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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to Fibra UNO's Q2 2021 Financial Results Conference Call on Tuesday, 27th of July, 2021. [Operator Instructions] Our hosts today from Fibra UNO team are Mr. Andre El-Mann, the CEO; Mr. Gonzalo Robina, the Deputy CEO; Mr. Fernando Alvarez, VP of Finance; and Mr. Jorge Pigeon, VP of Capital Markets and Investor Relations. So without further ado, I will give the call to Mr. Andre El-Mann. Please go ahead, sir.
Thank you, Michael. Thank you, everybody, for listening to our call regarding the second quarter of 2021 results. I am very pleased to say that we are very happy with our results. We -- I think Jorge will talk to you about the numbers. I won't read any data for you. Jorge will be in charge of those. So I just want to say that we are very pleased. I am very happy with the results. We are posting results of the second quarter that are 30% above second quarter of 2020 and 13% above -- in our NOI line, 13% above 2019. If we take in account all the year, the 6 months that have passed in 2021, we are above 2020 on 14.3% and above 2019, 14.2%. If we take in account the estimate that we have for the whole year, 2021 will be in the surroundings of 20% above both 2019 and 2020. So we feel very comfortable about these numbers. And we feel also comfortable about -- that in this very year, we will be surpassing our FFO also for 2019. So I think that the company has proven to be very resilient. And the resistance that we have in this particular crisis that we lived last year, and this year, still going on, I think that the company proved to be very resilient, and we are very happy on our model and our philosophy. We will continue to analyze very closely the destination of the excess cash that we have been retaining every quarter. And the only destination for those will be for repurchase of the stock and preferably -- and/or preferably debt repayment. There will be no other use for that cash that I mentioned above. We've been surviving not only one but many crises. And at this point, I would like you to try and be compatible with me. We want to separate ourselves from the rest. I don't think any of the rest of the bunch has lived -- outlived as many crises as we have. We've been public for 10 years, but you know that we've been running the same business for 4 decades now. And we've outlived many crises in the past. So what we are doing here with the public company is a proven formula, is a proven model of success. That's why we have the numbers that we are showing today. We don't want to brag about that, but we knew what will happen. I have been for 10 years, very, very repetitive. I apologize for that because I've seen the videos of the Investor Days and the conference that we have attended, and it's all in the same. [indiscernible] crises will come, and we are prepared for that. The crisis comes in very -- various shapes and forms. Today form, it's a pandemic. Today form, it's lack of a future for many countries that have yet not get the vaccine. Many of the countries, including the U.S. and, of course, Mexico and most of the developed countries, have acquired the vaccines and have inoculated the vaccines to a vast part of their population. And that, at some point, kind of gives us a light on when this pandemic will be over. I think that the new virus, we will continue to live with it. But as long as we have the vaccine, I think that we can go on with that. And about the crisis, I think is that -- is it over yet? Of course, not. But I think that we shed some light on the future and when the end is going to come, at least in the economic side. Financially, we are -- I think we are traveling through a calm waters today, even though in Mexico, the rate -- the interest rate went up 25% or 25 bps. I think that in our case, in our debt -- that in how our debt is today, it won't affect us a lot. The profile of our debt is still convenient for the model that we intend to follow in the company. So I would like you please not to compare us with the rest of the bunch. We have no comparables as of today. And I think that we will out -- overperform, and we will outperform the rest of the bunch. And the main thing that I want to communicate is that we are here for the long run. Our model is for the long run, is not to survive one quarter or any given quarter. Now can the rest of the bunch brag about that? No. Only us. The ones today -- the ones that are playing today, that are players today are not the ones that used to be. They haven't lived -- outlived a crisis. The ones that you see today, they didn't live the past and the past and the past and the previous and the previous crises. We have proven to be resilient, and we know that we will continue to resist whatever may come. Now talking about the pandemic, are we completely out of the woods? No. But the light finally turned on, and we can see the path, the way out. We feel also very comfortable with our diversification. As you know, we are the only player in town that is diversified. Today, I feel very comfortable. I am very happy with the combination and the percentage of all of our businesses, and all of them will perform. The retail is gaining -- regaining steam. Now we feel also very comfortable. What we saw last year is that within our retail portfolio, a vast majority of it comes from groceries' anchors. And those groceries' anchors performed well even last year. So we think that they will continue to perform, and we don't feel any risk about the retail. Will the offices disappear? No. I don't think they will disappear. They are slower than the rest of the sectors, but they will come back. Mark my words, they will come back. The industrial are still very solid. And we have a lot -- a portfolio -- a very large portfolio of industrial, as you know, and we intend to continue to take advantage of the situation today of the industrial space that is involved and is very hot. And we will continue to take advantage of that. What is happening today is that the replacement cost has gone through the roof. So this will eventually impact the rent. The rent prices will necessarily go up because of the replacement cost of all of the sectors, but especially the industrial side. Because if today, we want to build a new industrial park, the cost will have nothing to do with the cost of the industrial parks that we already have and we built the year -- last year and before that. Today, the replacement cost will be much higher. Therefore, the rent will need to be much higher in the new space because it will make no sense for properties that will be built today with today's prices to lease at the average market price today. The rent has not yet recognized the price of the replacement cost. So it will be -- it's a process that we need to go through. We need to trespass this process, and I think that we will. And eventually, the cost will be -- the rent will be impacted by the cost of the replacement. Now this success that I'm talking about the company is not driven by chance or by luck. It's all about experience and knowledge and prudence and having, finally, gather up the best group of professionals that we have the luck to have with us running the company. And most of all, it's about patience. We have been very patient, and that's what has allowed us to post the results that we have posted this very quarter. We will continue to best serve the interests of our tenants. We will continue to understand them, to listen to them and to try to help them throughout this crisis. I think we are on the verge to seeing the end of it, but we need to continue to be in communication and understand our tenants in order to help them get through this. Also, we will continue very professionally and very carefully to deliver the best results to our shareholders. Thank you, again, for your support and for your trust. And now I would like to pass the mic to Jorge in order for him to [indiscernible] the numbers. Please, Jorge.
