open to invest in industrial in Mexico.

Congrats for the 10 fantastic years.

Thank you.

Thank you so much.

[Operator Instructions]

We have one last question from Francisco Chavez from BBVA. Congrats on the results. My question is regarding the potential timing for divesting the office portfolio. When can we expect this to happen? And what will be your guidelines in order to protect corporate shareholder value?

Paco, in regards to the first part of your question, the timeline, I think we just addressed that. It's going to take whatever -- how long it takes to safeguard a proper valuation and a proper pricing on the properties. As I said before, probably it will be fair to say between 4 and 8 quarters to become 100% pure industrial vehicle. And the guidelines to protect and to create shareholder value, it's pretty much based upon book value. That's pretty much the point around we will be orbiting on the sales for the income-producing assets. The nonproductive assets, it's going to be also on book value without a cap rate attached to it because there's no income, there's no reference on income. And on the productive, we have a pretty good idea on the spread between the cap rate at which we originally acquired those assets plus the IRR that we will get on behalf of the shareholders with the exit price or the sale price of the property. So guideline is going to be essentially book value as a reference for those sales.

Thank you. With no questions in queue, I'd like to turn the conference over to the management of the company.

Thank you, everyone, for attending this call, and hope you have a great weekend. See you next quarter. Thank you.

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