Fibra UNO (FUNO11) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Fibra UNO's Q1 2020 Financial Results Conference Call, on the 30th of April 2020. [Operator Instructions] The format of the call will be a presentation by Fibra UNO management team, followed by a question-and-answer session. Our hosts today from Fibra UNO are Mr. Andre El-Mann, the CEO; Mr. Gonzalo Robina, Deputy CEO; Mr. Fernando Ãlvarez, Group Finance; and Mr. Jorge Pigeon, VP, Capital Markets and Investor Relations. So without further ado, I would like to pass the line to Mr. Andre El-Mann, the CEO of Fibra UNO. Please go ahead, sir.

Thank you, Michael. I want to welcome everyone to our first quarter of 2020 results call. Before I start, I want to wish you and your families well and stay safe. I'm sure we will get through these challenging times. I want to take some time to make some remarks before handing over the call to Jorge to go over our results in more detail. I would like to start by stressing how pleased I am with this quarter results. They clearly indicate the momentum our company has, heading in the right direction, with solid financial and operating metrics. Just to highlight a few statistics, we posted double-digit growth in total income, net operating income, NOI per CBFI, all growing between 12% and 13%. Total portfolio occupancy remain steady at 94.5%. And both leasing spreads and constant property performance remain solid above inflation. During this first quarter, the company has the momentum to achieve the results we have been expecting. However, this quarter results seems to need to take the back seat to other matters, the turmoil caused by the COVID-19 pandemic. Now I want to ask you to please take a step back with me to talk about our business philosophy. I think that this is not only relevant, but the key factors that will once again continue to separate us from others in the real estate business. We have built Fibra UNO with knowledge acquired through over 40 years of experience from the founding members of the company. The combined experience of this group and the hard work and expertise of all of our team is what has allowed Fibra, Fibra UNO to be the great company that it is today. Those of you whom I have met at roadshows or conferences have probably listened to me, say, that we know we are in a cyclical industry that we know a down cycle was bound to come at some point. And I have always said that we never know when or how it will happen, but we are sure it will happen. Yes, crisis do happen in our business, and we are living one right now, one of many that we have endured. It is this knowledge and the experience acquired that enable us not only to successfully navigate past crisis, but also thrive after them. It is with this knowledge that we have built the foundation of our business. I cannot stress enough the huge facts that we have designed and built our company for times like this because we know they come. We have built a very defensive company. We have shown prudence and conservatism to build it. And now we need to show patience, and we will. We have navigated crisis before in our country, in the '70s, '80s, '90s and 2000s. We have learned several lessons during these challenging times. For example, we know that there are only 3 things that all crises have in common. First, they happen. Second, all of them are different. None is equal to any other. And third, they pass. They all pass. I want to remind all of our stakeholders that our business is built on 3 main pillars, supporting our large and broad group of tenants across different segments in which we operate. Three pillars that support a highly diversified real estate company that is diversified by design, not only in the segments in which we operate, but also in our tenant base, which I qualify as highly polarized. And lastly, geographically diversified amongst all the cities and amongst all the cities and regions in which we operate. This is not by chance. It is by design. When analyzing FUNO and our business model, I would beg you to look at the forest and not get lost in the trees. FUNO operates in a market with many other players. We are the largest by a wide margin, but we are not the only player. However, we are the only player that combines all of the factors that I will mention and that make the difference in this industry. The strength of our company realized in 3 main pillars. The first pillar of our business model is to always aim to have the best location with the best-in-class assets. Sounds cliché but in our industry, it is absolutely true; location, location and then location. Our property portfolio is built around this principle at its core. We own the best-in-class properties in the best locations. The second pillar is offering these properties at competitive rents to our tenants. We are the only company that combines the best properties in the best locations offered to our tenants at a competitive rent. Having the best assets at the most competitive rent, always you do too many things. First, occupy the buildings fast in the good parts of the cycle. So solid and long-term relationship with our tenants and ensure that in both good and bad, then navigate the bad part of the fact. We remain high with a higher occupancy than that of the market. The first pillar in our business model is financial prudence, which has many angles. This does not mean just having a moderate amount of leverage. It also requires to manage a type maturity, interest rate and currency of the leverage being used in the company. In our case, it is no coincidence that the average life of our debt has consistently been about 10 years. Currently, it stands at 11.4 years. Our next relevant maturity comes due in December 2022. That is 32 months from now or almost 3 years. This means we do not need to refinance our debt in the next 3 years. Having to refinance debt on the [ sales ] market conditions, which typically occur in crisis is often impossible. And when possible, it becomes difficult and very, very expensive. We did not want to have this problem. So we don't have maturities to refinance. We are aware that having debt with an average life of 10-plus years consistently, counters an expense of 200 basis points more or less compared to shorter-term debt, and an expense we have been willing to pay to ensure the viability of our company over the long term and giving all the strength that we enjoy in these difficult times. In addition to the length of our leverage, 93% of our debt is senior unsecured, interest-only and bullet maturity debt, mainly bonds issued in the Mexican and U.S. capital markets. This is also by design, not by chance. Under the stress condition experienced in a crisis, financing in the capital market, as I mentioned above, becomes challenge at best and impossible under extreme circumstances. However, for a company with real assets that have an intrinsic value, at times like this we can, if needed, offer assets as collateral to obtain financing and liquidity. This is one of the many reasons we take such methodical care of the value of our assets. In addition, of course, to the basic fact that a valuable real estate asset will generate cash flow by our rents. I want to stress this point, and its huge importance, the value of a property. The