Earnings Call Transcript - VTMX Q3 2025

Operator, Operator

Greetings, ladies and gentlemen. Welcome to the Vesta Third Quarter 2025 Earnings Conference Call. This call is being recorded. It is now my pleasure to introduce your host, Fernanda Bettinger, Vesta's Investor Relations Officer. Please go ahead.

Fernanda Bettinger, Investor Relations Officer

Good morning, everyone, and welcome to our review of third quarter 2025 earnings results. Presenting today with me is Lorenzo Dominique Berho, Chief Executive Officer; and Juan Sottil, our Chief Financial Officer. The earnings release detailing our third quarter 2025 results was released yesterday after the market closed and is available on Vesta's IR website, along with our supplemental package. It's important to note that on today's call, management remarks and answers to your questions may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information on these risk factors, please review our public filings. Vesta assumes no obligation to update any forward-looking statements in the future. Additionally, note that all figures were prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. All information should be read in conjunction with and is qualified in its entirety by reference to our financial statements, including the notes thereto and are stated in U.S. dollars unless otherwise noted. I'll now turn the call over to Lorenzo Berho.

Lorenzo Dominique Berho Carranza, CEO

Good morning, everyone, and thank you for joining us today. While we entered the year facing macro uncertainty and slower market activity, I'm pleased to note we're now seeing encouraging signs of improvement as clients start to make decisions. Leasing momentum is returning. Tenant demand is intensifying and the fundamentals behind Mexico's industrial real estate market remain intact. We are particularly encouraged by the uptick we're seeing in leasing absorption, a signal that companies are regaining confidence and moving forward with their long-term commitments. Third quarter was a solid quarter for Vesta. We delivered strong operational execution in a market that has begun to normalize from earlier year softness, as I have described. Vesta's rental revenues increased, supported in part by the rent-generating buildings we delivered last quarter and will continue to drive revenue growth through the end of the year. Our retention rate remains high and rents on rollovers continue to trend upward, demonstrating both the quality of our assets and the strength of our tenant relationships. Meanwhile, our stabilized portfolio continues to perform well. Total income for the third quarter reached $72.4 million, which is a 13.7% year-over-year increase. And total income, excluding energy, reached $69.9 million, a 14.5% increase. We delivered an adjusted NOI margin and adjusted EBITDA margin of 94.4% and 85.3%, respectively, for the third quarter 2025. Let me now walk you through leasing activity and market conditions across our core regions. Total leasing activity for third quarter 2025 reached 1.7 million square feet, 597,000 square feet in new leases with new and existing tenants and 1.1 million square feet represented renewals with an average age of 6 years and a trailing last 12 months weighted average spread of 12.4%. Vesta's third quarter 2025 total portfolio occupancy, therefore, reached 89.7%, while stabilized and same-store occupancy reached 94.3% and 94.8%, respectively. As expected, our overall portfolio occupancy dipped slightly during the third quarter, primarily due to the delivery of new buildings currently in the lease-up phase as a result of the robust development pipeline we executed throughout the year. We're confident that absorption will follow, and this positions us exceptionally well to capture the demand we anticipate later this year and into 2026, given improving demand indicators, which I'll touch upon today. Let me share some color on what we're seeing across our markets. In Monterrey, we completed construction of our Apodaca park with three new state-of-the-art facilities now in the marketing phase. We're seeing strong interest, particularly from advanced manufacturing and logistics companies. We will be highly selective in determining our future tenants given the quality of our parks and Monterrey's role as a key near-shoring destination. Apodaca stands out as Monterrey's most strategic submarket, offering direct access to major industrial corridors and proximity to the Monterrey International Airport. And after the quarter closed in October 2025, we announced that we have acquired 330 acres of land in Monterrey in the high-demand Monterrey-Apodaca Airport Highway corridor. The site benefits from strategic location next to the Monterrey International Airport and Nuevo León’s Research and Technology Innovation Park, offering exceptional connectivity and direct access to a highly skilled labor pool. The deal included attractive 24-month seller financing, providing flexible capital deployment. And importantly, with this acquisition, Vesta's land bank is nearly complete to deliver on the Vesta Route 2030. In Ciudad Juarez, we saw early signs of a market turnaround in the third quarter. According to CBRE, overall vacancy contracted by 130 basis points and Class A vacancy retreated by 190 basis points for this market. This was underpinned by 1.3 million square feet of net absorption during the quarter. Vesta secured a lease with a global electronics company of 500,000 square feet during the quarter, a transaction which boosted third quarter absorption and reinforced the vacancy decline in this market. Juarez continues to draw international manufacturers, especially in electronics and high-precision goods. We believe the third quarter marks an inflection point in Juarez's industrial recovery and Vesta is well-positioned