Fibra UNO (FUNO11) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Fibra UNO Q1 '22 Conference Call -- Results Call on the 3rd of May 2022. [Operator Instructions] The format of today's call will be a presentation by the management team, followed by a question-and-answer session. So without further ado, I would now like to pass the line to Mr. Andre El-Mann, the CEO of Fibra UNO. Please go ahead, sir.

Thank you, Michael. Thank you, everybody, for your interest in our call. We are going to talk about our first quarter of 2022. And I couldn't be more happy to -- happier to present to you the numbers that we have presented yesterday. We yet broke another record on our total income, and we yet broke another record on our total NOI, our total FFO, et cetera, et cetera, et cetera. I think that our company and personally, I look at the future and I look at a very bright future for our company. We presented yesterday an 8.9% increase on total income. And more importantly, we presented yesterday, a 15.8% increase in our FFO against last year's first quarter. As at per CBFI numbers we presented yesterday, a 17.6% increase in our FFO, which for us makes a great number. And yes, we expect that this year, we will be breaking all last year's records. So we posted a very good number, in my opinion. And we are looking at a nice future for our company because we are still yet to get the full potential of the property that were under development, especially, and we expect for the third quarter this year -- late third quarter, the grand opening of Mitikah. So we expect that for the last quarter of this year and starting next year, we will be seeing how the full potential of the income generated by the Retail side of Mitikah will be pouring into our balance. And you will be seeing an increase on that every quarter, starting late -- the fourth quarter this year. So for us, we look at a very bright future. We go to the construction site of Mitikah and we see that we are have in our portfolio, 1 of the best properties in LatAm or the best property in LatAm, and we feel very comfortable and very excited about that property. We also have -- we expect to have by late this year, at the end of the year, the opening of Tapachula. Tapachula is a border down in the south border with Guatemala. And we see that it's a city with enormous potential in the Retail side. And we expect that it will be a great success, the new shopping mall that we are -- with grocery anchor shopping mall that we are yet to be opening in the last quarter this year. Also, we will have the opening of the -- what's the...

The expansion.

Expansion of the Valle Oriente that we expect to have the Retail side of the expansion for this year, again, late this year. So we have both constructions Valle Oriente and Tapachula that will start to fall on our NOI line and our income line later this year. So we are very happy at what the future present us. We know that there's worries about the whole world situation, the whole world status with the war in Russia and et cetera. And especially, we have seen and hearing a lot of worries about the inflation. Now for us, we've been leading to all the high inflation era. Remember that we've been in this market for many decades now, and we lead to a very hyperinflation included in Mexico. And today, we see the pressure with fractional pressure, but we don't see that, that pressure will affect the company or the company [Foreign Language]

Development performance.

Development performance. The company performance, I see bright in the future. And I would like you to share my optimism. The numbers don't lie, and we are breaking record after record, quarter after quarter, don't lie. It means that our model is paying off. And let me tell you that we expect it to continue to pay off this year and if you allow me the next year and the next. We are very happy with our numbers. I would let now Jorge talk about the numbers in particular. And I will also ask Jorge to talk to you about one thing that makes us very proud and very happy, which is the partnership that we just signed with AXA, the insurance company. Jorge, please?

