Fibra Mty SAPI de CV

BMV:FMTY14

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, and welcome to the First Quarter 2020 Fibra Monterrey's Conference Call. With us this morning from Fibra Monterrey, we have Mr. Jorge Avalos, CEO; Javier Llaca, COO; and Jaime Martinez, CFO. They will discuss on the more important strategic financial and operating aspects of the quarter.

It is important to note that the presentation referred to in this conference is available at www.fibramty.com, and the recordings of the call will be available on the website of the company in the next 2 hours.

Let me remind you that the information discussed in today's call may include forward-looking statements on the company's future financial performance and prospects which are subject to risks and uncertainties. Actual results may differ materially, and the company cautions not to rely unduly on these forward-looking statements. Fibra Monterrey undertakes no obligation to publicly update or revise any forward-looking statements.

I will now turn the conference over to Mr. Jorge Avalos. Please go ahead.

[Jaime Martínez Trigueros, executive]

Thank you, Brandon. Good morning, everyone, and my sincere best wishes to you and your families. Now let me begin by saying that in times like this, it is when you see how a company and its people are made of, and I'm sure we won't disappoint you. COVID-19 took us all by surprise, causing an unprecedented health crisis as well as a global economic downturn. Definitely, one of the issues that concerns us the most is the level of uncertainty associated with the pandemic, both for the time it takes for economic activities to normalize and for the changes it generates in the daily life of societies and its implications for different businesses. Facing these conditions, we are convinced that it is crucial to be prepared in multiple fronts in order to tackle this challenging environment in the best possible way.

On the financial side, we have prioritized liquidity as we have almost MXN 4 billion in cash from the follow-on we conducted in October '19. And by keeping all acquisitions on hold for the time being, we maintained a solid balance sheet with a net leverage ratio of less than 16%, one of the lowest in our industry.

Regarding our clients, we have a well-diversified roster of tenants in high-quality properties. With a best-in-class customer service, we have maintained an active communication with them, listening to their current concerns and working with them in finding relief mechanisms consistent with the needs and benefits of both parties.

Health-wise, we understand our responsibility towards society. And for this reason, we have implemented a home office model for our people who are able to perform their duties remotely as their safety is one of our top priorities. For our property managers, whose activity is mostly carried out in our workplaces, we have established safety protocols that allow risk reduction significantly. Likewise, as you can see in the second slide, we're preparing our buildings for the new safety and sanitation standards demanded by this challenging reality. With the aid of several technological tools, which, together by the adoption of a new hygiene protocol, will allow us to operate more adequately to current situation. Furthermore, we're very committed on helping the people in our communities that need the most by allocating our resources to help them overcome their difficulties in the best possible way.

I want to highlight why Fibra Monterrey differentiates as a resilient investment vehicle, particularly throughout these uncertain times. Our financial and operating performance has enabled us to continue carrying out competitive distributions to our investors, and I am very excited to announce that, as of this month, our dividends will be distributed on a monthly manner as our shareholders' percentage of private investors has been growing, and this practice will benefit their short-term cash flow needs. As always, we greatly appreciate the trust you have placed in us. We hope your families stay healthy and your business do well during these truly dire times for humanity.

I now will turn the call to Javier, so he can walk you through our portfolio status. Javier, please go on.

[Javier Llaca García, executive]

Thank you, Jorge, and good morning, everyone. I hope you all are safe and sound and staying at home. Let me present the operating side of our company in 2 parts: before and after the outbreak of the COVID-19 pandemic. I will start with the same-property performance analysis of the portfolio for the first quarter that we present on Page 4 of the webcast material. The portion of the portfolio for same-property purposes is comprised by 53 out of the 58 properties that we owned by the end of the first quarter of this year. It is important to point out that we're excluding the old Cuprum facility given the fact that the property was vacated last July and is still currently under development, and it does include also an additional 91 square meters of GLA after our BOMA adjustment in one of our most recent renewals at Oficinas en el Parque.

Occupancy dropped 80 basis points, mainly due to expiration and partial vacancy on one of our industrial properties in San Luis Potosi, which is currently under negotiations for a new lease. In terms of gross revenue, this grew from MXN 292.6 million to MXN 298.4 million, a growth of 2%, driven by the combination of lease [ collections ] and variation in exchange rate.