Thank you very much, Andre. Thank you, everybody, for joining our call. I will now go over the quarterly MD&A as usual. I'll start with the revenues. FUNO's total revenues decreased MXN 83.9 million to MXN 5.285 billion or 1.6% below the first quarter of '21, mainly attributed to a combination of the following: lower occupied gross leasable area, as we'll see later, mainly in the office and retail sectors; decrease in variable rents; net income of MXN 70 million as a result of credit notes granted as COVID-19 relief for MXN 306 million plus the cancellation of reserves for MXN 376.1 million; significant exchange rate appreciation and the effect of rent increases in active contracts as well as renewals. I'd like to highlight that compared to the second quarter of 2020, total revenues after COVID-19 support increased by MXN 987 million or 23%. In terms of occupancy, the total occupancy of our company's operating portfolio as of the second quarter of 2021 was 91.8%, a decrease of 70 basis points compared to the previous quarter. The industrial sector's operating portfolio had a 95.5% occupancy, 50 basis points below the first quarter of '21. Retail recorded 89.8%, 40 basis points below first quarter of '21. And the office portfolio 74.4%, 200 basis points below the first quarter of '21. The other operating portfolio was 99.3%, stable versus the first quarter of '21. The In Service properties' occupancy went from 84.4% to 80.7%, a drop of 370 basis points, basically due to the exit of 22,700 square meters from this category, which had an occupancy above 90%. In terms of operating expenses, property taxes and insurance, we saw a decrease of MXN 99.4 million or almost 20% compared to the first quarter of '21. Mainly this is due to a lag in the exercise of some expenses, which will be obviously exercised later on in the year. Insurance expenses increased by MXN 10.3 million or 13% compared to the first quarter of '21. This is mainly due to renewal of insurance policies. Property taxes increased by MXN 1.8 million, mainly due to the updates in the value of property of some of our properties. Net operating income increased during the second quarter of 2021 by MXN 21 million or 0.5% compared when -- compared to the first quarter of '21 to reach MXN 4.241 billion. NOI margin calculated over rental revenues was 88.3% and was 80.2% compared to total revenues. I also would like to highlight that when comparing the second quarter of 2020, NOI increased by MXN 996 million or 30.7%. Moving on to interest expense and interest income. Net interest expense decreased by MXN 108 million or 5.7% compared to the first quarter of '21, mainly due to a decrease in interest rates related to bilateral lines of credit, which were fully paid during the first quarter of '21. As you recall, we issued a bond, and this is part of our liability management exercises. We are starting to see the effects of that -- those liability management exercises. Interest gained from cash investments related to the resources that we have withheld from non-distributed cash; exchange rate appreciation from MXN 20.6 to MXN 19.81, it's almost a full peso of FX appreciation; interest capitalization updates as well as, I mentioned before, the liability management activities. Leading to funds from operation. As a result of the above, the funds from operation controlled by FUNO increased by MXN 120.7 million or 5.9% to reach MXN 2.180 billion. Compared to the second quarter of 2020, the FFO increase was MXN 1.180 billion, which is a 117% increase. Adjusted funds from operation increased by MXN 73.5 million or 3.5%, totaling MXN 2.180 billion, this despite the lack of profits coming from asset sales during the quarter. When we compare the adjusted FFO versus the second quarter of 2020, again, it's an increase of MXN 1.180 billion or 117%, which is clearly a very remarkable figure. And obviously, it shows the recovery the company is on. When we look at FFO and AFFO per CBFI during the second quarter of 2020, Fibra UNO bought back 18.1 million CBFIs or 0.5% of the outstanding CBFIs during the quarter to close the quarter at 3.799 billion CBFIs outstanding. The FFO and AFFO per average CBFI was MXN 0.5730 in both cases per share. This implies an increase of 6.9% and 4.5%, respectively, versus the last quarter. When we compare, again, this versus the second quarter of 2020, FFO and AFFO per CBFI increased a remarkable 124.3% in both cases. This is showing obviously the combination of the repurchase program as well as a recovery of the company. When we move on to the balance sheet, accounts receivable for the second quarter of 2020 totaled MXN 2.193 billion, decreasing by MXN 71 million net or minus 3.2% compared to the previous quarter. I would like to highlight that it should be noted that we managed to maintain receivable days at 37, even after