Thank you very much, Andre. Thanks, everybody, for joining the call. I will go through the MD&A of the quarterly results as usual, with one caveat I'd like to highlight. We released yesterday a document that had an incorrect information on Page 20, the subsegment data for industrial notices. We just released a new information that I will show you as soon as we get to that point of the MD&A. Going into the detail. When we look at revenues, the Fibra UNO total revenues after COVID-related support increased by MXN 31.3 million to MXN 5.8 billion, 0.5% above fourth quarter of 2021, mainly attributed to a combination of increasing gross leasable area; the effect of rent increases in active contracts; cancellation of reserves for MXN 114 million, offset by credit notes for COVID relief MXN 87 million, which resulted in a net increase of revenues of MXN 26.9 million; and exchange rate appreciation and its effect on U.S. dollar rents. I'd like to highlight one important point in this regard, and it is that we, as a company, believe that the pandemic is behind us, and therefore, we have no longer any COVID-related reserves in our balance sheet. So it's a signal from our end that we feel that the pandemic is behind us, and we're definitely and very clearly, not just on our recovery path. But as Andre was mentioning earlier, we are on a growth path for the company to retake the path we had prior to the pandemic. So stressing the point we feel that the pandemic is behind us, and we no longer carry any COVID-related reliefs or reserves in our balance sheet. We would expect to eliminate the COVID-related lines from our financial statements as of the following quarter. The second quarter of 2022, we will revert back to the normal reporting without any COVID-related lines. Now in terms of occupancy, total Fibra UNO occupancy at the close of the first quarter of '22 was 92.6%, an increase of 40 basis points compared to the previous quarter. The Industrial portfolio had 96.5% occupancy, 80 basis points above fourth quarter '21. We include additional GLA related to expansions and new developments as well as, obviously, the occupation of existing GLA. Retail portfolio was 89.5%, 10 basis points above the previous quarter. The Office portfolio was 60 basis points below the previous quarter because it obviously continues to be challenged. The others was 30 basis points below the previous quarter, 99.1%. And In Service property went from 100% to 93.1%, 690 basis points, basically due to the relocation of some tenants in Galerias Valle Oriente's expansion, which resulted in some contract renegotiations. Moving to operating expenses, property taxes and insurance. Total operating expenses decreased by almost MXN 100 million, MXN 94.6 million or almost 14% from the fourth quarter of '21, mainly due to seasonality of some expenses that tend to increase in the fourth quarter of the year. There is one exception to this, which is on a one-off of higher expenses for the Logistics sector, which I'll detail as when we get -- sorry, for the Light Manufacturing sector, which I'll detail when we get to that point of the discussion. Property taxes increased by MXN 24 million, 16% above fourth quarter '21, mainly due to the inclusion of new properties and insurance expenses remained stable versus last quarter at MXN 89 million. This resulted in a net operating income increase of MXN 11.6 million or 0.3% versus the fourth quarter '21 to reach MXN 4.6 billion. We are approaching the MXN 5 billion mark for our NOI. NOI margin calculated over rental revenues was 88.5%, and our total revenues was 78.1% (sic) [ 78.9% ]. Again, this is a record NOI since our initial public offering. Interest expense and interest income. The interest expense line increased by MXN 93.2 million, 5.2% compared to the previous quarter, mainly due to a reduction of interest expense capitalization of MXN 150.7 million, exchange rate appreciation from MXN 20.5 to MXN 19.9 per dollar at the end of the quarter, and the increase of the base rate of our variable rent component of our debt. As you know, we do have a small percentage of our debt linked to TA and LIBOR tier mainly. Funds from operations. As a result, from all of the above, our FFO decreased quarter-over-quarter by MXN 154 million, 6.1% versus the fourth quarter '21, reaching about MXN 2.4 billion. Adjusted FFO decreased by MXN 250 million, [ 6.1% ], totaled MXN 3.84 million, mainly due to the fact that were not -- we did not have any property sales in the quarter. Looking at FFO and AFFO per CBFI. Since we repurchased almost 21 million CBFIs -- sorry, 20,999,999 CBFIs, closing the quarter with 3.779 billion CBFIs outstanding. The FFO and the AFFO per average CBFI was MXN 0.6303 in both cases, which implies decreases of 5.7%, 9.1% versus last quarter. But obviously, this also represents a very significant growth of about 15% versus a year ago. Accounts receivable for the quarter totaled MXN 2.7 billion, increasing by MXN 408 million or 17.6% from the previous quarter. Without considering reserves for COVID-19, the provision for doubtful accounts, gross accounts receivable only increased by MXN 270 million. So as -- again, as we mentioned before, we are normalizing the performance of the company related to the COVID-19 reserves that we are no longer carrying in our balance sheet. In terms of investment properties. The value of our investment properties, including investments in associates