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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 Q3 2020 Financial Results Conference call on 27th of October, 2020. [Operator Instructions] Our host today from Fibra Uno are Mr. André El-Mann, the CEO; Mr. Gonzalo Robina, Deputy CEO; Mr. Fernando Álvarez, VP Finance; and Mr. Jorge Pigeon, VP of Capital Markets and Investor Relations. So without further ado, I would now like to pass the line to Mr. André El-Mann, the CEO. Please go ahead, sir.
Thank you, Michael. To you all, thank you. I want to share with you the third quarter 2020 results for our company. It is very well-known for all of us that the world has been hit by a pandemic and is now beginning to show the economic impact of this global health crisis. Mexico has been no exception to the impact of this crisis. However, as I have mentioned, time and time again, our company is very defensive and has been designed to withstand challenging times like this.
Of course, we are occupied day in and day out, ensuring that our company continues to operate, leveraging its strengths and navigate this crisis successfully. We are aware we are in stormy weather. Nevertheless, we have designed the strongest ship and are moving forward as we anticipated. As many of you may have heard before from me, we are a real estate-driven operation.
We based our decision on over 40 years of experience of each of the company's founders and the seniority and experience of our management team. We believe that the financial and operating results posted by our company are extremely solid in particular, considering the environment we are living in.
I want to start by stressing that real estate is a long-term business. Therefore, we must have a long-term view that dictates our decisions in managing our operations. Thus, although we are all aware of the crisis that surround us, and we are occupied in managing our day-to-day operation, we are fully confident that we will overcome the challenges we have faced and expect to face in the near future. We have no doubt that we will prevail, and this crisis, too, shall pass.
Our diversification remains one of our key strengths. And for example, not only because of the solid performance of the industrial sector but also because of the quantity and type of our tenant base, as well as the strategic location of our properties. We have the absolute debt portfolio of irreplaceable properties leased at competitive rents. The combination of top-quality assets at competitive rents gives us a head start to establish a defensive operation in times of a down cycle, like the one we are living. Basically, this results in a more stable and higher-than-market average occupancy. These are countercyclical measures adopted in what is a cyclical industry.
This diversification design and our prudent financial management had allowed us to build an armor around the company, to help us through the storm. We have decided to withhold vast amount of resources in order to make sure that our company will reach safe harbor once we leave the pandemic turmoil behind.
Despite having the worst quarter in Mexico's history in record during the second quarter of this year, our company met all of its obligations. The third quarter of 2020 represents an improvement of recovery versus the second quarter of 2020. Our perception of the performance of our tenants is that their operations are improving.
This quarter, we see that conditions are improving, and we see a turnaround in the performance of our company. This is reflected in our financial results in the bottom line as a 34.7% increase in AFFO per CBFI quarter-over-quarter. Revenues increased, we continue to offer discounts and enhance our reserves for doubtful accounts. Specifically for COVID-related tenant negotiations, these were approximately 30% below than what we reserved and deducted during the previous quarter. We reduced the amount of capitalized interest and still managed to increase our FFO on a double-digit basis. We perceived a recovery and the financial and operating figures of our company are showing this recovery.
However, we remain in an uncertain environment. We are seeing that COVID outbreaks are increasing globally and we do not know the -- what the near future will hold, and what kind of economic impact this may have globally and in Mexico.
We know crisis pass. This one shall pass, too, but we do not know when. We have always been willing to take the -- on the real estate risk, a risk we understand, and we have always been financially prudent, which is part of the fundamental design of FUNO's business model. What you can basically see in the financial and operational results of our company is this combination. Our company is enduring in these difficult times. We are evolving and reinventing ourselves in order to help our tenants and lend them a hand to reincorporate to the economic activity in the best way possible.
We have set up the best sanitary protocol in the industry. We achieve -- to achieve that goal we offer our tenants and visitors the safest and healthiest environment in all of our properties. All of these will comply with our financial duties without asking for any relief from our creditors and lenders. We continue to be well above the water and still producing enough funds to distribute dividends to our shareholders and on top of that, managed to withhold large amount of reserves to ensure our new future performance.
In this slide, I want to highlight the specific indicator -- indicators that I look into and that give me comfort that we are in a strong position despite the turmoil that surrounds us. First, we have a very solid cash position that includes proceeds from the revolving line of credit, a portion of the proceeds from the recent bond issuance, the cash we kept from the reduction in payout of distributions, second the fact that we have created a substantial amount of reserves for doubtful accounts.
I want to take some time to address the management of discounts and provision we are using in our business. Looking at things from the top, we have run COVID-related reserves through our P&L totaling MXN 1,030 million during the second and third quarters of 2020. In addition to this, we have added a total of MXN 518 million for ongoing doubtful accounts. The sum of these reserves that have passed through our P&L and are now in our balance sheet, totaled MXN 1,549 million. This effort has resulted in our accounts receivables dropping by MXN 20 million quarter-over-quarter. So from a liquidity point of view, I feel we are in a very solid position.
We are debating whether to repay the revolving line of credit or keep it a little longer. However, I feel we are getting close to the point where we should be repaying this credit line. Additionally, I want to comment that we are being extremely cautious on the financial side of the business with provisioning well beyond what we know today we need for the sake of being prudent. We may not need the amount of reserves we are generating. However, we prefer to be cautious and keep this portion for the time being.