considering the reversal of MXN 376 million in COVID reserves. When we compare gross accounts receivable quarter-over-quarter, we can see a recovery of MXN 418.2 million in past due rents. So clearly, this is another indication of the recovery of the company. We are able to collect some passive rents, and this obviously enabled us to recover some of the reserves that we are still holding in the balance sheet. We still have a substantial amount of reserves in the balance sheet, close to MXN 400 million. We can look at that in a second. Moving to investment properties. The value of our investment properties, including investment in associates, decreased by MXN 1.9 billion or 0.7% compared to the first quarter of '21 as a result of fair value adjustments and normal progress of construction of projects under development. And we'll discuss the fair value adjustments in a second. In terms of debt, gross debt totaled MXN 128.1 billion compared to MXN 131.4 billion recorded in the previous quarter. And this variation is mainly due to the FX fluctuation of almost MXN 1, as I mentioned earlier. Basically, MXN 3.3 billion of reduction in net debt from FX variations. The effects on total equity of all the changes I mentioned above increased by MXN 169.8 million or 0.1%, including the participation of controlling and noncontrolling interests compared to the previous quarter. This is the effect of the net income generated from quarterly results, derivatives' valuation, shareholders' distributions, provisions for the executive compensation plan as well as the repurchase of CBFIs. Moving to the operating results. The leasing spread for the company in pesos was 5.2% in the industrial segment; a negative 0.8%, almost flat, in the retail segment; and a negative 4.9% in the office segment; all compared with the peso inflation rate. The latter is basically due to flat lease renewals in the -- of -- in 23.1% (sic) [ 21.3% ] of the renewed GLA. Contracts denominated in dollars had leasing spread versus dollar inflation of minus 0.9% in industrial segment, almost flat; negative 2.3% in the retail segment where we basically have no dollar income or almost very little dollar income in the retail segment; and minus 7% in the office segment. The latter mainly due to reduction in rent of 41.7% of renewed GLA, which had a negative leasing spread related to the termination of the amortization of TIs in a significant amount of the contracts that were renewed, and we can talk a little bit further about that, if you want. In terms of constant properties, the rental price per square meter in constant properties decreased 9.5% compared to the weighted average annual inflation of 3.7% versus the second quarter of 2020. Without considering exchange rate variations of 10.7% and comparing the base rent variations only, the base rent per square meter of the portfolio is minus 2.3% versus the second quarter of '20. Looking at subsegment levels, the total rent per square meter of the portfolio increased to MXN 168, basically flat versus the previous quarter. This is mainly due to a change in current contracts, some renewal increases as well as the variation of the FX rate. Total NOI at property level, this is without excluding the effects of what happens at the corporate level, for the quarter decreased 8.6% compared to the previous quarter. These variations are mainly due to the following: for the industrial segment, the logistics' NOI increased by 2.4%, light manufacturing has decreased 6.8%, and that variations are mainly due to FX as well as a fire that we had in one of our properties, and that affected the numbers for this segment. And obviously, we have insurance, and the process is ongoing with negotiations with tenants and insurance companies. So just to note that this is why this is happening. The office segment NOI decreased by 10.8%, mainly due to exchange rate variations and the aforementioned occupancy loss. In the retail segment, stand-alone subsegment NOI remained stable. Fashion mall and regional center subsegments decreased by 12.7% and 15.5%, respectively. And this is mainly due to the closings of negotiations as well as the ensuing credit notes or discounts of rent afforded to 1 large tenant, which we had been in negotiations. And we were finally able to close negotiations with this tenant, which is indicative of the situation we are living in the retail segment, which is we are in recovery mode, and we feel confident that's the track that the company is on. The other segment NOI decreased 8.7%, mainly due to reductions in variable rents from hotels, which, as you know, variable rents have some seasonality, and we have more of those towards the end of the year and the beginning of the year. And with this, I close my comment on the financial and operating results. And Mike, we are able to open the floor to Q&A, please.