increased by MXN 2.4 billion versus the fourth quarter '21 as a result of normal CapEx of construction of projects, CapEx -- maintenance CapEx invested in our stabilized portfolio and a fair value adjustment to our properties. Total debt in the first quarter of '22 equaled MXN 135 billion compared to MXN 136 billion recorded in the previous quarter. Variation mainly due to the first disposition of the Mitikah credit loan for MXN 3 billion, debt repayment of MXN 1.8 billion and the FX variation from MXN 20.58 to MXN 19.99 per U.S. dollar at the end of the quarter. All in all, the resulting effect in total equity is that we had an increase of MXN 1.4 billion or 0.8%, including controlling and non-controlling interest compared to the first quarter, basically due to the change in net income variation from the quarterly results, derivatives valuation for shareholder distribution and provisions for the employee compensation plan. Moving to the operating results. In the leasing spreads, without considering the effect of inflation, which Andre was alluding to, we are experiencing obviously a higher than recent memory inflation both in pesos and in dollars. So without considering the effect of inflation, nominal increases in renewed contracts in pesos were 630 basis points in Retail, 870 basis points in Industrial and a decrease of 60 basis points, so basically flat rents in pesos for the Office segment. If we consider the effect of inflation, given that we have high inflation, we have a negative 40 basis points on the Retail segment, 200 basis points above inflation in the Industrial segment and 730 basis points below inflation in the Office segment. In dollar-denominated leases, nominal rent increases were 400 basis points for Retail; almost 280 basis points, almost 3% for the Industrial segment and minus 120 basis points in the Office segment. Obviously, comparing this to the prevailing inflation in dollars is negative 150 basis points Retail, negative 350 in Industrial and negative 750 in the Office segment. Considering constant property performance, rent per square meter was increased a nominal 4.9% compared to the weighted average inflation of 6.47%. In this case, it's very important to remember that there is a lag in the reflection of the inflation that we are seeing because obviously not all of the contracts have the maturity date during the quarter. So only those contracts that mature or will have a renewal, an anniversary of their signature during the quarter, the ones that we review inflation, the rest of them remain constant. So it takes roughly about a year to see the full translation of inflation into all of the contracts. Therefore, we recorded -- so we had an increase of 4.9% compared to annual inflation of 6.47%, which is a net decrease of 1.6% in real terms. Some U.S. dollar contracts in the Industrial segment have captured inflation. There is a drop in the Office segment occupancy as well as the reflection of increasing inflation in the contracts that had their anniversary during the quarter. On the subsegment data, and here is where we had the correction to our information supplement on Page 20, the segment data. Please refer to the new information supplement that was released. Now going to the subsegment. At subsegment level, the portfolio's total annual rent per square meter increased from $9.8 to $9.9, almost 1%, mainly due to a reduction in COVID-related reliefs, the increase in both current contracts and renewals as well as a recovery of variable rents. Total NOI at the appropriate level, this does not include corporate expenses for the quarter, decreased 3.6% compared to the previous quarter and the variations mainly due to the following. In the Industrial segment, the Logistics' NOI decreased 0.9%, basically a reflection of FX variation; Light Manufacturing had a decrease of 9.4%, and this is due to a one-off nonrecurring increase in expenses for that sector. Basically, we delayed payment due to the pandemic to some suppliers, and we recognize those expenses during the first quarter. We should see a normalization of the expenses in the quarter for this Light Manufacturing segment. Without the effect of the normalization, we would have had basically a flattish quarter for the Light Manufacturing segment. So the drop is elusively related to an increase in expenses. It's one-off for this quarter. In terms of the Business Park. We saw decrease of 9.6%, which is a combination of the 2 factors, also similar to Logistics. We had one-off expenses as well as a reduction in income due to some contracts expiring and as well as the limitations that we have in caps and some contracts in the Industrial segment. In the Office segment, NOI increased 15.9%. This is mainly due to a penalty related to an early termination contract, which gives the NOI for the segment. In the Retail segment, stand-alone NOI increased 3.7% quarter-over-quarter, which is very encouraging. Fashion mall and regional subsegment decreased 0.6% and 4.5%, respectively, mainly due to the reduction in variable rents, which is normal for the company to have a very high variable rent component during the fourth quarter of the year. And the Other segments dropped 27%, mainly due to the seasonality of hotel's variable rent, which was exceptionally high during the fourth quarter of 2021. And with this, we finish the discussion of the MD&A, and we can open the floor to Q&A. Michael, please open the floor.

