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Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the FIBRA Prologis Fourth Quarter Earnings Conference Call. [Operator Instructions]
Thank you for your patience. Ms. Violante, you may begin the conference.
Thank you, Devin, and good morning, everyone. Welcome to our fourth quarter and full year 2022 earnings conference call. Before we begin our prepared remarks, I would like to remind everyone that all information presented in this conference call is proprietary and all rights are reserved. The information has been prepared only for information purposes and is not a solicitation of an offer to buy or sell any securities. Forward-looking statements during this call speak only as of the date of this call. Our actual results, performance, prospects or opportunities may differ materially from those expressed in or implied by forward-looking statements.
Additionally, during this call, we may refer to certain nonaccounting financial measures. The company does not assume any obligations to update or revise any of these forward-looking statements in the future, whether it's as a result of new information, future events or otherwise, except as required by law. As is our practice, we had prepared supplementary materials that we may reference during the call as well. If you have not already done so, I will encourage you to visit our website at fibraprologis.com and download these material.
Today, we will hear from Luis Gutiérrez, our CEO, who will discuss our strategy and market conditions; and from Jorge Girault, our Senior Vice President of Finance, who will review results and guidance. Also joining us today is Hector Ibarzábal, our Managing Director. With that, it is my pleasure to hand the call over to Luis.
Thank you, Ale, and good morning, everyone. 2022 was an exceptional year for the FIBRA as our operating and financial KPIs have reached new high watermarks surpassing our expectations. All thanks to our team on the ground. We have exceeded our internal objectives and completed our capital deployment goals. Let me discuss some highlights for the year.
Our FFO and AFFO continues to increase year-over-year on a nominal basis, 11% and 9%, respectively. The growth was driven by higher rents and acquisitions. Operating metrics were strong, highlighted by rental growth on rollover, a record of 20.5%. This is the main driver of same-store cash NOI of 6.5% and occupancy reached a record high of 98.9%. We raised around $400 million of capital through a subscription rights offering. This was the biggest capital issuance in Mexico in 2022 during a period of financial volatility. Our balance sheet is one of the strongest in the market. We have the lowest cost of capital and proven leverage, which leads us with ample firepower to be opportunistic during times of uncertainty. We acquired 1.4 million square feet during the year for $135 million. These properties fit our investment strategy of being located in irreplaceable locations built to the highest standards and leased to some of the best global customers.
We have made substantial steps on ESG during the year, and I will let Jorge go into more detail. While we have consistently delivered strong results, it is time almost certainly when our strategy shines derived. Our performance demonstrates the importance to focus on both manufacturing and consumption as owning the best facilities in key markets, close to the end consumer, all while we have been able to outperform the broader economy. Real estate fundamentals continue to be very solid. The metro space has doubled since prepandemic levels. This was mainly driven by manufacturing sector, led by companies making long-term decisions on supply chains as they become more regional, and this is a structural change.
In Mexico, logistics and manufacturing real estate recorded its strongest end of the year, accelerating its positive performance from previous quarters. Nearshoring and receiving local consumption drove the fundamentals, and we believe those trends will remain in 2023. We saw record demand in 2022 in our 6 markets, reaching 36 million square feet of net absorption, an increase of 10% year-over-year. Supply barriers remain very tight, preventing developers from catching up. Land is scarce. Utilities like electricity are insufficient in certain regions and entitlement periods are taking longer. Vacancy in our markets declined 120 basis points over 2022, reaching its lowest level of 1%. Border markets and Guadalajara are sold out, and the vacancy in Monterrey is at historic lows.
As a result of these imbalances, rents are accelerating. Market rental growth increased by 15% during 2022. For 2023, we expect this to continue and vacancy to remain at very low levels. FIBRA valuations came flat at the end of the year. Our market cap rate was 6.65% and this is 50 basis points increase, which was offset by market rental growth. With the raise of interest rates, we expect a pressure of real estate valuations as we enter the year.