[Operator Instructions] Thank you. Our first question comes from Mr. André Mazini from Citi.
Yes. So my question is on the divestments that you guys signaled that you want to do this year still. If you could give color on the industrial sector divestments? Any particular geography you want to divest? We saw that a peer [indiscernible].
Thank you, Andre. Yes. On the industrial sector, what we are doing, as you may recall, we have acquired excess land and land reserves, land banks in the industrial sector, mainly in the northern states of Mexico, which is one, or probably the main, industrial port that we would be putting on the market to sell this end of the year, the second half of the year. There's an industrial building also in the northern states that has been empty since we acquired it. And right now, we are negotiating a couple of offers that we have for them. So that's mainly what we are seeing that we will be selling in the industrial sector during the second half.
That's great color. And just a quick follow-up. So which kind of bidders are you seeing, international players, private equity, the authorities which would be local guys, and also the cap rates that you guys are seeing in the industrial sector? And if it changes a lot for retail and office, which you guys also want to sell some stuff this year, right?
Well, as I mentioned, the players that we are dealing with are local players that are backed up by international investors. So -- but it's people that have been in Mexico, and it's in Mexico. And -- but some of their equity behind them is international players. And in terms of cap rate, what -- I cannot give you any reference because we are talking about mainly on land that is vacant land. And the only building that we are dealing with, it's also a vacant building, that we almost paid MXN 0 for it because it was -- when we acquired that portfolio, it was vacant. So we paid on an NOI basis. So it was almost 0, the costs were down there. So we are selling it at a replacement cost. And as Andre mentioned, the replacement cost has been going up due to the commodities, concrete and steel. So that's why we are taking advantage of this as of now.
Our next question comes from Ms. Vanessa Quiroga from Crédit Suisse.
Fibra UNO team, my question is regarding the activity that you are seeing different industrial markets for your presence? And what are you seeing in terms of rent dynamics?
Gonzalo, please?
The -- what we are seeing in the industrial market is both in the light manufacturing and the logistics, the rents are going up. And obviously, this is a trend that we are seeing -- we have been seeing always. But I would say that during this first half of 2021, it has been really something that we will be seeing. And especially, we consider this as a big opportunity since -- as a philosophy of the company that we have always been below market price -- a little bit below market prices. As soon as we get those renewals, everything that we will be seeing in the industrial market was going -- will be going up, up and up.
Gonzalo, do you expect that Fibra UNO will reduce their discount that it has in terms of rents versus the market with the upcoming renewals?
Right. It will be a combination of both. Probably, we will be reducing that gap to the market. And obviously, the market is going up as well. So it's a win-win in both cases, which will be the policy. We will be seeing nothing else but going up rates.
Okay. And I have a second question about the appraisals. Can you provide the detail of how much the appraisal value changed by each segment?
I don't have it at hand, Vanessa, but that's something that I can give you later on. And -- but I can give you -- probably, there will be future questions in regard to this. We did an exercise of the valuation of the 600-plus assets by the end of the quarter, and we went to see each one of them under the 3 different ways of appraisals. One is the cost of replacement, which surprisedly, obviously, it went up. Secondly, in terms of cash flows. And obviously, there will be some sectors that the cap rates suffer a decompression. In some other cases, like the industrial, there was a compression. So there was a mix effect down there. And the second one was the market compares. And we found also mix results down there, where some of them were going up and other ones going down. So at the end, that was the effect that was reflected on our financials.
Our next question comes from Adrian Huerta from JPMorgan.
My questions are also related to the previous two questions. [Technical Difficulty]
[Foreign Language]
Can you hear me better, Gonzalo?
Yes. Better. Much better.
Good. My questions have to do -- are related to the previous two questions. So on the industrial side, lease spreads, what you reported this quarter were similar versus what we saw in the first quarter with the U.S. dollar rents up 1.5%, the ones in peso, 9.5%. So even when you were talking about the rents going up, should we expect the U.S. dollar leasing spreads going -- growing at a higher rate than what we're seeing? And then I'll ask my second question after that.
Yes. Go ahead, Andre.
Yes. I think we'll see that, but it will take some time for you to see that because you need to have the new space coming out. I mean the things that we are building or else is building today, they're going to be ready for rent, maybe in 6, 9 months or a year. That's when you will see the pressure on the rent price. So I don't expect it to see immediately in the next quarter or the next one. But eventually, first quarter or second quarter next year, of course, you will see that.
Andre, and also on the industrial, when looking at the geographic mix of your industrial portfolio, your assets were relatively small in places like Puebla, San Luis Potosi, Aguascalientes, Saltillo. I mean, I haven't calculated exactly the square meters on each one of these places, but seems to be relatively small. Why not putting this in the portfolio and divesting these assets, of course, in [ industrial ] portfolio more?