On the operating front, I am pleased with the performance of our portfolio. Diversification is paying off. Competitive rents are paying off and strategic top-quality locations are paying off. Despite the pandemic and economic crisis, we had a marginal drop in occupancy with overall portfolio occupancy at 93.3%, positive leasing spreads in pesos and stable leasing spreads in dollar terms. We have concluded the majority of negotiations that we have started in early April. And as you may imagine, new requests for relief have been received, and we expect to continue to receive additional requests in the coming months, given the environment we're in. We are getting better, but the storm is not over yet.
We closed USD 38.8 million of asset sales and expect to close on the remaining $60 million over the next few days. I want to highlight that as of today, we have repurchased 64 -- in excess of 64 million CBFIs or 1.7% of the company and have also repaid debt for approximately $18.5 million. Taking care of our revenue line, while keeping a tight grip on the expense line, has allowed our company to emerge above the twister of news and economic havocs caused by the pandemic. We will redouble our efforts to continue to be the leader of the industry and deliver to our shareholders the best results in the commercial real estate sector in our country.
In sum, I am pleased with the performance of our company, especially in light of the circumstances. Our indicators tell us we're turning the corner. However, we must be mindful that this crisis is different than all others. And we do not have absolute certainty that the crisis is over yet. Since we know that the crisis is not over yet, we remain vigilant on our operations. We remain vigilant of our financial conditions and the prudent management of our financial position. This crisis shall pass, and we, we shall prevail.
Now I would like to pass the mic to Jorge Pigeon to continue. Thank you very much.
Thank you very much, André. Now I will go through the quarterly MD&A, as usual. I'd like to start talking about our revenue line. Total revenues increased by MXN 236 million to MXN 4,534 million or 5.5% above the second quarter of 2020. This is mainly attributed to the combination of the following: additional reserves -- revenue, sorry, from new properties such San Martin Obispo III and Queretaro Park V, which are part of the Hercules group of properties we acquired; the effect of rent increases in active contracts as well as renewals of these contracts at higher rental rates, as André mentioned; positive leasing spreads; of course, rent reliefs granted related to COVID-19 during the quarter for MXN 331 million; in addition to the rent relief, the COVID-19 reserve for future rent relief of MXN 331 million for this quarter; a decrease in variable rents and kiosk rents as expected given the environment we're living in; slightly lower occupied gross leasable area for the company.
In terms of occupancy, the total occupancy of FUNO's operating portfolio at the close of the third quarter of 2020 was 93.3%, which is only a decrease of 50 basis points compared to the previous quarter. Industrial operating portfolio recorded 96% occupancy rate. Retail operating portfolio was 91.6%, only 60 basis points below that of the second quarter 2020. And the office portfolio recorded an occupancy of 80.6%, which is 120 basis points below second quarter of 2020. However, I want to highlight that this drop is mainly due to the incorporation of Torre Cuarzo to the operating portfolio. And Torre Cuarzo obviously stand at slightly lower occupancy, given that it is a building that is still in the stabilizing portion of its ramp-up phase, but we're very pleased with the performance of Torre Cuarzo.
The others operating segment remained basically constant, with 99.7% occupancy. And the in-service properties dropped from 74.5% to 73.4%, which is basically due to the exit of Torre Cuarzo, which in this case, had a higher occupancy than the average of the in-service category.
Now moving on to the operating expenses, property taxes and insurance. Operating expenses increased by MXN 56 million or 13.3% from the second quarter of 2020. And this is mainly the effect of reopening our shopping malls. And when I say reopening, I don't want to mention that shopping malls were closed. As you know, 93% of our shopping malls are anchored by a grocery store regardless of what type of shopping mall there is. So they were operational, just portions of the shopping mall were closed. And we opened those portions to allow our tenants to move in now that the stoplight moved from red to yellow and orange. Insurance expenses increased by MXN 3.7 million, 5.5%, basically the inclusion of new properties in our portfolio, as well as property taxes increased by MXN 3.6 million, again, reflecting new acquisitions.
Net operating income during the quarter of 320 -- third quarter of 2020 increased by MXN 163 million or 5%, reaching MXN 3,408 million. NOI margin calculated over property revenues were 83.6% and 75.2% over total revenues.
The interest expense line, we had a net interest expense increased by only MXN 7.1 million or 0.4% compared to the second quarter of 2020. Basically, this is the reflection of the fact that we kept funds from our revolver, which we drew down 50% of that committed credit line, which is for MXN 205 million and 6.7 billion -- $205 million, sorry, and MXN 6.7 billion in cash. As you may recall, during the third quarter, we issued a bond for MXN 650 million (sic) [ $650 million ]. We used already [ MXN 520 million ] (sic) [ $520 million ] of that to repay debt. And as of today, have kept $130 million in cash.
We have a decrease in interest -- capitalized interest for the period, which was MXN 193 million. This is a reflection of the fact that properties that have been in development are starting, all of them, to come online. And we obviously expect these properties to start contributing to our revenues during 2021. And obviously, the income from the cash that we have on hand that has been invested and generating some income.