Let me expand on what we're seeing on the ground. More than 50% of the projects were build-to-suit are pre-leasing. Customer sentiment is positive as they are trying to secure the few available spaces ahead of future demand. On the manufacturing side, nearshoring continues to be the most robust trend driving demand in our markets. We estimate 3/4 of demand came from these opportunities. Shifts in the supply chain is making companies make long-term decisions towards regionalization, relocating all manufacturing process to our markets. Mexico is very well positioned to continue levering this opportunity in the years to come. Monterrey represented 30% of total demand due to its infrastructure and qualified labor, while border markets had record activity.
Additionally, we're seeing an incremental activity of logistics in the manufacturing side. Inventory management services from local and multinational 3PLs have been increasing. One example is that during the year of our sponsor signed 4 bids of projects in border markets plus Monterrey for 2 million square feet. We believe these firms will keep on growing, and some of these companies are already our global customers.
On the logistics front, customers, including e-commerce, 3PLs and retailers, had a positive utilization of more than 80% to face seasonal sales and are trying to secure spaces ahead of future demand. Because of that, Mexico City recorded the strongest quarter, absorbing 4 million square feet in the same period, driving the vacancy rate towards 2%. As land scarcity gets more severe, we expect to see new projects beyond the tollbooth emerging and the consolidation of Last Touch facilities.
As an example of this last one, we recently secured one of our Last Touch spaces in [ Mexico ] to a convenience store. We are seeing more traction in this kind of activity. Before concluding, let me discuss the 2023 outlook. We're optimistic as we start the year. I have never seen such market conditions in any time in my professional career, and we're very well positioned. On the internal growth side, increasing rents is the main driver to higher cash flow with no significant investment. Our mark-to-market is 21%. This is a great opportunity to have another record year of rental growth as we push rent and turn.
On the external growth side, we expect to be active and opportunistic. In addition to the Prologis pipeline of 5.3 million square feet, we will be patient and keep exploring third-party assets that align with our investment strategy. We view our balance sheet as a major competitive advantage. The flexibility we have allows us to play more offense. Our team of real estate professionals proved while they are the best in class during 2022 with seamless execution despite a changing operating environment. Putting everything together, we're excited about 2023. Our hard work will carry to this year where we expect our cash flow generation to be even stronger. We are increasing our distribution above 8%, sharing our success with our investors.
With that, let me turn the call over to Jorge.
Thank you, Luis. Good morning, and thank you for joining us. As Luis mentioned, we ended the year with exceptional results, driven by stronger demand and supply, mainly due to nearshore, which we see as a structural change and long-term trend. In 2022, we set many new records for the FIBRA and in the sector, such as year-end and average occupancy, rent change, same-store cash and GAAP NOI. This is a result of market dynamics and excellent operations from our integrated teams. As you can see, we have a portfolio in excellent condition supported by a blue chip balance sheet. This combination will help us keep on delivering value to our investors. In line with this, let me walk you through our financial results for the quarter.
FFO reached $41.5 million, a 15% versus last year or USD 0.42 per certificate, mainly due to rental growth and acquisitions within partially offset by last year's rights offering. AFFO was $32.3 million for the quarter, a 17% increase when compared to last year and above our expectations. Moving to operating metrics. Leasing activity reached 2 million square feet with a record period end and average occupancy reaching 98.9% and 98.4% above our expectations. Net effective rent change on rollover increased close to 27%, representing the highest since IPO. And for the last 12 months, it has been around 20.5%.
In terms of same-store cash and GAAP NOI, we had a positive increase of 9.8% and 10.1%, respectively. These results reflect our portfolio rent growth, higher occupancy and annual bonds for the quarter. We entered the new year in a position of financial strength with the strongest capital structure in the sector, maintaining excellent metrics and financial flexibility for future growth. Let me go through the highlights. Loan-to-value is 20%, which gives us ample liquidity, weighted cost of debt of 4% weighted debt maturity of 7.5 years, debt to adjusted EBITDA of 3.7 and fixed coverage ratio of 5.2.