[Operator Instructions] Our first question will be from Mr. Nik Lippmann from Morgan Stanley.

Thanks for clarifying the thing about Industrial rents. So it clears though it's much better with the adjusted supplementary material. My question goes down to basically the same point. Can you talk a little bit about the pricing performance that you're seeing in some of the different regions, say, North Bajio and the Logistics market around Mexico City, where we have sort of different -- almost sold out in the North, plenty of available space in the Bajio where you don't have too much, and then the Logistics market in Mexico City, what are you seeing on the ground? And how much convergence do you think that we can see between your rents and sort of the prevailing market rents in these markets?

Thank you, Nik. Well, I was going to talk about the difference between all the sectors at the beginning of the call, but I decided to take it from the Q&A platform. It's a very good question that you're asking. I think in our composition of our Industrial space, you know that we differentiate ourselves from the rest of the bonds because we have a larger amount of square meters dedicated to Logistics, mainly in the Logistics corridor that we identify in the whole country, which is from Mexico City towards North and now going to Queretaro and the rest of the Bajio area. But mainly, we are talking about Mexico City and the State of Mexico. The majority of our square meters are down there. And the differentiation between the Logistics and the manufacturing space -- the Light Manufacturing space is mainly that there is more inclined dollar-based rent in the manufacturing for natural reasons because they produce dollars, the majority of the manufacturing space is devoted to export so they produce dollars. And contrary, the Logistics is mainly devoted to the internal construction in the majority, I mean. That means the rents are always or almost always in pesos because they serve the local companies, the domestic companies for the domestic consumption in the majority of the cases. Now when you have a peso-based rent, you have a different growth through the years than if you have the dollar-based. The dollar-based is linked to the international inflation, the peso-based is linked to the domestic inflation, which normally is higher. Although when you have an event of depreciation of the currency, you tend to lever both of the fields, the dollar-based and the peso-based. Now what we have seen today in the last couple of years or 3 years is a very steady dollar and a higher inflation in pesos by maybe 10%. But we have been seen for more than 3 or 4 years that the peso rent came from the higher, the valuation of the currency that occurred between 2014 and 2019, and the recovery of the peso-based is what we are seeing today. So what we see in pesos today is very similar. The level of the rent is similar. Let me give you an example. When we went public, we had $3.50 equivalent in pesos, $3.50 per square meter per month. Today, the average is $5.50, equivalent of $5.50 per square meter per month. This is our overall average. So we've seen in the last 10 years that the peso-based rent increased and lever the field with the dollar-based rent. What we see in the future is we are going to continue this beating the inflation. Nevertheless, inflation this year will be a quarter because we haven't seen a level on last year, we haven't seen this kind of inflation in the past decade or 2 decades. So it's going to be hard for some of the players to adjust immediately. But eventually, we will be adjusting the -- and we will be beating the inflation because our peers are higher than we have today. And now we are talking about the whole sector. We are -- we need to get close to our peers. Today, I see for the immediate future that we will beat inflation. And eventually, we will be getting to a more similar level than our peers. I don't know if I -- I'm sorry for the length of the answer, but I wanted to express how we feel about the sector.

Perfect. So you're clearly seeing that convergence, I think that came out.

Perfect.

Our next question comes from Sheila McGrath from Evercore.

I guess I was wondering if you could talk a little bit more about your joint venture with AXA. How are the fees structured and just the strategic benefits for FUNO on that joint venture?

Of course. Thank you, Sheila. Actually, we did a very similar structure as we did in Helios. And now the difference is that our counterparties and insurance companies, they look for patients. But I haven't seen the success of our structure in the Mitikah project, which is under the umbrella of Helios. I think that we can replicate that structure many times. This is only the first step, and we are very happy and very excited about bearing up and partnering with 1 of the most important and most admired insurance companies in the world. The fact that they look at us and they chose us to partner with is for us price motive. And we expect that it's also going to be a huge economic success for the company. So I think that partnering with companies like that makes the whole -- makes sense a lot for us. And we expect that this is only the first one we have, and we will continue to do different partnerships with them or others.

And one other quick question. Can you comment on where cap rates are trending in the transaction market for your different property types and the impact on higher debt costs on cap rates?

Look, I would -- I have been very vocal about not having a direct correlation between the interest rates and the value of the property that we have, the cap rate is more a reflection of the value. There's always a connection, but it's not that big connection that everybody talks about. For me, what I have seen in the last couple of years is a differentiation between the Industrial world and the rest of the world, which is not more than 50 basis points, in my view. But we haven't seen that much of bargains out there. We haven't seen openings of properties that we will be eager to acquire. So that means that the cap rate haven't gone up that much, even though the interest rates in the Mexico case, I think, is 250 basis points or 300 [Foreign Language] The increase from the lower -- the lowest point. But I don't see bargains yet. So that tells me that it has an impact in the price of the properties that much.

Our next question comes from Mr. Pablo Monsivais from Barclays.

I have a quick one. On the supplementary material, I saw that you have more assets for sale compared to last quarter. So I would like to have more information of which kind of properties are you intending to sell on any price range that you perhaps are thinking about in terms of premium on [ different to energy ]?

I'll ask Gonzalo to answer that -- or Pablo -- please, Gonzalo, go ahead.