Operating expenses grew by 8.6%, mainly driven by increases in property taxes, particularly in our properties in Zapopan, Jalisco, and certain utilities. This resulted in an increase on our operating income of approximately MXN 3.4 million or 1.3% growth, which is slightly below our weighted peso dollar inflation rate, plus variation in the exchange rate.

It is important to point out that the same-property NOI margin decreased by 30 basis points from 90.6% in the first quarter of 2019 to 89.9% during the first quarter of 2020, still above our goal of 88%. Once we incorporate additional acquisition and constructions, which are mostly triple net, we were able to increase our net operating income in almost 6% year-to-year, and our NOI margin increased 170 basis points from 88.6% to 90.3%.

On Page 5 of the presentation, you have the key performance indicators of the portfolio as well as the expiration profile of our lease contracts all as percentages of our income. The combination of asset classes of our portfolio is practically half-and-half between our office and industrial properties.

It is important to point out that our currency composition has reached more than 75% of dollar-denominated leases, which allow us to strengthen our capital structure that Jaime will address later during the call. This composition could become even more dramatic with the acute devaluation of the peso over the last few weeks. The weighted average remaining term continues in the neighborhood of 5.1 years with more than 54% of our total income scheduled to start expiring not before 2024.

Before going into the second part of my presentation and on a personal note, I do want to express how grateful and proud I am of our operations, acquisitions and legal teams on an extraordinary work that will show in the following weeks. I also want to acknowledge our property managers and services providers who are our true first line of response in all of our buildings. And finally, my gratitude and respect to all of our tenants. We will continue to work side by side with them on enduring and becoming stronger together after this hard time.

With that, let me go through some of the operating aspects of our business that have been recently impacted by the effect of the COVID-19 global pandemic. I will start by saying that our most important and valuable assets are our tenants. And as such, we have always kept and will always continue to keep as close to them as possible, and this particular time is no exception at all.

As you can see on Page 7 of the presentation, from our 120 tenants in all our buildings, we have been approached by 52 of them, reaching out to either ask for specific relief or inquire about short-term potential assistance from the company. This group of tenants account for approximately 29% of our total rent revenues. Seven of these tenants requests, which account for 7.5% of gross rent revenue, were considered opportunistic and were not entertained. We have reached relief agreements on other 39 tenants, which represent approximately 20.1% of total gross revenue. 16 of these agreements have been fully executed, while the remaining 23 are in process of being duly executed and documented by the tenants. This agreement consider rent deferment of an average of 2 to 3 months of rent to be paid in a 6- to 12-month period. We're still discussing options with the remaining 6 tenants, which account for 1.4% of total gross revenue. Hopefully, we will be able to reach a win-win agreement eventually.

It is very important to point out that no free rent has been considered under any situation so far. As of today, we have not been approached to switch any ongoing lease agreement from U.S. dollars into Mexican pesos. As I said before, we will keep constant and open communication open channels with all our clients.

Turning to Page 7 of the presentation. And as of April 27, 2020, we have achieved an overall collection of the same-month rent invoice of approximately 77%, which represents 86% of collection progress compared to March 27, 2020, still considered a precrisis month in the rent collection cycle. The delay on collection is a result of the 23 deferment agreements that are still under execution by the tenants that I mentioned before. Collection should reach more than 95% levels once these agreements are fully executed during the first 10 days of May approximately. I will be more than happy to address this or any other issues in more detail during the Q&A section of this call.

If you turn to Page 8, we will talk for a moment about acquisitions and valuations. First of all, La Perla transaction that was announced last February was put on hold on March 31 due to the fact that the seller did not come through with an all due diligence process on time and to privilege liquidity of the company. Just as Jorge mentioned before and Jaime will address in more detail later on, there is currently no obligation or binding agreement for this or any other transaction in our pipeline.

I have to say that although by early March, we were just in line with our 2020 growth program, the current market environment helped make us to put all acquisition processes on hold. Uncertainty about not only the financial markets but also real estate variables, such as absorption, lease rate and occupancy, make almost impossible for us to foresee how price will be hit in the short term and therefore is too early to anticipate what new cap rates will be like. We strongly believe that investment opportunities will begin to arise as the pandemic effects on the market begin to settle. We will follow the evolution of all our primary target markets very closely to be ready to approach these opportunities along the way.