Now I would like to provide you our 2023 guidance. We keep on seeing high demand in our markets. In this sense, we expect the year-end [ occupancy ] to range between 97% and 98%. Following our strong leasing and record rent change in 2022, we expect same-store cash NOI growth to range between 3% and 5%. Annual CapEx as a percentage of NOI to range between 13% and 14%. G&A to range between $31 million and $34 million. On the capital deployment front, we expect to acquire between $100 million and $300 million, asset disposition between $0 and $50 million. Putting all this together, we are setting our full year FFO per CBFI range between $17.5 and $18.5 spend. Given our excellent results, we keep on adding value to our investors by increasing our distribution 8.3% to reach $13 per certificate.
Moving to ESG. Our efforts in 2022 can be summarized as follows. We have committed to NetZero by 2040 along with Prologis. We have reached 54% of certified buildings and 77% of LED lighting in terms of area, our goal being 100% by 2025. We launched our solar initiative in [indiscernible]. We were recognized for the second time a sector leader by Greg. We continue to be part of Dawson's sustainability index and the local S&P ESG index. On the soil side, we started our Prologis workforce initiative to help the communities around our portfolio to be employed by our clients. Before I finish, I would like to talk about last year's tax gain and its effect on the distribution. Dividend guidance distribution for 2022 was $0.12 per certificate, which represents $112 million, and we will comply with this guidance distribution.
In line with local tax rules, total taxable gains for 2022 will include an important portion coming from inflationary and FX gains on the debt. These 2 effects will make FIBRA Prologis taxable gain for 2022 an amount above our guided distribution. Because of this and in order to comply with preregulation before March 15, we will make the distribution in cash, which will comply with tax rule for 2022, but will be part of 2023 guided dividend. Let me be clear. FIBRA Prologis will distribute in cash an amount which will represent around 45% of total 2023 guidance and the balance to be delivered in equal payments on the second, third and fourth quarter.
I would like to finish thanking our teams on the ground who have made an excellent job and our investors for their constant trust and support. 2023 will bring new challenges and opportunities to our sector. Thanks to our strategy, unique position in the market and a strong balance sheet we will continue delivering sustainable growth to our holders and are ready to take advantage of opportunities. With that, I will turn it to the operator for Q&A.
[Operator Instructions] Our first question comes from Vanessa Quiroga with Credit Suisse.
Congrats for the yearly results. The question I want to focus on is about the contracts that you are signing currently, if you are seeing any structural or more profound changes in how you are signing contracts or negotiating terms with tenants given the increasingly tight demand-supply situation of industrial real estate in Mexico.
Thank you, Vanessa. This is Hector. I just, I would say, Vanessa, that customers have been evolving, and they have now a much better understanding of market conditions than what we experienced probably in 2020 and 2021. The contracts have not been modified to answer your question. The main difference is that the rate change or the increasing rent that customers are having is higher than what they have ever seen, but they are getting used to this situation. They understand the restriction between new products being launched out to the market. And I think the main difference that I see is customers willing to secure space even for more of what they need. In the past, they were trying to match their needs depending on the business or the contracts that they have and now we see customers willing to have spec space that's the right way to call it in order to secure future business. Particularly logistic customers, they have learned that having the space is producing them good business and good margins with new customers and I think that's the way the industry they will be.
Okay. Hector, so that means that they are seeing into the next, I don't know, 5 to 10 years, I guess, when deciding the pace that they want to lock in, right? Is that right? And I guess.
Yes. They are ending for longer terms. In the past, they were probably 2 to 3 years, and now we've seen logistic customers requesting 3 to 5 years so that's an important difference.
Okay. I guess second floor industrial buildings will come soon. Thank you, Hector.
Well, hopefully, in order for a multi-historical building as we present in the [indiscernible] market, our best estimation as of today is that trends need to increase above 50% of what they are so it's going to take a while until we get there. But let's see what happens.
Our next question comes from Nikolaj Lippmann with Morgan Stanley.
Congrats on the strong 2022 numbers. Now I guess I get to ask that guidance question. When I look at the same-store NOI 3% to 5%, it does look a little low. Can you talk a little bit about your FX assumption? Also, what are you expecting with regards to the evolution of your operating expenses baked into the business assumptions? So that's my question.