The logistics in Mexico is very particular. We have the grand highway, which is -- comes from Mexico City all the way to the border. And this is the most valuable for the logistics experience. Now you have different cities and different sizes. And as you say, you don't have that bunch of square meters there, but you still have the amount of square meters that you can experience a very tight vacancy. If you look at Juarez, which is very tiny city, you have a very large occupancy level, more than 99.5%. And that makes everything go sideways in all the expectations. Because a regular market, a normal market, in order to be evaluated, you need to have a couple of points or 3 points or 4 points of vacancy in order to really evaluate the market. If you have only one warehouse, and it's completely occupied, then the market tells you nothing.
So you need to also take in account what are the sizes of the cities and what is the future of the economy in Mexico. I think that this particular highway, super highway, [Foreign Language], they call it, which is from Mexico City, all the way north to the border, this will continue to grow. This will continue to grow in square meters, and this will continue to grow in demand. And once those met, the demand versus the growth, eventually, with the prices of the inflation that the prices of building new replacement costs go up, eventually, the pressure on the price of the rent will be showing up. I mean that's historic. It's not that I'm imagining it. It's historic. It happens every now -- every time and again. And now will happen because I don't see the prices of the steel or the concrete coming down again. So everything new will have a pressure and a pressure and a pressure on the existing price of the rent, and it will show in the next coming months.
Our next question comes from Ms. Sheila McGrath from Evercore.
Andre, you mentioned the rising cost of development, probably helping the supply of office over the long term. I was just wondering if you could give us a little bit more detail on how much you think the cost to build has increased over the last 12 months or so of the different property types?
Okay. What I can tell you because I have it on the top of my mind is on the industrial side. And it applies also to rest of the sectors in some way. The steel that we are using also the [ plaque ] and the [Foreign Language], Jorge?
Rebar. Rebar. That's steel rebar.
And the plaques that we use -- rebar as well has suffered a 60% increase in January last year. The concrete has suffered a 70% increase since January last year. So it applies to all of the sectors because either you need the rebar, as Jorge said, or you need the plaque for the industrial space. But you will need concrete on both, and you will also need elevators, escalators that are on an international price, that went up, not as high as the concrete or the steel, but they went up also. So what we have today is that if you want to replace or build a new square meter of warehouse, it's going to cost you practically 50% above what cost you last year in January. So it makes no sense for the rent unless you want your new property to have a return on cost 50% lower than you expected last year, and that's not the case. So eventually, eventually, as soon as everything falls into place because it will fall into place in all the sectors, today we are seeing in the retail, the steam that we have been hoping for is today starting to feel again. And the offices, you read time and again in Bloomberg or in the U.S. newspapers or in the Mexican newspapers that all the biggest companies are pushing their workers to come back to the office. This will happen. Eventually, it will happen. Some of them are not coming back any time. But the majority -- the vast majority will eventually come back to the office. And then the companies will have to place offices, et cetera, et cetera, et cetera. Also -- and we've talked about this in the past that people want more space between them. So the office that hosted last year, 100 people, that same office will host only 60 people. So the company -- that particular company, will need to adjust the space that they need for their workers, and their workers will eventually come back to the office. So I think that we need to -- it's [ slower ] -- the office space is slower, but I am positive that eventually, it will come back, and the price will be there. Now we don't have many projects or offices today. So there's a lot of inventory that will be slowly being occupied, and there is no new product coming to the market. So there's a lot place that -- different places that are at play today. There's no new inventory coming to the market. So the current inventory will eventually be absorbed by the natural absorption that the market will have -- is having and will continue to have even in a higher mode in the next coming quarters. I don't know if I answered correct.
Our next question comes from [ Mr. Guillermo ] from Santander.
Sure. Just two questions. And the first one on the collateralization. On each division, on retail, industrial and maybe -- and office, have you been making changes to the rent collateralization? Currently now, how many deposits versus the rent is the current collateral? And have you been asking for certain corporate guarantee, pago de fianza, real estate guarantee or anything else? Have you made changes before and after COVID on the collateralization part? And the second question is on the cap rate -- on the divestment cap rates for each sector, also on industrial, real estate, office. Have you been feeling any structural changes? Do they appear normal on scale in the industrial part and the cap rate was sort of attractive to many divestments. So despite this transitory occupancy and whatever, and I'm sure the office space is going to come back as well, have you been seeing changes in the cap rates -- in the development cap rate structurally in the sectors?