At the bottom line, funds from operation, the result of all of the combination above, the funds from operation controlled by FUNO increased by MXN 142 million or 14.2% from the second quarter of 2020, reaching MXN 1.1 billion. Adjusted funds from operations increased by MXN 342.8 million or 34.2% from the second quarter of 2020, reaching MXN 1,346 million. Mainly the change here is the increase due to the asset recycling activity, the $38.8 million that -- of assets that André mentioned we sold.
In terms of FFO and AFFO per CBFI, I'd like to highlight that the biggest impact is that as of yesterday, we have purchased -- or repurchased 66.8 million CBFIs. We are approaching 2% of the company. As of the close of the quarter, we had 3.87 billion CBFIs. And the FFO and AFFO per average CBFI were MXN 0.2930 and MXN 0.3441, respectively.
Now moving to the balance sheet. I'd like to start with accounts receivable. And I'd like to highlight that, as André mentioned during the beginning of this crisis, one of the key objectives we had was to ensure that our accounts receivable remained in check during this pandemic. It was one of the key objectives that we have. And I would like to highlight the fact that during the third quarter of 2020, the total account receivable base for Fibra Uno stands at MXN 2,268.5 million which is a decrease of MXN 20.8 million versus the previous quarter. This is mainly due to the fact that we have continued to enhance or increase our reserves for doubtful accounts on 2 fronts: one is COVID-related accounts, a reserve for accounts receivable, which currently stands at MXN 1,030 million, an increase of MXN 331 million this quarter; as well as an increase for doubtful accounts, which is the traditional doubtful accounts that we have in our balance sheet of MXN 139.8 million to reach MXN 518.7 million.
I'd like to highlight the fact that this MXN 518 million is a reserve that is in excess of what is required by the current accounting methodology. And as André mentioned, obviously, we believe that these reserves are likely to be larger than what the company may need. However, we want to be prudent on the financial side of the equation, and we prefer to reserve this cash. And if we do not need it in the future, then we will have that cash available for different uses.
In terms of investment properties, the value of our investment properties, including investments in associates, increased by almost MXN 4.5 billion or 1.6% compared to the second quarter of 2020. This is a result of the combination of asset revaluation, acquisitions of the Hercules group of properties, which advanced to almost 90%. We have, I think, one more property to acquire from that group of properties, the Tajuelos property. And the normal progress in construction of projects under development, mainly, but not exclusively Galerias Valle Oriente and the advance of Mitikah.
In terms of debt, net debt totaled 101 -- sorry, MXN 124 billion compared to MXN 122 billion recorded in the previous quarter. This variation is mainly due to a combination of factors. We had a bond issuance for $650 million, of which we used already $520 million to repay debt and have kept $130 million in cash. Bond buyback as of the close of the quarter for $10 million, and we bought almost another 10 million after the close of the quarter, and we expect to continue this activity. The exchange rate moved which went from MXN 23.13 in the previous quarter to MXN 22.35 as of the end of the quarter, which means that the company's LTV stands at 45.7%. However, this includes the proceeds from the revolving line of credit, which are $205 million and MXN 6.7 billion. If we exclude the effect of having these resources available, then the LTV of the company would have been 42.1%.
Total equity increased by MXN 2.8 billion, almost 2% versus that of the second quarter. This is basically the combination of net income generated from the quarterly results, derivatives valuation, shareholders' distribution and the provisions for the employee compensation plan.
Now moving to the operating results. Leasing spreads, as André mentioned, we are very happy to continue to report positive leasing spreads of 450 basis points in the retail segment, another 450 basis points in the industrial segment and we only saw a drop of 90 basis points in the office all compared to peso inflation. If we look at U.S. dollar leasing spreads, we had a 270 increase in the retail segment, a 140 basis points increase in the industrial segment, a 9% drop in the office segment. For further detail, obviously, we can go deeper into detail in the Q&A section, or we can look at Page 21 of our report.
In terms of constant property performance, I'd like to highlight that for this quarter, constant property stands at about 8.5 million square meters, and the company currently has 10.6 million square meters. It's a significant increase of almost 2 million square meters for the acquisition activity that the company has had over the last year. Basically, the Titan and Hercules acquisitions are the ones that are driving this change. But it's an important change in terms of the size of the company that we're looking at when we look at constant properties. Having said that, rental price per square meter at constant properties was 30 basis points below the annual average weighted inflation of 2.76%.
If we look at the subsegment level, total rent per square meter for the portfolio decreased to MXN 171, mainly due to variable rates -- the variable rent -- the fact that we're not receiving variable rents and the exchange rate variation, which were offset by positive leasing spreads above inflation. The net effect is the total NOI for the quarter at the subsegment level decreased by 2.4% versus the previous quarter.
Logistics and light manufacturing saw decreases of 3.9% and 5.1%, respectively; office decreased by 1.3%; retail segment, the stand-alone increased by 2.8%; the fashion mall and regional subsegment decreased by 1.6% and 7%, respectively, mainly obviously due to change in variable rents and COVID-related reliefs; other segment increased by 16.3%, basically due to seasonal behavior on some contracts.
And with this, I conclude my presentation of the financials and operating results and I'd like to open the floor to Q&A. Thank you very much.
[Operator Instructions] The first question comes from Mr. Carlos Peyrelongue from Bank of America.