Thank you, Nik. This is Jorge. Thank you for your questions. In terms of a same-store guidance of 3% to 5% for the year, you have to take into account that FX is part of that guidance. So we basically pay a high range and a low range of FX, and that moves a little bit the range. The reason for the rents to be in that level right now is that we do expect some increase in expenses due to inflation and other factors. Not all of our expenses are increasing by inflation, and we take into account that. So we have some operating expenses that are increasing during the year, and that gives us this range. Please take into account, Nik, that we ended the year with a very high occupancy. So occupancy for that matter, doesn't given our guidance, if not adding more to the same-store cash NOI, okay? So it's increasing operating expenses.
Nik, I would just say that 2021 and 2022 broke our forecasts. And given the pipeline, it's a good chance we can break the forecast again, especially on market rental growth. If that is the case, the numbers will be updated in following calls.
Our next question comes from Gordon Lee with BTG Pactual.
Quick question on the M&A front. First, on the deployment of cash, the $300 million guidance, I was wondering if you could give us a sense of how you think, broadly speaking, that will be distributed throughout the year, especially considering the fact that you already had some negotiations that I guess were stalled towards the end of last year, whether you've seen those coming back live. And the second question, just on the disposals. Is that just sort of ongoing portfolio sculpting best practices type of decision or is there something about those markets from Reynosa in particular that you've decided that you're less keen on?
Thank you, Gordon. Certainly, we are targeting PLD and third-party acquisitions. As you can see in the supplemental, we have 5.3 million square feet coming from the sponsor, which is 55% leased. As of timing, I would have to say that we need to be cautious. We have been seeing an environment of interest rates going up and certainly a higher cost of capital. There has been a gap between sellers and buyers and likely assets will be pressured in value. So for example, in the U.S., values have dropped around 5% to 10% this end of the year and a year more than 12%. So I think these times are to be patient. We need to see price discovered and let the markets stabilize and then just move forward.
I have to say that we are in a great position. We have the best balance sheet in the sector with amplifier power and 20% loan to value. So we'll be able to take care of opportunities as the year comes. Referring to your second part of the question, which is what has happened to some of the assets that we had negotiated during the rights offering. So we were able to move forward with one of those portfolios which was located in Tijuana. And this was coming from a U.S. pension fund. We were able to get a discount and you saw a closing of $60 million. The additional portfolio that we were negotiating, we did not get an adjustment to market conditions. And for that reason, we had to drop it. So having said that, I think we feel very comfortable about how we can take opportunities, internal, external, and we just need to be patient.
On the disposition front, Gordon, we are selling some assets that we have in erosion some assets that we have in a red on Matamoros. We're not selling anything in Reynosa. Reynosa is a market that we like and I think that PTs for activity is consistent to what we will redo trying to do now and to reshape the portfolio. We're taking advantage of the good market conditions to get rid of these assets that do not fit with our long-term strategy.
Our next question comes from Rodolfo Ramos with Bradesco BBI.
My question is a follow-up on Gordon's. I mean we have seen long-term rates in the last 3, 4 months or so coming down. I'm just wondering if you continue to see some of these other conversations that you might be having coming back to the table and how confident you are on your acquisition pipeline. And tied to this question as well is you've seen all of these markets along the northern border being very tight, whether it's space, energy constraints, et cetera, that make adding supply more difficult. Which other markets are you focusing on that might benefit from greater nearshoring demand given this tightness in the northern markets.
Thank you very much, Rodolfo for your question. And certainly, as we enter the year, we are hearing that there could be a soft landing, but nobody knows still very uncertain. And we will see, and as a result, long-term rates are coming down, the 10 years at 3.5%. Having said that, if you look at financing costs, they're up very, very high. If you want to secure long-term debt for one of these acquisitions, it's just going to be a number of around 7% and even higher than the 7%. And of course, the market takes time to stabilize. So we feel that maybe in the first or the second quarter, market conditions will settle. And once we feel the market has reached at the right level, I think we'll be ready to act.