Yes. Thank you, Jorge. Pablo, what we have on the pipeline, again, this is something that came into our door without soliciting them. They are nonsolicited offers. What we have on hand is we will be -- we have an offer for Industrial asset, which we will be selling way above NAV, probably you are talking 1.5x the NAV. This is one of a kind. Obviously, the Industrial is the hardest market. We can't ever seen in Mexico. We also have a couple of offers for 2 Office buildings, which also will be selling probably 1.15x, 1.20x NAV. And surprisingly, we have an offer also for a hotel that will be also sold with 1.4x NAV. So it's just a mix of offices, Industrial and leased hotel which are on that pipeline. Anything it's binding as of now, probably we will be putting on binding agreements in the next couple of months. So definitely for the next report, you will be seeing some of this already in our balance sheet and our P&L.

Okay. Just a follow-up and clarification. The MXN 3.6 billion that you have as others, is the hotel property that you are talking about?

Yes, yes.

Okay. And the MXN 3.6 billion is at NAV. So the final number will be 15% higher?

Yes. Exactly.

Perfect. And just one last question. Just quickly on the development CapEx, you still have it increased about MXN 1 billion relative to last quarter. Just want to have some color on the construction costs, which are increasing significantly. Do you think that right now, they may take a toll on the development yields or not yet?

Well, I can answer partially that question. Part of the increase on pending CapEx of the development has to do with the update of the [indiscernible] or Portal Norte project, the one that we just mentioned that we have the joint venture with AXA. Since the product is now started again, we updated the project, and it's -- the increase is mostly referred to that. And it's not necessarily because of the increase of the cost because we have most of the cost of that property already locked in. But we just updated the budget of that project. So that's what explains the increase mainly.

And in terms of yields, Pablo, we continue to seek to develop at double-digit yields, let's say, 10% or higher. And so far, we've been obviously capable of doing this because as Andre has mentioned in previous calls, we've always -- whenever we start the development, we buy the whole skill for that. We buy the concrete. So we fix the price of the development day 1, so we don't incur the risk of the -- those driver is driving the cost off. So we haven't had that problem on our end. The second point of answer to your question is that to the extent that rents do not go up and yields drop because rents are not going up, then this incentivizes developers from ourselves or anybody from developing new real estate until the rents catch up, which is also a comment that Andre has made before in previous calls, that whenever you see the cost of construction going up at the end of the day, what happens is that rents have to naturally flow to that -- to reflect that increase in cost. And in Mexico, overall, and I'm speaking property about the market, the rent level -- the absolute rent levels we have in Mexico in all 3 segments are very low compared to the cost of construction. So in our opinion, the direction of rents in real estate in Mexico in all 3 segments, should be north. They should continue to go up because the cost has gone up, and we don't see that cost going down, especially in the higher inflationary environment we're living.

Our next question comes from Mr. Anton Mortenkotter from GBM.

One of my questions is a follow-up from Pablo's question regarding the JV with AXA. As you mentioned, CapEx increased of around MXN 1 billion, but the GLA expected increased only like 6,000 square meters and also the revenue expected to increase a lot. So I was wondering what is this related to a shift in the Apolo project? I mean are you just beginning to do way different things from what you were expecting in the beginning? If you could provide some more color there?

Sure. Thanks, Anton. Well, what happened, if you recall, the original project we had when we acquired this, this comes way back from the acquisition of Apolo II when we bought this project. It was a mixed-use project back then with rents of what was it, 2016 when we acquired the property. And that was the initial budget that we had contemplated an office tower -- 2 office towers and a shopping mall. Now time has passed. And as you know, those projects are live projects. Same thing happened with Mitikah. And today, instead of having an office tower, we have a hospital. And instead of having a second office tower, we have doctors offices that will be serving the hospital, which was, by the way, one of the important drivers to make the development appealing for AXA to join us in that transaction. So we did have a change in the mix of what originally we bought from Mexico Retail Properties and the project that we have today. We usually do not move the information we have on the development table unless we have something material to change as it was the case of signing the joint venture with AXA. So we are reflecting the numbers that we have discussed with our partner for this project, which obviously includes higher rents, which are market rents for the Retail as well as for the hospital and the doctors of business towers.

Okay. Also regarding the Office spaces, I mean, the clinics and the doctor offices, do you equip those? I mean, this space related to the hospital, are you in charge of equipping the hospital with all the hospital equipment? Or is this -- the tenant is in charge of that?

The tenant is in charge of everything technical, but we have been investing in TIs. But TI is related to the construction. I mean, moving and flooring, nothing specialized, specialty both on the account of the operator.