to capture the next cycle of demand. In Tijuana, we're seeing slower recovery with market dynamics still adjusting to a recent influx of supply in this market. High vacancy is a result of a wave of speculative deliveries that entered the Tijuana market. That said, there are early signs of reactivation. CBRE highlights that 67% of leasing demand continues to come from manufacturing users, which reinforces Tijuana's ongoing strategic relevance in the broader nearshoring landscape. Vesta has been actively engaging with a strong pipeline of tenants in the region, which gives us confidence that dynamics are improving. Tijuana is a constrained market with limited land availability and physical barriers that make long-term overbuilding less likely. These fundamentals, combined with recovering demand, should gradually support rebalancing as the year progresses. And while Tijuana's pace of recovery is lower than in markets like Juarez or Monterrey, Vesta's competitive position remains strong. Our portfolio benefits from institutional-grade quality, reliable infrastructure, and access to key logistic corridors. As always, we will approach this market with discipline and a long-term view grounded in data and a deep local understanding of our markets. We have seen sustained strength in Guadalajara and Mexico City. Both markets stand out not only for their depth in scale, but for the diverse tenant base and consistently high retention, which is underpinning our overall portfolio. CBRE reports that the Guadalajara industrial market maintained a healthy 2.8% vacancy rate in the third quarter. Despite new deliveries, importantly, Guadalajara is a key recipient of foreign direct investment, particularly in advanced manufacturing sectors like electronics, automotive, and aerospace. In Mexico City, industrial fundamentals have remained remarkably strong as can be expected. CBRE reports record absorption year-to-date at the highest absorption in the last five years, driven by pre-leasing and long-term renewals. Vacancy remains low at just 2%, supported by steady demand from logistics and e-commerce tenants. More broadly, we're seeing that activity has stabilized in the automotive sector, and our tenants in the sector have continued to renew leases and deepen their long-term commitments. Mexico is deeply integrated into the supply chain that supports the North American automotive industry. We believe it's virtually impossible to decouple. In fact, we're seeing continued and growing integration across the region as manufacturers double down on resilient near-proximity production strategies. At the same time, we're seeing a shift in momentum toward other high-value manufacturing segments with strength in electronics, scientific equipment, and industrial machinery. Mexico has now overtaken China as the largest exporter of electrical and electronic equipment to the United States. Companies are investing ahead of current demand, which reinforces the importance of being ready when they're ready through land acquisitions, as I have described, but also energy supply. The Mexican Association of Industrial Parks recently announced that the federal government is advancing targeted initiatives to support industrial parks, particularly to meet the growing energy needs of new facilities and industries. We're confident in our ongoing collaboration with both federal authorities and energy regulators. As new energy legislation takes shape, we believe industrial parks, in particular, will stand to benefit. The proposed framework includes provisions for energy generation through public-private collaboration, which we see as a positive step toward enhancing reliability and long-term capacity for industrial users. This enables us to serve even energy-constrained regions without compromising service or delivery. Juan will discuss our financial strategy and related capital deployment, but let me make just a few related comments. During the third quarter, we successfully completed a senior unsecured notes offering that enhances our liquidity position, extends our maturity profile and gives us the financial flexibility to fund future growth under attractive conditions. This also enables us to refinance upcoming maturities without disruption, supporting both stability and expansion. Vesta's capital allocation has remained conservative and focused. We currently have only one project under construction, a direct result of our cautious approach at the start of the year in response to low absorption. That discipline is now enabling us to move with confidence as we prepare for new development starts for the end of 2025 and beginning of 2026. We are prioritizing markets where tenant demand is most visible, and we'll continue to direct capital toward land and infrastructure readiness, ensuring our growth is tied to quality, timing, and market visibility. Asset recycling is a key part of our capital allocation strategy, enabling us to monetize stabilized assets and reinvest in higher growth opportunities. During the third quarter, Vesta sold an 80,604 square feet building in Ciudad Juarez for $5.5 million, approximately a 10% premium to appraised value aligned with Vesta's strategy to opportunistically recycle assets. Considering our progress this quarter, we revised Vesta's full-year 2025 guidance. Juan will discuss in more detail. In closing, our third quarter results underscore a clear and consistent message for Vesta. Resilience and solid fundamentals ensure Vesta is well-positioned for what's ahead. This quarter also reaffirms our ability to execute on Route 2030, our long-term vision to build a scaled, diversified industrial platform serving the most important corridors in Mexico. With that, let me turn our conversation over to Juan to review Vesta's financial results in more detail. Juan?

