Fibra Mty SAPI de CV

BMV:FMTY14

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the 2024 First Quarter Fibra Mty's Conference Call. With us this morning from Fibra Mty, we have Mr. Jorge Avalos, CEO; Jaime Martinez, CFO; and Javier Llaca, COO; and Eduardo Elizondo, Legal Counsel. They will discuss on the more important strategic financial and operating aspects of the quarter.It is important to note that the presentation related to this conference is available at www.fibramty.com, and recordings of all the call will be available on the website of the company in the next 2 hours. If you are connected using our webcast tool, you have an option to download the presentation in order to move the slides at your own pace.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 advises not to rely on these forward-looking statements. Fibra Mty undertakes no obligation to publicly update or revise any forward-looking statements.I would now turn the call over to Mr. Jorge Avalos. Please proceed, sir.

[Jorge Avalos Carpinteyro, executive]

Thank you, everyone, for attending to our first quarter 2024 conference call. I am proud to share with you one of our best quarters achievements as we were able to successfully complete our first international capital issuance of $467 million in March, which was oversubscribed by 2.1x. This marks the seventh occasion that Fibra Mty has tapped into the capital markets. We simultaneously included an international primary private offering in the United States to qualified investors and in other countries, one of our main objectives since our IPO. And it was important to outline that international investors represented 56% of the issued amount, mainly compromising loan-only investors.One of the benefits of international investor participation is a significant increase in the trading of our stock, which boosted our ranking in 4 places at the Mexican Stock Exchange liquidity index during March, despite the new [ CBFIs ] being outstanding for only 15 days. As of March 31st, we are ranked 49th out of 178, just 4 places shy of being considered a high liquidity stock. This improvement positions us to continue attracting new active and passive investors and fulfilling yet another strategic objective of providing greater liquidity for our investors.Following the capital issuance and as we committed to the previous quarter, on April 16, 2024, Fibra Mty's Technical Committee approved our 2024 guidance. The target AFFO per share assuming the same average exchange rate as in 2023, is set between MXN 0.9390 and MXN 0.9553. This guidance translates to a yield of 7.8% at the high end, based on the 2023 closing price, and above 9% considering yesterday's closing price. This represents an attractive return even in the current interest rate environment that reflects the potential growth in AFFO for investors due to favorable industrial market conditions, our portfolio's solid fundamentals, including rent adjustments aligned with inflation and predominantly dollarized revenues and the strength of our capital structure.In terms of growth capacity at the end of first quarter '24, we were -- we have a firepower close to $900 million in the Industrial segment without exceeding our targeted debt level of 35%. With the potential acquisitions announced in February and March as well as the expansions under construction, we have committed close to 40% of our growth capacity at a capitalization rate of around 8%, primarily in light manufacturing properties in the northern markets with predominantly U.S. dollar rents and long-term lease contracts.In terms of organic growth, our portfolio continues to demonstrate its strength with occupancies in the industrial portfolio exceeding 99% and a recovery in the office portfolio occupancy from 73.1% to 75.1% compared to fourth quarter 2023. It is worth noting that in line with the behavior of rents in the industrial market, during this quarter, we achieved lease spreads of 20.7% above inflation in U.S. dollars. We also continue with the execution of our pipeline of industrial property expansions, with $44.9 million under construction and more than $48 million in negotiation, which we expect to partially or fully materialize during the second half of 2024.As mentioned in our last earnings release, we will continue a responsible effort to divest non-producing assets. Additionally, we are still seeing interest in various transactions involving the Zeus portfolio's land bank, having addressed different requests over the past few months. These opportunities are still in the preliminary stages, but for the benefit of the growth in AFFO per CBFI, we are confident that they can begin to materialize gradually in the short term.As you can see on Slide 2, with respect to the public announcement that we made for our intention of acquiring Terrafina, I would like to point out our 4 strategic goals that support our interests. Become one of the most relevant companies in the industrial sector in Mexico in terms of size and profitability with the best corporate governance within our peers. Two, create a natural synergy of sectors with the greatest economic activity in Mexico. Three, establish our position as the Mexican REIT with the largest footprint in the main industrial markets in the Northern Mexico and with the best operating margin in the entire sector. And four, increase joint profitability through the synergies generated, as well as through the potential reclassification of risk, by increasing the share liquidity on the stock market once the transaction is completed.Our core focus for this transaction is to unlock value for the shareholders of both companies. by enhancing cash flow per share and valuation. We will be disclosing the conditions of the transaction within the next 2 weeks as we are waiting for Terrafina's first quarter results.I will now turn the call to Javier, who will walk you through our portfolio performance. Javier?