Also, it is the consensus of our third-party appraisers that is also too early to anticipate what data impact on valuations will be, specifically in terms of discount rates. We certainly expect a momentary distortion on valuation of our portfolio driven by the acute devaluation of the peso.

Let me finish my piece of the presentation with our own take of some of the potential post-pandemic effects, particularly in the office market. There is no doubt that this COVID-19 pandemic will have a disruptive effect. On one hand, the physical, not social, distancing in the workplace could drive a reduction on density of headcount and amenities within the office. This less than space would either result in less people in the same amount of space or the same people in a larger amount of space. Let's come back to this in a moment.

Some of this practice is not a new invention. It's been there for some time but never in such stressful conditions as now. Extended home office when it's so radicalized and forced creates severe social unrest that it eventually becomes more a problem than a solution. Now if you take physical distancing and home office and combine them both rationally, they could present a great opportunity to ease pressure on the employees while, at the same time, provide them with a more friendly and productive workplace at no additional cost.

For instance, let's take a company that is looking to modify its office layout in order to increase the GLA ratio per person and therefore reducing density and enhancing physical distancing. If that company increases ratio -- GLA ratio, sorry, let's say, by 20% but implements a staggered or alternate home office practice for all the people 1 day per week, then it will keep 100% of the employee base with 80% of them occupying the office and 20% working from home at any given moment. The change of the layout might represent an additional investment, which, by the way, could be funded by the landlord to later amortize it in the rent, but fixed operating and occupancy costs for the tenant would remain the same if no less by means of less parking space. This is not only a supposition, but it's already happened. We're already working with some of our tenants in similar structures. And obviously, there is not a single answer or solution by every company, it is all tailor-made.

With that, I'm going to ask our CFO, Jaime Martinez, to talk about the key financial aspects of Fibra Monterrey. Go ahead, Jaime.

[Jaime Martínez Trigueros, executive]

Thank you, Javier, and good morning to everyone. I hope that you and your families are healthy and safe in this new environment. I would like to divide my speech in 3 sections, starting with the first quarter results, continuing with the beginning of cash distribution payments on a monthly basis, and finally, Fibra Monterrey's financial conditions regarding COVID-19 environment.

First quarter results were in line with our guidance as market volatility began at the second half of March. We could expect the main part of the effect will start to appear during the second quarter. Exchange rate devaluation caused 2 relevant changes in our balance sheet. The main effect was in our investment properties, which increased in 23% and our bank loans with 22% growth when compared with first quarter '19.

Operational numbers were positive as AFFO per CBFI grew 6% versus first quarter '19. The dilution effect related with the -- excluding the dilution effect related with our latest follow-on carried out last October. Once considered, the issuance, which represented a 50% increase in outstanding CBFI, the acquisition of the Garibaldi portfolio, the reduction in leverage and the financial income driven by our cash balance, we observed a marginal reduction of 1.9% in AFFO per CBFI when compared to first quarter '19.

For this quarter, distribution will be MXN 0.261. Such amount, annualized, represent a 10.7% yield if calculated at yesterday's closing price of MXN 9.7 per CBFI.

We are proud to announce that a project we had since our IPO has started this year. From now Fibra Monterrey will make monthly distributions, and we consider that matching waiting period between cash distributions and increasing the payment of frequency will provide more certainty of cash flows, which might result in Fibra Monterrey being a more attractive vehicle for individual investors. As shown in Slide 11, in April, we will distribute January; in May, February; and so on.

To talk about COVID is to talk about uncertainty. Under such environment, we prepared some information to provide more insight about Fibra Monterrey's financial situation. First, as shown in Slide 12, cash and liquidity levels give us flexibility, while net debt shows the strength of our balance sheet. Such position provides margin of maneuver in terms of debt, future acquisitions and other measures that might be required by the changing conditions of the market.

