© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Doug, and I will be your conference operator today. At this time, I would like to welcome everyone to Fibra Uno's Second Quarter 2018 Earnings Call. Fibra Uno issued its quarterly report on Tuesday, July 24, 2018. If you did not receive a copy via e-mail, please do not hesitate to contact us in New York City at (646) 284-9435. Before we begin the call today, I would like to remind you that the forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance with IFRS and are stated in nominal Mexican pesos, unless otherwise noted. Joining us today from Fibra Uno is -- in Mexico City is Mr. André El-Mann, Chief Executive Officer; Mr. Gonzalo Robina, Deputy CEO; Zury Attie, Executive Vice President of Strategy and Finance; Gerardo Vargas, Vice President of Finance; Mr. Javier Elizalde, Vice President of Treasury; and Mr. Jorge Pigeon, Vice President of Capital Markets and Investor Relations. And I'd now like to turn the conference over to Mr. André El-Mann. Sir, please begin.
Thank you, Doug. Ladies and gentlemen, thank you for joining us on FUNO second quarter of 2018 results call. As customary in our calls, I will make a few remarks, and I will then handle the call over to Jorge Pigeon for a more detailed discussion of the quarter's relevant figures. I want to start our call commenting on one of the most important changes for our country in many decades. On July 1, Mexico held a peaceful and democratic presidential election, which shifted Mexico's direction. We've experienced in the past -- in the last few months turmoil and stress. Although was a political, social-driven stress, it affected somewhat our economy, forcing investors to retrieve and pull their investments off our country. Now the threat of a storm has passed. And having heard our government-elected officials, especially our President-elect, changing in a significant manner the speech regarding private investment, foreign and domestic, and showing a friendly face business growth driven, we can see the clouds over our economy scattered more and more and a new bright sky appearing for our country. Therefore, great expectation arise. Having said that, our company has been designed to endure difficult times. We feel strong about our solid circumstance and metrics, our favorable debt horizon and the quality and superb location of our properties that fills us with confidence for the future.
For those of you who have followed FUNO on our first 7 years as public company, you have heard me say this many times before. Independent of who's in office, we have long stated that we believe in Mexico, in our nation. And therefore, have invested and continue to invest in what we believe is by far the best investment alternative available to us. I want to put this commitment in perspective. First, our major development pipeline is worth approximately MXN 22 billion. This, of course, is in addition to the MXN 230 billion of real estate assets that we manage. We want to stress this Mexico and Mexico's real estate sector is an excellent place to invest and a place where the best is yet to come. We have just recently begun to see some of the seeds that we have been planted over the last decade now flourish. A building middle-class with growing disposable income and a highly resilient economy that has weathered financial and market turmoil. We have been and continue to be firm believers in the potential of our country. We have worked and will continue to work hand-in-hand with the government, whomever this is, in order to improve the communities in which we invest, to provide easier and efficient access to goods and services to our society. At FUNO, we remain fully committed to bringing the best to our country and taking advantage of the unique opportunity it offers. We want to reiterate this. At FUNO, we continue our unwavering support of Mexico and stand ready to continue investing and to work with the new administration to build a better Mexico for everyone.
Along the lines of the positive of our country, I want to highlight the strong growth of our -- our company has shown, in particular, in the last year. Property income grew 18.5% compared to second quarter '17. Similarly, our net operating income grew 16.4%. Most impressive of all is the fact that we have managed to grow our funds from operations 22.5% since June of 2017. This is particularly remarkable considering we have continued to invest in brand-new development, which entails additional capital and the cost associated with this capital, as well as enduring yet another increase of 25 bps in the Banco de México benchmark rate, all of which affecting significantly our interest expense line. Despite these matters, we remain on track for FFO/CBFI acceleration towards the second half of 2018. We continue to maintain our overall occupancy around the 95% target. This quarter, we are reporting 94.6% consolidated occupancy. We are very happy to post these results against a backdrop of a complex financial markets environment. Yet, we consistently continue increasing rents above inflation. As you may have noted in the quarterly supplemental information package, we are going to be replacing the same-store rent indicator and instead reporting our leasing spreads. Leasing spreads represent the spread versus inflation, at which contracts have been modified each quarter. For this quarter, we are extremely pleased to show a positive leasing spread of 300 bps for peso-denominated contracts and positive 130 bps over U.S. CPI for U.S. dollar contracts.
