U.S. Markets closed

Edited Transcript of TERRA13.MX earnings conference call or presentation 28-Apr-17 3:00pm GMT

CI Banco SA Institucion de Banca Multiple FF/00939 Earnings Call

MEXICO, D.F. May 28, 2018 (Thomson StreetEvents) -- Edited Transcript of CI Banco SA Institucion de Banca Multiple FF/00939 earnings conference call or presentation Friday, April 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alberto Castillo Chretin

Fibra Terrafina - Chairman and CEO

* Francisco Martinez

Fibra Terrafina - IR Officer

* Maria Barona

================================================================================

Conference Call Participants

================================================================================

* Armando Rodriguez

Signum Research - Stock Market Analysis Manager

* Carlos Peyrelongue

BofA Merrill Lynch, Research Division - MD, Mexico Equity Strategist,Cement & Construction and Real Estate Analyst & North Andean Strategist

* Dan McGoey

Citigroup Inc, Research Division - MD and Head of Research of Brazil

* Eugenio Saldaña

* Fernando Froylan Mendez Solther

JP Morgan Chase & Co, Research Division - Analyst

* Francisco Suarez

Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities

* Marimar Torreblanca

UBS Investment Bank, Research Division - Director & Product Mngr for LatAm

* Roy Andrew Yackulic

BofA Merrill Lynch, Research Division - Director and Corporate Credit Research Analyst

* Wilfredo Jorel Guilloty

Morgan Stanley, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good morning. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to the Terrafina earnings conference call. (Operator Instructions) Thank you for your attention.

I will now turn the call over to Ms. Maria Barona of i-advize Corporate Communications. Please go ahead, ma'am.

--------------------------------------------------------------------------------

Maria Barona, [2]

--------------------------------------------------------------------------------

Thank you very much, and welcome to Terrafina's First Quarter 2017 Year-End -- 2017 First Quarter Conference Call. I'm Maria Barona with i-advize Corporate Communications. We're pleased to have with us today from Terrafina Mr. Alberto Chretin, Chief Executive Officer; and Mr. Francisco Martinez, Investor Relations Officer. Mr. Chretin will be taking us through the company overview and operating review for the quarter. And Mr. Martinez, IRO, will briefly talk through the financials.

Before we begin, we'd like to refer you to any forward-looking statements mentioned during the quarterly report. Any information expressed or implied during the conference call may contain forward-looking statements, which could involve certain risks or uncertainties. Terms such as estimate, project, plan, believe, expect, anticipate, intend and similar expressions may identify such forward-looking statements. The company wishes to caution listeners that any forward-looking statements made during this call by the company's management may change based on various important factors not under the company's control. These comments represent the company's judgment at the time of the call. The company disclaims, however, any intent or obligation to update these forward-looking statements.

Thank you for your attention. At this point, I will turn the call over to Mr. Chretin, Terrafina's CEO, for his initial comments. You may begin, sir.

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [3]

--------------------------------------------------------------------------------

Thank you. Good day to everyone, and thank you for joining us for the review of Terrafina's results for the first quarter of the year. 2017 began with solid footing where Terrafina maintained its tendency of strong operating and financial indicators, which included the benefits of the $422 million acquisition that took place in January. As such, results for the quarter were very strong, not only on the same-store basis but also further driven by this acquisition. It is important to note that despite these strong figures, the full impact of the acquisition will be more perceptible in the second quarter.

These transactions consisted of a total of 6.3 million square feet for a portfolio of 51 Class A industrial properties with high occupancy levels, superior average rents, stable maturity profiles as well as 100% dollar-denominated triple net leases with multinational tenants. Added to all this, this transaction also generates a clear improvement in the various operating and financial indicators for Terrafina's overall portfolio. In general, this was a very beneficial transaction in that it is in line with our strategy of executing accretive acquisitions.

Just to give you further details, as a result of this transaction, Terrafina as a whole was able to reach occupancy levels of 94.9%, a 21% increase in gross leasehold area, an improvement in average age in the portfolio to 12.5 years and continued exposure to dollar-denominated leasing contracts with solid addition of multinational tenants. Additionally, these properties are located in the prime Northern Bajio industrial markets, which is aligned perfectly with our goal of geographical balance throughout the country.