Second, in terms of debt maturity, as shown in Slide 13, we are in the process of refinance USD 35 million through our HSBC syndicated loan, extending even more our debt schedule. We expect this to be concluded within the next weeks. It is worth mentioning that when this is concluded, our next material payment will be on June 2022.

Third, we did a stress test of AFFO at different scenarios of reduction in revenues and exchange rate volatility. As shown in Slide 14, a 30% decrease in revenues would translate in annual AFFO per CBFI between MXN 0.66 and MXN 0.72 at peso-dollar rate of MXN 19.65% and MXN 26, respectively, which, at a MXN 9.7 per CBFI price, would yield between 6.8% and 7.5%, both above fixed income short-term rates, which might be adequate given the stress levels shown. According to Javier's stress scenario, a 10% reduction in revenue may take AFFO per CBFI to a range between MXN 0.89 and MXN 0.98, depending on the exchange rate, which represents a yield of 9.2% and 10.1%, respectively.

Finally, I would like to mention that even with our solid position, we are working extra time to maintain Fibra Monterrey's financial situation solid in order to navigate through one of the most difficult situations we have lived.

That would be all. Brandon, please proceed with the questions.

[Operator]

[Operator Instructions] The first question will come from Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

I have 2 questions. The first one is regarding the relief programs for your tenants. If you can give us more color on what mechanism are you implementing and how many months are you deferring the rent? And when do you expect to collect those rents?

And the second question is on Javier's remarks on the potential effect of these current prices on the office market. Do you expect occupancy and rent in the office segment to be under pressure in the coming years?

[Jorge Avalos Carpinteyro, executive]

Paco, nice to hear from you. First, on the relief program, what we're doing is that we are offering the tenants with deferment programs that go between 1 and 4 months. I would say then the 39 agreements that we already had, the average would be between 2 and 3 months in the vast majority. There's a couple of cases that we extended the deferment for 4 months, and there is also a couple of them that were below 2 months. But essentially -- and every one -- every single one of them is a tailor-made solution. But in general, what we're doing is that we are financing a portion of the rent, not the whole rent in most cases, so the tenant can pay us back and catch up with us between a term of 6 to 12 months, no later than 12 months. So what we're doing is that we are having a short-term hit in cash flow that is going to be recovered throughout the next few months in order to catch up. As you can see on Page 6 of the presentation, we expect the hit -- the momentary hit to be in the neighborhood of 20% that is going to catch up pretty fast.

I'm not saying that we are not going to face any further problems. We believe that May and June might be more complex in terms of the economic cycle and the rent cycle, but we're going to play by ear. What is very important to stress out and to emphasize is that we're not giving any free rent so far. We believe that we have payment with a very strong balance sheet, and I believe that our strong balance sheet shouldn't be affected by means of a strong balance sheet.

[Francisco Chávez Martínez, analyst]

It is important to point out that you're using the rent deposit.

[Jorge Avalos Carpinteyro, executive]

We're using the security deposit in most cases, so this becomes kind of a self-financing in part from the tenant because we're using money under deposit -- the security deposit. That is the tenant's money, and they're going to recover that security deposit later on in the short term.

Going to the second part of your question Paco, obviously, there is going to be -- there's already a strong pressure on the office market, mainly in Mexico City, Guadalajara and Monterrey. Especially for new leases, new buildings that have vacant space are going to suffer the most. We believe that lease rates in terms of dollars is going to reduce a little bit, again, especially for new leases.

Something ironic that is happening is that this condition is allowing us, at least, particularly to us, to secure more tenants that have scheduled expiration this year. What's happening? Tenants right now are not considering to relocate to a new office space given the uncertainty time, and they don't want to spend a large amount of money on tenant improvements and moving under these uncertain times. So what they're doing is that they're extending their leases at least for a couple of years in order to settle them to have a better visibility of their business. And that's allowing us to increase our retention rate this year. So we obviously expect pressure on all markets, not only the office market, but it's going to be more focused on new development than on [ satellite assets ].

[Operator]

The next question will come from Gordon Lee with BTG Pactual.

[Gordon Lee, analyst]

Just a couple of questions. On the rent relief for the financing that you're providing for your clients, I assume that you're not charging any cost of financing, but I would just want to confirm that.