[Javier Llaca García, executive]

Thank you, Jorge, and good morning, everyone. I'll start my piece of the presentation on Page 4 with the composition and geographical distribution of our portfolio as of the first quarter of 2024, which remains similar from the previous quarter. Our footprint expanding to 15 real estate markets across 14 states in Northern, Central and Bajio areas, with a total GLA of roughly close to 18 million square feet, out of which around 15.5 million square feet are industrial, 2.2 million square feet are in office buildings and [ 8,000 ] square feet belong to our small retail portfolio, in addition to our land bank.Overall occupancy in terms of GLA stands solid above 96%. We continue to consolidate the strong presence in the markets with the most exposure to nearshoring real estate transactions, and we'll continue expanding in such markets, particularly in the Northern and Bajio areas.Going to Page 5 of the material, we present a brief overview of our new key performance indicators as of the end of March and moving forward. In terms of percentage of rental revenues, these indicators remain like the previous quarter. 71.4% of rental revenue by asset class from our industrial properties, while office and retail account for 27% and 1.6%, respectively.We expect revenue from the Industrial segment to extent as the acquisitions pipeline start to be deployed. By location, rental revenue from our Monterrey-based portfolio represents 41.6%, followed by Guadalajara, Guanajuato, Tijuana, and Saltillo, which combined represented [indiscernible] of total rental revenue. Occupancy rates as a percentage of potential revenue at full capacity remains close to 93%. Our dollar-denominated leases represent almost 82% of rental revenue, which could further expand if the peso exchange rate increases.And finally, these maturity schedule and weighted average lease terms is just shy of 5 years with around 41% of revenue beginning to expire in 2029. As we mentioned during our previous earnings call, we believe that during '26 and '27, we will be able to capture positive lease spreads on a larger share of revenues given industrial renewals and new leases.On Page 6 of the webcast material represent the same property performance analysis for the first quarter of 2024 compared to the same quarter of the previous year. For purposes of this analysis, we use all investment properties in our portfolio prior to Zeus, which represents a total GLA of 8.9 million square feet. There is a marginal increase in the square footage of these properties as some expansions at our Filios, Fagor and Catacha properties, have been either completed or close to be completed.Compared to the first quarter of 2023, gross revenue contracted in 2.4% of MXN 8.8 million with a decrease of 2.6% or MXN 8.3 million in our net operating income, mainly due to negative FX impact following the first quarter of the previous year. NOI margin contracted 10 basis points to 88.4%. The composition of NOI variance will be explained in detail in the following slides.I would like to mention that our NOI in dollar terms regardless of FX, increased to approximately 7.2% between the first quarter of '23 and the first quarter of '24. Once we incorporated revenue from Zeus, the aggregated portfolio generated a total net operating income of MXN 551.4 million compared to MXN 330.6 million in the fourth quarter of 2023, an increase of around 67%. Our NOI margin for the aggregated portfolio was of 91.9% for the quarter.Slide #7 of the presentation, explains in detail the MXN 8.2 million reduction in our net operating income comprised of the following: MXN 26.1 million decrease due to a negative FX effect between the first quarter of 2023 and the first quarter of this year. MXN10.6 million decreased due to net vacancies from certain lease expirations; MXN 27.9 million increase due to inflation escalation on lease agreements and new leases; roughly MXN 0.5 million increase due to savings in certain operating expenses. As you can see, once we include additional revenue of about MXN 237.1 million from the Zeus portfolio, we reached the MXN 551.4 million NOI in our aggregated portfolio.On Page 8 of the presentation, I would like to address the variance in the valuation of our investment properties portfolio, in which we have seen a negative impact of about MXN 1.5 million in FX change alone during the last 12 months prior to March of this year. Some CapEx expenses, as well as improvements in the operation and market conditions and current investments in expansions compensated for some of the FX negative impact, bringing valuation from that to MXN 27.1 billion as of the end of the first quarter. It is important to point out that valuation on assets as of the end of the first quarter of 2023 already included the Zeus portfolio as this transaction was carried out just 3 days before the end of such quarter.Before addressing further details of our real state operation and investment, I will turn the presentation over to Jaime to talk about the highlights of our most recent equity opening. Jaime?