So we see all transactions. We have a very healthy pipeline coming from the sponsor, as you can see in the supplemental. So we feel very comfortable to meet our guidance. And we see that there are more opportunities coming our way, we will always update it during our earnings calls every quarter.
The second question, Rodolfo, that you made regarding how the activity in the border is performing. We are 100% occupied in Juarez, 100% occupied in Tijuana and 99.8% occupied in Reynosa, 98.5% occupied in Monterrey. So these numbers speak by themselves. Monterrey is being one of the big auto winners of this nearshoring trends. It was a record market in absorption with 3.6 million square feet. And our sponsor made the largest bet on land on Monterrey 18 months ago. I think that this [ nearshore ] trend somehow is ratifying the views and the strategy in the markets that we have selected is the right one. You mentioned it is every day more and more difficult to supply new space in the markets that I mentioned. The energy is the most important challenge. And I think that these are very positive news for the current closings of FIBRA. This represents a higher challenge to grow organically and to supply in space.
But I think that Prologis is better positioned than competitors to surpass these challenges and to be able to supply space in these markets. This trend about customers requesting space is there. There is a pipeline, there's a waiting list. This high number on occupants is the evidence of this. So we need to work hard, and we need to surpass the infrastructure and the intelligent challenges to supply new spaces. And in the meantime, we need to take advantage, and we need to be doing a good job working with our customers, making them understand current market conditions and being able to achieve rent increases as we have always had in doing it.
Our next question comes from Gerard Gorski with Goldman Sachs.
I wanted to focus on the leasing spreads and trying to understand a bit of the breakdown because they did increase sequentially to 27%. But what I wanted to understand is, is this as true for consumer-driven markets as it is for manufacturing markets or has it led more by one or the other? And then connected to that, I just wanted to understand what is your expectations for leased going into 2023? Do you expect this pace of high 20s, perhaps 30s to continue increasing during this year? Those are my questions.
Gerard, this is Hector. Thank you very much for your question. I think that this question relates to one of the main points of FIBRA Prologis and the potential that we have to keep on creating value within our portfolio. The best view that we have as of today is that the less stress that we have for a market that we have in place and for market rents is about 20%. This is at the beginning of 2023. My best expectation that I have on this relies depending on each one of the markets, [indiscernible] on top of this list, but I wouldn't be surprised if market trends in these 2 markets go above 20%. This represents a unique opportunity for us to keep on growing organically without making any additional investments. This doesn't have to do if the facilities are manufacturing or logistics.
I think that as of today, the main problem that we have is the challenge, as I was mentioning in the previous question, the challenge to supply new space. The vacancy is at a peak in all of the markets in which we participate, rents are at peak and rents will keep on increasing. So supply in the state is very difficult. The bond space will be creating important rent growth going forward.
Our next question comes from Pablo Monsivais with Barclays.
I have 2 quick questions. The first one is, if I recall correctly, you have record numbers in '21, record numbers in '22 and it seems like 2023 will be record as well. [indiscernible] valuations in the market hasn't been reflecting the true value of your portfolio perhaps until now. How do you see the cap rates and the valuations trading in 2023? Do you think that finally, we are in this positive environment to see valuations reflecting the positive trends that we're seeing, that's number one. And the second one is regarding that, given that your portfolio is mainly focused on logistics and yet you see a very strong boost on the light manufacturing side, would you reconsider shifting the gears to do more live manufacturing in the next 2, 3 years?
Thank you, Pablo. This is Luis. And yes, early the pandemic created great conditions for the real estate markets. And of course, this is not only in Mexico, it's globally. But the current trend has to do very much with the structural changes in the manufacturing sector in which companies are making long-term supply chain decisions and shifting the manufacturing to Mexico. And this is a driver that only the manufacturing countries have. And we have seen our country take advantage of that in comparison to other more developed markets. As a result, 2021 and 2022 demand has doubled from pre-pandemic levels.
We saw, of course, the area of cheap money, and we saw cap rates coming down very, very importantly, but now with interest rates going higher, we are seeing our values stabilized. And we have seen, especially in the second half of last year, values to go up, as I was mentioning in the call, we have seen adjustments in the U.S. of around 5% to 10% and in Europe between 10% and 15%. In Mexico, year-on-year on 2022, we have an expansion of around 7% and values came flat in the fourth quarter.