Juan Felipe Sottil Achuttegui, CFO

Thank you, Lorenzo. Good day, everyone. Let me begin by highlighting our strong financial results for the third quarter. As a result, Vesta has revised our full 2025 guidance. We now expect our EBITDA margin to reach 84.5% by year's end, up from our prior guidance of 83.5%, underscoring our continuous focus on expense control and on delivering strong results. We expect to solidly achieve revenue growth between 10% and 11% for our full year with an adjusted NOI margin of around 94.5%. Now let me walk you through our third quarter results. Starting with our top line, total revenues were up 13.7% year-over-year, reaching $72.4 million, primarily driven by rental income from new leases and inflationary adjustments across our rented portfolio. As per our current mix, 89.4% of third quarter rental revenues were denominated in U.S. dollars, slightly up from 89.2% in the third quarter of 2024. On the profitability front, adjusted net operating income increased 14.7% to $66.1 million. Our adjusted NOI margin remains strong at 94.4%, up 16 basis points from the prior year, reflecting higher operating leverage as revenue growth outpaced costs. Adjusted EBITDA totaled $59.7 million, a 15% increase year-over-year with a margin expansion of 34 basis points to 85.3%, driven by a lower proportion of administrative expenses in relation to revenue during the third quarter 2025. Vesta's FFO, excluding current tax, increased 16.5% year-over-year to $47.4 million compared to $40.7 million in the third quarter 2024, while FFO increased 20.1% to $0.055. We closed the quarter with pretax income of $52.4 million compared to $62.7 million in 2024. The decrease was primarily due to lower gains on revaluation of investment properties as well as lower interest income, reflecting a reduced cash position during the period. Turning to our capital structure. On September 30, 2025, we successfully completed a $500 million senior unsecured notes at a 5.5% interest rate due in 2033, further strengthening our balance sheet, enhancing financial flexibility, and advancing our goal for a fully unsecured capital structure. The notes received a BBB-/Positive rating from both Standard & Poor's Global Ratings and Fitch Ratings. The proceeds were used to prepay the existing debt and shortly after the quarter's end, on October 9, we repaid in full our Metlife II credit facility and related incremental facility for $150 million and $26.6 million, respectively. As a result, we ended the quarter with $587 million in cash and cash equivalents and a total debt of $1.45 billion as of September 30, 2025. Our net debt-to-EBITDA ratio increased to 4x, and our loan-to-value ratio was 31%, which temporarily reflects the outstanding balance of the facilities that were repaid shortly after the quarter's end. On capital allocation, Lorenzo has noted that we sold an 80,000 square foot building at a 10% premium to appraisal value in Ciudad Juarez during the quarter, consistent with our strategy of opportunistically recycling assets. At the same time, we continue to strengthen our land results, as Lorenzo mentioned before, with the acquisition of 330 acres of land in Monterrey. Moreover, reflecting our balanced approach to capital allocation, on October 15, 2025, we paid a cash dividend for the third quarter of $0.38 per ordinary share. This concludes our third quarter 2025 review. Operator, could you please open the floor for questions.

Operator, Operator

Our first question comes from Juan Ponce with Bradesco BBI.

Juan Ponce, Analyst

It seems clear that demand signals are going in the right direction. When considering your long-term development pipeline, are you comfortable accelerating Route 2030 projects in the first half of 2026? Or do you think it is prudent to proceed more slowly ahead of the USMCA review in June? I ask because, although vacancies have declined a bit in some northern markets, Tijuana still remains elevated. I just want to hear your thoughts on how you're approaching this growth.