[Jaime Martínez Trigueros, executive]

Thank you, Javier, and thanks, everyone, for joining the call. I would like to begin my speech highlighting a significant milestone for Fibra Mty during this quarter. The company has successfully completed its first ever domestic public offering alongside a simultaneous private primary global offering. The offering consisted of roughly 680 million shares valued at around $470 million, which included the rates offer as well as the greenshoe.Following a six-day roadshow during which we interacted with more than 60 investors, we generated a demand totaling 2.1x the rates offering size, equivalent to almost $900 million. Notably 67% of this demand originated from international investments. This remarkable response underscore the strong interest and confidence in Fibra Mty both domestically and internationally. This achievement reaffirms our status as a company with the highest number of equity issuance in Mexico over the past decade with certain offerings, including the IPO.Moving on the next slide. As previously mentioned, the equity issuance was an outstanding success. The slide before you provide a comprehensive breakdown of the demand and allocation by shareholder, investor type and concentration. In terms of demand from shareholders, 75% originated from new investments. This statistics is a testament to our strong track record as we have outperformed our benchmark, especially from a dividend yield perspective, and demonstrated best-in-class corporate governance for the last 9 years.From an allocation perspective, 59% was assigned to new investors. This has significantly enriched our investor base, diversifying it and increasing the liquidity of our shares to an average trading volume of around MXN 25 million in the first quarter 2024, even though there were only around 10 trading days after the offer.Moving on to investor type, a significant portion of the demand [ upon ] 55% came from hedge funds and retail. However, in line with our commitment to honoring our long-standing investors and prioritizing other major investors with long-term objectives, the allocation was structured accordingly. 72% was distributed to ForEx and long-only investor and the remaining to hedge funds and retail.Finally, from a geographical standpoint, international investors contributed 67% of the total demand, reflecting a robust global interest in our company's growth trajectory. With respect to the allocation of international investor received 56% of the shares while domestic the remaining 44%, maintaining a balanced commitment with both our local investors and international.Moving forward, after our recent equity issuance, our outstanding debt fundamentals have significantly improved. As seen on Slide 11, we reduced our loan-to-value ratio from 26.6% to 21.5% on a quarter-on-quarter basis and decreased our net debt-to-EBITDA ratio to 0.3x. This provides us enough flexibility to capitalize opportunities going forward without having to tap the market and keep a prudent capital structure.In addition, we maintain our debt 100% unsecured and U.S. dollar-denominated with an interest rate well below 5%. Furthermore, our average debt maturity stands at 4 years with no material maturity until late 2027. We are well prepared for future investments with available credit lines and cash that represents 15.2% and 20% of our assets, respectively.With that said, I will turn the call to Javier who can walk you through the pipeline and expansion.

[Javier Llaca García, executive]

Thank you, Jaime. Moving on to Page 12. We will address some of the most relevant aspects in state of our pipeline as of the first quarter of 2024. Before walking you through the slide, I want to emphasize that the Terra transaction that Jorge mentioned and that we will address further in the call will not be an impediment for us to continue negotiating and acquire the identified properties and that none of the resources from the recent equity offer or debt capacity will be used for such transaction.Having said that, we currently have around $1.1 billion work potential target industrial stabilized portfolios and properties across Mexico under binding agreements evaluation and/or negotiation. These potential acquisitions are layered as follows: $289.9 million on acquisitions already announced and under binding agreements for a total of 3 million square feet of GLA. These transactions are on the final due diligence and will start being closed before the end of the second quarter of this year, as announced in our latest press releases on this matter. $437.9 million of potential acquisitions being negotiated for a total of 4.2 million square feet of GLA being several of these opportunities of market use. And finally, $368.9 million of identified portfolios currently under evaluation for a total of another 6.4 million square feet of GLA. Altogether, the pipeline accounts for more than 90 different properties with a weighted average lease term of more than 9 years for a total of close to 14 million square feet of GLA and with 94% of the rental revenue on the dollar-denominated lease agreements.We estimate that our total firepower after our latest issuance and before the final closing of these acquisitions to stand around $900 million, including both available cash and debt capacity to reach 35% LTV. As mentioned during our previous earnings calls, we have executed the first 4 agreements for certain expansions in our industrial portfolio, which are highlighted on Page 13 of the presentation. The construction of these expansions continues to progress on schedule and will be fully delivered to the tenants between the second and fourth quarter of this year. One of them already commenced rent and the remaining 3 will commence rent before year-end 2024.These expansions in certain properties in San Luis Potosi, Monterrey, Queretaro and Aguascalientes with a total GLA of more than 0.5 million square feet, will represent a total investment of about $44.9 million. This expansion would generate additional annual NOI of $4.2 million. This is a yield on cost of 9.4%, net of investments in tenant improvements, which are amortized throughout the lease term. These expansions also will allow us to extend the lease term in another 10 years with an attractive blend-and-extend lease rates close to market and above current rates. The expansions that are still under construction will increase the size of portfolio in close to 3% in terms of GLA.It is also relevant to say that all required imaging for these projects has already been secured. More expansions on our industrial buildings are well advanced negotiations and are expected to be executed in the next few weeks. It would drive additional GLA of another 570,000 square feet with an investment of around $45.1 million at a similar yield on cost that the previous 4 -- that the 4 previously mentioned.Finally, I would like to mention that in the leasing activity related to renewal of industrial space, where rent to be negotiated at market rate, a rough lease spread of 24.7% in U.S. dollar-denominated was achieved. After adjusting for inflation corresponding to each lease contract, as Jorge mentioned before, the lease spread was 20.7% in U.S. dollars.Finally, during our last earnings call, we presented the stage of the office component of our portfolio, which we present on Page 14 of the webcast. It is worth noting that the overall occupancy rate for this asset class improved in close to 200 basis points to 75.1% from 73.1% in the previous quarter. We have been working on putting together the best strategy for the potential disposition of the performing and non-performing assets. We will be communicated promptly to the market as this strategy is finalized, approved and implemented.As for the non-productive assets, we are well advanced into the best and highest use of these properties to estimate the potential sales value and initiate the marketing process during the second half of this year. At the end of today's presentation, I'll be more than happy to address any questions you might have regarding operations and acquisitions for our real estate portfolio. But for now, I will hand over the presentation again to an Jaime. Go ahead, Jaime.