NAV in our books is the basis or the foundation that allows us to take on leverage in the good times. And more importantly, in the bad times if needed. Also part of this financial prudence is access to liquidity, which becomes a lifeline of many companies in times of stress. We also know this from experience and therefore, we have had at FUNO for a few years now, a committed revolving line of credit. At the time of commitment, this line of credit represented approximately 10% of our assets. We have been paying the commitment fee for this credit facility since 2015. Last year, we renewed and expanded this line of credit as well as linked it to sustainability metrics, which, by the way, I am pleased to share with you that we have achieved the sustainability goals we set back then. The current line we have available is committed for MXN 13.5 billion, and USD 410 million, almost 10% of our assets. It is a senior unsecured dual currency revolving line of credit with a final maturity of 5 years plus 2 extensions of 1 year each in total, up to 7 years final maturity. This line has been available to us for use in crisis environments for the last 5 years, and we did not expect to use it, yet we wanted to be disciplined with our financial prudence and had the line available. As you know, we decided to draw 50% of this line a couple of weeks ago. And have the proceeds from this line in cash in our accounts. We drew 50% of this line -- of this line to increase the financial flexibility of our company and strengthen our balance sheet even further, under what I can describe as uncertain times. We decided to only draw 50% of this line in order to maximize flexibility and be efficient with our use of capital. I do not want to be incurring in higher expenses. In addition, we also decided to temporarily reduce the payout of this quarter's dividend to 50% of AFFO. We will analyze the environment and specific situation in the coming quarters, and we'll take decisions on liquidity and distribution at appropriate time. Needless to say that this decision we made responds only to prudence. We understand that we answer to different constituencies. We answer to equity investors and also debt investors. We have also identified that we have growth-oriented investors, but also dividend-oriented investors. And of course, we have our credit rating to look for. All the aforementioned have entrusted us to manage their resources. With this type of decision, we are stepping up to our [ tourist ]. These are the reasons that we evaluate to make a fair balance and reach a responsible and punctual decision regarding the dividend distribution for this quarter. We are sure that our company is strong enough to receive the impact of this pandemia in the world, in the worst and in our country's economy. But I think that this measure will strengthen up our balance sheet and put us in a much better position to stand up and emerge even stronger when this situation ends. As you can see from my comments above, we are more than well prepared to face the challenges that lie ahead with a very solid and highly defensive company that has a very diversified tenant base, best-in-class assets in the best location, competitive rents and managed with financial prudence. We have said since day 1, becoming a public company, that we were built for times like this because real estate is a long-term business. And in order to succeed, you have to endure through time, challenging times have often brought us business down -- brought businesses down. We should prevail the difficult time that lie ahead as we say the unknown, we are bound to rely on our expertise and the diversification, the prudence and first and foremost, patience to sail through this storm. And I can assure you, we will prevail and we'll find calm waters and wind filling our sails We understand that we live in the age of speed when information and misinformation travel at the speed of a click worldwide. Many of you have heard about the quarantine and stay at home measures undertaken by governments all over the world, to try to contain the effect of the pandemic. These measures have had a negative effect on the economy globally as many businesses have been forced to shut down temporarily. This is not good news. And it makes navigating this crisis very challenging. I am sure many of you are eager to know what is happening with our tenants. In particular, those who have been forced to temporarily shut down. I want to remind you that we have stated many times that we are a real estate driven and therefore, very much a tenant driven company. We understand that our tenants are facing, as we are, very tough conditions, and we are working with them, to help them navigate these crisis. We need to be close to our tenants, listen to them, try to understand, try and understand their situation in order to find solutions that will lessen the impact of this storm for both our sides. We are working hard with our tenants being emphatic to their needs while also enduring that we take care of our company, ensuring that we'll take care of our company. We are negotiating on a case-by-case basis, we are -- with all of our tenants. And for that, we need patience. We understand that there is not a one size fits all type of solution, and we need to be patient. We need to understand and be supportive of every one of our tenants. And for that, we need to be patient. We must find solutions suitable for them as well as for our company. And for that, we need patience. This is not an easy task. And it takes a lot of effort, but we are willing to work as hard as it takes to complete this task. And for that, we need patience. Seek to find solution that: A, help our tenants the most; and B, make the lesser financial impact for FUNO. And both conditions will be carried away successfully while we prevent our account receivables to grow. Seems easy. It's not. We know it's not, but we will get there. But all in all, we need to be patient. We are working with our suppliers as well to ensure we can navigate these choppy waters, the best way possible while we seek to manage our expenses. I'm sure they will be supportive. In addition, we remain cognizant of those of our suppliers that rely heavily on personnel to provide us with their services. For them, we will be supportive and show our solidarity. Finally, I can't stress enough the flexibility and prompt response of all of the people here at FUNO. Our speed of reaction has been superb. This is our strength. I thank all of our personnel. FUNO has not and will not lay off any of our personnel during this turmoil. We value loyalty, and we will show our solidarity and appreciation. We are in the midst of the process of negotiating assistance during this pandemic. In addition to this, you will see that our operating expenses came in lower as we are reducing nonessential expenses. I want to stress, however, that we are not reducing maintenance expenses. As we need to ensure our properties remain in tip-top shape, for when we come back to our normal activities. Because I am sure we will come back to our normal life, and we will surpass this crisis. Thank you all for your patience to this longer than usual speech. I will now pass the mic to Jorge to go over the numbers in closer detail. Jorge, please?

