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Edited Transcript of GICSAB.MX earnings conference call or presentation 24-Jul-19 4:00pm GMT

Q2 2019 Grupo Gicsa SAB de CV Earnings Call

CUAJIMALPA DE MORELOS Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Gicsa SAB De CV earnings conference call or presentation Wednesday, July 24, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avril Carenzzo;Treasury and Investor Relation Officer

* Diodoro Batalla Palacios

Grupo Gicsa, S.A. de C.V. - CFO

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Conference Call Participants

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* Fernando Froylan Mendez Solther

JP Morgan Chase & Co, Research Division - Analyst

* Francisco Chávez Martínez

BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst

* Valentín III Mendoza Balderas

Casa de Bolsa Banorte Ixe, S.A. de C.V., Research Division - Research Analyst

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good afternoon and welcome to the GICSA conference call. (Operator Instructions) It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and hello, everyone. I'm very pleased to welcome you to GICSA's Second Quarter 2019 Earnings Conference Call.

Joining us today from Mexico City are Mr. Diódoro Batalla Palacios, Chief Financial Officer; and Mrs. Avril Carenzzo, Treasury and Investor Relations Officer. They will be discussing the company's second quarter 2019 consolidated results per the press release distributed yesterday.

If you wish to be included in future distributions, please contact us at i-advize in New York at (212) 406-3693 to be added immediately.

A special note to any members of the media who are joining us today. We would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. If you're a member of the media and wish to direct any question to the company, please contact the company directly after the call.

Also, I just want to mention that during this conference call, comments made by management may include forward-looking statements, which are subject to various conditions and uncertainties based on a variety of factors. The forward-looking statements may differ materially from actual results. Thus, we ask that you refer to the disclaimer located in the earnings release prior to making any investment decision.

It is now my pleasure to turn the call over to Mr. Diódoro Batalla, Chief Financial Officer of GICSA, who will begin his presentation.

Diódoro, please go ahead.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [3]

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Thank you, Rafael, and hello, everyone. Thank you for being with us today to review our performance for the second quarter of this year. And before we begin with our presentation, I would like to formally introduce to you and welcome to our conference call, Mrs. Avril Carenzzo, our Treasury and Investor Relations Officer.

After the relevant event we issued on June 18, 2019, as part of the company's program to optimize operating cost, we hope to merge Treasury and Investor Relations departments. Avril, who has served as our Treasury Officer at the company since 2017, has more than 14 years of experience in administration and finance, including various senior positions in treasury, finance, risk management, budget control, investor relations and financial planning and analysis.

Now I would like to turn the call to her who will give an operating highlight for the quarter. Avril, please go ahead.

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Avril Carenzzo;Treasury and Investor Relation Officer, [4]

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Thank you, and good afternoon to everyone, and thank you again for joining GICSA's second quarter earnings call. I am very glad to assume this new responsibility and please -- feel free to contact me anytime.

I would like to begin my presentation by discussing some important events that took place this quarter. I will then provide an overview of the company's operational highlights before turning the call over to Diódoro Batalla, our CFO, for his financial discussion. After which, we will be happy to answer any questions that you may have.

Let me begin by saying that we are satisfied with the favorable results for the quarter, which were in line with our expectations and growth strategy for the year. And despite the Mexican economic slowdown, we were once again able to deliver another solid quarter, driven by the strong performance of our stabilized portfolio as well as the contribution of the 5 properties opened during last year, which are beginning to generate steady revenue.

Projects under development continue to report solid progress and were in accordance with schedules as well as budget. Lomas Altas, Explanada Pachuca and Explanada Culiacán reported progress -- progress rates of 96%, 95% and 67%, respectively. These properties under construction will be delivered this year and represent an additional GLA of 179,000 square meters.

Furthermore, we made solid progress in commercialization of our portfolio in -- under development and in stabilization. During the second quarter, we commercialized 22,000 square meters of leasable area, equivalent to 141 new signed contracts. As of today, we signed contracts that represent 71% of the total GLA. Please note that in the regional earnings report issued yesterday, we corrected a couple of figures on Page 11, Table 2, specifically in Paseo Metepec and Grand Outlet Riviera Maya.