[Jaime Martínez Trigueros, executive]

Thank you. Talking about bottom line results, as shown on Slide 15, the main positive variation year-on-year were in the first and second closing of the Zeus portfolio. Nevertheless, these benefits were partially offset by a higher interest expense needed to finance the Zeus acquisition paired with a lower cash balance when compared to last year. And last but not least, the impact of our highly dollar-denominated leases and peso-denominated expenses given the strengthening of the peso, which has stayed as constrained on our AFFO when translated into Mexican pesos as previously stated by Javier.I would like to expand on the financial result [ effectively ]. Having fully paid for the Zeus portfolio, financial income partially transformed into rental revenue. On an aggregate basis, this translates into a negative valuation given the spread between the short-term interest rate received through cash investment in the first quarter 2023, above 11% and the going-in cap rate of the acquisition of 8% in dollar terms, which was further affected by the land bank paid in October, which isn't an income-producing asset as of now. We are confident that even though this could affect cash flow in the short term, long-term return will more than compensate for potential transactions on the land. Lastly, the CapEx increase arose to meet the requirements in the same property portfolio aligned with Fibra Mty forecasted needs for this year.As you can see on Slide 16, I'm thrilled to announce that despite increasing our shares outstanding almost 40% and the headwinds in the additional return given the spread contraction between going-in cap rate and the cost of capital and the cash flow drag of now owning the land bank, we have set our guidance 1.6% above last year's cash distribution. Considering the above, we are committing to our investors to keep their cash flow per share growing and with an attractive premium above our weighted average weekly rate benchmark.As detailed on the graph on the right, the cash flow distribution for 2023 amounted to approximately $0.94 per share calculated at an exchange rate range between MXN 17.50 and MXN 18 per U.S. dollar. Taking into consideration the estimated organic growth from rental increases as well as occupancy, the integration of announced expansions into our portfolio and the successful deployment of our firepower, the target distribution for 2024 stands above $0.95 per share and relative to the same exchange rate effect as in 2023. As mentioned, this translates into an increase of 1.6% above 2023 cash flow distribution.Having said that, even though AFFO per share may appear similar to last year, it's crucial to emphasize that thanks to our recent equity offering and recently announced acquisitions, our cash flow resilience is at its highest since inception. Moreover, in addition with the balance sheet fundamentals previously highlighted our increase in dollarized revenue share coupled with the growth of our industrial footprint and diversification of our income across locations, tenants and economic sectors, not only have we accomplished a greater quality in cash distribution, but also we've managed to reduce certain risks along the way.I would also like to highlight that at the closing price, this guidance would reflect in a dividend yield above 9%, which we believe is in reflecting the fundamental value of Fibra Mty. Therefore, when possible, we'll be using our buyback program in another [ remnant ], as we see it as an attractive capital allocation. As in previous quarters, on Slide 16, there are selected information to compare the contents of our main financial indicators over the last 12 months to facilitate your analysis.Before opening the floor for Q&A, I would like to mention that at this time, we have shared all the information we can address on the Terrafina transaction. So we will not be able to expand on the topic of the Q&A section.Operator, please go ahead with the question from the audience.