Thank you very much, Andre. Thanks, everybody, for attending our call, and stay safe. Hope everybody and your [ folks ] are doing well. First, I want to remind everybody that we renamed the maintenance expense line as operating expenses to make it more accurately reflect what's included in that line, which is what Andre was alluding to, regards reducing the nonessential expenses, but not reducing specifically our maintenance expenses in the company. Now I'd like to start with the comparison between the first quarter of 2020 and the first quarter of 2019, first quarter of 2019 -- sorry, fourth and some year-over-year highlights. In terms of our revenues, revenues increased by MXN 76.1 to MXN 5.16 billion or 1.5% above fourth quarter '19, which is mainly the combination of several factors, the stabilized revenues from the properties included in our portfolio, such as the TITAN acquisition of last year and Tepeji, the effects of increases in active contracts as well as renewals at higher rental rates, increase in occupied gross leasable area and the occupancy rate increase of In Service properties, which are, as you know, in the ramp-up phase. In terms of occupancy, we remain stable at 94.5% compared to the previous quarter. Our Retail stands at 93%, 30 basis points below the previous quarter; Industrial, 96.9%, 30 basis points above fourth quarter '19; and Office, 83%, 60 basis points below the fourth quarter of '19. And Others remains at 99.7%. In service property occupancy increased from 72 -- decreased from 72.3% to 71%. Basically, the inclusion of La Isla 2 and La Viga properties into the In Service category is what generated this minor drop in the occupancy of In Service properties. Now moving on to operating expenses, property taxes and insurance. Operating expenses reduced -- were decreased by MXN 75.8 million or 15.3% compared to -- for the fourth quarter of '19, mainly due to cuts in, for example, marketing expenses and other nonessential expenses that can be deferred throughout the year. This was taken as a preventive measure given the effects of the COVID-19 pandemic. Insurance expenses increased by MXN 1.8 million or 2.7% as a result of properties that recently started operations and property taxes decreased by MXN 18.9 million or 12.4% due in part to savings obtained by prompt payment discounts. All in all, net operating income came in increasing by MXN 136.1 million or 3.4% compared to the fourth quarter of '19, stands at 4 billion a hundred and -- MXN 4.16 billion. And NOI margin calculated over revenues at 89.7% and 80.5% compared to total revenues. Interest income and expense line was a net interest expense of MXN 305 million or 23.3% increase compared to the fourth quarter of '19. This is mainly due to the decrease in interest capitalization of our interest expense, consequence of the development properties, which were completed and come out of the development category for accounting purposes as well as the fact that we did not have acquisitions with capitalized interest as we did in the previous quarter. And also an increase in the total amount of debt basically from the depreciation of the currency, which at the beginning of the quarter was MXN 18.87. And at the end of the quarter stood at MXN 24.28. If we compare the first quarter of '19, the net effect on the result of 37% expense increase. FFO, as a result of all of the above, controlled by FUNO, that means the majority FFO decreased by MXN 193.8 million or 7.8% compared to the fourth quarter of '19 at MXN 2.28 billion. AFFO is the same number, increase of MXN 193.8 million. And when we look at it on a per CBFI basis, since we did not have any issuance or repurchases of CBFIs, both FFO and AFFO stand at MXN 0.5809 per CBFI in both cases. Moving to the balance sheet. Our accounts receivable in the first quarter of 2020 totaled MXN 1.9 billion, increasing by MXN 470 million or 31.6% from the previous quarter. This comes partly from the acquisition of the TITAN portfolio. As you may recall, we have mentioned this many times. Whenever we acquire a portfolio, it takes time for the tenants to change their accounts on who they're paying, et cetera, et cetera, and that always increases a receivable. This has absolutely nothing to do with COVID or anything like that. As well as seasonality in the first quarter, which we usually have a spike in collectibles -- or in accounts receivables, sorry. So this is normal. We expected to have something like this. This is nothing that's out of the ordinary. In terms of investment properties, the value of our investment properties increased by MXN 2.3 billion from the fourth quarter of '19, including our investment in associates, basically the result of asset revaluation and the normal progress of some of the construction that we have been carrying out for projects under development. In terms of debt, the first quarter of 2020, we ended up with MXN 129 million compared to MXN 107 million recorded in the previous quarter. This decrease is mainly due to the exchange rate depreciation I mentioned before, moving from MXN 18.87 to MXN 24.28. And then an increase in bilateral lines of credit for MXN 3.5 billion for advanced payments of acquisitions and properties under development. The net effect of the depreciation of the currency at the end of the day, resulted in a decrease in our equity, book equity of MXN 17.5 billion or 10.5% compared to the previous quarter, including the participation of controlling and noncontrolling interests. This basically is, as I mentioned, the result of depreciation of the currency, net losses generated from quarterly results, the derivative valuation, which also is affected by the FX depreciation, shareholder distribution related to the fourth quarter results and the provision for the employee compensation plan. In terms of our operating results, as Andre mentioned, we had very solid leasing spread in pesos, [ 930 ] basis points Industrial segment, 560 basis points in the Retail segment, 460 basis points, all of them above inflation in the Office segment, compared to the [ peso ] inflation rates. Now for contracts denominated in dollars: We had leasing spreads of minus 70 basis points in the Industrial segment, basically stable; minus 230 basis points in Retail segment, this is, as you know, a segment that has very little dollar income; and minus 530 basis points for the Office segment. In terms of constant properties, the rental price per square meter had an increase of 770 basis points above the annual weighted inflation of 3.09%. In terms of the subsegments, we can see that total price per square meter for the company increased from MXN 164.8 to MXN 178.6, mainly due to exchange rate variation as well as positive leasing spreads above inflation. In the same way, the total NOI for the quarter increased 3.7% compared to the previous quarter. With this, I will conclude my comments regarding the financial metrics and operating metrics. And I would like to ask Gonzalo to please comment on some asset dispositions that we are under review. Gonzalo, please go ahead.