Lorenzo Dominique Berho Carranza, CEO

Thank you for your question. We have definitely seen positive demand signals across most markets. Mexico City and Guadalajara have remained very strong throughout the year, with record low vacancy rates and robust demand, particularly from sectors such as logistics, e-commerce, and electronics. Other markets are also showing some positive signs. In terms of our long-term plan, we analyze each market carefully at our investment committee to determine where to resume and initiate new operations and developments. This quarter, despite a slower year for construction starts, we resumed in Guadalajara with one building. Throughout 2025, we will continue to commence projects in other markets where we have recently acquired land and identified strong demand to keep developing. We intend to maintain our focus on the mid- to long-term goals outlined in Route 2030 and will closely monitor demand trends starting next year across different sectors. In relative terms, Mexico remains well-positioned for many global companies. However, we will consider the upcoming USMCA review next year, which may impact tariffs for other countries, and we will proceed with caution as necessary.

Juan Ponce, Analyst

And just as a follow-up, these positive demand signals, are they coming from existing tenants or companies that already have operations in Mexico? Or are you seeing this already from new tenants?

Lorenzo Dominique Berho Carranza, CEO

That's a good question. I believe it's a combination of both existing tenants and new tenants. We’ve noticed increased visits from companies across North America, Asia, and Europe. Interestingly, this interest spans various industries, not just traditional ones like the auto industry, which remains strong and is integrating supply chains. We're also seeing significant interest from rapidly growing sectors such as electronics and aerospace, as well as from logistics, which continues to perform well.

Operator, Operator

Your next question comes from the line of Pablo Ricalde with Itaú.

Pablo Ricalde Martinez, Analyst

Congratulations on the results. I have two questions. The first one is about the leasing activity observed in October. Can you provide an update on whether you have leased some of the industrial parks that were vacant in September? My second question concerns the balance sheet. What are your thoughts on the net debt to EBITDA ratio by year-end, considering all the land acquisitions?

Lorenzo Dominique Berho Carranza, CEO

Pablo, thank you. Juan, let me expand on the first question, and then you can provide additional details on the net debt to EBITDA for year-end. I didn't fully grasp the question due to some background noise, but I believe it was about leasing. We successfully leased several buildings, including one for our logistics operation in the electronic sector in Ciudad Juarez. Additionally, we secured leases in the Bajio region and Tijuana for food and beverage, logistics, and the auto industry. We anticipate that this particular sector will continue to flourish in the coming quarters, with increasing absorption across various regions. The pipeline appears to be improving significantly. Vesta possesses high-quality buildings in prime locations that are brand-new, which is crucial for clients seeking space. It's important to note that many of our buildings already have energy, providing us with a competitive edge. Despite facing some competition, we believe Vesta is well-positioned with top-notch locations, modern buildings, and the necessary utilities and infrastructure to support light manufacturing and logistics operations. Therefore, we are optimistic about the upcoming quarter, the end of the year, and we also expect a strong recovery in 2026.

Juan Felipe Sottil Achuttegui, CFO

As for the balance sheet, our current level of leverage is simply a result of the bond issuance and the interim period before we settle the liabilities. Leverage will decrease as we pay down the Metlife liabilities reflected on our balance sheet. Consequently, our net debt to EBITDA and leverage ratios will move closer to our objectives. The current ratios are not concerning; we are right where we need to be with a strong balance sheet and considerable borrowing capacity.

Lorenzo Dominique Berho Carranza, CEO

For the end of the year, Juan, are we going to have a net debt to EBITDA close to 25% loan-to-value and net debt to EBITDA below 4.6 maybe?

Juan Felipe Sottil Achuttegui, CFO

around 4x.

Operator, Operator

Your next question comes from the line of Francisco Chávez with BBVA.

Francisco Chávez Martínez, Analyst

The question is regarding the improvement in guidance for EBITDA margin. How sustainable is this new margin? And what can we expect once you resume the start-up of new projects?