[Operator]

[Operator Instructions] Our first question comes from Gordon Lee with BTG.

[Gordon Lee, analyst]

I have 2 questions. And I know, Jaime, you basically said not to ask anything about the Terra transaction. But without getting into specifics or numbers, I was hoping you could maybe tell us a little bit about the framework that you've used sort of to approach it? And more specifically, when you say that this would be an accretive transaction for shareholders of Fibra Mty, how do you define accretion? Sort of what are the variables or the metrics that you look at for accretion? That's question number one.And the second question, just a quick one on the firepower. The $900 million of firepower that you sort of assume pro forma for the newly capitalized balance sheet at a 35% loan to value, does that assume any divestments either from the office portfolio or some industrial properties? Or is that sort of on a gross basis? And any divestments would add to that?

[Javier Llaca García, executive]

This is Javier. Thank you for the question. I'm going to start with the second question, and then I'm going to transfer the call to Jaime. The firepower that we have roughly $900 million that does not include any proceeds from a potential sale or disposition of any of our current assets. That's only considering the picture as you see it right now. So we might increase our firepower as we progress and we start being successful on the divest of the office portfolio or any other properties that we might recycle even on the industrial portfolio. I hope that answers the second question, and then I'm going to transfer the call to Jaime on the first question.

[Jaime Martínez Trigueros, executive]

Gordon, well, as you know, for us, it's important to value the company or both companies, not just in the first layer, which is at the property level. So what we are going to do is to measure the company from the AFFO base. And our objective is to have an accretive result for both shareholders in terms of increase in the AFFO per share they already have. That's been in a very simple way approach.

[Gordon Lee, analyst]

Perfect. So basically, accretion is defined as if the company pro forma has a higher AFFO per share for investors or yield for investors that's accretive. That's basically the way that you would approach it if I had to simplify very crudely.

[Jaime Martínez Trigueros, executive]

That's correct. That's exactly. We will have higher cash flow for your shares in each of the companies.

[Operator]

Our next question comes from Andre Mazini with Citigroup.

[André Mazini, analyst]

Yes. So my question is also around the deployment of capital. You guys are definitely more acquirers than builders right? Just acquirers, I would say. So which types of real estate owners would be sellers in the short term for this vast firepower to be deployed? Would it be the authorities with their CKDs that would be reaching their end of their holding periods, which would be the most probable sellers of portfolio for the deployment of capital or I don't know whether Fibra's or other types of investors. So but the main counterparties that you guys are talking to for the deployment of this capital on the acquisition side?And then the second question, maybe on Chinese tenants exposure, we've been seeing the China-U.S. relationship heating up, leading up to the U.S. elections. Trump saying that there's going to be the imposition of tariffs for Chinese OEMs based in Mexico. I know that they're not huge at the moment, but I think they could become important in the future, like the marginal investment from the Chinese will probably be important. So do you think -- I mean, the future will be very different if the China policy from the U.S. becomes very restrictive towards them coming to Mexico. So are they important right now? And how do you think it's going to be going forward vis-a-vis Chinese investment if Trump comes to power?

[Javier Llaca García, executive]

Thank you for the question. This is Javier again. Regarding the first part of the question, who are we buying the properties from? The short answer would be mostly private developers in the Northern and Bajio areas. There's a couple of potential transactions in the long-term pipeline that come from some CKDs but what we are -- what we have in the short term, the ones that we have announced already that are under binding agreements, those come essentially from private developers looking for liquidity to continue developing new properties. That would be as for the first question.And for the second question on elections and potential tariffs. We are positive that the main conditions on the USMCA won't change a lot. What has been said about during the campaign of some of the candidates in the U.S. about imposing tariffs to Chinese car manufacturing -- manufacturers looking into exporting into the U.S. market, that wouldn't have an effect in our portfolio as we don't have Chinese tenants more in the existing portfolio or the upcoming pipeline that export to the U.S. Some of these Chinese companies that we have in our portfolio, which come for less than [ 5% ] in the total portfolio, they provide parts to even U.S. car manufacturers. So we believe that if that was going to be the case on the tariffs, which we see unlikely, but if that happens, it won't affect the core of our portfolio.Now, if that's going to happen and that could turn off the appetite for some of the Chinese investments in Mexico. I think that's early to say. We continue to see a lot of activity from our Chinese companies in the market in general, not in our specific case. But I think that's early to say. We haven't seen a slowdown in the momentum of Chinese real estate transactions, and we don't expect for that to change in the short term.