Yes, I can take that. Okay. The first question, I think that today, we are living a strange time. We would like also to have more collateralization of our tenants. But given that the tenants are scarce today, we need to be softer, not harder on the requirements in order to give the space to any given company. This will change. Of course, we want -- we have our policies, and we have our way of doing business, and we will stick to our business model. But today, it's time to be softer and not harder with the tenants because tenants are scarce. We understand that, and we try to match that with our way of doing business and have the necessary guarantees in order to give our space to any given company. That was for the first part of the question. Now the second. Is it time to divest? I don't know. I don't know if the industrial side of the business is today ready to be sold. Because what I'm seeing is an opportunity that never have risen in Mexico. Today, we are being living dispute between the 2 largest markets in the world, and we happen to be geographically attached to the largest one. And as long as they have this dispute, and my view is that this dispute is going to last for at least a decade, we need to be able to take advantage of that. If we will take advantage of that, we will need as much space for as much companies as we can. So what will happen today, I don't think it's going to be -- is the right time to sell. And what we've been building in the industrial, and I said this time and again in the past, I hate to be repetitive, and I apologize for that. But we've been serving all the logistics companies for 30 years now. And they have been growing double digits for 30 years now in a row. And today, we are serving a 1/3 of the market -- they are serving 1/3 of the market. Imagine what will happen -- we naturally have a long way to go in that sense. But imagine what will happen if, suddenly, we take advantage of the space left by the Chinese in order to place and establish companies in Mexico to fulfill the needs of the market near to us. We will need more than that. We naturally have opportunity. But today, with the dispute of those giants, I think that all that is -- will happen to Mexico in that sense will be for the best. So I don't think today is the moment to sell in the industrial side. The rest, as you say, and I agree, is going to fall into place. The offices will come back. The retail, we still are underserved to our population. Just remember that in Mexico, we live the same crisis that all the world has lived. But our population, the regular job didn't receive any perk from the government. So these particular guys don't have the money to go and spend in the stores. But today, they are returning to their regular jobs. They are charging their salary, and they will spend all the salary. So we will see -- in a few months, we will see what happened with the retail. So answering the question, I don't think today will be the best day. But if we find an attractive offer for any of our assets, any one of them, we will evaluate it with -- very, very carefully and very professionally. And if we decide, we will go to our committee and make the sale.
Sure. And just on the part -- when you mentioned, right now, it's the time to be maybe softer and things will change. On that, what's going to be the collateral change from today asking for deposits to maybe tomorrow asking for a corporate guarantee or a real estate guarantee, pago de fianza, whatever, what's going to be the natural path given the structure of the tenants?
Today, we have optionality. We ask for deposit. Of course, in all of the cases, we have deposit. There's a very few exceptions. But today, we ask for deposits on the rent. And also, we ask for corporate guarantees. In the case that the mother company does not wish or does not -- or cannot give us a guarantee, we ask for a fianza or a real estate guarantee or something like that in many -- this is in the industrial large surface tenants. With the smaller tenants, with the retail tenants, especially, or the office -- smaller office tenants, we always ask for a real estate guarantee. We can change that for a fianza. But we have the optionality. We've always had the optionality on those.
Our next question comes from Mr. Nikolaj Lippmann from Morgan Stanley.
I have -- I'm sorry if my questions, too, become, I guess, a bit repetitive, but two questions. First, a general question, probably for you, Andre. Can you talk about sort of the top 3 priorities for -- on the strategic side when you go to the Board of Directors or you sort of reflect on the company over the next 5 years or so? What are the most important points for you to get right? So that's question number one. Question number two goes back to the idea of sort of taking the diversification and breaking it into 2. There will be investors who will be jumping up and down about the prospects for industrials but be deeply concerned about the -- some of the secular trends facing the commercial real estate. What are the criteria that you feel that you'll be looking at in order for you to sort of break it into Fibra UNO or Fibra Duos for lack of a better way of putting it? And what would be some of the fiscal considerations that investors would -- or you would have in relationship to that?
Okay. I'll take second question first. I've always said, and again, I'm very repetitive, and I apologize for that, but I think the way the company is sailing and what we see in the horizon is to separate the sectors, but it's not the moment now. Why do I think it's not the moment? Because we just achieved a size that matters. We achieved a size that has its own life because of the liquidity of the share. I don't want to tear off the liquidity today. We haven't get to the fiscal implications yet. We can explore that. I don't think today is the moment, but we can explore that today. And maybe when we decide to do the separation of the different sectors, maybe the fiscal implication will be different. But we can always have an opinion on what the fiscal implication will do as of today. In the U.S., remember that we are following a model. We didn't invent anything. In the U.S., the REITs came out 60 years ago, and they specialized 25 years ago. It took them 35 years to learn. I know that we are following a model, and we have advantage in that because they invented everything, but we are following that model, but we need time. And I don't think today is the time to separate the different business. And I would like Gonzalo to answer the first question, please.