Thank you, Jorge. Just a brief note on what we are doing in terms of the disposition of assets. We have been active during this quarter. And as of today, we have 3 transactions that I would say that has a pretty nice [ advance ]. One of them, we have already signed an LOI, which belongs to an industrial portfolio with a mix of land and industrial buildings. This transaction will be around $40 million with a nice multiple against the acquisition price that we have. These assets are mainly from the TITAN portfolio. We will be making a really nice profit in a really short period of time. Besides this one that has already signed an LOI, we have another land portfolio, industrial land portfolio on the Chihuahua state, which is mainly under the analysis of the [ PSA ]. We will go straight on the [ PSA ] in that case. We also are in negotiation with an office building in Mexico City. And besides these 3 ones that are really likely that we will be closing, we have [ Tepeji ] portfolio offer. It's worthwhile to mention that any of these are properties that we had on the market. They were all solicited offers. So it's unlikely to have these times to have this type of offers with a really nice prices compared to our NAV, all of them are above our NAV. So we will keep you posted on the advance of these ones as soon as we have some [ close ], we'll let the market know through a notice through our webpage.

You thank very much, Gonzalo. Now if we can open the floor for Q&A.

[Operator Instructions] We have the first question from Mr. Javier Zabalgoitia from GBM.

My question is regarding the MXN 1.2 billion deposit for the acquisition of investment properties, if you could clarify a little bit more to which acquisitions is this related to? And as a second question, there's one more -- is more related to negotiations tenants. You commented of the difficulties caused by peso depreciation. If you could provide some more color to which could be the impact of this.

The deposit is part of the Hercules portfolio that is, as you know, part of the acquisitions that we mentioned earlier. And even in the last quarter, I made the comment that we were likely going to go ahead with any commitments that we had that we were bound to continue and reduce CapEx or expenditures, acquisitions, et cetera, and those things that we were not bound to continue. So this is related to that. And your second question, sorry, about FX.

Yes, I can take that on.

Go ahead, Fernando.

What we expect the impact of the FX depreciation, as you can see in our numbers because at the end of the quarter, the FX was already at above MXN 24. We have mainly 2 impacts there. One is a very obvious one in the part of our debt that is in U.S. dollars. Of course, that will increase the amount of our debt and also increase the amount of our interest payment. As you know, we have part of our debt that is in U.S. dollars. We have part of that is hedged by derivatives. And in the other side, and the other impact is that a peso depreciation will also increase the share of our income that is in U.S. dollars. 32% at the current level of the exchange, 32% of our income is in U.S. dollars. We have a coverage of more than 1.3x, our income in U.S. dollars to our interest payment in U.S. dollar. So those are the 2 impacts that the peso depreciation can have in our company.

I would like to add one in addition to what Fernando commented, and that is that on the asset value side, you see the debt immediately revalued as the peso depreciates. That's something that you see day 1. But the asset side of the equation, the asset value also will reflect the depreciation of the currency because, at the end of the day, real estate is dollarized in Mexico. The buildings are worth dollars over the long run. So you will see basically that buildings we revalue, let's say, the FX depreciated 30%, you should see the revaluation of real estate assets by that same 30% in a period of, let's say, 18, tops 24 months or something like that. So the immediate effect is what Fernando mentioned. And there's also an effect that you will see in the coming quarters and in our balance sheet, and that is an increase in the value of the property.

And also, you will have -- you will see an increase on the rent because the rent is also dollar linked in some sort of way. So in the next 18, 24 months, as Jorge said, you will see that our spreads in the peso based rent will be higher than usual because it will catch up eventually.

Also as a follow-up from this. Regarding the FX, also with tenants like the negotiations with them with this [ offer, ] is there any like how is it to pass-through this effect to them like the structure of the leases? Is it easy? Or is there any tenant that is like denying or doesn't want to pay the increments?

It's like it's an Ice cream store. We have 1,000 flavors. We have for any one of our tenants, a different way of asking things. Some of them, of course, want to change the dollar rent for peso rent at a MXN 20 exchange rate. We have everything. We have from all the players, and we are taking care of in a case-by-case basis. It will be a resistance [ how do I want to say ].

It is like a marathon.

Competition. It's a resistance competition, not a speed competition. So we need to be patient. And we will get agreements with each and every one of them, hopefully.

Our next question comes from Mr. Francisco Chávez from BBVA.

I have 2 questions. The first one is regarding the short term and regarding the cash distribution. I noticed that you cut the payout to 50%. Is this something that we can expect for the following quarters? Or -- and when do you expect to normalize the payout ratio? And the second question is regarding the long term looking at the forest, as you mentioned. After this COVID-19 situation, do you expect any change in the trend of the real estate industry in Mexico, especially in the shopping malls and in the office buildings?

Second question first. I don't think there will be a dramatic change in the trend. Today, all of us are imagining different worlds and different scenarios, all of us, all the population of the earth because we really don't know what happened. But I think I have a good memory. And this sentiment, I've had it before. We have think in the past that everything is going to change for good. And guess what, nothing changed. They're different trends, but in essence, everything goes back to the same. I don't mean that the world is going to be marked forever, and it's going to change forever every step of the way. I think there'd be different things, for example, in the office space, many people say that from now on, there's a lot of people who will need to work from home. But should that happen, the people who work in the office will need more space between them. So we -- you will need double the space, and you will have half the people working. I don't know if that will happen. I really don't know. That's only speculative. I think that we need to be patient and see how things evolve, and we need to be ready. This is what makes us, here at FUNO, more comfortable than anything else, that we are strong enough to endure these coming months, which will be, without a doubt, difficult. That we need to endure and then things will get back to normal. This is our view. I don't think there will be a change that will change things forever. I don't think we're there. [Foreign Language]

Payouts.