And now moving to a brief overview of the quarterly operating results. At the conclusion of this quarter, GICSA has 15 properties under operations, which reflect the positive results. We reported a total of 836,000 square meters of GLA in our portfolio, while GICSA's proportional GLA was 698,000 square meters, an increase of 32% compared to last year quarter. This was mainly due to the incorporation of the 5 properties opened last year and restructuring of our joint portfolio that took place in July last year.

The second quarter reflected an increase of 5.6% in same-store sales. We registered a total of 18 million visitors in our shopping malls, which represents an increase of 3.8% in same properties and 29%, including the 5 openings of last year. These indicators are a clear evidence of our clients' preference, which positions GICSA as a highly competitive alternative within the market.

The Malltertainment properties, which we discussed extensively in the quarterly report view to these -- in these exciting figures continue to demonstrate the remarkable acceptance we have seen by our customers.

In terms of occupancy rates, this remains at healthy levels, finalizing the quarter at 93% and 90% in the stabilized portfolio and total portfolio, respectively. The renewal rate remained at 98%, and lease spread went up to 10.1%. Cost of occupancy of our tenants was at 9.78%, and the average fixed rent for the portfolio reached MXN 384 per square meter, an increase of 2.8% compared to last year's quarter.

This concludes my presentation. Thank you for your attention. I will now turn the call over to Mr. Diódoro Batalla, our CFO, who will review the finance numbers and financial performance of the period. Diódoro, please go ahead.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [5]

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Thank you, Avril. I will now review the financial performance for the period. Please note that all figures are in Mexican peso terms.

Also, in this quarter, too, second quarter of '19, is the last quarter that we need pro forma information to provide a better understanding of comparativity purposes on the impact for the asset swap that we performed last year.

In this quarter, consolidated EBITDA, excluding the revenue recognition from extraordinary services from the second quarter last year grew by 17%, while proportional EBITDA increased 29%. As we said in last conference, income for our residential project, Cero5Cien, is not recognized in our EBITDA. By IFRS regulation, it is reflected on the noncurrent liabilities in our balance sheet as client deposits. As of this quarter, we have already signed 53 contracts and collected MXN 1.42 billion since the project started commercialization.

Furthermore, consolidated net operating income for this quarter was MXN 850 million, while proportional NOI reached MXN 680 million, representing an increase of 17% and 52%, respectively. Considering only the current portfolio, the increase was of 41% and 80%, respectively.

Total operating revenues, excluding the recognition of the second quarter '18 extraordinary services, increased 17% year-over-year, up to MXN 1.1 billion, mainly driven by the contribution of the properties recently opened in 2019. On a pro forma basis, also excluding extraordinary service recognition, total operating revenue grew 30% year-over-year.

Regarding expenses, during the second quarter, total expenses decreased 4% year-over-year, mainly because we don't have any more third-party property management expenses.

Regarding operating and administrative expenses for our properties and our corporate offices, they grew 11% and 24%, respectively, mainly due to higher electricity costs, investment needed for the consolidation of our Malltertainment concept and expenses related to the termination of 56 employees from our corporate offices as part of our strategy that will allow us to improve operating margins.

Now moving on to the balance sheet. Total assets increased 7%, up to MXN 68.5 billion and total liabilities reached MXN 39.2 billion, representing an increase of 5%. Both increases are mainly related of the application of the IFRS 16 that generates an entry in both assets and liabilities for the rent of land that we have in Metepec and Masaryk 169. Additionally, during the quarter, the company focused on improving the debt maturity profile and enhancing financing costs. We successfully refinanced Capital Reforma bank loan, extending its maturity from November 2022 to June 2024, improving the interest rate by 65 basis points. Likewise, we were able to negotiate a better credit loan for Paseo Queretaro from a construction loan to a simple loan, improving its maturity for April 2026 and the interest rate by 95 basis points. As a result, GICSA's total debt increased 3% from previous quarter. The breakdown of debt by currency represents 74% in pesos and 26% in U.S. dollars, maintaining a natural hedge and flow of dollars that cover our liability in the same currencies. LTV closed at 35%. We also continue to hedge interest rate and inflation risk through contracting of derivatives. As of today, our total value of debt is covered with interest rate swaps. Also, derived from our -- from current market conditions, we are evaluating strategic opportunities that include, without limitation, the review of our debt profiles and possible refinancing options as well as strategic alternatives to raise equity for the portfolio that is under operation and development.