Perfect. And just if I may, another question quickly. You talked about your leasing spreads. Could you give us a little bit of color on how your contracts are indexed to inflation? I mean, what amount of your contract is indexed inflation, which one has like a fixed increase? Could you provide some color there?

Yes, sure. 100% of our contracts are linked to inflation. Now as I said, we may have -- we may be facing some of our tenants struggling with velocity, the speed on how they can digest this new era of higher inflation. And by higher inflation, I mean, it's 7% last year instead of having 20 years of 3%. But maybe they will have a trouble digesting it and maybe it will take in some years or couple of years to digest those increases. But we also see that we -- this particular environment got us in a very good moment. We're coming out of the pandemic, and after the pandemic, we will return to the path of recovering the rent. For Mexico, we have been below our peers by a mile for the last 15 to 20 years. So we are still yet to go back to the path of the recovery. And that's why I think we will beat inflation. Letting know and stating that we know that we will face some struggle from our tenants in this first year and the second one. But aside of that, we will beat inflation, and we will return to the part of the recovery of the rent that still are very way below against our peers.

Next question comes from [indiscernible] from Suma Capital.

I have a follow-up on the Office space. Could you give us a little bit more color about the occupancy, not only in this quarter, but the outlook for the following because in the comment information, you mentioned that one of the reasons that the occupancy rate is now we...

I apologize. Sorry to interrupt, but we're having a very hard time understanding what you're saying on our end. Could you please repeat?

The line is not good.

The line is not very good. I apologize.

Yes. My apologies for this. I was asking about the Office spaces. It's a follow-up in the occupancy rate. I was wondering if you can give us more color about what happened this quarter because you mentioned in the supplement information that one of the reason of the decrease in the occupancy rate is the customarily recreation of a payment contract. So could you give furthermore color and your expectations for maybe the following quarters regarding on the occupancy rate.

So if I understood correctly, occupancy in the Office segment and our expectations for occupancy and rents in this segment. Is that correct?

Yes, yes.

Thank you.

What I see in the Office space, I, contrary of what the majority of the market gurus said, I think that I am very optimistic. I think that people in Mexico, we want to get back to the office. We are seeing it. We are looking at our business and our buildings being slowly but steadily filling up again. I can tell you the number of the Mitikah tower. I was there yesterday, and the manager of the building said that she has been seeing an increase from 16,000 people going to work to 40,000 people in April. So that means that the companies are now calling back their employees and the employees want to get back to the office. This is in a general umbrella of the Office space. What we are seeing is we are living in our corporate offices. We have leased at 82%, I think, but we are occupied at maybe 55%. So we are still get 50% of the people not coming -- 50% people that is coming to work are yet to come, but we are seeing increases week by week by week. So I think in the Office sector, the occupancy will get back to us in the next 12 to 18 months. And the price of the rent will take longer than that. Maybe the price of the rent will be a couple of years more. But I am pretty sure that we will get back to where we were. And we will continue from that point to increase and have a growth in that very segment. I don't know if I made myself clear.

Our next question comes from Mr. André Mazini from Citigroup.

Sorry if this question has been answered. I jumped in a little bit late. But the question is on possible reconversions, right? So of course, the highest and best use of real estate may change over time. I know that you guys are bullish on Office, of course, is return to the office, and working from home is not something that's going to be speaking forever. But on the other hand, it is the highest vacancy rates you guys have. So do you think it makes sense to maybe reconvert some Office space or any other property type in particular to something else if the demand changes? Or that CapEx is not worthwhile, it's better to sell or something like that? So should we expect some reconversion does the yield on cost the IRR on these types of projects pencil?

Thank you, André. I said I was optimistic, not bullish, but I continue to be optimistic. But yet again, we are always willing to analyze every single piece of opportunity in order to reconvert if it makes sense to, sell if it makes sense or to continue with our portfolio if it makes sense. We are today, as Gonzalo said, analyzing very carefully to unsolicited offers from 2 different office buildings. And I think maybe 1 of those or both will be crystallized in the next coming quarters. But having said that, we are continuing our plan to reduce our exposure. Remember that we reconverted various Office and Retail space to hospitals and clinics, and we are yet to announce the reconversion of 1 or 2 properties to residential as we already announced. So we are continuing with that plan. But it's always -- remember that this business is very opportunistic, and we will try to get the advantage of any opportunities that come to our desks. But answering your question, of course, we are willing and we are continuing with our plan to reconvert some of the properties, whichever of them makes more sense to residential.

Our next question comes from Mr. Carlos Peyrelongue from Bank of America.