In terms of profitability, in 2017, the acquisition will enable Terrafina to achieve higher indicators, raising the NOI by a range of 22% to 24% and the AFFO between 27% and 29%. Investors will also see the benefit as we will continue with our target of distributing 100% of the AFFO, which translates into higher distributions per CBFI to our shareholders.

And now moving on to the quarterly operating results. Terrafina concluded first quarter with total occupancy levels of 94.9% and average leasing rate of $4.96 per square foot per year. The occupancy rate for the first quarter experienced a 160 basis point increase versus the comparable period in 2016. If we include the signed letters of intent, occupancy for the quarter will reach 95.1%.

It is also important to mention that first quarter same-store operating results also improved compared to the fourth quarter results, which was prior to the acquisition, with a 94.2% occupancy level and an average leasing rate of $4.92 per square foot per year.

Moving on to occupancy and rental rate results by region. The Northern region reached 96.8% occupancy at $4.83 per square foot per year. Bajio was 91.6% occupancy at the rate of $5.12 per square foot per year. And in the Central region, occupancy reached 93.6% with a leasing rate of $5.20 per square foot per year. These figures are in line with market levels, and they give stability to the portfolio as we continue working with our tenants to fulfill their industrial real estate needs. Given these figures and our proven track record, we remain confident that our results will remain sound in the near future.

Additionally, same-store occupancy and rental rate by region had stable results, with the North region at 96.3% occupancy and $4.78 per square foot per year; Bajio, 90.1% at $4.99 per square foot per year; and the Central region at 93.6% occupancy and $5.20 per square foot per year.

Leasing activity for the first quarter reached 1.6 million square feet, with renewal activity in 16 of 22 expirations. Moreover, combined with early renewals, Terrafina signed leases for 1 million square feet during the quarter. As it pertains to new contracts, there were, in total, 500,000 square feet additional during the period, a continuation of the positive trend, there is clear evidence of the resilience of industrial real estate activity in Mexico.

Terrafina also continues its successful track record in terms of lease renewals. All of our leases are important to us. However, it is part of the nature of the business that certain tenants may not renew for different reasons. For example, one tenant chose to build its own space rather than renewing its lease contract. However, it is important to point out that on the whole, Terrafina continues to experience a high success rate in terms of lease renewals, as you can see in our figures, due to the quality of the space and our strong tenant relationships.

Additionally, Terrafina leasing maturity profile improved to 8.2% for the portfolio rolling during the year. Again, we are very optimistic about maintaining sales and leasing activity levels during 2017. This is possible due to our close tenant relationships and the efforts of our market officers.

Moving on to the main financial indicators. Rental revenues were $40.3 million for the first quarter, which is 23.7% higher than the figure reaching the first quarter of 2016. Compared to first quarter of 2016, NOI increased by 24.6% to reach $39.6 million and a margin of 87.9%. EBITDA was $35.7 million with a margin of 79.2%, which is 107 basis points increase compared to the first quarter of 2016. AFFO for the quarter reach $22.1 million, with an AFFO margin of 48.7%. This in turn generated distribution of $22.1 million or MXN 0.74 per CBFI, which is equivalent to $0.036 per certificate. Consequently, this resulted in an annualized dividend yield of 10.3%.

Before moving on to the financial section, I want to just mention that we continue evaluating growth opportunities for Terrafina. After closing these large acquisitions we have just discussed, our focus will center on consolidating them as well as continuing the organic growth of the portfolio through built-to-suit and expansion opportunities with our current tenant base. However, we are continually analyzing new options and reviewing potential acquisition opportunities that are in line with our operating and financial goals.

Finally, I want to close with additional positive news. Our team just concluded a very in-depth selection process for the new CFO of Terrafina, and we will make the formal announcement in a couple of weeks.

Thank you for your attention. And I will now turn the call over to Francisco Martinez, our IRO, as he takes us through the financial review.

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [4]

--------------------------------------------------------------------------------

Thank you very much, Alberto. I will begin with a brief review of our first quarter financials. And please note that all figures discussed are in U.S. dollars. However, Mexican peso figures have been provided in the report for your convenience. Additionally, NOI, EBITDA and FFO figures exclude noncash items as well as nonrecurring and transaction-related expenses, the latter of which are only included as part of the AFFO.