The payouts. We took a lot of thinking about the payout reduction this quarter. As I said, we answered to different constituencies. And we need to be prudent and responsible. And we will do this exercise every quarter until everything gets back or aims back to normal. Once we do that, we will get back, of course, to our regular distributions system, but in this time, we will review each and every quarter and make decisions each and every quarter.

We haven't decided today what the payout is going to be next quarter, we're going to have to wait to see what happens next quarter. And once we see what happens, we'll take the decision at that point in time. And just adding comment to Andre's comment regarding the office space. I probably had 130 or so calls with investors and whatnot, and a lot of you guys are working from home. And not one of you has told me that you are not eager to go back to the office because you cannot stand working from home. Maybe a lot of people do enjoy it, but the common denominator of all of my calls was, I cannot wait back -- cannot wait to get back to the office. So I think that yes, I agree with Andre that things are not going to change that much.

Our next question comes from Vanessa Quiroga, Crédit Suisse.

I hope everyone is well in your families. My first question is regarding the asset sales that Gonzalo commented. Do you have a preliminary number of proceeds that you could get from all these sales if they're all successful? And do you expect to close them this year, all of them? And the second question would be on the distributions. Do you think that you will be able to compensate for the lower payout ratio in the coming quarters? And the third one is about some specific numbers, if you can provide some guidance regarding the impact that you think you can have on total revenues for the year from the negotiations with tenants regarding rent lease?

Last question first. No, we have not have a guidance. The only guidance I need you to please support me in is we need patience. The more patience we have, the better we do. We need the company to understand our tenants, but we need time to understand them. And we need to find the best solution for both sides of the table, and this will take time. So I won't -- I would not want to make an assumption because I think I could be far from the target and from the final results. So we need to be patient. We are negotiating. Everybody is worried, all of our tenants are worried, and we are worried, but we cannot have -- make a decision today. If we make a decision with one tenant today and the things go on over a month and over 2 months, and over 3 months, we will need to sit down again with them. That's not going to happen. We are going to take very much care of them, but we need to be patient, and we will find the best solution suitable for both parties. This is a problem that is impacting everybody, not only the tenants and not only the landlords. I mean I'm sure that you have seen many of the big tenants in the world talking about stopping payment of rent. That is first of all, is against the law. Second of all, it's not fair. As it's not fair that the landlords take all the damage, neither the tenants can take on all the damage. So we -- I think this exercise, we have lived in the past for different reasons, maybe for an earthquake or maybe for a huge devaluation or maybe for a crisis of tequila, mainly for different reasons. But this is an exercise that we have had in the past. That's why I'm not so worried, I know that we need some time and we will figure it out. About the disposal of...

Disposal of assets. Gonzalo, if you can comment on the potential total size of the asset sales?

Yes. The 3 transactions that I mentioned that we're really actively working on. The [ rent share ] will be around USD 100 million and the rest of the things that we have on the table probably will be account for an additional $150 million. So -- but the 3 ones are really moving forward are around $100 million.

And the last question regarding the potential to compensate for the reduction of the distribution in this quarter. As Andre mentioned, we are going to have to wait and see what happens. We need to be patient on the whole year, not just this quarter. We need to be patient on the whole year at the end of the day to see what happens and where we stand. And we'll make -- literally, as the saying goes, we'll cross that bridge when we get there. And we haven't gotten to the point of this quarter, the second, which we are living right now being over, we're early in the first month of the second quarter. And there's still a lot of turmoil, there's still a lot of things going on. So we need to be patient to see where we end up being, and we'll make the decisions regarding distributions at the appropriate time. I wish I could give you more guidance, but we don't have a crystal ball to see where this is going to end. But rest assured that one thing that we do know is the experience of having lived these things before, how to work with our tenants, how to listen to them. And we will come to a solution that suits both.

Okay. Just a follow-up on the distributions. Would you or have you considered if under the agreement, the management agreement, it is possible to also reduce on the fees, if it was necessary? Is it possible under the agreement? Or would there be a specific or an extraordinary process to follow if you decided that this is the way you want to go?

I think not. One thing doesn't have to do with the other, but we will -- we will review, and it's on the table, and we will review and we will let you know. As long as we know what is the final number that we have with our tenants and with our suppliers, I think we will let you know.

Our next question comes from Ms. Shiela McGrath, Evercore.

I was wondering if you could provide an update on Mitikah, is construction halted? And what percent preleased is that project? And any expectations on delay?

Well, construction is halted at Mitikah and every other construction in Mexico because of the COVID pandemic. We did have to continue a little bit longer than most constructions for structural reasons because there was safety issues that we have to make sure we cannot leave the building as it is right now. So some of it is under construction because of that reason. It's a small portion, not the full project, but it does remain active just not the whole thing, for structural reasons. Because it's unsafe to stop the construction of that project at this time. In terms of pre-leasing, a couple of comments. As you know, we're approaching over 85%, close to 87% of units sold at the condo. The office is approaching about 80%, including what's leased to the Ministry of Education. And Torre Mitikah is going very well. It's approaching 70% lease or above that. If we take into consideration some of the contracts that are under discussions. And the shopping mall, the last figure that I had was above 85% pre-leased.