In terms of CapEx, during the second quarter, GICSA used MXN 840 million for the projects that we have under development. For the remaining 2019, GICSA expects to invest additional MXN 900 million in our next opening in Lomas Altas, Explanada Pachuca, Explanada Culiacán and Outlet Riviera Maya.

Before concluding my presentation, I would like to stress that in GICSA, we remain committed in obtaining solid results, executing our strategy in the most profitable manner possible. Our goal is to stay on top as one of the industry leaders in our market. 2019 has been, and will continue to be, a year of important challenges. As such, we plan and continue our focus on expanding our operations on key markets that demonstrate solid performance fundamentals and growth to maximize value of our company and its shareholders.

With that, we conclude our presentation. We appreciate your continued support and interest in GICSA. Thank you for your attention. Let me open now the floor for questions. Operator, please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Valentín Mendoza with Banorte.

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Valentín III Mendoza Balderas, Casa de Bolsa Banorte Ixe, S.A. de C.V., Research Division - Research Analyst [2]

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I just want to follow up on what you just mentioned, Diódoro, regarding the financing options you're evaluating. Do -- you are considering a follow-on equity or many -- any other option to monetize the assets you have under your portfolio? And the second one has to do with Galerías Metepec, as this is probably the third quarter we haven't seen any advance in the construction of this project. I just want to know what's going on then -- what's going on there and if you are maintaining your expectation to deliver this project by the second half of 2020?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [3]

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Valentín, regarding your first question, we are not considering follow on, on equity. What we are really doing is that we are evaluating options for our operation -- operational portfolio, do something like we did in -- for Reforma in order to refinance and extend and have better conditions in rate and also more maturity time. That is what we are actively searching for the operational portfolio. And for the developments that we have there, we have pending to start, which are San Luis Potosí, Aguascalientes, Paseo Coapa. We are searching for equity at the project levels. It's private equity that we are evaluating in order to have a business associate that will -- who will provide us with up to 50% of equity in order to be able to start that project. That are essentially the options that we are considering. And regarding Metepec, as I told at last quarter conference, we are finishing our agreements with Liverpool in order to merge both projects, and that is taking us to a redesign of the -- of some of these spaces and also stating the terms that we are going to proceed in order to have the same project for both companies. So that is the why we are -- we haven't start -- restart that project. And once we start it, we will know better, we will know the delivery date because it will depend on how much changes we have to do in the projects as we have it right now, because almost all the structure is already in place, but we still need to do some work. So I will have more clarity on the delivery date once we have finished these negotiations with Liverpool.

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Operator [4]

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(Operator Instructions) We'll take our next question from Fernando Mendez with JPMorgan.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [5]

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Regarding the projects that you mentioned, Diódoro, that could start developing -- development soon and that you would be looking for partners to actually participate at the project level, how much is the additional CapEx that you will require for these projects for your share? That's my first question.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [6]

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Froylan, it will depend on how much we are with equity we'll raise. We are aiming for 50% participation from 50% -- from 40% to 50% participation. So if we go for that, then we will invest, from our side, around MXN 500 million for each project. So it will be MXN 1.5 billion for the 3 projects.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [7]

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Perfect. Would you be willing ever to sell a minority stake in the stabilized assets to refinance some of your debt and lower the leverage that you currently have?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [8]

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Yes, we are always open to that possibility. And we are always looking into the market. And of course, that if we find a good proposal with a good partner also, because it's not only the money, it's also the firm that is partnering with you, because this is a long-term relationship. So it's about money, but also about who is the partner. But if we receive and if we get some good offering for the operational portfolio, of course, we will be open to look that, only -- as we always do, we will never give up the control of the assets. We will -- it will always be -- we will conserve the operation and the control of the assets. And for us to have a partner at the project level is also good because we collect fees, and these fees help us to manage our corporate expenses.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [9]

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Is these some of the options that you're currently discussing from the ones that you mentioned earlier?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [10]

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Not for the operational portfolio, as we speak. We are most focused on improving the debt profile, in terms of terms, maturity and rate. That is what we are most analyzing right now. We don't have any current discussion on the minority participation in the operational portfolio, but we're always open.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [11]