The first quarter was marked by the acquisition of the 51 properties discussed by Alberto a few moments ago. I don't want to repeat the points that he covered, so I will go right into the brief discussion of the financials, which include the major benefits of the acquisition.

Rental revenues increased by 23.7% to $40.3 million compared to rental revenues of $17.7 million for first quarter 2016. NOI for the quarter totaled $39.6 million, a 24.6% versus the comparable quarter. This led to an increase in the NOI margin of 85 basis points to 87.9 compared to 1Q '16.

Same-store results were solid. As Alberto mentioned, the full effect of the acquisitions will be more evident in the second quarter and of course, going forward. However, to paint a more accurate picture of the quarterly results, we provided same-store figures in the acquisition section of this earnings report. This will help with the analysis of the actual same stores. And to highlight some of the same-store results, during the first quarter, all of our main metrics improved. Rental revenues increased 3.4%; NOI, 4.2%; EBITDA, 4.1%; and AFFO, 10.4% compared to the first quarter of 2016.

With regards to consolidated results, we reached $40.3 million in rental revenues, a 23.7% increase compared to first quarter of '16. And real estate expenses were only $10 million, maintaining real estate expenses in line as it was the quarter prior to the acquisition.

It is also worth noting that as part of the seasonality of our business, Terrafina registers the majority of its property taxes during the first quarter. And these taxes represented 35% of the total real estate expenses. The other figures that comprise real estate expenses remain similar to 1Q '16 results.

In terms of the NOI, this figure reached $39.6 million, a 24.6% increase, with 85 basis points improvement in the NOI margin compared to 1Q '16, thus reaching an 87.9%. EBITDA levels rose by $7.2 million or 25.1% to reach an EBITDA margin for the first quarter of 79.1%. This EBITDA margin was a 107 basis point improvement over 1Q '16.

Financial costs increased 30% compared to the first quarter 2016 to reach $12.6 million as a result of higher financial expenses due to the revolving credit facility used to finance part of the acquisition and also all of the borrowing expenses related to the refinancing of $150 million, as it was announced in February 2017.

FFO levels rose by $5.3 million for the quarter, a 26.9% increase. FFO margin reached 55.3%, again, an increase of 151 basis points. AFFO was $22.1 million, a 33.2% increase, while the FFO -- AFFO margin for the first quarter was 48.7%, a 363 basis point increase. This led to total distributions per certificate of USD 0.0364 for a total of $22.1 million, which in pesos were MXN 450.5 million or MXN 0.74 per certificate for the period.

Moving on now to liquidity. Let's review the balance sheet. For the period under discussion, Terrafina have a cash position of $55.2 million, which decreased in relation to the previous quarter. It is as was expected, as Terrafina used part of these resources for the recent acquisition. Additionally, we currently have available close to $80 million in the revolving credit facility and from the VAT refund that was generated from portfolio acquisition. We expect a reimbursement of approximately $50 million towards the end of the year, which will be used to pay down debt.

Total debt at the end of the quarter was $1 billion and finished with 45.6% LTV and 3.2x debt service coverage ratio. This level is in full compliance with the debt covenants. Again, our expectation is to reduce LTV to approximately -- from 43% to 44% with a V -- VAT reimbursement. We're also in the process of buying a derivative position to hedge against any upcoming changes in interest rates, and this information will be disclosed in more detail in the second quarter 2017 results.

Thank you for your time and attention. And at this point, I will ask the operator to open the line for the question-and-answer session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Jorel Guilloty with Morgan Stanley.

--------------------------------------------------------------------------------

Wilfredo Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

So my first question is regarding your LTV levels. And I'm sorry if you addressed this in your opening remarks, I stepped in a little bit late. But they rose this past quarter and it was about mid-40s. And I was wondering, is that more due to increasing leverage levels? Or does it have to do more with the valuation done for the properties in this -- the last time you did the valuation process?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [3]

--------------------------------------------------------------------------------

Thank you, Jorel, for your question. It's in regards with the additional debt that was incurred as a result of the acquisition. As you know, we have an unused credit facility with Citibank of close to $675 million. So we used close to $295 million to refinance this acquisition announced in early -- mid-January 2017.