Could you please break down for me, the rent relief? What percent comes from retail and what percent comes from office? And whether in office, you saw an increase from the third quarter to the second quarter? Was it stable? Or did it go down in terms of the request for rent relief in the office space?
Thank you, Carlos. Actually, in terms of -- we do not have the exact percentages, but I can give you estimate of probably 75% to 80% came from retail and 20% to 25% came from offices. And in the case of offices, it stayed stable compared the second to the third quarter. And this is mainly because some of the negotiations, we started them in the second quarter and we end up finishing the negotiations in the third quarter.
And in that case, in particular, I can give you some samples that we trade some of the relief we gave them for extensions on the lease for a long period. I can give you 4 samples that are in between 5,000 square meters to 17,000 square meters, of which we extend the length of the lease from 5 to 7 years. So the closest finish -- the closest end of the leases that we will have with those 4 tenants will be 2029 and out all the way to 2035.
And in particular, in these 4 cases, which are a big sample, I can tell you that we did not get a single square meter back from them.
Our next question comes from Ms. Vanessa Quiroga.
Could you -- I think it would be very helpful if you could share with us what you are seeing in your tenants in terms of recovery, specifically in retail. Based on the requests for relief that you have received to now, do you expect that the 4Q will be similar to the third quarter in terms of relief? That's the first part of my question.
The other one is regarding the Hercules portfolio, the assets that you acquired during the quarter. Can you clarify if there are already contracts in place in those assets? And if you paid with cash on hand or shares?
And I guess the third one is if we will continue to see acquisitions in the short term.
Vanessa. I wouldn't want to guess what the relief will be for the fourth quarter. What I know is that what I'm perceiving from the tenant is that they are improving every day. The reason is very simple: now they are open. Before, they were closed. So some of them are open with a shorter schedule. I think with time, they will be moved to the full schedule of operations. But today, some of them are open with a limited schedule of operation. That brings us to the view that they have -- they were closed, now they are open. They are feeling that they have some sales. I don't know what they were expecting, but they are feeling comfortable with the amount of sales that they are receiving right now. And I am positive that these sales will eventually come back to normal in our market.
So as far as the tenants' view, this is what we are perceiving from them, we are perceiving from the dialogue we have with them but also with the checks we're receiving from them. Because it's impossible for us to receive checks from them if they would continue to be closed for 8 or 10 months now. So the logic of our view is we are seeing that they are improving because now they know that eventually, they will get back to normal, that they have already opened and eventually, they will open in a regular schedule. That's for the first part of the question.
For the second one, Hercules had about 90% of stabilized income. But this portion, in particular, those 2 last buildings are 99% occupied. We are talking about around 200,000 square meters of GLA, 100% devoted to logistics, brand-new space that was just finished by the developer and great locations, one is San Martin Obispo and the other are Queretaro Park. So great, great buildings. And for the acquisitions, what we have on the pipeline, is the remaining portion of Hercules, which is 70,000 square meters of GLA of industrial. And the other part is the shopping mall that is pending to be transferred on Queretaro. And we expect to be transferred probably by the end of this year.
In the Hercules retail portion, we are negotiating the price to be paid in steps. So that will be released once we finish the negotiation with them. But that's what we have on the pipeline as of today that we have added since day 1 this year.
Regarding how you're paying..
It has been done in cash, Vanessa. Not in shares.
Our next question comes from Mr. Pablo Monsivais from Barclays.
Hello. I have a quick one. On your NAV calculation page of your quarterly report, you mentioned that your NOI of MXN 16 billion is not reflecting the potential that you have because you have some properties like La Viga, La Isla Cancun II, et cetera, that they are not generating 100% of the NOI they should generate.
So my question is the following. What's the normalized level of NOI we have to see on a normalized scenario, if it's MXN 18 billion, MXN 20 billion? What is the level that we should look at?
Pablo, it's Jorge. I think that fully stabilized NOI, given where we're standing today should be close to MXN 20 billion for the company.
And this is a combination of what we have mentioned, considering that we have empty spaces. And the other one is that this 60 million is the last quarter times 4, and obviously, the last quarter wasn't a stabilized or regularized one. So taken under consideration, these 2 subjects, I will consider that we'll be around MXN 20 billion.
Okay. And do you expect to reach that level by, I don't know, some point next year because, of course, you have the COVID also you have the stabilization of some properties. But for probably for modeling purposes, should we think of reaching MXN 20 billion by the second half of next year? Or less than 6 months? What's roughly the time line for this?
We expect to reach that amount by the second semester next year. But we will still have a lot of upside because we haven't taken account. By that time, we should have finished, for example, Valle Oriente. Valle Oriente is not taken into account in that number. [ Satélite ] there will be 12 more months to go from that point. We don't have taken into account that. So we still have a lot of upside. And especially with our flagship property, industrial property that we are under construction right now for almost 3.5 million square feet, we will receive the first million already leased in the next couple of months. So there's a lot of upside in our numbers. And of course, the [ dual ] account, which is Mitikah it will eventually start dropping resources on the NOI.
Our next question comes from Mr. Nikolaj Lippmann from Morgan Stanley.
Two questions, if I may. First, returning a little bit to what Carlos and Vanessa were looking for in the beginning. Can you provide -- so I'm not sure that third quarter was a homogeneous quarter in the sense that maybe the last part of the quarter was quite different from the first part of the quarter. Can you provide any color on collection over the course of the quarter to see if there's a trajectory of improvement or trend of improvement there? So that's question #1.