These effect contracts with an annualized base rent value at approximately MXN 1.3 billion. As you know, another of the many goals of FUNO is to be a world-class company. The ESG initiatives undertaken by FUNO in the last couple of years are starting to pay off. We are proud to announce, we are now a constituent of the FTSE4Good Index Series. This index is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance practices, that's what ESG stands for, as determined by an external and independent assessment. In this year's revision, FUNO was the only Mexican company to be added in said index. Before I pass the call to Jorge Pigeon, I just want to say, as all of you may be aware, Gerardo Vargas, who until today was our Vice President of Finance, will now act as an external advisory to our CEO. I would like to express my gratitude for his commitment and dedication to Fibra Uno during these past 4 years. We appreciate his valuable contributions to the growth and development of FUNO during these times. We will be happy to continue to see you around, and we are sure Gerardo will continue to add value to our company in his new role as advisor to the CEO office. On the other hand, I would like to welcome our new Vice President of Finance to Fibra Uno, Fernando Alvarez Toca who based on his ample experience, we are sure will contribute to the continued success of FUNO. Prior to joining Fibra Uno, Fernando Alvarez Toca acted as CFO and CEO of Gentera as well as of Banco Compartamos. In these positions, he was responsible amongst others of the IPO of Banco Compartamos as well as its debut debt issuance and subsequent debt placements in the local markets. Additionally, he was responsible for the massive growth of Compartamos savings product, reaching over 1 million accounts in under 18 months. He also has an M&A experience, playing an important role in the international expansion of Gentera, and lastly, he also was CFO of MIRA Companies. Welcome, Fernando, to this great team.
And now please allow me to pass the mic to Jorge Pigeon. Jorge, please?
Thank you very much, André. Thanks, everybody, for joining the second quarter results call. As is customary, I'll go through the MD&A of the quarterly results, and then we will open the floor to Q&A. I'm going to focus on the comparison of first to second quarter number. If there are additional questions, please, as I mentioned, feel free to ask when we reach the Q&A session. Turning to the P&L. Property revenues increased by MXN 85.4 million to reach MXN 4.2 billion, which is 2.1% above those of the first quarter of '18. The increase is mainly due to higher occupancy of Torre Diana, slight change in maintenance income and, as André mentioned, the effect of contract renewals, and the leasing spreads that we are showing are the ones that you're starting to show on a quarterly basis, which of course occurred above inflation, as well as some of Mitikah project development fees. In terms of occupancy, overall occupancy was 94.6%, basically unchanged, 20 bps below that of the first quarter of '18. We had an increase in industrial segment of 40 basis points to 97.3%. We have basically flat in terms of retail. And occupancy in the office segment is 84.2%, which includes inclusion of Montes Urales 620, which is a brand-new property, if you recall, we purchased, which is almost not full at this time. We're only using a small portion of the facility of 17,000 square meters more or less. And also we included in this quarter, in the operational portfolio, the remaining part of Centrum Park, which was not included in the previous quarter. If we were to exclude the effect of the addition of this new property as well, the addition of the square meters from Centrum Park, we would have been above 86% occupancy in the office segment. So we are very pleased with the performance of the portfolio. In terms of maintenance, expenses, property taxes and insurance, we saw maintenance, property tax and insurance increase 2.3% from the first quarter of '18, which is an increase of MXN 13.3 million. This is mainly due to income tax increases in certain municipalities of Mexico. This is not something that is happening nationwide, but there have been certain municipalities of Mexico, in which we have seen an increase in property taxes. This is what's driven most of that increase. As a result of the above, net operating income rose by MXN 69.6 million from the previous quarter. Now moving on to interest expense and interest income. We had a net interest expense increase of MXN 98.7 million in the second quarter, mainly driven by 3 effects: The depreciation of the FX, which went from MXN 18.34 to MXN 19.86 at the close of the quarter. We had an increase in the TIIE benchmark rate. As you recall, Central Bank of Mexico increased the benchmark rate 25 basis points. And we issued new unsecured loans for MXN 2 billion, and we reopened the FUNO 17-2 local bond insurance for another MXN 2 billion. Basically, the additional debt is, as André mentioned in his comments, to continue to fund our investment in our development pipeline, as well as some of the monies we also use to close on the acquisition of Montes Urales 620. If you recall, we had given a deposit in advance, and then we finished closing during the quarter. So that was about MXN 58 million give or take that we ended up spending this quarter. As a result of all of the above, FFO, in spite of our revenues increase, given the bigger increase or larger increase of interest expense as well as the additional expenses from property taxes, we recorded a decrease MXN 33.5 million compared to the previous quarter. However, we recorded a gain in the sale of property. If you recall, we sold a plot of land in Apodaca, which was part of Vermont portfolio, if I recall correctly. We had already started to invest in this property to develop a building and the tenant next door basically approached us and asked to buy the property. As we mentioned, we didn't put up a for sale sign, it was just an unsolicited offer. And we ended up basically making MXN 87.2 million in profit, which were recorded in the AFFO line. At the end of the day, AFFO increased MXN 30.8 million, basically on the back of all of the things that I mentioned before, including the sale of land. Also, I'd like to highlight then during the second quarter, we repurchased a little over 29 million CBFIs for a total of 880 -- MXN 838.6 million, which is almost 100% of the proceeds of the sales that we have incurred, excluding some monies, for example, the profit that I mentioned here that had to be included in the fiscal result account.