Juan Felipe Sottil Achuttegui, CFO

We have been focusing heavily this year on maintaining a low-cost base, and the growth in our revenues has significantly aided us in sustaining an attractive EBITDA margin. As we continue to expand the company, we expect EBITDA to remain strong. I anticipate that EBITDA will consistently be in the range of 83% to 85% as we progress.

Lorenzo Dominique Berho Carranza, CEO

And related to the development question, I believe we have the right management structure since we are a vertically integrated company with internalized management. We have the appropriate headcount to manage the operations for our existing portfolio as well as the development aspects. Since we are developing in the same markets where we already have a presence, we do not expect any significant increases in costs. In fact, we anticipate becoming even more efficient and benefiting from our internal management and vertical integration. Therefore, we believe that operational margins will continue to favor us.

Operator, Operator

Your next question comes from the line of Adrian Huerta with JPMorgan.

Adrian Huerta, Analyst

Congrats on the results and also on the land acquisitions. Just going back to the first question on demand. What else can you share with us in terms of how quick the recovery could come, meaning tenants looking and willing to sign contracts? Is there a backlog, or is there a backlog of companies that you've been talking to that have basically said that once there's more clarity on the USMCA, they will be coming? Anything else that you can share with us on that to give us an understanding of how quick these companies could start signing new contracts?

Lorenzo Dominique Berho Carranza, CEO

Thank you for your question. This year has been a period of transition. Earlier in the year, we experienced a significant slowdown in new absorption, with many companies halting decisions in both Mexico and the U.S. due to uncertainty. However, as the year has progressed, we are witnessing a substantial backlog of companies eager to establish operations in North America. We are in regular communication with potential clients and have been traveling globally, with representatives in the U.S., Canada, Europe, and Asia, attending conferences to understand how companies are evaluating their manufacturing strategies. Decisions are influenced by various factors; some companies are responding to the AI technology revolution, making rapid advancements in the electronics sector despite tariff uncertainties. Others, like those in the auto industry, are waiting to see the final outcomes. Nonetheless, companies still aim to stay in the most dynamic economic region, and Mexico plays a crucial role in North America. We continue to see encouraging export numbers to the U.S. and improving trade balances, particularly as some countries reduce their participation with the U.S. Thus, we are confident in our position as a key partner to the U.S., and we believe that the industries established since NAFTA will remain well-positioned.

Adrian Huerta, Analyst

Understood, Loren. And if I may add just another quick question. So we should expect some new construction to start over the next two quarters. And regarding the land acquisitions, we shouldn't expect much to happen in the next two to four quarters?

Lorenzo Dominique Berho Carranza, CEO

Sure. As we have mentioned before, we adjust our development pace as needed. Currently, we are being cautious about where we begin new projects. We will keep an eye on the demand in each market. We have plans to start some projects by the end of this year, and next year we will evaluate the situation closely. The positive aspect is that we have been able to acquire land throughout this year, which positions us well for the mid- to long term. We secured strategic locations, including a second site in Guadalajara to support our Route 2030 strategy. We also acquired land in Ciudad Juarez, Mexico City, Monterrey, and San Nicolás, which are advantageous for last-mile and e-commerce logistics. Additionally, we recently acquired a prime piece of land in Apodaca that further strengthens our position in Monterrey. With this land in hand, we will begin making improvements, including earthworks and utility installations in Tijuana, to ensure we are ready to develop when demand increases. As of now, we have approximately 90% of the land needed for our 2030 strategy.

Operator, Operator

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

Alejandra Obregon, Analyst

Congratulations on the numbers. My question is on the energy front. You have now the land and you were talking about the utilities. I was just wondering if you can talk about how the electricity part is playing out. The new government announced five packages for industrial real estate, utilities, plants. So I was wondering if you think that will help your plans going forward? And then also your investment in associates line appears to be gaining traction. So just wondering if you can talk about this energy investment and how should we be thinking of it going forward?