I think on Office, you pretty much answered that you want to get a feel of when you think you can start seeing sequentially some increases in occupancy. You've been close to flat, certainly in the last quarter, just to get a sense of the speed of the recovery. And if you have mentioned any payout ratio for dividends for this year, that will also be helpful.

Yes. The questions were, sequentially, the occupancy of our Office and the payout ratio for the dividend, right?

That's correct. Yes.

Okay.

Okay. We decided to retain 20%. Remember that we are coming from a different world, let's say. We retained the first time in the first quarter of 2020. We are now in first quarter of 2022. The pandemic made us retain the first year and the second year after -- or during or after 40% or 45% of our dividend, and it paid off. It paid off in the sense that we were very solid, will continue to be, and we expect to continue to be and we decided this first quarter to retain 20% of the dividend in order to be able to continue with our repurchase program, if so, or reducing the debt, if so. I'll say this again, I'm saying this many times, and I apologize for saying repeatedly. But the important thing is to produce the dividend. If we distribute it or not is really not that important. The important thing is to produce, and we are completely committed to continue to be producing the money. We expect for this year a growth in the dividend that last year was 2.36% -- I'm sorry, MXN 2.36 per CBFI. We are committed to reach a double-digit growth in that number. And I think that should be our main concern. We decided to distribute -- to payout 80% of the first quarter. And one of the issues that will incline if we retain 80% or 20% or 30% or 10% is how the fiscal return looks as the years go by -- as the year goes by because the fiscal return -- the number of the fiscal return can change 1 quarter to the other, depending on the currency exchange rate and the inflation rate that is going through the year. So we decided to make a 20% retention in order to have the flexibility, either to repurchase or to reduce the debt. But this same 20% or the retention that we will make in the next quarter -- in the next coming quarters may be affected by how we see the end of the fiscal return for the end of the year. I don't know if I made myself clear.

Yes. very clear.

Thank you.

Our next question comes from Jorel Guilloty from Goldman Sachs.

Most of my questions have been answered, but I wanted to touch again on the sequential decline in NOI for the manufacturing portfolio. I'm sorry if I missed this, but what was the one-off that led to that decline? And then the other question was quickly on the future of lease spreads, specifically looking at the Logistics portfolio. Do you expect this real rent trend in lease spreads to continue going forward? Those are my questions.

Regarding Light Manufacturing, yes, we had a one-off increase in expenses that we had a -- we didn't accrue, and we had to pay them off in this quarter. You should not see a repeat of that going forward. That -- out of the 9% decline that accounted for [ MXN 8.4 million ]. So basically, all of the decline was related to that. Excluding that effect, we should have basically neutral or flattish quarter. And given that it's mostly dollars and we saw the dollar appreciate during the quarter, it's consistent with the dollar appreciation. That's on the Light Manufacturing sector. And in terms of our expectation for leasing spreads, do we expect to be able to beat inflation? The answer is yes. We do expect to be able to have positive leasing spreads above inflation, obviously, a high inflationary environment poses some challenges. As Andre has mentioned, some people will have some difficulty digesting the fact that we have a higher inflation, so there's going to be some pushback on the inflation escalators. But we do expect to see, at the end of the day, a bottom line. We do expect to beat inflation overall as thoroughly said and done in a nutshell.

Yes. So just to clear up, so specifically for the Industrial portfolio because it seems like that's the 1 that's been seeing the real rent growth. So your expectation is for that to continue near term and in the medium term? Is that -- am I understanding correctly?

In the Industrial portfolio, yes, we do expect to see that occurring in the near term and in the medium term.

Our next question comes from Mr. Rodolfo Ramos from Bradesco.

Congrats on the result. My question is a little bit of a follow-up. And I just wanted to see if you can provide a timeline of when do you expect to close that gap on the Industrial side in terms of the real lease spreads? And also, if you can comment on the particular dynamics that you're seeing in the Bajio region. That would be my first question. And then a second question, if I may. Besides the focus on your operations, which we have seen a very nice recovery and record figures, what other options are you evaluating to enhance shareholder value, whether it's -- I mean, we disclosed the distribution side quite in depth, but repurchases, maybe spinning off a portion of your portfolio internalizing the structure. I know that in the current global volatility environment that we're currently going through, it might not be the right timing. But just want to understand how are you looking at other alternatives besides more fundamental performance?