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And Diódoro, could you quantify how much would your cost of debt lower from current levels if you were to exercise all of these options that you have to refinance the debt at the project level?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [12]

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I don't have -- right now, we are evaluating that. So I don't have precise data on that, but we are aiming to improve the rate around 25 basis points in general for the portfolio. And maybe go for a term of around 7 to 10 years, more than we have right now.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [13]

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And lastly, Diódoro, you mentioned contribution for the assets that are starting to contribute in this year. You mentioned a number, am I -- did I hear well, like MXN 900 million?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [14]

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No. That MXN 900 million is the CapEx that we are going to spend for these 3 projects and the new one that we started, which is Outlet Riviera Maya. That number is regarding the CapEx.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [15]

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Oh, CapEx.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [16]

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Yes, CapEx to be spent in this project.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [17]

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That's for the remaining CapEx?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [18]

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Correct. Correct.

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Operator [19]

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We'll take our next question from Francisco Chávez with BBVA.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [20]

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I have 2. The first one is regarding the residential Cero5Cien project. We saw a very minimum advance in the construction during the second quarter. Can you give us an update? And do you plan to accelerate the construction pace? And the other question is regarding this announcement that we saw a few weeks ago on the partnership that you are doing with Liverpool for the -- for some Galerías shopping malls, and can you give us more color on how this partnership will work? Does this represent or will represent fees for you? Do you have any number?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [21]

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Paco, regarding your first question, the method of construction in the residential project is that you pay in advance all the structure. And the constructor goes to the factory and builds all the pieces in the factory. And when it's done, it comes to the land and place it, no? Kind of like a LEGO, no? So the advance in construction is not putting yet all the fabrication that is going on the construction site. We register the advance only when the pieces are on site. So once this vendor finish the -- in the factory and brings the pieces and start to put it together everything, advances will reflect more quickly than it is right now. We expect it to happen from here to the end of the year. We are working currently in the -- at the same time, in 6 different buildings of the project. So we expect to reflect more advance in the next quarters. That is the -- [all there it is] . I don't know if I was clear with the answer.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [22]

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Yes. And maybe if you can give us an idea of how is demand for this residential project going in the last few weeks?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [23]

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Yes. We just signed 2 new contracts for this project last month, and we have several contracts under negotiation with several clients, and we are very positive that the market is -- it's a little bit slow, but this is part of the project, because all residential projects, they start at the beginning with a big portion of the sales, then the sales goes down and sales start to rise up again when you have around 50% advance in construction. That is how these residential projects work and that is what we expect to happen. But yes, we have demand, and we have several contracts under negotiation at the moment. Okay? And regarding the -- sorry, you have another with the residential?

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [24]

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No, no, no, it was for the second question.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [25]

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Okay. For the second question, we have -- what we have with Liverpool is a partnership in Galerías Metepec. The agreement is that we are going to merge these 2 -- they have Galerías Metepec and we have Paseo Metepec. Both of them are going to be Galerías Metepec, the same name, because it's the name that is already commercially positioned.

And in terms of fees, we are not going to have any fees from this because it's going to be the same commercial space for the clients. But for us, it will be separate. Each one which -- we are going to collect our rent, they are going to collect the rent and the operation will be joint. So that is the terms that we are finalizing in the operational agreement. Once we do that, we will start construction again.

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Francisco Chávez Martínez, BBVA Corporate and Investment Bank, Research Division - Team Leader & Chief Analyst [26]

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Okay. And what about the parking spaces, will you share the revenues or the parking lots will be separated?

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [27]

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No parking spaces will be shared. That is another of the issues that we are finalizing in the negotiation because we cannot separate those. We can separate the clients because they are very well-located in each of the parts of the project, but parking space is shared. So that is one of the things that is under review right now, but our look is that it will be shared. For the clients, it will be transparent. Clients will never know that we are 2 owners.

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Operator [28]

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And there are no further questions on the line at this time. I will return the call to Mr. Batalla.

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Diodoro Batalla Palacios, Grupo Gicsa, S.A. de C.V. - CFO [29]

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Thank you very much. Thank you very much for your interest in our company. On behalf of GICSA and this team, I want to express our appreciation for your interest, and we thank you for taking the time to join us today. Please do not hesitate to contact us with any questions or follow-ups you might have. Have a good day.