So we believe that our real estate values will come down in Mexico as they have come down in the U.S. and Europe. And this will be a function of how market rental growth is related to this cap rate expansion. So this is something that's going to be price discovery. It is total not going to go as much as it is going down in the U.S. and Europe because also on the upside, it didn't go much as up as it did in those other countries. So we'll need to see. Certainly, there is a lot of excitement on the nearshoring trends. We did the rights offering at MXN 52 recording trading above 60. So we are trading above NAV. Our NAV is currently around MXN 58 to MXN 59. So this is around a 5% premium.
Certainly, the portfolio and our strategy is very flexible. So we have chosen the best industrial markets. In the times of e-commerce expansion, we had a lot of growth in Mexico City, and we were prepared to do that. Now that we have this structural change in manufacturing, we have great presence in the border markets and Monterrey, and we're taking advantage of it. So I guess what I'm saying is we're flexible, and we will be moving where the demand is. Certainly, we see a better growth on the manufacturing sector in the next 2 to 3 years and eventually, if the winds change, we are ready to take advantage of it.
Just an additional comment on this. 60% of our portfolio, logistics and 40% manufacturing. Number one, logistics and consumption are not in bad shape. I think that there's a perception because of Amazon announced last year that they were giving out in some of our facilities that this was a very negative condition. I think that what happened last year is that the logistics growth is getting into our bond rate visible rate in the pandemic, the numbers that logistics and e-commerce reached were spectacular. Today, we keep on experiencing in Mexico, an increase near 15% on e-commerce and this type of activity, which is a run rate that could be sustainable. So I don't see an issue going on with this part of the portfolio.
Second comment is that the prevotes we do spend a lot of time in the product design. And even if you are developing a product the data product, we do a lot of work with our customers even in the build-to-suit projects because the facilities that we develop are either reduced in manufacturing or logistics. So this has both components, they are flexible, they are hybrid, and I think that, that does represent an additional advantage to us.
[Operator Instructions] Our next question comes from Francisco Suarez with Scotiabank.
The question that I have is on the parent overall pipeline that I see. Basically, these guys commenced starts of 4 million square feet last year. They think that they will be having completions 4.3 million square feet this year. The overall language side, mostly at 14 million square feet as well. So my question is, it seems that PLD is not reducing their overall pipeline and develop Mexico. So linked to the previous questions, the questions that I have for you, is that will you be asking the same discount to PLD as well in the Mexico Prologis that are stabilizing?
Thank you for your question, Francisco. And let me tell you that we have never been restricted by PLD regarding their investments in Mexico. Despite of geopolitical conditions, Mexico has always been a country where PLD has shown appetite to keep on investing. On a relative basis, the business in Mexico to PLDs as they have grown importantly in the U.S. is below the big numbers that we used to have so that represents an opportunity. I think that the challenge that we have here conducting the business of Mexico Prologis is to present the right opportunities with the right returns. And we do so we will have ample support from corporate.
Having said this, we have not stopped an ore from our sponsor. We keep on chasing the right land in the right market. I think that an additional variants is that today, you need to anticipate and from the moment you buy land until the moment you can receive the first check from your customer could be between 2 to 3 years. So this cycle is much more bigger than what it used to be. And this represents a barrier. We see a lot of new competitors jumping to the market. And this situation is different from what was in the past. You need to anticipate, you need to buy land, you need to work infrastructure. You need to start investing a lot of money before establishing the first need check. And this is a new condition that the market has, and we do not anticipate the situation to be different in the short to near term.
So Paco, one last comment. So what is our 2023 plans on the sponsor pipeline. I think number one is to replenish land in some of the markets, especially Tijuana. And then I think you can expect that the parent will at least put to work 3 million square feet of additional. And most likely, a lot of this will be build-to-suits as the market conditions and this is just a great advantage to have FIBRA for the pipeline.