Now moving to the balance sheet. Accounts receivable in the second quarter of '18 amounted to MXN 1.5 billion, almost MXN 1.6 billion compared to MXN 1.3 billion in the first quarter of '18, which is mainly explained by the acquisition of Apollo I and II portfolios. I would also like to highlight here that over a year ago, Deutsche Bank announced the sale of its Mexico operations, and we wanted to make sure that we had a trustee that had -- that was qualified and has the strength to support an operation of the size of Fibra Uno. So we decided to change the trustee with Actinver, and the new name of the trust will be the Fibra Uno trust. You will no longer see the Deutsche Bank 1401 Trust as the name of Fibra Uno, it will be the Fibra Uno trust. Actinver will be the trustee. And I'd like to comment that although we changed the trustee, we did not have any fiscal impact, maybe very minor delays on payables. When we change trustee, people want to change accounts, and everybody takes an opportunity to see if they can delay the rents, we really have seen no major effect on that. So I would say and qualify the transition to the new trustee as a success and very smooth.
Going to investment properties. The value of our investment properties increased by MXN 4.3 billion in the second quarter of '18, which is the net effect of a series of things. First and foremost, asset revaluation. As you know, we do a mark-to-market of our properties once at the end of the year, and we do a quarterly estimation. This is a quarterly estimation that is being done by Fibra Uno. We continued to invest in projects under development, which also increases the investment properties line. We carried out the acquisition of Montes Urales 620 for $60 million. And we sold the plot of land of -- in Apodaca for almost MXN 197 million. So that's how we tally up the MXN 4.3 billion in increase in investment properties. In terms of net debt, amounted to almost MXN 73 billion compared to MXN 67 billion recorded in the previous quarter, which is the net effect of a series of things. First, the depreciation of the FX from MXN 18.34 to MXN 19.86 at the close of the quarter. That added almost MXN 2 billion of debt. The renewal of unsecured loans were MXN 2.7 billion. A new unsecured credit line of MXN 2 billion and the reopening of the FUNO 17-2 local bond issuance for 3 -- MXN 2 billion, which we used MXN 883 million to repay the FUNO 16 local bond issuance. So the net effect is what you are seeing, the addition of almost MXN 5 billion.
And lastly, trustors’ capital decreased by MXN 2.3 billion in the second quarter of '18 as a result of the net effect of the quarterly results distribution, derivatives valuation, which is basically what happens when the FX move, we have a series of movements in the derivatives that we use to cover the 2026 bonds and the additions of investment properties, et cetera. So with that, I conclude the commentary section of our results, and I would like to open the floor to Q&A. Doug, if you can please open the floor to Q&A?
[Operator Instructions] Our first question comes from the line of Álvaro García with BTG.
I have 2 questions. My first question is on the office space. What impact would you expect for your properties, specifically, or for the office space in general in Mexico City on the new government's plan to move some key government offices outside of Mexico City? That's my first question. And my second question is on the buyback. The decline in CBFIs. My understanding is that these are CBFIs that have no economic rights, they're in treasury but have yet to be canceled. Is that correct? And are there plans to cancel those shares are not?
I will take your second question first, Álvaro. Yes, that is correct. Those are in treasury shares. And we have not decided whether we're going to cancel them or not. But for the time being, they have no economic or voting rights.
For the second question -- for the first question, as you know or you may know that our company has not a large exposure to government offices. Actually, we have, I think, less than 2% of our area devoted to government. But having said that, we really don't know what will happen with the new government, but from what all of us have heard, I think it's very difficult to move all of the institutions. I think that the movement will be on just part of the secretaries or the institutions of the country to different states because the states nowadays have not ready -- are not ready to receive -- they don't have the infrastructure to receive that many people. So I think the movement will be slow -- very slow, and the market in the city and in the states will absorb that in due time. So I don't think it's going to be an abrupt movement in that sense.
Just to give you a sense. One of the ministers' offices that has like around 10,000 employees, on the first year, they are planning to move to their new location around 150 people. That's the proportion of -- that's actual data of one of the ministers' offices. So this is going to be taking longer than everyone is expecting.
Our next question comes from the line of Francisco Chávez with BBVA.
I have 2 questions. The first one is regarding the payout. In the first half of this year, we saw a payout of 104%. Can we expect a similar number for the second half? And when do you expect to normalize such payout to? Is it going to be until next year? And the second question is also regarding the office segment. What can we expect from the recently acquired property in Montes Urales? And when can we expect occupancy in the office segment to get near the 90% mark?
Paco, it's Jorge here. I'll tackle the payout ratio question first. What we want to do is smooth out the payout and the dividend growth. Because as you very well know, we have a lot of projects that are coming on stream and that we are putting in the operational portfolio. Case in point, we added almost 30,000 square meters of Centrum Park, which was still in the last stages of construction last quarter. We just added them to the GLA this quarter. We don't expect that -- those square meters to generate money this quarter, but they should in the next 2 or 3 quarters. So that will accelerate, generally speaking, FFO per CBFI. So instead of having 2 quarters of close to MXN 0.50, which is where we have been, and then an increase in the second half of this year and into 2019, we decided to smooth out that curve and payout a little bit more now and maybe payout a little bit less later in order to make it a smoother line. So that's the objective that we have regarding the dividend and the payout. Bottom line, you should expect payout to be closer to 100% and then maybe once we get to 2019, closer to 95% or that's the target that we have for 2019. And then, for the office in Montes Urales, I'll ask Gonzalo to answer.