[Jorge Avalos Carpinteyro, executive]

This is Jorge. In terms of your question, the Terrafina transaction, we believe it's going to be accretive. I would just mention that our core focus for this Terra transaction is only to unlock value for our shareholders and Terra's shareholders. As long as it is accretive for both, we will go along with the transaction, give away, we will just step down. Thank you.

[Operator]

Our next question comes from Pablo Ricalde with Santander Mexico.

[Pablo Ricalde, analyst]

Fibra Mty team, I don't know if you can hear me?

[Jorge Avalos Carpinteyro, executive]

Yes.

[Pablo Ricalde, analyst]

I have 2 questions. The first one is, which percentage of your industrial rents are below market rent? That's the first one. And the other one is, how are you seeing a competitive landscape in terms of acquisitions, like we have seen a lot of other REITs raising money. So how are you seeing like competition to buy those assets, like industrial assets in the northern part of Mexico?

[Javier Llaca García, executive]

Thank you, Pablo. This is Javier. In terms of the low market rents that we currently have, I can tell you that the region, our northern portfolio is, in general, below market -- below market rates. And our Bajio portfolio is just around market trends. However, I would have to say that we continue to see a rent growth in Bajio, starting to catch up with the northern markets. So roughly, I can tell you that, in general, our portfolio is, you take the combination of our northern mark component and the rest, you will see that we are about 5% average below existing rental markets.Now in regards to the competition on other assets, we continue to see a lot of activity from private developers selling their assets. So far, we haven't had too much competition of the 200 -- and roughly $290 million that we're about to close. Those were off-market deals. Those were deals that we sourced ourselves. And as I said before, a lot of the -- or some part of $470 million that we have on the second layers of the potential pipeline. I can tell you that some of them are as well of market deals. So I can tell you that we still feel confident about the competition.Now, are we going to have more competition in the future as the rest of the Fibra raise equity? That might be the case. But we believe that, at least for now, on the firepower and the proceeds that we got from the latest offering, we believe that we have enough pipeline to fulfill and deploy those proceeds and continue growth.

[Jorge Avalos Carpinteyro, executive]

Also, I would like to mention, Pablo, that let's keep in mind that the market in general continues to expand. The rate of new construction in general in the market has picked up a lot in comparison to [ 2022 ] and prior and before that year. We expect that net absorption moving forward this remained pretty stable at around 5 million square meters per year, and construction is going to be roughly about the same, probably 6 million square meters per year. So we're going to continue to see an expansion on the market, and therefore, to have more opportunities, not only for us, but for the rest of private or institutional investors that are looking to invest in the industrial real estate market in Mexico.

[Pablo Ricalde, analyst]

Perfect. That was very clear.

[Operator]

Our next question comes from [ Isabella Salsora with GBM. ]

[Unknown Analyst]

Hello, can you hear me?

[Jorge Avalos Carpinteyro, executive]

Yes, we can.

[Unknown Analyst]

Perfect. I was wondering if you could provide more detail on how the strategy to divest them underperforming properties as part of portfolio optimization strategy is progressing this quarter and this year in general?

[Javier Llaca García, executive]

Great, Isabella. Thank you for the question. This is Javier again. From the 3 layers or the 3 types of portfolio assets that we have on the portfolio, performing assets -- performing, outperforming and non-productive. We are working on 3 different strategies that are still in the works and soon to be announced. But I can tell you that at least from the -- on the non-productive assets, we are well advancing the strategy, and that strategy consists on estimating the best and highest use of those properties for potential redevelopment to calculate residual value of the properties based on those potential developments and go to the market to the developers market to sell those properties most likely to a developer and to try to get as close as residual value. We estimate those assets to be in the neighborhood of $71 million to $72 million. And that strategy is going to be implemented during the second quarter of this year.As to the performing and outperforming properties, as we said before, we have increased our occupancy overall in the portfolio, up to 75.1%. We want to be very thorough and very orderly on how to approach this strategy. We're working with institutional brokers to put together a large-scale strategy. We're still working on that. We expect that to start happening during next year. And we're going to take enough time to make the most value out of those properties. But again, once we have a strategy implemented, we will communicate it to the market promptly.