Okay. Great. And then could you give us your insights on WeWork, what percent of revenues is WeWork for FUNO? And just your thoughts on that co-working model going forward?

It represents about 3.5% of our revenues.

I think, Sheila, that with the last week that we had the buildings open, they were still full. So I think that it will come back. I don't think that it's going to change the life of the people already working there because they were so happy. The buildings were so full that I think it has a very good chance to come back.

Okay. Great. One last quick question. In the U.S., a couple of REITS, not many, but a few REITs have decided to suspend the dividend and then they'll kind of look at it in fourth quarter to see what their net taxable income was and then kind of distribute just the minimum net taxable income. I was just wondering if this would be strategy that you would consider to preserve liquidity.

Absolutely, Sheila. It's part of what Andre mentioned that we're taking it step by step, we took the decision of this first quarter, given the information we had for this first quarter, we need to see what happens with the second quarter. As you know, we are required by law to distribute 95% of our net taxable income. That's a legal requirement. Today, given where the FX is today, we have net capital loss. So we have the ability of not distributing anything if we need to. If the exchange rate goes back at the end of the year, for example, which is something we don't know but could happen. If it happens and then it generates net taxable income, then we will have to make distributions based on that net taxable income at that point in time. So I guess that the flexibility is there. We are open to working under all the different scenarios. And we'll have to make decisions based on the information we have at that point. I guess that's why Andre has been mentioning that patience is very important because we cannot make decisions about the future without knowing what's going to happen.

Our next question comes from Mr. Armando Rodriguez, Signum Research.

Hope everyone is fine. My first question is if you could give us a number in order to get sense about the tenants that are still in operations, particularly in the Industrial and Retail segment? And my second question is about the revolving credit facility that you recently [ post ] during this month. Could you give us the financial cost of this line? That's my only questions.

Second question first. Fernando, will you...

Yes. Well, the revolving credit facilities, a dual tranche line. The amount is MXN 6.5 billion plus 400 -- I'm sorry, MXN 13 billion plus $400 million. As André and Jorge already explained we decided to withdraw only 50% in order to not increase the amount of interest unnecessarily. We have a spread over [ Tier ] and over LIBOR of around 120 -- 125 basis points. This spread will go up if we don't comply with the commitment -- with the sustainable commitments that we commit within this line. As we already mentioned, we are happy to announce that we already complied with that commitment with a full 5 years commitment of energy reduction per square -- occupied square meter. So we're very happy about that. So the spread of that line is not going to go up. And every time that we are not using that line, it has also a fee of 30 basis points that we gladly pay because it is a life insurance. This is a line that helps us to -- to navigate in difficult times like right now. So those are more or less conditions of the line. It is 5 years, 5 years term, is revolving, so we can pay it and re-withdraw it if it was necessary, and we have the ability to extend it 2 more years in case we need it as well.

And for your other question, I would have to get back to you because I don't have the exact number of tenants that are working or not working, those are considered essential and nonessential activities. I'd like to get back to you on that.

Our next question comes from Mr. [ José Cuenca ] from Citibank Amex.

Just a quick question following up on what was already asked about the fees. Just to confirm if perhaps not a reduction but are delayed in the payment of the fees, are you open to consider that? And my second question is, are you worried about -- or what is your perspective about the office segment of your portfolio after a COVID -- even post-COVID, are you worried that a softer economic environment might not be or might hurt your occupancy in that segment?

Last question first. I think this pandemic is going to affect all the sectors in one way or the other. I think that we are very well positioned to cope with it, but it's going to affect, for sure. I don't think that it will be as dramatic, but for sure, it's going to affect some of the tenants. As for the first question, yes, I said it's on the table. And we will see what happen with our tenants and our suppliers at the end, and we will work something out.

Let me add a little bit on the Office segment, Jorge. It's -- if you can recall, all permits and licenses for new buildings have been on hold for the last almost 18 months. So obviously, those buildings have given now the opportunity of catch-up in terms of occupancy quarterly to the demand. And due to the COVID, I don't think that new projects will be seen in the near future. So at the end, this will compensate the demand against the offer that we have right now in the market. So I don't see that it will get bad. Probably on the opposite, it's just a matter that it will be getting better once the COVID issue passes in the next couple of months.

And I'd like to add one comment to the answers of these questions, and it is that if you recall from Andre's initial comments on the structure of the company, the business philosophy and how we are designed as a company. In all 3 sectors, and obviously, it is particularly true in the office sector, we have a combination of best-in-class assets with the best locations at the most competitive rent. It's something that we can do. Size does matter. Economies of scale do matter and enable us as a company to be able to offer to our tenants, buildings of the best quality in the best location at a cheaper rent. So this, I think, is going to obviously help Fibra UNO in a general market environment. If you're talking, if the market going to suffer in occupancy, probably the answer is yes. And probably, we will see that Fibra UNO is going to suffer a lot less than the market given the strategy that we have. This is the foundation since day 1. In the good part of the cycle, we have already seen it. We have been about 500 basis points above the average of the market in occupancy. We have not seen it as a public company. Obviously, this is the first time we see a crisis as a public company. But we'll see it in the future. And I expect to see that Fibra UNO is going to have a higher occupancy than that of the average or the market.

We'll have the next question come from Mr. André Mazini from Citigroup.