And then the second question I had on the operating side is if you could just remind us what your lease expiration looks like by segment for 2020. So the leases that are coming due in 2020, how are those split by segment?

And then a question for Jaime, which is on your -- if you could just remind us of your total debt, how much is in pesos? And of that peso debt, how much is variable given the declines that we've seen in interest rates?

[Javier Llaca García, executive]

Gordon, this is Javier. The first question regarding the relief program, we -- in most cases, we are not charging any financing costs, especially on the security deposit portion because mainly that's their own money. On the longer term on a few cases that are a little bit longer term than the average, we are using pretty much inflation as cost of money to catch up with it, but I would say that the vast majority of the relief agreements that we have do not include cost of money given the fact that it's fully short term and it's mainly their own money on the security deposit. And we're taking -- we're pitching in with the cost of money on our side to help the tenants.

In regards to your second question, the lease expiration profile by segment, I can tell you that office is 4.7 months -- years, sorry, industrial is 5.2 years and the small retail portion that we have is 9.9 years. Altogether is 5.1 years. But I can tell you that given the projection of our retention rate of this year, we hope that at least office and industrial is going to stretch a little bit by the end of this year.

[Jaime Martínez Trigueros, executive]

Gordon, this is Jaime. The 100% of our debt, $253 million are dollar denominated. As you know, it's the only way to have accretive debt. And the second part is the of 14% -- around 14% is variable. The rest is fixed, as you remember.

[Jorge Avalos Carpinteyro, executive]

What is the interest rate, fixed?

[Jaime Martínez Trigueros, executive]

The fixed interest rate is around 4 points -- around 4% -- 4.4%, I'm sorry.

[Operator]

The next question will come from Pablo Duarte with Actinver.

[Pablo Enrique Duarte de León, analyst]

The first question would be could you please give us an update on these negotiations on expiring contracts in 2020 and 2021?

And the second one is the unchanged guidance responds more to a soft impact expected on Fibra Monterrey's operations as of late? Or is it more related to the uncertain ongoing environment which makes it harder to predict?

[Javier Llaca García, executive]

Pablo, this is Javier. The progress on the renewals, on the expiration schedule for 2020 remain -- I would say, remain at least the same, if not better, than what we projected on the last quarter of last year. We have only one material expiration that already happened that didn't renew for a portion of an industrial building that is already on the negotiation of about 5,000 square meters. Because of the uncertainty, as I said before, most of our tenants that have expirations this year are willing to renew given the fact that they don't want to take any chances on additional CapEx on relocating to a new facility. So my short answer would be that we expect to have about 85% to 90% retention rate on contracts expiring this year.

Now talking about 2021, most of the negotiations that were underway are on hold given that the companies still have some time as they want to focus their effort on facing the pandemic right now. I can tell you that we are 30% into renewals for next year. We are very close to secure a second material contract. I don't want to speculate, but I think we're going to have a very, very good retention rate for 2021 as well.

[Jaime Martínez Trigueros, executive]

Pablo, well, you're right in both of your acceleration. The first, I would like to say that in such environment, it's obvious to revisit our guidance, I mean, we have under scrutiny of every component of our guidance. Having said that, we don't want to move that number as of today because of the uncertainty. But we know that it's better to inform how things are behaving with the stress test that I just commented.

If we go through Javier's scenario, I mean, worst-case scenario or so, it might suggest that the range might be between MXN 1 and MXN 1.10. I mean but it's too early to call. I mean we are just revisiting all the variables in order to be more precise and especially after Javier talked with their tenants are evolving better. I mean, that's what I think it's the best or the most -- the smartest way to go through the guidance.

[Jorge Avalos Carpinteyro, executive]

Just to complement, Pablo, this is Jorge. As Jaime was saying, we have the same information regarding today's input, but we also have the same uncertainty, as you all might have, about the future. So what we did with our Board members, they asked us to do, first of all, a liquidity test, a financial stress test in order to see where Fibra Monterrey was standing. I mean the variables that Javier and Jaime are using for a hit in terms of revenues that range between 0% to 30%, I believe -- we believe that 30% is way too far, but we did it just to determine that as a stress test. But as Javier was mentioning, he believes there will be a hit probably somewhere of around between 5% and 10%. So that -- I believe, not by saying that that's our new guidance. But when we have more clarity on how this evolves, we are surely going to come back and provide you with a new guidance.