Thank you, Paco. With regard to Montes Urales building, since we bought it with our negotiations with single tenants for the whole building and everything -- the closer we got to the election day, everything was freezed. After the election day, we have been in touch, again, with suspicious tenants for the whole building. And in the interim, we have heard and we have a couple of LOI for people that are willing to take one of them 1 floor and the other one is willing to take 2 floors. So we will -- probably in the next 30 to 45 days, we will finish our negotiations for the single tenant. If we can close it, that will be great. Otherwise, we will be starting taking under consideration of the LOI for multitenant for the building.
Our next question comes from the line of Eugenio Saldaña with GBM.
First, I wanted your comments on how do you manage to earn lease spreads above inflation at a time that your strategy has been to keep your rental prices below market to be protected for this cycle. Is that, that you are shifting your strategy or perhaps marking-to-market? Or how do the market is behaving, I mean, regarding this? And in any case, how below your rents -- how below market are your rents across the board at this time? And secondly, also regarding rents. Your rents is paid on the leasing spread section. Are they net effective or the face value of the contract or how are they?
Can you repeat the last portion of the question, the net effective part?
Sure. Yes. The rents displayed on the lease spread section that you -- the new lease section that you placed on the report, are they net effective rents? Or are they...
What do you mean by net effective?
I mean, actually the ones that the tenant is actually paying or are they -- like the contracts maybe -- perhaps the contracts have some concessions or something like that, that they are face -- that there is some face value on that agreement that is not perhaps...
Okay. Explained like that, they are net effective rents. And I'll ask the people who really know about it fairly.
The reason for us to have the leasing spread at that metrics is, the very reason why we consider that we should be and we are not below the market. We are on the lower end of the market. The market shows forever a range, and we are on the lower end. So we are on the range of the market. It's just that we like to be on the lower end, near the lower end. And now we have the opportunity that -- to lease or to renew the contracts that we currently have with these spreads. But these spreads, we have been talking about it for 7 years. We always say, since day 1, that our rents grow from 50 to 150 basis points on top of the inflation, which is now that we have stated and we have designed this disclosure metric for you to understand better, what is the leasing spread on our renewals? So we are trying to put down the numbers for you to analyze in a better manner. But we have been saying this from day 1, since inception of the company, our rents grow 50 to 150 basis points on top of the inflation.
Just a follow-up. So then you're still kind of be on the lower end of the market, correct, after these lease spreads?
Yes. We like to be there because -- and I said this before in the introduction that this business is cyclical, and we will be seeing tighter times and we will be seeing better times. As for the tighter times, we want to be prepared because it's very easy for a company. Let's say, that a company -- any given company have 3 or 4 or 5 sites for offices or for plants or for retail space. If the going gets tough, these companies, any given company, try to shut down some of the operation in order to save some money. It's only logical that the operation any given company will shut down first is the one that is more expensive. And they will shut down last the one that is least expensive. So we want to be the last one to be shut down in that particular scenario. And we want to be the first one to be opened again when the circumstances allow to open again the -- but this -- what I'm telling to you, it comes only from experience. There is no statistics printed in the Mexican economy. What I'm telling to you is only coming from experience. And that's why we want to be near the lower end of the range and be comfortable there.
And just to follow-up on that. There's definitely no change in strategy, nothing at all. And the reason why we took out the same-store rent indicator is because this figure was baked in those numbers that you are seeing in the same-stores. If you recall the same-store indicator was something like MXN 12 billion worth of rents, this is MXN 1.3 billion or MXN 1.4 billion worth of rents on a given quarter. The other one was almost 100% of the company, and it was closer to the famous 50 to 150 basis points that André was mentioning. And in this case, we are only showing the contracts that have changed during the quarter. So the leasing spreads of the quarter are the ones that you saw there with the 300 basis points and 130 basis points for peso and dollar spreads, respectively. But these numbers were baked in the same-store rent indicator. And since we felt it was not delivering the message that we wanted the market to understand, which is exactly what André is mentioning, we changed it for the new -- this new leasing spreads, which did suggest that contracts that suffered a change or modification during the quarter.
Our next question comes from the line of Vanessa Quiroga with Crédit Suisse.
First one is on the new table of the leasing spread. Thank you for including that. Do you expect to be able to have the same leasing activity in each quarter of this year? I think this table is showing that about 8% of the portfolio was renewed in the quarter. So I'm wondering if you expect that same level of leasing activity going forward. And the other question is about the pipeline of development projects. If you can provide an update on the projects in that table, especially those that have a delivery date of 2Q?
Sorry, Vanessa. Yes, going back to your first question regarding the leasing spreads. This is the contracts that have been renewed or revised on each quarter. So yes, we could expect to see something more or less stable around this number going forward in terms of the value of the contracts that we are revising. How big a spread or how small a spread, that's going to depend, obviously, on the leasing activity, the strength of the market, et cetera, et cetera. And that's precisely what this is supposed to show.