Question #2 relates to asset sales. You did a bit of that this quarter. Obviously, you have a relatively high loan-to-value ratio at this stage. What can we expect in terms of asset sales towards the end of the year and maybe into 2020?
Thanks, Nik. The first part of the question, we can share that the percentage of collections regardless of what specific account that collection came because, I mean, in every single month, you receive collections from different months, not just that particular month. But every single month, we are seeing a higher percentage of money coming from collections compared to the amount of money that we invoice, excluding credit notes and discounts. We have seen that number coming up since April. And just to share with you a ballpark of what we saw in the last month of the last quarter, it was close to 100%. It was around 98% of collections to invoices.
So again, not every single amount came for the accounts of that particular month, but this is a number that gives us -- that makes us very optimistic.
In terms of the sales, Nikolaj, the one that is fully closed and paid in full was the industrial one that had a mix of 2 buildings and 4 pieces of land. Taken on the consideration just the buildings, the cap rate that we sold that for, that was at 7.15%. And in terms of the multiple that we had against the acquisition that was 6 months old, since it's part of the Titan portfolio, just on the building, the factor, the multiple was 1.44x.
And the other one that is fully committed that we are just waiting for the green light from COFECE, that one will be closed at a cap of 7.29. And the multiple in that against the acquisition is 2.15x. And against the book value, it's 14.6x. And we expect to close it in the next few weeks. That totals an income of around 100 million. And out of that, we will be -- we have already done some of that. We will be acquiring probably around 40% to 45% of that, repurchase some of our debt and the remaining 55% to 60% will be repurchase of shares.
Got it. Should we expect more asset sales beyond what you're talking about here somehow?
Yes. We are working in 3 different ones, which are -- one of them is from the office sector. I cannot give you too much light on that one. But I can tell you that it's a sale of an office building close to $100 million. And we have another industrial one. That will be around $134 million. And we have a retail one that will be around a $77 million. And we haven't signed anything with them. We are in the negotiation process. One of them is already doing the due diligence on one of the assets, but we don't have a hard commitment yet.
Your next question comes from Mr. Adrian Huerta from JPMorgan.
André, Gonzalo and Jorge, I have the -- my first question is just on the rent relief that you have on the balance sheet for MXN 1 billion, then you have another MXN 500 million for reserves for doubtful accounts. From the MXN 1 billion for reliefs, aren't these supposed to be canceled at some point? I mean, difficult to really recover those sort of cash reliefs that were offered to clients. And then the second question is just on Valle Oriente, which is one of the few greenfield projects that you have. Can you tell us a little bit on how the leasing activity has been on these assets, especially now with the pandemic, et cetera?
Second question first. Thank you, Adrian. Valle Oriente, when we started the construction -- well, first of all, we needed to refurbish the current shopping mall. Then we needed to have more space in order for the expansion of some of our clients there. We were very tight on the construction. We have the excess land that we acquired when we acquired the shopping mall, and we got the permits. So we started with the design of the shopping mall, and we pre-leased 60% of the shopping mall.
Today, we have 60% relief, even though that is not the same client that we used to have before. Some of them dropped, and we got new clients. We have also, out of the 18,000 square meters of offices, 12,000 of them are a hotel, Hilton brand hotel, and it's already leased. And out of the 7,000 or 8,000 of office space, we have leased only 20% of those, re-leased 20% of those.
But we needed to give a new face to the shopping mall. And we are taking advantage of the new construction to refurbish the old part of the shopping mall. And we will end up with a brand-new shopping mall, up-to-date installations. And we feel very confident about it because it's an extremely, extremely well-located piece of property.
So I know that right now, maybe retail is making some doubts, but not for us. We feel very comfortable because the location is on [Foreign Language].
[indiscernible].
The first part of the question, Adrian, as you just pointed out, we have a bit above MXN 1 billion of reserves. That's on top of the -- around more than MXN 500 million that we already granted as credit notes or discounts. From this MXN 1 billion reserve, around 50% of that is an amount that is currently being negotiated or we expect -- or is considered part of current negotiations. The other 50% is actually a reserve that we are providing on top of what we are doing right now. So that's why we are talking about that there's a chance that we end up not using 100% of the reserves and then those reserves coming [ intact ].
But obviously, I mean we're in the middle of a very important crisis. So there's also a chance that we end up using 100% of the reserves.
Our next question comes from Mr. [ Nicolas Bianchi ] from Jefferies.
Just a quick one on the bond buybacks. You mentioned there that $10 million was done in the quarter and another $10 million afterwards. And in the financials, in the notes, it says that the buybacks were for $7 million of the 2030s and $3 million of the 2050s. Just considering that those were the bonds that were reopened in the quarter, could you clarify a little bit of your strategy for these debt buybacks and how we should think about that moving forward?
Well, we wanted to buy back debt in order to be coherent. When we sell a property, we need to repay or, in this case, repurchase a bond in the...
Proportion.
The similar proportion that we have debt in our company because we are selling the assets. And we wanted to repay debt. We haven't been able to find a debt that won't represent a penalty for us. The only one that was on a price level that was acceptable for us was the '30 and the '50. And it also is the only one that was available in the market. So we bought the $10 million of that particular bond.