--------------------------------------------------------------------------------

Wilfredo Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

And will this LTV be in line with how the regulator looks at the LTV?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [5]

--------------------------------------------------------------------------------

Well, as you know, the regulator, they ask a cap up to 50%. So we're pretty much in line with what they're asking. And in terms of our internal regulation or policy, we think we are -- as I was mentioning during the script, we will be going back to levels of close to 43.4%. Nevertheless, we think that the optimum level will be going back to levels of 38% to 42%.

--------------------------------------------------------------------------------

Wilfredo Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

Okay. And then my last question is in terms of re-leasing spreads. So those have been going -- sorry, not re-leasing spreads. The percentage of leases renewed, that has been going down as of late. It's in about the 70s right now. Is your expectation that, that would be the renewal levels going forward? Or should we expect that to improve?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [7]

--------------------------------------------------------------------------------

Thank you. The renewal levels are definitely going to improve. And let me just gave you some color on these renewals. Out of the 22 expirations that we have, we renewed 16. And then the 6 that we did not renew, I think, 2 were very small spaces, one in Camargo and one in San Luis. And then we have also one tenant that decided to buy -- to build their own facility. And we have another tenant that wanted to change the lease contract to dollars, and we decided not to do that. So out of the 6 spaces that we didn't renew, we already have letters of intent for 2 of the most important spaces. So I think we're being consistent with the percentage, how we calculate the percentage, in other words, the 16 renewals versus the 22 expirations. And that's why you see that percentage. But from the overall, this is a very -- a very good rate of renewal for 260 properties in that -- to have the 22 that expire and to have those 6 expirations that we didn't renew. And for the reasons that I just explained, it's very common to our business, and we monitor, as I mentioned before, all the expirations. And we think that moving forward, we want to continue to see the renewal levels in the range of 80%, 85%.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Carlos Peyrelongue, BofA Merrill Lynch, Research Division - MD, Mexico Equity Strategist,Cement & Construction and Real Estate Analyst & North Andean Strategist [9]

--------------------------------------------------------------------------------

Could you provide some color as to the demand/supply in your key markets, how you're seeing the dynamics on this regard?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [10]

--------------------------------------------------------------------------------

Certainly, Carlos, and thank you for the question. Yes, well, in regards to the current expiration, let me just use the opportunity to tell you that right after the election of Donald Trump, I visited 8 of our most important tenants in the sectors of aviation, automotive, electronics and medical and trying to get some feedback about what the impression was, what the clients were going for with the -- after the election. And I can tell you that the feedback that we got from all of them was a cautious optimism about how things are going to turn out. And so what we have seen since the election is I don't want to totally say business as usual as we all are monitoring what's going on. But I can give you an example that since that time, we signed 15 lease contracts. Out of the 15 lease contracts, 7 were new lease contracts and 8 were renovations. And we had some requests for expansion. And the reason why I'm saying this is because for the current tenants, we have seen not only that they maintained their own plans but also, they continue with some of their expansion plans. As far as the pipeline of new tenants, I think that there was a small time -- period of time in which tenants -- potential tenants were -- or companies or prospects of operation in Mexico were hesitant about what to do. But I think that we have seen that picking up again during the last few weeks. But again, in our business, in our portfolio, we have seen continued interest in maintaining their operations. The Northern market continues to be the preferred location for manufacturing for export. And we see that continues to be very strong. The Bajio, indeed because of the cancellation of the Ford plant in San Luis Potosi that there was some hesitation also in some Tier 1, Tier 2 supplies that were going to that area because of that reason. The Central market continued to have very high occupancy in terms of -- mostly for logistic and distribution companies. So on the overall basis, we think that in terms of -- the manufacturing for export continues to be very strong. And there continues to be a lot of interest for logistic and distribution around the Central market.