[Javier Llaca García, executive]

And also, I would add to Jaime's and Jorge's remarks, Pablo, that the stress test that Jaime did with our projections would assume that we have a drop in cash flow, and it's persistent and steady and systematic for the next 8 months which is very unlikely to happen. So we believe that we are being very conservative when it comes to stress test and when you talk about distributions.

[Operator]

The next question will come from Carlos Alcaraz with Apalache Análisis.

[Carlos Alcaraz Pineda, analyst]

You talked about year-over-year growth of funds from operation and adjusted funds of more than 30% for this quarter. In the event that there were no more acquisitions in the year by the situation, what NOI annual growth could we expect in the future?

And the second question is what role will your exchange rate expectation play here?

[Jorge Avalos Carpinteyro, executive]

The first question about the NOI growth, Carlos, definitely, we cannot forecast any growth in terms of an acquisition because we don't see that -- as Javier was mentioning, we don't see how the market will react and where the cap rates and how the -- how to put a price to any acquisition. So in terms of natural organic growth, well, I would assume that it would be only in terms of Mexican inflation and U.S. inflation.

I didn't get the second question, if you can repeat that again.

[Carlos Alcaraz Pineda, analyst]

Okay. What role will your exchange rate expectation play here?

[Jorge Avalos Carpinteyro, executive]

As we discussed or we presented, I don't know which slide was it that Jaime was presented. He did a forecast in terms of revenue hit between 0% and 30%. And also, we forecasted a range in the -- or the peso between MXN 19.5 to MXN 26. We're based -- we believe that the year-end average for the peso-dollar will be somewhere around MXN 24 to MXN 24.5.

[Operator]

The next question will come from Hernando (sic) [ Armando ] Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

Thank you very much for this presentation, very helpful. And my question is related to the tenants that have asked for relief. And my question is if you have identified that those tenants are maybe dollar-denominated contracts or -- particularly on the office segment? That's my first question.

And my second question is on the industrial segment if you can give us a number of -- the number of your tenants that are not currently in operations.

[Javier Llaca García, executive]

Of course, Armando. This is Javier. On -- let me start with the second question -- with the second part of your question on industrial. We have identified and we are talking to 6 companies now -- 5 companies, I'm sorry, that are on critical health of operations. All of them are first-tier providers to the automotive industry, and they depend on the automakers that are, as you know, most of them totally hope. They are still paying rent. We are working with one of them on the relief program that was already agreed upon. They tell us that they expect to restart operations in the short term, given the fact that the automotive industry in the U.S. is starting to put a lot of pressure and is considered essential activity in the U.S. So they're positive about the short term. And I can tell you that the rest of our industrial tenants, as far as I know, none of them have stopped operations. Most of them are on an essential supply chain production, so our industrial portfolio looks pretty resistant and steady.

On your first part of your question, regarding the U.S.-denominated leases and the peso-denominated leases, we haven't been approached for a single switch from dollars to peso so far. I can tell you that on the relief program, we have a mix of dollar- and peso-denominated leases that their tenants have approached us. I would have to say at the top of my mind that is more peso-denominated than dollar-denominated contracts, the ones that have approached to us for a relief. And if the relief is done on a dollar- or a peso-denominated lease, the approach and the treatment is exactly the same. If there was to be a cost of money in neither one of them, we would use either Mexican inflation or U.S. inflation accordingly.

[Operator]

The next question will come from Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

Just a follow-up. Regarding those tenants that will defer rents, what will be the accounting treatment for rent?

[Javier Llaca García, executive]

Paco, when it comes to deferment program, the invoicing on the current ongoing rent is done. So the treatment is of an account receivable like any other company. In that regard, what we do is that we recognize the income once we issue the invoice. And the recipients of the invoice acknowledge the invoice for collection under short-term cash. Pretty much, that's it.

[Francisco Chávez Martínez, analyst]

Okay. But then the revenues, NOI and EBITDA, will be somehow distorted by noncash revenues, right?