The second tranche that we -- I just read that we have been paid off today, 18.5 million -- the 8.5 million. We paid a piece of that in pesos in the order of 6 million or 7 million.
And [ MXN 15 million ] of the FUNO 18.
FUNO 18 bond, peso bond that we repurchased.
So we are having a hard time finding what debt can we pay in order to devote the money proceeding from the sales of assets to repay debt in any form. We are trying to find the best form to repay the debt. But the ideology and the philosophy is to repay debt in the proportion that we have debt across the company when we receive funds from sales of assets. I don't know if I make myself understood.
[Operator Instructions] Okay. So perhaps we'll move on to the next question. Next question comes from Mr. Bradley Sohn from Mirae Asset Management.
This is Bradley Sohn from Mirae Asset. My question -- I have 2 questions. My first question is about the acquisition pipeline. It looks like there's about MXN 2 billion amount of acquisition to proceed. Could you give me a sort of time line for this acquisition? And that's my first question.
And my second question is about the leasing expiration profile. It looks like there's about 5% of lease expires for this year, and then there is about 12%. So a total of 17% this year next year. And could you sort of give me a breakdown into sectors, into retail, industrial, office. Just out of the 17%, how much falls into retail and office?
Yes. In terms of the acquisition pipeline, what we have is around 70,000 square meters of GLA of industrial that I'm probably projecting that we'll be into the company on the first quarter of next year. It won't be this year. And for the retail portion, which is mainly just one asset remaining, that will happen in this fourth quarter.
Now in terms of the leasing renewal, the 5% is ongoing. It's part of the normal negotiations of the company. So it's something that it's -- you can look at it as a rolling basis. It's moving over time. Specific segments, I don't have available at this time, but I will be happy to send you an e-mail or follow-up call if you want. I can give you the breakdown, but I don't have it right now available.
Okay. So just a follow-up question on the lease negotiation. Do you see -- like I'm pretty sure you guys are in the process of negotiating with this tenant. And in terms of, I guess, the rental, the price, just -- could you just sort of give me a like brief update how the rental income is going to be in fourth quarter and next year? I mean, for the lease to be renewed, yes?
Part of what you're seeing in terms of leasing spreads is -- that's the section of leasing spreads, in which we showed that in retail and in industrial, we had a 4.5% leasing spread above inflation. That should be an indication of where we're moving. It's obviously very difficult to say where we're going to be renewing contracts in the fourth quarter and the first quarter of next year.
But obviously, as André mentioned, we feel that tenants are turning the corner. The figures we have in the company show that we are turning the corner. However, this crisis is different than any other crisis we've seen before. We are seeing flare-ups of COVID-19 going up again in Europe. That may have an impact -- that may happen in Mexico. We don't know. It's very difficult to look into the future in these times, given the several factors of uncertainty that we have ahead of us. But the most recent indicator we have, which is the third quarter leasing spreads. We're 4.5% above inflation in retail. So that should be the guide of where we're looking at.
Our next question comes from Mr. [ Jorge Mauro, Fundamental Capital ].
My question is just a clarification. You gave that run rate of 5 billion for the fourth quarter of next year for NOI. And just -- I mean, assuming your historical contribution margin of, let's say, 58% FFO to NOI, just help me out here, but this implies an FFO north of MXN 2 billion. Is that correct? Is that what you have in mind?
Yes, that is correct. That's what we had actually the first quarter of this year.
Okay. And in that case, we should expect distribution of 85% of that amount out of dividends. I mean you distribute on the adjusted FFO. But similar regular conditions, these 2 should be pretty much the same.
We are -- as I believe André mentioned during the last call in the quarter, dividends, given the circumstances we're living, we're actually literally deciding the dividend payout on the day of the results, what the payout is going to be and we're looking at a bunch of different drivers.
In terms of FFO, yes, we should be north of MXN 2 billion, definitely. In terms of payout, it could be the MXN 2 billion or it could be less. Depending on what the environment we are seeing at the time. But the policy so far of the company -- just to clarify one last comment, the policy so far of the company has been to pay out what we generate in cash under normal circumstances.
And just a follow-up. To reach this MXN 5 billion, is assuming how much of M&A?
Zero M&A.
Zero M&A. I guess, is this on the current portfolio with the macro conditions normalizing?
Just stabilizing the current portfolio, as André mentioned, yes.
Our next question comes from Mr. André Mazini from Citi.
So my question is on variable rents. In the beginning of the call, Jorge mentioned lower variable rents, which I think is comprehensible, given that retail tenants have been selling more given the still -- the lockdowns and the coming out of lockdowns and all that. But thinking going forward, do you think using more variable rent and maybe less base rents as a tool to help out tenants is something that makes sense for you guys? I would imagine the tenants will be more comfortable signing contracts going forward, the retail tenants, I mean, if they're going to pay more rents, if they sell more and there's all the uncertainty behind the future of retail and all that.
So is it a marginal change in the rental contracts towards more variable rents, something that may make sense to help out tenants going forward?
Thank you. Very interesting question, André, very interesting. This has been part of the conversations with all the tenants, particularly with the retail. They now -- they would feel very comfortable if they would have only variable rents. But that will leave us out of the game. We cannot live with only variable rent because we are not, in a sense, I don't want to say the word responsible, but we are not partners with these guys.