Thank you. Nik, I think that if you are talking about 3 top strategies that the company is having right now, I will go back to basics. After a crisis like the one that we are passing through, I will say that, definite, we'll be working on consolidating our existing portfolio, meaning bringing back the occupancy that we are used to, put our best effort to occupy those square meters that we have vacant as of now. Secondly, we'll be taking care of our tenants. We devote the existence of this company to our tenants. So we better take care of them and help them make money in order for them to keep us paying us rent for the long run. So that will be probably the second one. And the third one will be taking advantages that we consider that the market will be presenting and that we have to be ready in order to take advantage of those opportunities.
Our next question comes from Mr. Alan Macias from Bank of America.
Just wanted to confirm your adjusted payout ratio policy for the rest of the year. Should we still assume 50%? And for next year, is it too early to be thinking of what the adjusted payout ratio will be?
Gonzalo, please?
Yes. Definite, for the rest of the year, you will be seeing something between 50% to 60%, as we have done it for the last quarters. And it's not just a matter of taking the decision to have a distribution equivalent to 50%. It's a matter also that if we are going to be producing an AFFO of around 250, 260 with the price of the shares at MXN 21, MXN 22, we won't be distributing a 12% dividend. At the end, there's a rationale also of paying just 50% or 60% of that. That means that we will be paying a dividend equivalent to 6% or 7%. It's not a matter just of 50%. It's a matter of what makes sense considering the price of the share at that moment.
If I may add another comment, if the shares were to be trading at MXN 45, we would be distributing 100% of AFFO is another way of looking at it, Alan.
Our next question comes from Mr. Anton Mortenkotter from GBM.
I have just two quick questions. One is related to the development of Galerias Valle Oriente. Just I saw an increase in expected CapEx for the property with the same yield. I don't know if there was any change in the project that you could provide us some color of?
Yes. Valle Oriente, we finally signed with a hospital. We changed the office space for a hospital. We are spending on the TIs for the hospital. And also in the hotel that we signed, and we expect the shopping mall to be opened late this year or early next year, the same as the hospital. So we are very happy with that project. And remember that we said that we would sign with different hospital companies. And we signed with 3 different hospital companies. We are renovating a couple of office buildings into hospitals and also building new ones in the case of Valle Oriente and Satélite, and also in Mitikah. So we are very pleased that this new sector -- subsector that rose last year with all this pandemic is staying with magnificent location that we have.
Okay. Great. And also another question. I was -- it seems like the La Viga portfolio had a harsh drop in occupancy to the 50% level. I don't know if you could provide us some details about that. Are you seeing any dynamics similar to this for other properties?
Actually, one -- La Viga is another one. Another hospital, we are today under construction in order to renovate the office space into a hospital. And we suffered there a vacancy of 2 large government tenants, but we are working on coming back on the occupancy.
Okay. But just as a follow-up, so that space plan -- the plan for that space is also to shift to -- oriented to hospitals, right?
[Foreign Language], Gonzalo?
Yes. Actually, part of the vacancy that you are seeing in La Viga will be converted into hospitals. And the remaining ones, we already have 2 negotiations on the table with office space for the government -- local government.
Okay. That's perfect. If I may, can I ask another question? This is regarding buybacks. During the quarter, the buyback activity slowed down a little bit. I just was wondering what pace do you plan on continuing with your buyback program?
The buyback -- sorry, go ahead, Andre.
[Foreign Language]
Thank you. The buyback, as Andre mentioned, the dividend policy, we are retaining cash. As Gonzalo mentioned, one of the reasons is that there has to be a rationale between what the dividend payout is in terms of actual payout and the value of the shares. So there is more or less a 7% yield. What we are keeping in terms of cash will be used for 1 of 2 purposes: repaying debt or buying back shares. The decision on the company on which 1 of the 2 to use and when and how depends on a number of different factors, where, for example, repaying debt may be more accretive immediately for shareholders, we may decide to repay back some debt. And in other cases, if we continue to see that the shares are trading at a very low value, as they are right now, we will continue to buy back shares. In addition to this, you also have to remember that we have available or would have available cash from asset dispositions that could also be used to repurchase shares if we decided to do that.
The next question comes from Mr. [indiscernible] from SUMA Capital.
I have only one. I know that Andre already mentioned about office buildings, office spaces. At some point, they're going to be back. However, the question is do you have a specific strategy to position those office spaces that you already have? I don't know, maybe different types of marketing, digital marketing or even discounts for tenants or maybe new tenants?