--------------------------------------------------------------------------------

Carlos Peyrelongue, BofA Merrill Lynch, Research Division - MD, Mexico Equity Strategist,Cement & Construction and Real Estate Analyst & North Andean Strategist [11]

--------------------------------------------------------------------------------

Understood. And in terms of supply, is there any market where you see an increase in supply that is worth noting?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [12]

--------------------------------------------------------------------------------

Well, I think that there were some starts from the -- for the third quarter of 2016 that are being terminated now. And I think that, that is adding a little bit, not much, not something to be worry about, a little bit to some vacancies on markets. But I think that the supply continues to be good, in my opinion. And when I say good, it is a smart supply. I don't see somebody going crazy and building a lot of space. I think that the developers -- which is not our case because as you know, we're not a developing company. We don't have any [spec] buildings or anything like that. But I think that the supply, the developers, it's well measured and they are gauging also interest in some markets. And as I mentioned before, the starts of the last quarter of last year are being terminated around now. And I don't see many new starts now. But if you ask me, I think that they're going to continue with starts of new supply probably in the next few months as occupancy levels continue to be very high.

--------------------------------------------------------------------------------

Carlos Peyrelongue, BofA Merrill Lynch, Research Division - MD, Mexico Equity Strategist,Cement & Construction and Real Estate Analyst & North Andean Strategist [13]

--------------------------------------------------------------------------------

Understood. And one last question, can you comment on your payout ratio for the dividends? You were around 100%. Is that something you plan to continue? Or do you plan to lower that in order to have some money for the expansions or renovations that you talked about?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [14]

--------------------------------------------------------------------------------

No, we plan to -- the target is to continue with the distribution of 100% of our AFFO.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question comes from Eugenio Saldaña with GBM.

--------------------------------------------------------------------------------

Eugenio Saldaña, [16]

--------------------------------------------------------------------------------

I have 2 questions. The first one is regarding the tax shield. I mean, given this current FX level, I mean, how much do you have left, I mean, in order to continue to distribute capital and the distribution not to be taxed? That's the first one. The second one is regarding cash and a further clarification on LTV. I mean, if you could comment on how are you planning to decrease the LTV, as you mentioned in the previous question. And with your cash on hand, I mean, correct me if I'm wrong but I didn't see any development in this press release as of March of this year. I mean, are you planning to develop with that cash or perhaps acquiring something like that?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [17]

--------------------------------------------------------------------------------

Thank you, Eugenio. In regards to your first 2 questions, tax levels right now, as you can see in the results, we're still having a fiscal loss. So what we will be having in terms of distributions will be allocated as a return of capital. Now with the recent acquisitions that we made in January 2017, we think that this level of capital return that we are giving in terms of the distributions can be maintained at least for 2017. Yes, it could be changing. But as of today, it will have the same treatment as capital return. And your second question for the LTV decrease, the strategy that we are following is basically, first, having the VAT reimbursement. As you know, for every acquisition that we made, there is a VAT attached to the transaction. So right now, we are in the process of getting the resources back, and we think that this could be seen by third or fourth quarter of the year. And of course, there is an additional way at which we lower LTV, which will be synthetically with a -- doing a capital raise or doing the follow-on with the shelf registration program. As you have seen right now with the market, this is the right moment to go out and to think of this option. This could be something that the company could be thinking of to have also the LTV lowered by the end of the year. If everything goes right, there is an opportunity for us.

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [18]

--------------------------------------------------------------------------------

And in reference to development, you're right, we had very little development. We had a small built-to-suit that we have in Monterrey. We're doing this. We do very selective development at this time. We're going to unlock value from land reserves, the [was highlights] on the balance sheet since the IPO by means of executing this built-to-suit in Monterrey together with the joint venture partner there. It's part of it. It's a built-to-suit, and that is the only development that you see for this quarter.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Francisco Suarez with Scotiabank.