Lorenzo Dominique Berho Carranza, CEO

Thank you for your question, Alejandra. Being able to anticipate our clients' energy needs has been essential. That's why we have closely monitored various options to offer our clients in different regions. We believe the government is moving in the right direction by continuing to support foreign investment in manufacturing. We have been collaborating with them and the association of industrial parks to ensure that these parks have the proper packages, incentives, and energy resources to attract investments. We are optimistic about the government's efforts in providing these support packages. Vesta exemplifies how we can begin feasibility studies and energy processes as soon as we acquire land. While we develop the parks and facilities, we are simultaneously investing in energy infrastructure so that when companies ramp up their operations, energy will already be available. We recognize that this requires time, but we have achieved great results by securing energy, which is why our parks are already equipped with it. We are confident this will be a significant advantage as demand continues to rise. Regarding your question about energy investments, we have recently made some investments in renewable energy, including a recent closing in Monterrey. This focus on solar panels and renewable energy aligns with our Route 2030 goals, which mandate a certain percentage of renewable energy in our portfolio.

Operator, Operator

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

Wilfredo Jorel Guilloty, Analyst

I have two quick questions. I don't want to dwell too much on development, but I'm interested in the specific quantitative indicators you consider when deciding to launch a development. Are you looking at occupancy trends within your own portfolio? Do you analyze the market’s occupancy or net absorption trends? Do increases in leads from external brokers or your internal commercial team play a role? I'm curious about the specific numbers you evaluate when deciding to proceed with a new project like the one you announced in Guadalajara. For my second question, regarding leasing spreads, I've noticed a slight decline in the last twelve months' leasing spreads, from 13.7% in the second quarter of 2025 to 12.4% in the third quarter of 2025. What factors contributed to this decline? Are lower rents in certain markets being used to boost occupancy? I would like to understand the reasons behind these trends in leasing spreads.

Lorenzo Dominique Berho Carranza, CEO

Thank you, Jorel, and thank you for joining the call. Vesta has a distinct investment strategy. We have developed over 43 million square feet of industrial buildings in the past 25 years. Additionally, we work with excellent clients and manage our properties internally rather than relying on external brokers. This gives us direct insights from our clients and the industry. Our strategy includes local leadership and regional marketing officers in each market, allowing us to understand the key demand drivers. We base our investment decisions on our own data and analysis, though we sometimes consider outside opinions. The core knowledge is within Vesta regarding when and where to start projects. Our experience has proven successful. For instance, this marks our third expansion at the Guadalajara Vesta Park. Our notable clients there include Amazon, Mercado Libre, O'Reilly, DSV Logistics, and Foxconn. Maintaining close relationships with these companies helps us identify market trends. We believe that launching new buildings near growing companies is fundamental to Vesta's success, and we plan to replicate this approach in other projects where we have recently acquired land. Regarding your question on leasing spreads over the last 12 months, there hasn't been a significant drop. I anticipate they might stabilize in the future, but the trend appears to be upward over the last four quarters. If our spreads remain in the low teens or high double digits, that will be appealing. It's crucial for these numbers to be sustainable moving forward. We believe Vesta's portfolio has the potential to improve its leasing spreads, currently at 12%, which is significantly higher than inflation. Most of our leases exceed inflation rates, and all are indexed to inflation, adjusting annually. In many situations, we can adjust accordingly. Today’s CPI is around 3%, while we see a 12.4% spread, which is substantial.

Wilfredo Jorel Guilloty, Analyst

A quick follow-up, if I may. So just based on the development pipeline and how you get to the decision to launch, you mentioned conversations with existing tenants. Does that imply that future launches could be for these existing tenants for them to expand? Or is it more that you get color on the demand from them and that gives you the confidence to go forward with a new development?

Lorenzo Dominique Berho Carranza, CEO

Well, I can only tell you that more than 60% of our growth comes from existing tenants. So we like to grow with existing tenants, particularly because they are outstanding companies. So that's why we continue to develop close to them. And if there's an opportunity to grow with them, it's fine. But if we continue to find other great companies that need to open up operations in Mexico, we will continue to do so. And I think that for that reason, we focus a lot on trying to be close with good companies and keep and support their growth and become the real estate partner in Mexico. And I think that has played out well in the past, and we think that, that will continue playing out well in the future.

Operator, Operator

Your next question comes from the line of André Mazini with Citi. And since we have no response from Mr. Mazini, we are moving on to the next question from Francisco Suarez with Scotiabank. No response again, moving on to the next question. Next question is from Anton Mortenkotter with GBM.