Again, it will fall into the 50 to 150 basis points. And let me try to explain a scenario when that will be possible. We have 5 years length of the contracts, which means that we renew our contracts 20% a year. In the renewal is where we can get above the inflation because in the revision, all the contracts that are current will revise them once a year, in general. In the revision, we only agree with our tenants to increase the inflation. In very few cases, we agree inflation plus 1 or inflation plus 2. But in general, it's inflation what we can increase for the contract -- current contract that will revise every year. Now for the renewals, we can get above the inflation, and that will be 500 basis points or 600 or 400 basis points on top of the inflation. But given that only 20% of the whole portfolio renews every year, this 20% that is impacted with 500 basis points on top of the inflation make an impact on all the portfolio for around 50 to 150 basis points. And that's why I am saying one and again that our properties, our rents grow from 50 to 150 basis points on top of the inflation in the whole portfolio.
Our next question comes from the line of Marimar Torreblanca with UBS.
I also have 2 questions. The first one is, given that you mentioned that you have used most of the proceeds of asset sales for buybacks already, how do you expect buybacks to behave going forward? Are you going to wait for more asset sales to keep executing on the program? Have you changed your mind on how to fund this program? How should we think of it for the second half of the year? And then the second question, which is related to Vanessa's question on the development pipeline. Can you give us an update on the occupancy for Cuarzo and Midtown Jalisco?
Sure. Midtown Jalisco. Midtown Jalisco is due to open its first phase year-end and second phase on spring next year. We are very pleased with this particular project. This is one-of-a-kind project, and it will change the face of the city of Guadalajara, one of the most important in the country. We are very happy with our mix of tenants, with the reception that the building and the shopping mall and the hotel have had until today. And as for numbers, we have already signed 40% of the building -- of the office building, and we are under the last phase of the negotiation for another 40%. So we expect that for the opening, we will have above 80% of leasing or the space leasing in the office space. Of course, the hotel is 100%, is leased. And as for the retail, we have leased 80% of the area and 60% of the doors, meaning we have all of the anchors and the subanchors leased, and we are remained with the small retailers, which is the normal process of when any shopping -- any new shopping mall coming to the market. So we are on track with what we expected. We are on track on the prices that we expected. But we are way above in the design and the beauty of the building. I encourage you, if you have the opportunity, to go and see the building, it's really, really amazing what we have accomplished in Guadalajara. As for Cuarzo, Cuarzo we leased that B tower. B tower is fully leased, represents 17,000 square meters from the whole building out of 17,000. And the A Tower, we have today under -- we already agreed on the terms and conditions, but we are expecting the signature. It will take a couple of weeks to have sign the contracts, and we have already leased 16,000 square meters out of the 53,000 remaining. So we are just across the half of the whole building.
In the case of Midtown Jalisco, just to give you a sense, the 40% that it's already leased and signed, they had already take possession in order to do their tenant improvement.
Okay. And on the buyback program?
On the buyback program, Marimar, the idea that we've had is, obviously, we continued to have unsolicited offers for some of our assets, which we are studying. And to the extent that we carry out those sales, those asset recycling, and the shares continue to trade where they are today, it's obviously very easy to decide where to place that capital. And that's why we purchased almost MXN 140 million worth of CBFIs, which is almost 1% of the company's outstanding shares, 0.7%. So yes, you can expect to see something like that. I don't think we would go into borrowing for carrying out a repurchase program. But if we do get unsolicited asset sales and conditions remain similar, yes, you can expect us to do that.
Also we can see if we can manage to balance our payout and reach the target of 95% that Jorge was talking about, that will bring to our treasury resources and maybe we can use also those resources to, if we decide, continue to execute the buyback program.
Our next question comes from the line of Alejandro Lavin with Citi.
I have 2 questions. The first one. If you have to choose one, which segment would you think will have the best potential for rent growth next year? And the second one, if you could give us a quick update on the M&A pipeline? I mean, we know you're always looking at opportunity. So what sectors you're currently looking at? And also in terms of valuation, has this changed before versus after the elections?
I think that the sector that will behave the best in next year will be the sector that is now in peso-denominated because the inflation has not reached out. We expect that inflation will kick in, and this affects especially the peso-based contracts. As for the sector, I feel that all of the rents are, in terms of our comparables, are below the market. So they will show, in my view, recovery in the next coming years.
And this is not Fibra Uno, what André is saying is, Mexico market rents are cheap, it's not Fibra Uno's.
I'm talking market wise.
Understood. And on the M&A pipeline?
Obviously, as you mentioned, we are always seeing opportunities coming to the market. I can tell you that during the last quarter, almost all the activity was freezed. Nobody wanted to sell, nobody wanted to buy. And we are working on some analysis of the opportunity. Obviously, it will be on a smaller scale than the one we have done in the last year. But you will be seeing some activity in the next 2 quarters. And in terms of pricing, obviously, there has been a cap decompression. So the prices have going down. And obviously, we will be seeing all the opportunities, but we will be just taking those that really add value and are assets, as the rest of our inventory, that really have a potential of adding value to our investors.