--------------------------------------------------------------------------------

Francisco Suarez, Scotiabank Global Banking and Markets, Research Division - Associate Director of LatAm Utilities [20]

--------------------------------------------------------------------------------

I was surprised by the low CapEx that we saw on this quarter. Do you think that is sustainable going forward, in other words, the overall AFFO margin that we're seeing is something that is sustainable? You have spoken a bit about that, but it would be great to have more additional thoughts on that. And lastly, have you considered at all any changes on the payouts out of AFFO? Would you start to consider creating reserves?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [21]

--------------------------------------------------------------------------------

Thank you, Franco. With regards to your first question, you can see for the first quarter, we did not have high CapEx use. Basically, what we have been working is to have different developments for the quarter. And this first quarter, we did not have anything built. But we're working for the second quarter, third quarter, fourth quarter. And the budget that we expect is to spend close to $6 million for the Capex maintenance of the company, which is equal to USD 0.20. We will be working for new development but also be very strict in what type of property we'll be developing, which is basically, we're thinking of doing expansions or built-to-suits. At this time, we have seen some of our clients, the tenants interested in expanding some of their buildings and doing some built-to-suits. So we are under the process of finalizing. So yes, I think that this was a particular quarter where we did not see any additional new development where going forward, we will be seeing some of these properties in development.

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [22]

--------------------------------------------------------------------------------

In reference to the second question about we do not hear any plans to change our approach to the payout. As I said before, our target is to continue distributing 100% of the AFFO. But I think it is needless to say that you know that we have exercised in the past a recycling of capital activities. And by this time, we're analyzing also some asset sales that are going to -- again, we're considering some of the assets that we have a tenant that isn't interested in buying the facility because they want to customize the facility to a point that perhaps those beyond what makes us comfortable for a lease or we also have some properties that are empty or some that are in market where we may want to reduce our exposure. At this point, I don't want to give any more details on that. But that can be a source also of capital. But to confirm, we do not have any plans to change our payout ratio, and we would continue to distribute 100% of our AFFO.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Marimar Torreblanca with UBS.

--------------------------------------------------------------------------------

Marimar Torreblanca, UBS Investment Bank, Research Division - Director & Product Mngr for LatAm [24]

--------------------------------------------------------------------------------

My question is now that your acquisition is closed and the performance of the stock has also improved year-to-date, are you considering more acquisitions to be funded by equity issuance or perhaps using your shelf program? Or are you only looking at small things that would be funded by things like what you were mentioning before, the asset recycling strategy?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [25]

--------------------------------------------------------------------------------

Thank you, Marimar. Well at this point, as I mentioned, we are aware that there are going to be opportunities in the future for acquisition. However, in the short term, we are focusing also on integrating these large acquisitions. We're also focusing on the organic growth of the portfolio by means of expansions or with deals our current tenants. Indeed, we are -- we have the shelf registration program, and we continue to monitor the market and the conditions. But it's in the horizon to go back to the market to have more acquisitions.

--------------------------------------------------------------------------------

Marimar Torreblanca, UBS Investment Bank, Research Division - Director & Product Mngr for LatAm [26]

--------------------------------------------------------------------------------

Okay. And just a follow-up question. Are there any portfolios out there that you are seeing -- actively seeing that are interesting or are a good fit for your portfolio? Or do you think that future acquisitions will be more fragmented?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [27]

--------------------------------------------------------------------------------

I think that there are some opportunities. And actually, as you know, it's a very close community and we know many of them. And of course, we have some conversations. But I think that due to the current market conditions and the overall situation between then U.S. and Mexico, I think everybody is waiting. So to be precise with the answer, yes, there are some portfolios that are of interest to us, and that we can trigger again negotiations at the right time.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from Dan McGoey with Citigroup.

--------------------------------------------------------------------------------

Dan McGoey, Citigroup Inc, Research Division - MD and Head of Research of Brazil [29]

--------------------------------------------------------------------------------

A quick question about leasing spreads, Alberto. Your occupancy rate up in the North is close to 97% now. I'm wondering if you could talk a little bit about the leasing spreads, particularly in that market, and what you really need to see in order to be able to push rent a little bit more aggressively. And again, I focus on the North just because it's the lowest average price or average rents that you have. But maybe you can also just highlight, is there any market that you're seeing where it's sufficiently tight that you might be able to push rent a little bit more aggressively?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [30]

--------------------------------------------------------------------------------

Thank you for your question. Yes, in terms of -- and that's a very interesting question. Thanks for it. I think in terms of leasing spreads, especially in the North, as you pointed out, the occupancy is very high because the barriers of entry in the North are somewhat low. And because there is also a lot of land and players and because it is a mature business with a lot of players and construction companies and brokers, et cetera, I don't really see and we don't plan to have rent growth -- substantial rent growth. We see some growth in the developed market because as you know, part of our lease contracts have clauses that provide for rent increases due to inflation, mostly U.S. inflation because if you remember, almost all part of the contracts in the North are U.S. dollar denominated. So we don't see a substantial rent growth. We also don't try to push rents higher because we want to -- we control with the rent levels that we have, that we maintain occupancy, and we don't think that this will be an opportunity to increase the rent because of what I just said about the expansion of supply when the occupancy levels reach the levels where we are today.