Ernst Mortenkotter, Analyst

Congrats on the results. We've been hearing that some private developers under pressure to deploy committed capital are starting to buy stabilized assets rather than take on new spec projects given the softer demand backdrop. Are you seeing that trend as well? And would you think that this environment actually plays to your advantage, I mean, being able to preserve liquidity and deploy when demand dynamics are more favorable?

Lorenzo Dominique Berho Carranza, CEO

Thank you very much for your questions. One of the significant advantages of this industry is the ample liquidity in the market, which benefits us. We are noticing private market players willing to acquire stabilized assets. For instance, we recently completed a small asset sale that indicates a willingness among owners to acquire buildings, particularly from institutional investors. However, our primary focus will remain on development, especially since we are purchasing land at current prices, investing in infrastructure, and building new properties. We believe that with development yields at around 10%, compared to acquisition cap rates of 6% to 7%, there are substantial investment opportunities available. That's why we will prioritize capital allocation towards the highest returns that create the most value. Liquidity benefits everyone, and we've seen this trend not just from private markets. Recently, an IPO in the industrial sector launched with appealing cap rates, which sets valuation standards and expectations for the future. For Vesta, we see a good chance for repricing, especially considering the significant discount we are still facing to our net asset value. These indicators also give us the opportunity to potentially buy back stock, as we have a buyback program established. When there is a considerable discount to our net asset value, we will continue to utilize this program, as we have in the past, to enhance shareholder value.

Operator, Operator

The next question comes from the line of an indiscernible speaker. For Vesta, we believe there is a good opportunity to reprice, especially considering the significant discount we are still experiencing compared to net asset value. This presents great references and also gives us the chance, in some cases, to buy back stock since we have a buyback program in place. When we notice a major discount to net asset value, we will continue to utilize this program, as we have historically, to generate value for our shareholders.

Unknown Analyst, Analyst

Congratulations on the results. I have a couple of questions. The first one is a follow-up on lease spreads. I mean we did see like a small decline quarter-on-quarter, but they're still really above 2024 levels where they were around like 7%, 8%. Do you think like going forward into the fourth quarter and next year, you will be able to sustain this double-digit increase? And the second question is on same-store portfolio occupancy. Could you give us like a little bit of color on why the occupancy in Tijuana dropped from like 97% in the second quarter to 85.6%?

Lorenzo Dominique Berho Carranza, CEO

Thank you. I will start with the second question. We experienced a slight decline in same-store occupancy due to the addition of new buildings to the same store, which are currently in the marketing phase and remain vacant. This includes two large buildings in the Tijuana mega region, one of which is located in Ciudad Juarez. That's the reason for the slight drop. However, since these are new buildings in the marketing stage, we are confident that this decrease will not have a lasting impact and will eventually recover. Regarding your first question, I believe we will continue to see sustained growth in leasing spreads in the double digits. Market rents have remained stable in most areas, which is a positive sign. This has led to significant increases in renewals and leasing spreads across various markets, allowing us to capture value. We expect this trend to continue as we capture leasing spreads above inflation, and we remain optimistic about it.

Operator, Operator

Your next question comes from the line of Alan Macias with Bank of America.

Alan Macias, Analyst

Just can you share the cap rate of the building you sold recently? And are you seeing more demand or more offers to buy buildings? And the second question is, what are you seeing in the trend in real estate taxes and insurance costs? Any indication of what the government will be looking for tax increases next year?

Lorenzo Dominique Berho Carranza, CEO

Thank you, Alan. Let me start with your second question. Currently, we have secured our insurance costs for the next couple of years, so we haven't seen any major adjustments at this time. Eventually, when we renegotiate that, we will see. We also haven’t observed any significant changes in real estate taxes. More importantly, while we bear part of the cost, we transfer some of that to our tenants. In most cases, we have triple net leases, meaning that tenants can absorb those costs. Even so, we believe this doesn't significantly impact their overall production costs. Rent and some operational costs remain competitive compared to other regions. In some instances, rent and real estate-related costs only account for 7% to 9% of total production or logistics operation costs, which is still a competitive figure. We will continue to seek cost reductions, but I believe tenants can manage those costs and remain competitive. Regarding your third question about the cap rate, we will keep proceeding with asset sales. A recent example is an asset we acquired over 15 years ago, which we did not develop. The cap rate based on in-place rent was 6.2%, with a sale price of $68 per square foot, representing a nearly 10% premium. This illustrates our strategy of selling certain vintage assets to realize value, sell at a premium, and focus on capital allocation towards higher-return investments, such as new developments, effectively closing the investment cycle.