We have invested our share of the business. In this relationship, tenant and the lease landlord, we have already paid our dues. We paid all the money needed to have the shopping mall rise. And it's very difficult for us to take that decision to go only with the success of the tenant.
In the past, we were pushing very hard the tenants to convert the rents to a variable rent, not the whole rent, to have a minimal rent and then share the success of the business if it will be. Now the tenants, they want to change the minimal rent. You raise the minimal rent and go to only part of the success, if ever there is success in their business. Because they are feeling now that they are not having success, and they may not be having success because of the situation.
But they will be -- they will be having it. Now for us to change our rent with a minimal rent and a potential percentage of the sales, whichever is higher to only a percentage of the sale, is difficult. We won't do that unless it's a client that we need so much or we want so much to have in our centers, which up to date, we don't have. But we need to sign a contract that gives the tenant, the counterpart an obligation, any obligation. So it's been part of the discussions and part of the conversations with the tenants. And we have been negotiating one by one by one. It's a very difficult time.
I mean, when I see all the results in one line, it's maybe very easy, fairly easy for the analysts to understand the company. But behind the scenes, every line comes from a million different conversation and a million different discussions with the tenants. Today, the tenants are pushing to be only variable rent, but we cannot allow that given that Mexico is, in part -- and this is what I think that will help us come faster than the rest of our peers. As a country, and particularly as a company, we haven't had reached the right level of rents. We still are very cheap.
I mean if you talk with a Brazilian guy, his perception is Mexico is for free, practically for free. If you talk with a Colombian guy, his perception is the same. If you talk, of course, with the U.S. guy, the perception is the same. Why? Because we have the price to rent very low.
So one can -- we cannot go only with variable rent because I cannot be subordinated to the success of any business, except my own. And on the other hand, I know that we will come and we will come hard. Because we come from a neighborhood of very cheap rents. We are easier to reach -- we are easier to survive, we as landlords for the tenants.
We are easier to survive even in a condition like this. So all in all, I won't be subordinated to the success of the tenant. I will share with him, I can have a minimal rent and negotiate this minimal rent and have part of the rent in the expectation that his success will give us the full rent that we expect. This we can negotiate, we do it every day with all of our tenants. But we need to start from the base that we need to have a minimal retribution, a minimal pay from our spaces. I don't know if I answer correctly your question.
Our next question comes from Mr. Armando Rodriguez from Signum Research.
As you mentioned before, one of your strongest fundamental is the occupancy levels explained by your competitive risks. So considering this rent growth this quarter, how are you seeing the spread versus the market average by each segment? And André, as you mentioned before, how are you seeing the efficiency cost, particularly in the industrial segment that I understand is one of the lowest compared, for example, to the retail or the office segment?
Can you repeat? Sorry. It's just we...
Pardon on those questions. I didn't quite catch it, the second part.
Second question is related to the occupancy costs. Particularly on the industrial segment. But I don't know if it is related to your previous comments, André, for example, that you compare the LATAM region, Colombia, Brazil, et cetera. And nowadays, I understand that occupancy costs in the industrial segment is one of the lowest compared, for example, with the retail segment, as much...
I would like to clarify for me, occupancy cost means how much of the sales of the particular tenant, the rent represents. So this applies for the retail guys, especially. For occupancy cost in the industrial, I would understand, and correct me if I'm wrong, the price per square meter. And the price per square meter in the industrial segment in Mexico, we are still cheaper than the rest.
Let me talk about the country first. Countrywide, country-wise, we will be in the $6 per square meter per month area. Us as a company, we are below $5 per square meter per month. So this is our competitive advantage against the rest of the competitors in the country.
But if you compare with Buenos Aires or Bogotá, or Rio de Janeiro, they are all between $8 and $10 per square meter per month. So as a country, we still are very attractive. As a company, we are attractive against our peers here in Mexico. But as a country, we are still very, very, very attractive.
So having said that the occupancy cost belongs only to the retail, I would tell you about retail. In the retail, this metric is very important for us. The occupancy cost in Mexico is around 7% to 8%, which means shoe store that sells MXN 1 million pays for rent, MXN 70,000 to MXN 80,000 per month per year or wherever, 7% to 8%. This particular measure -- measurement of occupancy costs in Brazil is 12%. So this same shoe store in Brazil would have paid 120,000. And in the U.S., it's 16% to 18%. So this particular shoe store would pay 160,000 to 170,000 for the same space.
So we are still very cheap in all the measures. This is my rationale to -- when I say -- and I say time and again, believe me, that we are very cheap. I don't know if I answered both the questions already.
Yes. Sure. So considering these circumstances, economic circumstances, are you seeing those levels maybe flat over the following quarters? And that's my question.
Yes. I think that we have been -- and I said this, again a lot, that we have been seeing a positive spread to 50 to 150 basis points because I think that the rents were recovered. Now I wouldn't like to say what I'm seeing about this pandemic because we don't know when it's going to end. So maybe the pandemic will put a pause on the positive spread that we have from 50 to 150 basis points company-wide. And this pause will eventually come to an end, and we will, again, be seeing 50 to 150 basis points on the company-wide positive spread. I don't know if the pause will be for 1 quarter or 2 or 3. We need to play this by ear and being analytics of every single quarter.