In that case, we've been using all of those. We have all of the part-time office, big players are our tenants. We have used digital -- also digital platforms in order to lease. We have tried everything. I think that what we're seeing today is that we have been quite resilient and very defensive. And what will happen is going to happen to all the market. The -- Mexico, the country at all is underserved also in office space. If you compare the amount of square meters to the size of the economy, it's still underserved. So we were having a very nice run with the new space produced every year, and we stopped for a couple of years with this crisis. So I think that everything will fall into place. As for a specific strategy, we have all the strategies. And that's why we are the most relevant player in the market. I think that we -- the strategy that we use is the one that should be involved for the type of business that we're running.
And our final question from today comes from Mr. Jose Carlos [indiscernible] from CI Mexico.
You guys have been very active in the ESG strategies. So how do you guys think that this will impact and, I think, positively in the -- over the short and midterm and -- in the effective rents and in a corporate level as well. So how do you see these attractions for -- from ESG?
Gonzalo?
There was really a bad connection, Jose Carlos, but I will say that you are asking about the ESG strategy that we have?
Yes, correct. Yes, correct. You have been like very active in that matter. So I just want to know if -- how these initiatives will impact in the short and midterm in a corporate level and, as well, in the lease spread, effective rents, occupation strategies, and -- I mean versus other players that are not taking very seriously the ESG theme. That's my question. And my second question, Gonzalo, would be that you guys -- I mean, the industrial sector is facing right now a few challenge -- challenges such as the infrastructure and services or lack of infrastructure, specifically in the electrical grid. So how do you plan to tackle these challenges in the mid- and long term? That would be my two questions.
Let me take the ESG question first. One thing I'd like to highlight is that we are not doing ESG as something new. We, as a company, already did all of these things in the way of doing business is how we conceive the business. Part of what Andre was mentioning, the fact that we have been able to be here as a public company 10 years, and before that, almost 40 years in the business is because we have a sustainable view of the business. This means analyzing all of the different risks that can affect the business, monitoring them and taking care of them. This is what sustainability means, and it has been divided into 3 letters, which is ESG, but it's nothing more than analyzing all of those different risks and mitigating them. For example, the most recent one we have addressed is having a water stress test in which we know exactly which of our shopping malls or industrial properties will face drought, which are subject to potentially being in flood zones, so we can address the risk of a flood coming in the future and things like that. So this is something we already did as a company in our way of doing business.
The only thing you are seeing and that is different is that now this is something that has become important to report. So we are reporting on what we already did. And the reason we are being able to move so fast is because this is part of the DNA of the company. I cannot talk about our competition. But speaking for ourselves, this is something that is part of the DNA of the company. This is part of how we do business. And this is what we will continue to do. It's something that is fundamentally important for us because it is mitigating the risks -- all of the risks that can affect our business. So this -- we take this very seriously. Now is this something that we'll be able to feed through to tenants in terms of potentially charging higher rents and things like that? You already can see that. For example, you can charge a higher rent for a LEED Gold certified building as opposed to a non-LEED Gold certified building. And we are in the process of certifying a lot of our GLA that did not have the certification, but because of the way they were constructed meets the criteria needed to be certified as LEED. So you will continue to see that the number of square meters that we have as a company, for example, will be LEED certified, and this will feed into higher rents because you have those certifications. I hope that this answers your question. Now I'll ask Gonzalo to take the other piece of the question.
Yes. And actually, still on the ESG, definite, there are a lot of our tenants -- existing tenants that wouldn't be with us, if we wouldn't have the certified buildings. And secondly, we haven't built any office space since inception that has not been certified as a LEED. So definite, that's what we are doing. And definite, that's a benefit, and we will be keeping doing it. And definite, we consider ourselves as leaders in the industry in terms of ESG. In terms of the infrastructure or energy for the industrial sector, obviously, we have done everything that is on our side. And actually, probably, we will consider ourselves as the largest holders of KVAs that are sitting in the northern states of Mexico where there is a lack of energy. We have a reserve of KVAs down there sitting in order of the benefit of our tenants. And if the reform will pass or will not pass and which will be the future of this, obviously, that's not on our hands. But my personal opinion is that it won't pass. Definite, that's -- that will be against the industry. But I don't think that it will pass, and there will be probably some changes. But at the end, we cannot, how to say [Foreign Language]. However, you want to call it [Foreign Language].
You cannot -- we don't want to kill the goose with the golden eggs.
Yes.
As we have no further questions, I'll pass the line to -- back to Jorge for the concluding remarks. Please go ahead.
Yes. Thank you very much, Michael. Before handing the call to Andre for final remarks, I would like to tell the audience that if you have additional questions, feel free to reach us at the investor e-mail, and we'll be happy to answer your questions. Andre, please, if you have any additional comments?
Gracias. Thank you, Jorge. Thank you, everybody, for their time and their interest in our company, and we will -- you will hear from us in the next quarter when we report the results. Thank you very much.