Our next question comes from the line of Pablo Ordóñez with Itaú.
I have 2 questions. First one is on your leverage. Can you give us an update on what to expect ahead? The net debt is already at MXN 73 billion. I mean, the Investor Day, you guided for MXN 70 billion by 2020. So what should we expect ahead for leverage? And the second question is on the industrial segment. The segment is reporting very strong figures. I was wondering if this is already reflecting the new properties from the FRIMAX acquisition. And what you expect ahead?
Well, go ahead.
I'm answering your second question. Obviously, the sector has been strong. Industrial has been really the best performer in all portfolios. I'm not just talking about Fibra Uno, in every FIBRAs and everything, the industrial sector has been really strong. And the only figure that is reflecting down there from the FRIMAX portfolio is the first building that is around 35,000 square meters that we added to our inventory as capital, which is part of the FRIMAX portfolio, which is a warehousing in the Lerma area next to the Toluca airport.
Now regarding leverage, you can expect us to maintain the prudent strategy that, as André mentioned, the company is designed to withstand the cyclicalities that happen in this business, and part of that design is to maintain a prudent capital structure and prudent in terms of total leverage, which is, as you mentioned, right now 32%. And that moves a lot with the FX. So we also have to take that into consideration. I think that the accounting number you're seeing there is a little bit misleading, so to speak, because it shows the peso and dollar debt and doesn't show the effect of the derivative. So we will have to add the effect of the derivatives that we have contracted to show the true amount of the debt that we have, which is closer to MXN 70 billion, 7-0. So you're seeing a movement of about MXN 2 billion due to FX and that can be greater or smaller depending on how much the FX moves. So that's one thing to bear in mind. The actual leverage of the company is MXN 70 billion, including the effect of the derivatives because we don't owe the 2026 bonds. If you recall, we carried out full cross-currency swaps and on those, we don't go dollars, we go pesos, but we're required to report the debt and then, on a separate line in the balance sheet, required to report the effects of the derivatives. This is one of those things where unfortunately accounting makes life a little bit more complex to tell the story. But simplified, our debt is about MXN 70 billion, number one. And number two, the other thing I'd like to highlight is that, even if it's been small pieces here and there, we have acquired certain things that were not included in the plan in the Investor Day. For example, Montes Urales 620 was not part of the plan that we had back then. And we have this building, and I forget the name, in Monterrey, where we have the Santander offices, Saqqara, thank you. The Saqqara building was also not part of the plan that we introduced on the Investor Day. So those acquisitions have increased a little bit the amount of investment that we have. But if you exclude the acquisitions and the effect of the depreciation of the currency because the projections that we presented on the Investor Day are done at constant FX, then we are completely on track in terms of where we said we are going to be in leverage, et cetera. Sorry for the long-winded answer.
Got it. And Jorge, on what level of LTD do you feel comfortable on the medium term?
I mean, like -- we've always said, we'd like to have a conservative debt leverage, 30%, 35%. If we see a golden opportunity, we could go to 40%. But at this point, we don't see anything like that. You should expect to see us in the 30% to 35%, 36% of TD.
Our next question comes from the line of Jorel Guilloty with Morgan Stanley.
First off, thanks for providing the details on the leasing spreads. That said, I wanted to understand the metric a bit better. So you said that spreads for retail leases that are denominated in pesos were 10% or 430 bps spreads inflation. What we want to understand is what subsegment drove this? Was it the fashion malls, the regional centers, the neighborhood centers? And also what type of tenants? My second question is, given this meaningful lease spread, has your occupancy cost target change for retail? That is, is it 30 to 50 bps higher than what it was previously?
First, yes it's very strong leasing spread. As André mentioned, those are reflecting basically peso-denominated leases, and as André mentioned, this is the one that we expect to see the strongest base, given that U.S. dollar inflation has not impacted peso rents yet. So you should expect in general peso rents to be very strong. Now we don't have a measure specifically of which contracts, which subsegments or anything. We just analyze the leasing spreads of the contracts that have revisions during the quarter. And that's the information that we are presenting. We don't have a specific of, if it was fashion mall or what specific type of tenant was driving this because it's very wide, varying quarter-over-quarter depending on which contracts come to the table for renegotiation or revisions. And in terms of occupancy cost, we would expect that the long-term trend for occupancy cost in Mexico would be to increase. As you know, we are closer to single-digit occupancy cost overall with a very wide range, maybe a large, large anchor can have a 2% occupancy cost and the smaller chains can have double digits. But overall, as an average, we are closer to 8%, 9% maybe as a country. And the expectation is that we should see these numbers becoming double digits in the future. And in the future, I mean, 5 or longer years, not something that is going to happen immediately.
And if I may. But given this leasing spread of 10%, are you already seeing a meaningful move towards this double-digit occupancy cost that you speak about?
No.
Okay, all right.
The sales of the retailers are growing at the same pace.
We're just catching up.
Exactly.