I'm sorry to jump in for the long answer, Paco, but remember that this FIBRA process on this acquisition with PLD through a third-party appraisal. So there's no negotiation on the value. That said, as we've mentioned last year, we were going to do some acquisition from Prologis value we're coming in to the appraisals, and we decided to stop and wait a little bit more, given what you just mentioned. So there's not [indiscernible]. We are not obligated to buy. Prologis is not in the position of pushing these assets to us. We can decide and the value comes from operation.
Our next question comes from Adrian Huerta.
My question has to do with the dilution that you had from the equity offering. How do you guys see that dilution that you had and when are you expecting to be back to the levels that you had before this? I mean if you look at the FFO guidance, I think you're guiding I mean, let's say, in peso terms, somewhere around MXN 3.4, MXN 3.6. And if we look at the 3Q annualized was a little above MXN 3.8. And considering the guidance that you have on M&A, it seems like it will take a while for that dilution to close.
Thank you, Adrian. This is Jorge. Let me divide it and I'll just focus on FFO and to give you a quick answer. First of all, if you look at our FFO on a nominal terms, if you do the math, we are increasing net FFO year-over-year in 2023, about 20%. So there is an increase in nominal basis. On a per share basis or per certificate basis, we added 20% more certificates due to the write offering within last year. So basically, we are rerating the dilution. We are paying being flat year-over-year. So what we said last year is that it would take us about 18 months to neutralize the dilution if you may, it is taken us 12 months, 1 year so 6 months in advance.
Regarding our acquisitions, most of our acquisitions, the way that we see them, the way that we model them, we model them more to the end of the year. it could happen before but for valuation in terms of guidance, we do that because there are things like antitrust entitlement and some other factors that we do not control, but we account in our model for hopefully this answers your question.
So Adrian, the dilution has gone better than we have expected as Jorge said, 12 months. And I think the main driver of it is higher cash flow coming from rents. That is mainly the driver that is closing the gap on the dilution front.
I would not look at it on an annual basis, and I just take the 3Q number, which was the last quarter that we don't incorporate the 1Q and 2Q into the equation. Again, at somewhere around 3.8% FFO per share is that a level that you could be achieving then by the fourth quarter of this year then 3, 4 quarters of this year?
I mean, you're looking at and your comparing 3 quarter to fourth quarter without the new certificates, is that what you're saying? That's what you're saying. I mean we would be 20% above the third quarter if you take away the certificates.
Our next question comes from Renata Cabral with Citibank.
You mentioned a lot about the M&A front, but I have a question about the long term. Do you think that now we have Mexico has a lot of opportunities related to new shore and the reason why the M&A front will be related to that. But in the future, how do you think Prologis will have the portfolio because today, it's more linked to logistic tenants, let's say? And do you think that in the long term, I don't know, in 5 more years, it can shift to manufacturing or you will be opportunistic when we see that only in the future?
Thank you, Renata. And certainly, yes, as I was mentioning, 3/4 of demand comes from manufacturing in 2023. Having said that, demand doubled prepandemic levels and even logistics demand is in pretty healthy levels. It didn't double as manufacturing, but it's pretty healthy. So very confident in our drivers. We are being opportunistic, and we believe there's going to be higher growth on the manufacturing side. So we could easily see that in the next 5 years, the manufacturing sector may represent more than 50% of our portfolio in the next 3 to 5 years, but eventually, the drivers change, and we will be taking advantage of where the market goes. So at this moment, we feel very comfortable and we're very well positioned and I think we have the best portfolio in the sector.
Our next question comes from Alan Macias with Bank of America.
Just 2 questions. Just to give an idea of how competition for acquisition is developing in Mexico. What are you seeing? And if you are seeing new players coming into Mexico into acquire assets? And what are you looking at cap rate acquisition levels? Should we expect something similar to the fourth quarter acquisition 6.3 or should we expect something higher perhaps.
Thank you, Alan. This is Hector. I could identify the competition into different sectors. The bigger investors are willing to take advantage of our Mexico industrial real estate with the big portfolios, the nearshoring as all that way, I think that, that profile of our big names that are not yet in Mexico, keep on being interested for they've got the same approach that we have and this volatility and this lack of price certainty is bringing to them. I think that they will be back, and I think I'm expecting them to have a different situation on the second part of this year once that interest rates have settled and we have a better panorama of what's coming forward.