I would now like to read out 2 questions that came via the text. First one is from Vanessa Stevenson, from BlueBay Asset Management. I believe we have already touched on this, but could you please give some color on the drivers of positive leasing spreads in the retail and industrial? And any observation on the health of tenants across the retail portfolio?
Well, again, we have -- we see the retail come to a lower than we used to have positive spreads but still have positive spread. Maybe we will be seeing a pause on that positive spread, and we will be only getting increases with inflation in the next quarter or so. But we have been -- continue to see the positive strength that we have.
In the industrial part, this is a conversation from 8 quarters ago. When the peso came up, the rents were, in our case, were flattish, where peso basis. So when the dollar changed the exchange rate went up, and we are talking about that now the dollar is trading at MXN 21, more or less. And it was trading at MXN 13, 3 years ago, so -- or 4 years ago.
So this change in the exchange rate is now recovering, and that's why we have seen a very strong positive spread in the industrial segment because eventually, it will catch up. It hasn't come from inflation because we have not seen that big of an inflation in the last 4 years. But it has naturally come up and regained the ground loss to the dollar-based rent. So I think it's only levering to what would be dollar rent.
In -- before the devaluation of the currency, maybe that the rent was $450 per square meter. When the devaluation took place, that $450, because of the nature of the contract that was in peso rate, went from $450 to $320. And naturally, the USD 320 with the continuous strong increase in peso-based contracts came on to $450 again. So this is the positive spread you are seeing in the industrial side.
In the retail side, you are continuing with a positive spread, a steady, small but steady positive spread.
The next question coming from the text from [ Exequiel Perreira ], independent analyst. If we agree that the worst of pandemic has already happened, can you please explain the high amounts of cash on your balance sheet?
Well, first, we don't know if the worst of the pandemic already happened. It seems like that. But as we have pointed out during the call, we don't know what will happen, and we are not in the business of speculating. But we also commented that we are right now in the middle of conversations within the team to discuss if it's the right time to give the resources from the revolver back to the banks. We are in the middle of those conversations. Now it seems that it could be a good idea to alleviate a little bit, the line of interest expense with that decision.
So we're in the middle of that, but we haven't taken that decision. But certainly, we're closer to that point than we were back in April when we decided to withdraw it.
And certainly, we love to say that we think that the worst is over, but we haven't seen where the end is. So we expect that -- we know that the -- medically, we have improved a lot. The mortality rate has dropped down dramatically. But we would love to see the definitive remedy for the situation. We haven't heard from any of the health authorities yet, definitive remedy and/or a vaccine.
So I think that once we learn from the health authorities, we will see the worst is over. The [ word ] for me, is that the mortality rate is down dramatically. But I would love to see -- to have a definitive remedy or vaccine come from the health authorities worldwide.
Our next voice question comes from Mr. Gordon Lee, BTG.
I have actually -- most of my calls have been -- questions have been answered already, but I guess I just have one quick one, which is on the CBFI buyback. Are those CBFIs that you intend to cancel? And should we expect you to continue being active on that front?
Gordon, thank you for your question. Yes, we expect to cancel those CBFIs. As you know, we have 1 year by law to do that. So we will expect to have those cancellations. And I think that we will need to think a lot about the best use of our capital.
In the case of the sales, I said before, we need to be coherent, and we will pay as much credit as the percentage that we have company-wide in order to be coherent only when we sell properties.
As for the retained dividend, we haven't made or reached a decision yet. And it's one of the possible scenarios to continue to buy back. We haven't seen that the buyback will support any price on the share. And we are not specialists on that. So we have not yet reached a decision. But first things first, we will need to lever the company to know that we won't need to use the retained dividends. And after we do that, I think we can get and decide what the best use of our capital is.
Our next question is from Mr. Aldrin Castro from SURA Mexico.
Can you hear me?
Yes.
There's some new investigation from COFECE regarding -- there's not a lot of color about what it is, but about real estate issue on being monopolistic practices or something like that. Do you have any color about it that you can share with us?
No. We are really clear on what they are looking for. And we are completely clear on that. What they are looking for is that probably there were some tenants that place a claim saying that the different players in the market, landlords put their minds together in order to keep the same strategy in terms of discounts or relief.
And in terms of the Fibra, if I can tell you that we have been really close and none of us were teaming up in terms of the conditions to give up the reliefs to give up to the tenants.
Probably there were some other players in the market, not the Fibra, that probably we're trying to team up on this factor. But it's really true, and we have seen it and we got letters from. There were some tenants associations, trying to do it as a bold negotiation among them. So we are really easy on this. We don't see any risk factor. And if COFECE asks for information, we are more than willing to collaborate with them, and there won't be any issue.
These guys are -- there is no ground for these allegations. Because what they are saying is they going to a 30% -- "look at this guy. They're only giving me a small discount and I want a larger discount." I mean there's no ground for the allegation.
We are seeing no further questions at this point. Thank you very much. We'll pass the line back to you, Jorge.
Thank you very much, Michael. Thank you, everybody, for listening to us for the results of the third quarter, and I hope to listen from you in the results of the fourth quarter next January. Thank you very much, everybody. Have a good day.