--------------------------------------------------------------------------------

Dan McGoey, Citigroup Inc, Research Division - MD and Head of Research of Brazil [31]

--------------------------------------------------------------------------------

Okay. And is there any market that you see tightening a bit more? Or that would apply as well in your other regions?

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [32]

--------------------------------------------------------------------------------

Well, what happened in the -- there was -- so in the Central market, the occupancy was very high and the barriers of entry are much higher in the Central market. The Central market experienced also a spike also in rent. So there was -- that's why some of the rents in the Central market are higher. However, because of the nature of the natural tenants in the Central market that are mostly logistic and distribution tenants and many of them have their business in Mexico and therefore, they're pushing for rent in pesos, that also sent a message that rents are going to stay also in the Central market. So to answer your question, I really don't see an opportunity to have rent growth in basically any of the markets.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Our next question comes from Froylan Mendez with JPMorgan.

--------------------------------------------------------------------------------

Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [34]

--------------------------------------------------------------------------------

I wanted to dig deeper into how much time or how much fiscal losses, let's say, you still have to keep paying dividends as return of capital. I would like to know like the date when you would think you'll run out of capital losses. And on the other hand, when you just say that you'll focus on the integration of the new -- of the recently acquired portfolio, what does that mean? Are there any untapped synergies? And more importantly, how long does it take for this full integration?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [35]

--------------------------------------------------------------------------------

Thank you, Froylan. And with regards to your first question, as I was mentioning, right now, our fiscal advisers, they have told us that there will be enough space to have this treatment for what is considered fiscal loss. Nevertheless, things could change in the future. And as we include additional acquisitions or there are transaction expenses, this can be changing in the -- going forward. But yes, as of today, in 2017, what we have, the information we got from our adviser is that we still have the same treatment for the fiscal loss for the year.

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [36]

--------------------------------------------------------------------------------

And in terms of the integration of the portfolio into the Terrafina portfolio and the organic growth, yes, we have some opportunities with the expansions, with the -- not only our current tenants but also the tenants of the portfolio that we acquire that we look forward to capture those business opportunities through those expansions and a couple of them that are also committed in the contract. So that is going also to lock additional value in the acquisition. And in terms of the timing, I think that we have 5 very good property managers and with the assistance of PGIM, of Prudential on the portfolio management and asset management teams, we've been able to improve also on the operating metrics of the portfolio and to benefit from the expertise of different property managers in different regions. So we are focusing now on enhancing the efficiency of the administration of the portfolio and prepare us for the expirations and make sure that we provide solutions to our tenants in terms of expansion and to also continue the success on renewals on the expiration. So that is the main focus of the integration activities for the portfolio. And it's going to take -- we don't think that this is going to be a period of time that is going to be completed. I think this is an ongoing initiative, try to enhance the strengths of the different portfolio managers. But the main reason for us for now for not continuing very aggressive with our growth plan is because of the market conditions and the fact that we recently completed this acquisition.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from Roy Yackulic with Bank of America.

--------------------------------------------------------------------------------

Roy Andrew Yackulic, BofA Merrill Lynch, Research Division - Director and Corporate Credit Research Analyst [38]

--------------------------------------------------------------------------------

I'm sorry, I think I just missed when you said your target reduction for the LTV ratio. I believe it was 35% to 40%. I just want to confirm that.

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [39]

--------------------------------------------------------------------------------

Thank you, Roy. Well, our current policy is to be around the range of 38% to 42%. Right now, from the 46.5% (sic) [45.6%] that we are right now, this will be reduced to close to 43% to 44% with the VAT reimbursement.