[Unknown Analyst]

Perfect. That was very clear.

[Operator]

Our next question comes from Alan Macias with Bank of America.

[Alan Macias, analyst]

Just a follow-up question on the office sector. Occupancy has reached 75%. What are your expectations for year-end? And can we think of a level of 80% that you would be more aggressive, I guess, in your divestiture of the performing -- [Technical Difficulty]. And the last question is, if you can remind us of the leasing spreads you obtained in the office sector?

[Javier Llaca García, executive]

Of course. Thank you, Alan. This is Javier again. On the office segment, that 75% that we had achieved during the first quarter, we continue to see a slight increase on the demand of office space. Our Guadalajara portfolio is pretty much fully occupied. The vacancies that we have are mainly in the Monterrey and Mexico City markets. Let's remember that we have a very low exposure to the Mexico City market. We were able to achieve around close to 80% occupancy in the next 3 to 4 quarters. And as we increase that occupancy, we would be in a better shape to go to the market and try to sell that and to an investment -- to an investor marketplace.And the third question in regards to the lease spread in office, I would say that there's almost no lease spread right now as the rent are starting to pick up very, very slowly. The renewals and the new leases that we have achieved, we are pretty much flat to inflation -- to Mexican inflation that is because the market is becoming more and more peso-denominated outside of Guadalajara. Guadalajara, we had a strong component in dollars. But in Guadalajara, specifically, we have seen positive lease spreads even in dollars. But given the fact that we have no vacancy left in Guadalajara, you could expect lease spreads flat to inflation in the next transactions that we might have on the office component.And can you repeat the second question?

[Operator]

Alan, your line is live.

[Javier Llaca García, executive]

Alan, can you hear me?

[Alan Macias, analyst]

Sorry. Sorry, I was in mute. Just the second question is 80% occupancy level for the office sector. Would that be a level that you would be comfortable in selling those performing assets?

[Javier Llaca García, executive]

Yes. I mean, you have to see it from 2 standpoints. The overall portfolio and the assets that could be sold alone. Obviously, we're aiming to have a large-scale sale of the office component. We expect to -- we believe that we could achieve around 80% occupancy in the next quarters. I would feel very, very comfortable with that level of occupancy. Talking about a large scale, so that would be a package sale, if you will, of the office portfolio.

[Operator]

Our next question comes from Francisco Chavez with BBVA.

[Francisco Chávez Martínez, analyst]

My question is a follow-up on the potential divestments in the office segment. How are the negotiations going in terms of valuation and on how that valuation compares with your appraisals in your balance sheet. Can we expect a write-down or potential valuations will be above the NAV of those buildings?

[Javier Llaca García, executive]

[ Francisco ], Javier, again. I would say that it's early for me to answer that. We're working on the -- I mean, we have the valuation that we do all the quarters of the assets in terms of book value. We're working on the -- let's say, on the market price or potential market price of all 3 layers of the office segment. And I think it's still early to specifically answer your question. Obviously, we're looking to sell those assets above book value. That's our key objective. But it's still early to give you an expected sale of the price of the properties. Again, we're working with a group of companies, advisory companies doing the best and higher use for the non-productive assets and we're working with 2 large institutional brokers to give us a broker opinion of value, which differs a little bit from a typical appraisal, and it's more like a mark-to-market potential value of the properties.Our valuations that you see in our balance sheet are revised quarter-by-quarter. And that valuation reflects the slowdown of the office market since the pandemic. We have -- if you look at historical valuations, our third-party evaluator, or appraiser takes into account the condition and the environment of a specific market of the assets. And we believe that the heat on the office market in general because of the pandemic effect is already reflected in our book value of the portfolio.

[Operator]

Our next question comes from Edson Murguia with Summa Capital.

[Edson Murguia, analyst]

The first one is related to the lease spread and industrial properties that you have. You mentioned that it's 20%. So could you give us a little bit more color about that? Because if you compare it to other peers, the biggest rate in Latin America, I mean, I'm not quite following because even there is leasing spread has not -- is not in the same level as yours. That will be my first question.The second question, you mentioned in the call that you are planning to do a buyback program. Could you give us a little bit more detail about this buyback program? Because on a price action level, right now, every single CBFI is trading at MXN 10, $0.18, $0.19, it's below that the settlement price a couple of months ago of the offering. So can you give us a little more color about this?