The second sector of competitors, it has never been as big as it is today. We have been observing a shift from other type of asset classes developers, office developers, shopping centers, developers, residential developers. We see a lot of interest, and they are welcome to the sector as the sector has big opportunities. But I'd like to mention all the time that almost 70% of the business that we do, we do with our customer base. So in this business, it's very important to have this type of business relations to create confidence with the customers so you become their partner on the growing future. This is the way I see competition.
Regarding cap rates, my best forecast that I will have for this year is that we will still have some pressures to compress cap rates, not much, probably between 25 to 50 bps. But I think that importantly, the market rent growth that we're expecting will offset a lot of these corporate expansion. So interest rates and volatility settles cap rates potentially will recuperate. This mentioned in the previous answer, in the U.S., there was much more dramatic upside and downside on cap rates. Mexico has been more moderate on these so I don't anticipate a big fluctuation on that on 2023.
Our next question comes from Lucila Gomez with Compass Group.
I have 2 questions. The first one is looking at the 2023 outlook and guidance you mentioned and the following on a little bit on all the nearshoring questions you've had. I just wanted to ask, does the 2023 outlook includes additional opportunities that could come from near-shoring or are you just taking into account, for example, current negotiations and current clients that have been looking around. So are you expecting like the guidance includes some possible additional nurturing or only what you are currently seeing in Mexico? And my second question is, sorry, I missed the NAV number you gave so if you could mention it again.
Thank you, Lucila, for your questions. So I guess when we guide in this year, we take into account all of the circumstances. Certainly, as you mentioned, the nearshoring opportunities are all there. We are working in several third-party acquisitions, and we also have the 5.3 million square feet pipeline coming from the sponsor, which will be available for FIBRA to acquire. So having said that, we need the market to stabilize. And if we have it stabilize sooner, I think eventually, we could revise our guidance up or down but we feel very comfortable about our guidance and certainly, I hope it proves to be conservative, and we outpace it, but that would have to be announced at a later date.
And Lucila, this Jorge, you made a question about NAV that you missed the number. We didn't give a number on NAV. By the way, we don't give a number of NAV. You have the different pieces. You have the valuation of the portfolio, which is basically flat. In our balance sheet, you have the number of shares on our debt so you can do the math and take your peak on the FX. So we can discuss this in a more call, but we don't give NAV numbers.
Our next question comes from Rodolfo Ramos with Bradesco BBA.
Just a follow-up on -- I mean you touched on the Mexican peso during your earlier comments and how it affects guidance. But just wanted to see, we've seen the peso is giving up some gains, but it was around 1,850, as back to '19. It's certainly been stronger than perhaps we were expecting not too long ago. How does this affect in your opinion, commercially talks with potential clients going forward? I mean is this a real source of concern? Have you seen customers perhaps trying to change rent or lease denomination? How should we think about a very strong peso impacting your business going forward?
Thank you, Rodolfo. We have happy customers. I mean all the people that pay I mean some of our customers that do pay dollars and they have this exchange rate is a lower lease cost to them. The most of the peso component we have in Mexico City because they are multinational companies doing operations in pesos. So for the FIBRA, it does represent a higher revenue from the component that we have pesos that could be probably around 3% will remain at these FX till year-end. So I think that a strong peso does not create anxiety to our customers. We never change forces. I mean, dollar leases are dollar leases until they expire and peso leases after leases until they expire. I mean, I think that we have a clear understanding with customers about this, and we do not experience a lot of conversations from this regard.
There are no further questions at this time. I turn the call over to Luis Gutiérrez for closing remarks.
Well, I want to take the opportunity to thank everyone that connected to this call. 2022 was an outstanding year. And as I said in my remarks, I have never seen such good conditions in industrial real estate. So we are hoping for a great year as well. Please feel free to reach out. Hopefully, we can show you our properties. And thank you very much and see you on your next call. Thank you.