Thank you. Thank you very much for the question. I won't like to be arrogant, but we are talking about a record-breaking company every single quarter. And of course, we would like to enhance the value of our shareholders. This is our main job here. But I think that, first of all, we need to continue to be occupied and concerned to continue to produce the results in order to be talking LatAm I'm talking right now. Talking about our company that is breaking records in NOI and in income every single quarter. So having said that, if we fulfill that job that we have, that job prescription which is continue to produce the results. I mean the [indiscernible] results, not the very fancy spin-off and redistribution, et cetera, et cetera, et cetera. But if we continue to have the early results, we can talk and we can think about the next thing. Of course, we always analyze what would be the best creating value for our shareholders. Today, Industrial space is very hot. Very few people remember when the Industrial space was cold, and the rest of the sectors were hot. I happen to be one of those. And I'm not flashed by what is happening today. I'll take things with more caution. But nevertheless, we listen to the experts, and we're always trying to make the fundamental changes in the company that will allow us to deliver more value to our shareholders. But first and foremost, we need to maintain our feet on the ground and continue to deliver the healthy and insignificant results that is continue to be -- to receive the rent, not grow the expenses and continue to break records every single quarter. [Foreign Language] And now the Bajio. Okay. The Bajio today, in my view, and maybe my view could be partial and linked to our most powerful area, which is the north of Mexico City and towards the State of Mexico. The Bajio is feeding off from what is happening in the Mexico City area. The Bajio still has a lot of land. The Bajio area is easier to build than it is in the Mexico City area. And I think the future is there, but it's feeding off. [Foreign Language]

Remaining.

Remaining.

The remaining from the Mexico City area. I think that there's still a lot to do between what the Mexico City area has grown, and I mean in distance and the Bajio. There's a lot of space there to be filled. And the Bajio will continue to have a significant growth. But if, again, we'll be feeding off from the strongest Logistics corridor, that is the Mexico City area.

Our final question comes from Mr. Javier Gayol from GBM.

Congrats on the record quarter. I have just 2 questions. The first one is related to the Office spaces. I don't know if you responded to this, but you mentioned in your information that a big part of the increase in revenues and NOI came from a early termination that you guys charge to a tenant. So maybe if you could give us a little bit more information as to how much of this was a one-off related to the termination fee? The amount of space that this tenant will let that you guys vacant and if that is already incorporated in this quarter's results, that will be great color?

Yes. If we exclude the performance of the early termination fee, which again, is good news for us because basically it means that from a financial point of view, that space remains rented and at the same time, it's available for rent. So that is a good place to be when you've already received the rent for that contract. Excluding that, basically, would have a flat quarter on the Office segment basically.

And just one last question. We saw on your balance sheet a new loan receivable for MXN 680 million. Could you just give us some color as to what is that related to? And how should we think about that item on your balance sheet, please?

Can you repeat what items are you referring, please?

Yes. On your balance sheet, there is -- I think you mentioned -- it's named as -- it's an asset named as a loan receivable. If I'm not mistaken, that wasn't before -- that wasn't in your balance sheet before that MXN 680 million. Just to understand why is this different to other receivables? And how should we think about this going forward?

Yes. That loan receivable is basically a loan that the rent vehicle from Mitikah is providing to the residents vehicle of Mitikah. We concentrated all the financing from the rental vehicle of Mitikah, and that amount was just reported by Jorge is around MXN 3 billion. And then the rent vehicle provided a loan of that amount that you are referring to the residences vehicle. So that's basically the structure that we are using. And what is going to happen going forward in the next 12 months, while we are delivering all the apartments that loan will be repaid to the rent vehicle, and we will remain only with the loan that we have on the rent vehicle. I don't know if I made myself clear.

Just if I understand correctly. So basically, one of the vehicles loaned money to the rent vehicle and as rents come in, that is going to be repaid, let's say, that's the correct assessment of that?

That's correct. The only correction is the rent vehicle is lending to the residents vehicle. But what you explained is right.

Resilient vehicle won't be receiving any rent. It will receive the proceeds of the sales of the apartments. So when it received sales, when we signed the deed and received the remaining of all the sales, these loaning should serve that of the renting.

Okay. That's very helpful. And again, congratulations on another record quarter for you guys.

Thank you.

Thank you.

We have no further questions at this point. We'll pass the line back to the management team for the concluding remarks.

Thank you, everybody. Thank you, Mike, for the call. And thank you, everybody, for your interest in our company, and we expect to give along some very good news next quarter. Thank you very much. Have a good day, everybody.

Thank you very much. This concludes today's call. We'll now be closing all the lines. Goodbye.