[Javier Llaca García, executive]

Yes. Right. In that case or in the case that the tenant that does not pay in time, we are not to distribute any cash that we didn't receive.

[Jorge Avalos Carpinteyro, executive]

So the question, Paco, is in terms of accounting, you will have revenues, but you have a collection of those revenues up to 30, 60, 90, up to 180 days, and that will affect only the FFO, I mean, the cash flow, but not the revenue. So that's going to be invoiced for a collection over 90 to 180 days.

[Javier Llaca García, executive]

Yes. But let's keep in mind, Paco, that when it comes to the security deposit, there's a natural cash flow between our account of -- our check account that we have for security deposit, we take that money out into our operation account and there's a transfer of money, so there's no virtual cash flow. There's a natural cash flow when it comes to the security deposit.

[Jorge Avalos Carpinteyro, executive]

And it is important, just to mention, how many months typically you have in office and industrial properties for that security deposit.

[Javier Llaca García, executive]

Between 1 and 2 months.

[Jorge Avalos Carpinteyro, executive]

So that means that it will go somewhere from April and May to some part of June.

[Javier Llaca García, executive]

We have allocated already about MXN 32.7 million on security deposits that are going to be used to the relief program. So the main part of the...

[Francisco Chávez Martínez, analyst]

Just to confirm, the FFO and AFFO lines will adjust for these noncash revenues, right, during this period.

[Javier Llaca García, executive]

Exactly. But what is important is that the security deposits will reduce this amount. I mean it's not the whole relief that Javier just mentioned.

[Jorge Avalos Carpinteyro, executive]

Yes. With those security deposits, their FFO won't be affected during the first probably 1 to 2 months. After that, then you will have a receivable that will affect the FFO. Is that clear?

[Francisco Chávez Martínez, analyst]

Yes, yes.

[Operator]

The next question will come from Francisco with Scotiabank.

[Francisco Suarez, analyst]

Thank you for the wonderful discussion you have provide for us, very helpful. The question that I have, just to make sure that I understood correctly, that you are mentioning rent relief, but it seems that some of that will be in the form of actually deferral of rents. So can you just -- can you confirm this idea that you are actually deferring rentals rather than recent rent and if that -- and if the answer changes by segment?

[Javier Llaca García, executive]

Yes. Paco, this is Javier. Yes. The relief program is everything is deferred. There is no write-off. There's no free rent so far. Now the deferment comes with the noncash portion of the relief program. The cash portion is security deposit that is going to be taken from our security deposit account, and the noncash relief is going to be a deferred program that ranges between 6 and 12 months on the tenant to catch up with that, I believe.

[Francisco Suarez, analyst]

That's very clear. And now my second question. So with this information, it is fair to say that the initial impact on AFFO might actually be lose out throughout the year. And what I want to understand now that you are planning, if I'm not mistaken, to distribute on a monthly basis, the amount of distribution should be a little bit lower in the -- during the second quarter compared to what it might be in the third and fourth quarter.

[Javier Llaca García, executive]

I would say that the timing of the impact -- first of all, the distributions that were going to be in April, May and June, they already happened. And they are January, February and March. So those are already discounted for. We're still calculating the distribution on a quarterly basis, even though we're going to pay them on a monthly basis. Now having said that, we expect the bulk of the noncash relief program part to be probably between May and June. So that would be, let's say, during the second quarter of this year. So we should expect probably the impact on AFFO on distribution -- for the distribution that are going to pay probably in August and September.

[Jaime Martínez Trigueros, executive]

Exactly. And I just would like to add that we have 2 effects. One is that Javier just mentioned, and the other one is exchange rate. As you know, now 75% of our rents are in U.S. dollars. So there are -- both effects may offset some part of it. We are not sure, as Javier is just finishing the negotiations and the written agreements. So it is difficult to call it now, but I think Javier's answer was the right one.

[Operator]

[Operator Instructions] With no questions in the queue, I'd like to turn the conference over to management of the company.

[Jorge Avalos Carpinteyro, executive]

Thank you, Brandon, and thank you, everyone, for attending this conference call. Hope everyone is fine, and we'll be speaking to you in the next quarter. Take care.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect your lines. Enjoy the rest of your day.