--------------------------------------------------------------------------------

Roy Andrew Yackulic, BofA Merrill Lynch, Research Division - Director and Corporate Credit Research Analyst [40]

--------------------------------------------------------------------------------

Okay. And so the target is to bring it back to the policy of 38% to 42%. Is that correct?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [41]

--------------------------------------------------------------------------------

That is correct.

--------------------------------------------------------------------------------

Roy Andrew Yackulic, BofA Merrill Lynch, Research Division - Director and Corporate Credit Research Analyst [42]

--------------------------------------------------------------------------------

Okay. And that's what you're referring to with potential asset sales and such?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [43]

--------------------------------------------------------------------------------

Excuse me, we're getting the end of that...

--------------------------------------------------------------------------------

Roy Andrew Yackulic, BofA Merrill Lynch, Research Division - Director and Corporate Credit Research Analyst [44]

--------------------------------------------------------------------------------

And I guess the managers that do that was when you just discussed potential asset sales of assets that tenants perhaps wanted to buy or they were empty or markets where you wanted to reduce exposure. That was the intent of the asset sales, is to reduce that?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [45]

--------------------------------------------------------------------------------

Exactly, that is correct.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Our next question comes from Jorel Guilloty with Morgan Stanley.

--------------------------------------------------------------------------------

Wilfredo Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [47]

--------------------------------------------------------------------------------

I have one quick follow-up on the LTV question. And specifically, if it can be disclosed, what is the cap rate that's being used for the asset valuation on the LTV calc?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [48]

--------------------------------------------------------------------------------

Well, as of today, what we're using is we offer in our earnings report what is the implied cap rate for the company, including the average certificate price for this particular quarter and also the average FX for the quarter. So as of today, we're close to a 9.2%. Yes, if you use what had been the change of the current certificate price that we're close to this 31.5%, with the FX going down to close to MXN 90, we are, right now, at an implied cap rate of close to 8.2%. So we have been narrowing that gap for the implied cap rate, which -- actually, the benchmark that we often use, what is the current valuation under an NAV standpoint, which is, right now, at an 8%. So let's say that the figure that we're currently analyzing is how we do as of today, and we're having a 5.5% to 6% discount to NAV.

--------------------------------------------------------------------------------

Wilfredo Jorel Guilloty, Morgan Stanley, Research Division - Equity Analyst [49]

--------------------------------------------------------------------------------

Okay. So bottom line, it's an 8% cap rate for the LTV?

--------------------------------------------------------------------------------

Francisco Martinez, Fibra Terrafina - IR Officer [50]

--------------------------------------------------------------------------------

Correct. That's right.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Armando Rodriguez with Signum Research.

--------------------------------------------------------------------------------

Armando Rodriguez, Signum Research - Stock Market Analysis Manager [52]

--------------------------------------------------------------------------------

Well, talking about possible border adjustment tax, we know maybe NAFTA won't reflect aggressive changes as we felt at the beginning of this year. But I want to know if you are considering maybe some scenarios, particularly with your automotive clients about this.

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [53]

--------------------------------------------------------------------------------

Well, as I mentioned before, I think that when we talk to some of our most important tenants and even some companies that are operating on the manufacturing for export about this issue, they see no substantial impact on their operation, even if there was the case that there will be a border adjustment tax. So as far as we -- we're taking any provisions to that. We continue to be very close with our tenants. Not only I have conducted some meetings with them but our market officers are also talking to them. We participate in several forums in which we analyze several scenarios. And so we, as Terrafina, do not have any initiative in motion to address any of those contingencies other than continue to be very close to our tenants and make sure that we continue to fulfill their real estate needs. And we have a cautious optimism about how this negotiation is going to go forward. And that's what we can do at this point with these elements of the international trade.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

At this time, we have no further questions in the queue. We will now turn it back to Mr. Chretin for closing remarks.

--------------------------------------------------------------------------------

Alberto Castillo Chretin, Fibra Terrafina - Chairman and CEO [55]

--------------------------------------------------------------------------------

Well, thank you again for your interest and attention here today. Please do not hesitate to contact us with any questions you may have. Have a great day.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines, and thank you for joining us this morning.