So my question is on M&A. If I heard correctly, so $40 million of what's going to be sold is from the TITAN portfolio. So the question is, is this some properties that you considered noncore. When you bought TITAN, so you had in mind the idea of selling these properties already when you were considering and bidding for TITAN, et cetera? Or this is something that came about later, a good bid, as you guys mentioned, over NAV, et cetera. Just to understand the dynamics there. And also on the acquisitions from the Hercules portfolio, if I also understood correctly, the plan is to go ahead. And with that acquisition and also has the price changed, given that we have way more uncertainty now, right, than when you guys first did the calculations and the bid for the Hercules?

Regarding the M&A on the TITAN portfolio, that's not -- we did not consider as key for special assets on the piece of land. Part of this portfolio that we are selling right now includes some of the land and 2 buildings that were obviously considered as a core part of the portfolio. But this is a packaged sale that includes land and buildings. The buildings are [ Quadis and Reynosa ], one on each one of them. So they are not really core assets. They are just the average assets that the portfolio has. But definitely the land that we acquired with the portfolio, it's something that we will consider to sell it next day.

Great, Gonzalo. And then on the acquisitions from the Hercules portfolio, the closing of that hasn't changed, even given the uncertainty?

Go ahead.

Yes. Actually. Okay, go ahead.

No, go ahead, Gonzalo.

No, actually, it's -- the way -- it depends on the way you see it. The way I see it is that we have locked those prices probably 6 months ago or so. And obviously, in pesos, and they haven't changed even there was a peso devaluation. So at the end, probably, we have a 25% discount in terms of U.S. dollars. They have those assets that are really 4 assets. Again, on the last mile distribution, logistics, they are not light manufacturing. Considering that, I think there are 4 assets that it's a really accretive acquisition as of today, even with the last prices negotiated. So that's the way we see it.

And then one other comment, I'd like to make that Andre mentioned in the previous quarter. And again, I want to reiterate that, is that any commitments that are assigned and we're bound to go ahead with, we're going to -- we have to go ahead with them. So this is the case of this portfolio.

Our next question comes from Mr. Luis Yance from Compass.

Just 2 follow-ups. One on the dividend side. Have you considered or would you consider paying the dividends with shares at some point to preserve liquidity and maintain the dividend, or that's something that is off the table. That's number one. And then number two, going back to the negotiations you're having with your tenants, I totally understand that patience is required to get through this. But I was wondering if you could share a little bit about how those negotiations are taking shape in terms of perhaps the percentage of your customers that have come to you to start a negotiation and whether -- I'm assuming it's more concentrated on the retail side or whether you're seeing sort of the same on the industrial side. Is it more rent holidays? Is it more the payment deferrals actually what you're seeing?

Last question first. We have seen everything in -- with our tenants. Yes, it comes especially for retail. Those are the most immediately affected. But lately, we have been receiving also from the industrial and office space, call for relief from the tenants. We have divided our tenant base in 3 different groups. Tenants that need no relief, for example, tenants that still are open and maybe selling more than they were selling before, essential tenants such as Walmart or pharmacies, et cetera, or banks, et cetera. Then we have 2 groups of tenants. Tenants that are affected but are not that much affected, and let me expand on that. Mom and pop stores, shoe store that is tended by the family member and maybe cousin. And they have one more employee or 2 compared with a corporate long chain store that have immediate corporate expenses that they need to face. Those are 2 different types of tenants in our view. The first one had, of course, an impact but the second one has an impact that need to be out-of-pocket money immediately. So we think that we -- that the relief that we are willing to give to one is different than the ones that we are willing to give to the other one. Either way, we are working on each and every one case by case. For those who are the first one, the mom and pop stores, the businesses that are being attended by the owner or almost by the owner, we have received out of 3,000 requests, we have received confirmation on our plan that we are willing to give for relief in 65% of the tenants. In the chain and corporates, we have -- get an agreement with maybe 50% of them. I don't want to get into the details right now. I will get into details when we finish with the negotiations. But it's more or less the way that we are dealing with the problem that we have right now, this is only on retail. The thing that we have been receiving in the last couple of weeks from the industrial and offices, we are being taking care of it case by case. We do not have a group of tenants in the industrial side. But we know that we have, for example, companies that are dedicated to the auto industries, but they are in a problem that has nothing to do with the COVID. It's another type of problem, but everyone is in the same ship now. So we will take care of everyone, and we will analyze. We very much care each and every one of requests that we receive.

Great. And the dividend, would you consider paying dividends on shares? Or that's off the table?

Actually, we considered it for this quarter but I said that we took a lot of discussion about the dividend this quarter. And the decision that we made is to pay to retain half of the dividend do pay. But it's still under discussions if we are able and willing to pay in shares for the next quarter. We need to see how everything evolves. And this quarter and the next one, the second and the third quarter are vital to reach a solution that I'm sure is going to be good for the company.

Great. And let me make my final question, more of a long-term question. I mean when I look at your breakdown on how diversified you are, how are you thinking about that sort of breakdown that you have between retail, industrial, offices, going forward? Is it fair to assume that perhaps the industrial on the logistics portion gain market share within your portfolio? Not necessarily shrinking offices or retail, but stable, and then the rest is sort of your growth driver? Or how do you see that changing? And even within that, the contract terms, do you see that changing? Because, for example, in retail, what we've seen over the past few quarters is the average contractor has been coming down a little bit. So I was wondering if that's a new trend, and then it gets amplified with this crisis as people perhaps are willing to sign only shorter-term contracts.