As a matter of fact, if we don't grow double-digit, then the occupancy cost is going to drop because the retailers, if you know, have been growing double-digit for the last 3 or 4 years. And unless we grow double-digit, the occupancy cost drops.
Our next question comes from the line of Sheila McGrath with Evercore.
I have a few questions. On the industrial sector, it's done very well from e-commerce. Just wondering if that strength is isolated to Mexico City? And do you have any concerns about the strength of e-commerce and industrial negatively impacting the shopping centers?
No, I don't think we're in that stage, not near there. And I really don't believe that the performance of the industrial sector is due to the e-commerce. I think that e-commerce may represent 5% of the industrial market. The industrial market has been strong because the lack of space that we had in the past. Mexico is growing a lot, and the movement of merchandisers are growing a lot. And now the customers and, I mean, all the chain of customers from the store that is selling or the distribution center that is receiving the merchandise through them, central stores and the stores to the small retailers and the retailers to the public are more and more demanding every day. And everybody wants just in time the product. So the logistics has grown a lot. And this is our field of expertise. That's why I can say positively that e-commerce has slim to none impact on the performance of the industrial sector. The industrial sector has grown because the logistics in Mexico are taking a more and more important role every single year. And I think that there's still a lot of years to come with the importance of logistics.
Okay. That's helpful, André. Just 2 more questions. On Page 14 of the supplemental, Jorge, you highlight the acquisitions that have not been included in the quarter. I just wonder, how we should think about the timing of those acquisitions for the balance of the year? There is like MXN 5.679 billion in retail and office not included in the quarter.
Yes. You're asking about when we expect to close on those acquisitions?
Yes.
Just to give you -- in the total portfolio, we will be closing in the next 2 quarters probably 3/4 of whatever is remaining as of today. And the remaining 1/4 will be on the first half of next year. And we have another one that will be closed on the fourth quarter of this year. So probably you will be seeing whatever is remaining, 85% will be closed during this year and the remaining in the first half of next year.
Perfect. And one more quick question. Just want to understand the tax impact when you sell an asset at a gain. How much you can allocate to buyback? Or how much there is like frictional tax leakage when you sell at a gain? I just want to understand that.
Sheila, it's Jorge. The plots of land we sold except for the one in Apodaca never generated rents. So it was not part of those assets that you have to hold for 4 years, et cetera, et cetera, in order to keep your tax benefit. The only thing we have to do in this case, more than having a tax impact, is that we have to include the profit that we generate as part of the net taxable income calculation. If I was holding one property as a company and I sell it and I hold the profit, then the profit will go to the distribution and that will have to be distributed, no matter what. And the rest, I can use for other things like, for example, buybacks to the extent that there is a profit to what's reflected in our books. Now let's use an example of Reforma 155, which is a property that we're going to hold for 4 years before we sell it, in which we recorded a very large profit against the cost of what we paid. The property was revalued over time, and we don't actually have a very significant profit in that property, taxable income profit. So we are able to use more of that cash for repurchases because at the end of the day, you have to recall that Fibra Uno is a transparent vehicle for tax purposes.
Our next question comes from the line of [indiscernible] with [ Loma Development ].
Where do you think the market is still positioning Fibra Uno CBFI?
If you see the silence, that's because we have --- I mean, we're working very hard for the last, not months, 7 years. If you look at the occupancy of the company, it's been very stable around 95% since day 1. We've had those famous 150 -- 50 to 150 basis points in leasing spread. Everything's been going on exactly as described since day 1. The only thing that we got hit with, that was probably something that we couldn't defend ourselves against, was the 500 basis point increase in interest rates. And obviously, that ate up a lot of the growth, the NOI per CBFI that the company has shown. Excluding that, it bits me. And obviously, I think not a lot of people are looking at the development. Because as André mentioned, MXN 22 billion of development is a lot. And let me stress that it's a lot of money invested in assets that currently don't generate cash. And if you look at the company exclusively on the cash that it generates today, there you have a 10%, 15% discount just on the development. But you can give me a [indiscernible], happy to take your ideas.
Our next question comes from the line of Pablo Duarte with Actinver.
I have 2 questions. The first is, could you please give us an update on the development project of La Viga? And the second one is also related to developments. What amount of interest expenses did you capitalize in the quarter?
We capitalized MXN 150 million this quarter. And La Viga, I'm going to ask Gonzalo to give us an idea of where it is. I think it's pretty advanced, but I'm not sure if it's almost done or done.
La Viga, it's on schedule. We have 3 towers there. The last tower is on the refurbishment. We expect that to conclude in the first quarter of next year. We have added a little bit more. We were expecting to have that building a little bit sooner. But with the earthquake, people finally moved out. If you recall, we had a tenant that did not want to move out of the building. With the earthquake, they finally moved out. We moved in, did the refurbishments. Once we were in there doing the refurbishment, we said, you know what, it makes sense to bring this building up to par with the other 2 towers. So we decided to invest a little bit more money and maybe take a little bit more time, but have a much better building that's comparable to the other 2 towers. So we should have that up and running, as André mentioned, by -- for sure, by the end of -- by the first quarter of next year or maybe the end of this year.