Operator, Operator

The next question comes from the line of Francisco Suarez with Scotiabank.

Francisco Suarez, Analyst

Congratulations on the great quarter. My first question is about Mexico City, specifically why La Villa has taken so long to lease up. Is there a difference compared to what we observed at Punta Norte? My second question pertains to the overall trends in the market regarding concessions, such as three months of rent or step-up considerations, and any CapEx. Have there been any changes in how you renew leases or offer new leases to clients compared to the past?

Lorenzo Dominique Berho Carranza, CEO

Thank you for joining the call. La Villa is an impressive project, though it's smaller than Punta Norte, which is a significant fulfillment center for e-commerce. The opportunity with Punta Norte was unique, allowing us to secure a long-term lease in U.S. dollars with a major e-commerce player. La Villa focuses on the last mile and is smaller in scale. We have been exploring potential clients and have been careful in finalizing the right tenant, which has taken longer than anticipated. The silver lining is that rents in the region are increasing, and we’re optimistic that we will be able to lease the building at a better rate with a more suitable client. We're confident that by next year, it will be fully leased. Mexico City has strong dynamics, and we recently acquired land in the second quarter, with hopes to begin construction soon. Regarding concessions, they vary by market and tenant. When we establish a lease, we build a relationship with the tenant, focusing on long-term leases in U.S. dollars with reputable companies that enhance property value. Therefore, while we may negotiate some concessions on rent, we also receive benefits in return. Our strategy remains creative, aiming to collect rent promptly while prioritizing the overall return on the asset rather than immediate income. We prefer to have a vacant building over an unsuitable tenant, even if it takes longer to find a good fit, and we will continue to uphold that principle.

Operator, Operator

Your next question comes from the line of André Mazini with Citigroup.

André Mazini, Analyst

Apologies for the connection issue. My question pertains to your land strategy at a high level. It seems you have more than 90% of the land necessary to achieve the 2030 growth plan. How do you view the potential trade-off between risk and return? On one hand, holding a large land bank isn't ideal since it doesn't generate cash flow. On the other hand, having too little land could put your growth plan at risk. How do you navigate the trade-off to maintain an optimal land bank that supports both cash flow and growth?

Lorenzo Dominique Berho Carranza, CEO

Thank you, André. That raises an important question about Vesta's overall strategy, which emphasizes the necessity of having a forward-looking plan. Our strategy builds on past successes, particularly from when we implemented the Level 3 strategy, during which we invested about $1.1 billion in development across key regions such as Guadalajara, Monterrey, Mexico City, Tijuana, Juarez, and other markets in the Bajio. This approach proved to be very effective, yielding returns exceeding 10% in U.S. dollars during that period. In our Investor Day presentation, specifically on Page 22, we highlighted returns of 10% in Mexico City, 10.1% in Monterrey, and 10.5% in Guadalajara, compared to relevant transactions in those areas that were between 6% and 6.7%. We believe significant opportunities remain in our investment strategy moving forward, where our plans include purchasing land, concentrating on the right markets, and identifying a $1.7 billion investment for the Route 2030 strategy, focusing primarily on Monterrey, Guadalajara, Mexico City, Juarez, Tijuana, and Querétaro. Few companies possess a forward-looking strategy supported by adequate land resources. While determining the optimal amount of land has its complexities, being well-capitalized and having a global market perspective, especially with recent acquisitions in Monterrey, positions us well to secure land, develop infrastructure, and be prepared for when demand resurges. These projects have the potential for success, allowing us to showcase their benefits effectively. Thank you, everyone, for joining us today. Vesta's focus has been on ensuring we're well positioned to capture resurging demand. We are entering the final quarter of 2025 with a strong balance sheet, a high-value operating portfolio, and the strategic priority to continue executing on our long-term Route 2030 growth plan ahead of what we expect to be a strong 2026. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. We thank you for your participation.