Maybe -- all right, let me see if I understood the question well. We have in a retail spaces, we have many -- if you go to a shopping mall, you will see in the hallways, you will see a lot of kiosks. Those kiosks in our model are leased at a 90-day period and renew every 90 days. Today, we are seeing a lot of those ending the contracts for obvious reasons. I don't think that it will change the way that we look into the composition of our terms of leasing in the future. I don't think that it will be a dramatic change in that. We have leases for the big boxes for more than 10 years, for the sub anchors for 5 to 7 years. And for the regular retail spaces, more retailers for 3-year stops. This is our design, and our desire. We do not want to let the length of the small retailers to the length of the contract of the small retailers in their hands. This is in our hands. And we are comfortable with 3 years because at any given time, you can change the use of the space for another brand or another type of goods. So we would still have that in our hands. The kiosks will come back eventually. We are not worried about that. And the first question, I would say that we envision this company for 40% Industrial. And from Industrial, you take in account also manufacturing and also distribution and logistics, and 40% Retail and 20% Office space. We are very close to that neighborhood today in our composition. And I am very comfortable with that. I think that we will continue on that trend. Today, everybody is eager to have industrial space. Everybody think that industrial is good and retail is bad. Let me say, in my experience, is not quite like that. I have seen the industrial space empty. And it's not a good sight. It was long ago, but you never know, it will happen again. For us, to be diversified, if there is, gives us strength today. Everything that we have done in the past, today, we are showing off. Because today is helping us. I don't know if I answer correct.

Yes. And one comment I'd like to make on the lease term of retail. It appears as though we have reduced the lease term. And what happened, in fact, is that we had, if you recall, included in retail, hotels and bank branches, which have very, very long-term contracts. We have now a category called others in which we have the hotels, bank branches and all those things. Those have a very long-term contracts. And that's why it looks like the contracts for retail has been reducing. But it's just a matter of how we classified the information and the fact that we excluded that from the retail because that was not properly retail. So we're now showing the, I would call it, normal length of the contract. We haven't been seeing any reduction in the length of the contracts that we have.

[Operator Instructions] I'm seeing a question from Mr. Richard Lee from Citadel.

I did have a question on the Hercules portfolio acquisition. Do you -- how do you envision doing that acquisition? When you did the TITAN portfolio, your leverage level was obviously lower. And I know you're up against kind of the higher range for the rating agencies at the moment, and particularly given the dynamic in the market, I'm curious how you envision that financing that acquisition. And then second would be the time frame for that acquisition?

We already closed on a portion of the Hercules acquisition. And we will close for the rest in the next coming month or so, and we have our lines of credit open. And we are controlling the ratios in which we draw that in order to maintain an efficient ratio. But we have the resources to close on that.

And in terms of a comment on -- regarding the ratios, obviously, look skewed right now. For example, LTV jumped significantly, not because we drew MXN 17 billion worth of debt, but the FX depreciation created that. Because as I mentioned, that happens immediately, but you don't see the asset revaluation until, let's say, the next 18 months. Now if you think about it, what's going to happen, is that we see the leverage jump today. And then 100% of the assets, not just 38%, which is the leverage we have, but 100% of our assets get revalued by 30%. So if you do the math on those 2 things, today we are at 45% or so LTV, we're going to be at 33% or 32% LTV in 18 months because of the revaluation of the assets. And as Andre mentioned, depreciation of the currency is translated into higher leasing spreads in peso terms. And obviously, we report in pesos. So you will see, obviously, not in the next 2 quarters, but in the next 18 months. You will see that those positive leasing spreads are going to be introduced into higher income and the ratios that have to do with leverage measured against cash flow, et cetera, that look stressed today are going to look a lot more relieved in the next 18 months. So in a nutshell, the tendency is for the company to naturally delever significantly, especially with the depreciation of the currency over the next 18 months.

Got it. I mean so should we expect the financing to be done with the revolving credit facility proceeds? Or would you envision taking out similar to the TITAN portfolio, a secured term loan against the portfolio? What kind of LTV if you do, are you envisioning for that?

No, no. The revolving line of credit. We intend to maintain that in cash. I don't know, Andre, if you want to add a comment regarding how we expect to finance the...

Yes. As Jorge is pointing out, the withdrawal of the revolving facility is 100%, just to have more flexibility, more strength in our balance sheet. We are not planning to use those resources, just remain those resources there. And when the crisis ends, most likely, we will just give that money back to the banks. How we have been financed these acquisitions already and the rest of the acquisitions, we have been using our bilateral lines that we have with the banks. And when the moment is right, we will see the best options to refinance those balances and to keep those maturities for the long term.

And the LTV?

LTV, as Jorge just pointed out, we expect that to go back below 40%. And in -- in a couple of years, even way below 40% back to the levels that we have had historically of around 35%.

We have a next question comes from Ms. [ Gabriela Sibral ] from AXA Investment Managers.

You mentioned a few times about being patient. So with that regard, I was just wondering if you had conversations with the rating agencies and how they -- how patient they are willing to be in these circumstances?

Thank you. Well, this situation that we are living is global crisis. Every sector and every company is having impact from this crisis. We know that the rating agencies understand their role, and they are very responsible on the very important role they play in this in normal basis, but especially in this crisis. And they are very professionals at analyzing every single issuer and every single credit name and its specific impact. As we have been discussing already, and as you can see in our numbers, the financial position of Fibra UNO is very strong to navigate these crisis. The rating appreciate that in our conversations. We make sure that they see the strength that we have. So it's not about asking the rating agencies to be patient. I think they understand that they need to analyze every issuer and every credit name by itself. And then act according to the conditions of every issuer. So that's the way we see it.

I'll pass the line right now to Fibra UNO team to close the call.

Thank you. Michael. Thank you, everybody, for listening to the call. I now will please urge you to stay safe, and I hope you have a wonderful weekend. Thank you.