Our next question comes from the line of Alan Macias with Merrill Lynch.
Just one question. What is your expectation of the new Mexico City administration? Do you think they will be more strict in new developments in Mexico City? And if so, what would be your answer to this, if this is the case now that it will harder to obtain construction permits?
Actually, what we expect, Alan, is that the new government will probably freeze everything for at least 6 months to a year, just to find out how those constructions license and permits were given and do analysis of how they can restructure the area -- the specific areas, [Foreign Language] on each one of the counties. And obviously, it will be hard to obtain new licenses during this period, 6 to 12 months. And after that, I'm pretty sure that they will be harder to obtain. And they will be promoting some areas. And -- but obviously, they will be on favor of the development, I can tell you. We have the experience of when Lopez Obrador was the mayor of the city, he was the one that promoted all the density on Reforma corridor. The first building built there was the Torre Mayor. He gave 10 years of the tax -- the property tax benefit. We were exempt for 10 years. And -- so at the end, probably it will be just a transition period. But at the end, we will be seeing some impulse on the -- or the [indiscernible] -- or the -- yes, or the [indiscernible] growth of the city.
Actually, what happened with Lopez Obrador in the city, before he promoted growth in the Reforma corridor, he shut down all development. And that brought us to a different situation. The market itself regulated that and pushed all the growth to the State of Mexico, outside the City of Mexico, and rents grew a lot. We think that if you shut down development here, the rents -- the cost will be higher and the rent will go up.
Occupancy will go up as well.
Because if you don't have newer space, you will have to fit in the space that already exists. And I think that the market will regulate that also because a city like this cannot stop growing.
And do you see any risk that ongoing developments might be slowed down, if the Mexico government decides to review?
There is always a risk. But when you do a development, you need to have all your permits in order. And of course, you have rights, and this is a country that rule of law prevails in now. I think that the ones that have all the permits in place will continue. I don't see government shutting down or dishonoring the permits awarded in the past. But I see and I think it's good that there is a closer revision from the government to newer developments because of what happened with one development very renowned that collapsed. We expect that everything will fall into place. We don't foresee any problem.
Our next question comes from the line of Francisco Suarez with Scotiabank.
Thank you very much for adding the information on leasing spreads. That's a great addition, gents. The question that I have is that you are trading at steep discounts to your NAV, which is actually not only a shame but also -- it's not fair, to be honest, I don't think that's sustainable. But the point is that you are trading at very, very steep discounts. And the question that I have is that, why not cutting your payout ratios and actually allocating more to the buyback program and allocate -- and cancel those shares?
In times like these, and as you said, it's unfair. I think it's unfair. And I think is -- we need to continue to work. Many ideas cross our minds. We have by law to distribute 95% of our fiscal results. We know that we have room there to stick to the law and distribute only our fiscal results. But this company was designed differently. This company was designed to get into the real estate business. Everything else is financial business, and I'm not into financial business. I'm into real estate business. I will try to continue, at least for now, to stick to our roots and go and make our real estate business as profitable as we can. And I don't like -- I don't -- wouldn't like to change the essence of the company. This company was created to simulate a building or a group of buildings owned by any given person, persons that are not professionals of the real estate, so they can get into the real estate business. And to simulate that, we need to take in account that we'll receive the rent of the buildings and we distribute between all the owners of the shares. This is how we designed the company. So we would like to stick to it, although maybe makes more sense to rebuy the shares.
Get one more question, Doug.
Our next question comes from the line of Cecilia Jimenez with Santander.
My question is actually a follow up on leasing spreads. I would like to know from a geographic point of view, which are the regions that are contributing the most on the leasing spreads for retail and industrial properties, if you can share with us their geographic perspective?
Sorry, Cecilia, I couldn't -- you're breaking out a little bit. The only thing I heard was geographic something.
Yes. The leasing spreads. If I take a look at the map, which would be the regions contributing the most from a geographic perspective to the leasing spreads? So basically, where in the country are you having best pricing in retail and also in industrial portfolio?
We haven't finalized specifically the geographic -- where geographically the contracts come from. But I can tell you that is going to be very, very, very similar throughout the country, nationwide, because we are not seeing or have exposure to an area that's severely depressed compared to areas that are growing extremely quickly. So I would say that it's very stable.
So if we take under consideration that we are renewing almost 1,800 leases a year. So it's all over the place, and we don't see any geographic tendency on those renewals of spreads.
One geographic tendency, I can tell you, is office is going to likely be Mexico City.
For sure. Maybe just a final one, if I may. We have heard some competitors on the industrial portfolio, Monterrey and Guadalajara could be having some weakness in terms of additional competition? Are you seeing the same in your portfolio or not necessarily?
In particular, what we have industrial in Guadalajara is 100% leased and has been like that for 5 years.
That is all the time we have for questions. I'd like to turn the call back to Mr. El-Mann for closing comments.
Thank you, Doug. Thank you, everybody, for listening and for your interest in Fibra Uno. And we will be back with the third quarter results. Thank you very much. Have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.