[Jaime Martínez Trigueros, executive]

This is Jaime. In terms of the buyback, as I mentioned, the price of the [indiscernible] ratios are too low. We consider that this is not reflects the value that our shares should have. So we are preparing the buyback program. As you know, we are now going to do these reports. We are in a quite period, so we can't use it. We are very interested in doing it. And what we are going to do is to buy in another way as we did in the pandemic and another circumstances in which the price still reflect the real value of the company. So we think there's a lot of attribute for our shareholders in the buyback strategy. So we are going to be very close to the market to take advantage of this situation.

[Edson Murguia, analyst]

Just a quick follow-up on this. But do you have any specific strategy like any specific amount of money that you want to put it on in the market? Or do you have a strategy how many CBFIs are you planning to buy back?

[Jaime Martínez Trigueros, executive]

Well, as you know, it's better to do it in a very -- I mean, looking each day market because we want to understand where the sellers want to take away the Fibra Mty shares. We don't want to affect the price of the market. What we want is to take advantage of what happened, I mean, of those discussions of the market, but is difficult to say the amount or so because it depends on how the market really have. As you know, in each shareholder meeting, we have -- we asked for the approval of the 5% of the value of the company in buyback. We are going to do the same in this shareholder meeting that we are going to have later today. So we'll see it depends on how the market behaves and we prefer to maintain our strategy more confident.

[Javier Llaca García, executive]

Yes. This is Javier again. We're not sure that we understood your first question. Can you please repeat?

[Edson Murguia, analyst]

Yes, it's related to the -- in the presentation, you mentioned that you have industrial lease spread, and I'm quoting, I stood at 20.7% above inflation. We got sort of more detail because when you compare that number with one of the peers in the Mexican market, which is the biggest grid in Latin America. I'm not quite following how do you achieve that? Because even there's their numbers are not in the same level that your numbers regarding on the leasing spread in the industrial segment.

[Javier Llaca García, executive]

Okay. I got it now. And let me try to elaborate. Let me first start to telling you that talking about ourselves, the 20.7% is calculated. Let me try to elaborate a little bit more on how we calculate the lease spreads. We calculate the lease spreads on those contracts alone that have an expiration during that quarter from those the ones that were either renewed or a substitution of the tenant have on that new lease rate compared to the previous one. So the last one before renewal of our expiration. On gross in those terms, that lease spreads on those specific contracts that were open to negotiation because let's keep in mind that a lot of contracts for us and for a lot of owners, a lot of contracts have a close on automatic renewals. And from the ones that have automatic renewals that those that were renewed was renewed at the existing terms. That means flat to inflation. So that those don't account for that lease spread. From the ones that were open for new terms, the gross increase was 24% -- above 24%. If you discount the inflation in that term, and that's how you get to the 20.7% lease spread now.As to the second question on why our leaseback compares that way to provide that we're talking about. But the answer that I could give you is that this is cyclical to the lease cycle. In other words, you can accept a very few renewals in the quarter and then your lease spreads to drop because you're not going to have that much of activity on renewing those contracts or getting new tenants for that properties. In this quarter report, we are doing for the first time in more detail on what is the percentage of expirations by quarter for the whole portfolio. So with help of the anniversary of the lease looks like third quarter, and it's broken down into what percentage of this -- of those anniversaries are fixed inflation are capped to certain inflation have fixed escalations or flat leases. And what percentage of those leases quarter-by-quarter are subject to new conditions and renegotiations and what percentage has an automatic renewal.So you could expect valuations throughout the year, depending on the anniversary of those leases. So that's probably a question that should be addressed to probably we can talk about our own maturity schedule. And as we have been very verbal in the past, we privilege work over lease backs. We believe that very -- too much on the lease spreads and represent some kind of a speculation. We rather have a longer visibility of the cash flow. We rather have longer walls and that helps us not only to have a lot more confidence and visibility on the cash flow, but that helps us to build long-term relationships with our tenants. And that's the reason that we are investing close to $100 million on expansions with our existing tenant base.

[Edson Murguia, analyst]

That's really helpful. Last, I know that you mentioned it regarding Terra, it's -- you cannot mention anything. But I'm wondering because next week on Monday, it's the Annual Shareholder Meeting of Terra. So regarding on the time line, can we expect some clarity in a couple of weeks?

[Jorge Avalos Carpinteyro, executive]

No, Edson, we don't expect much. What we can tell you is that we're expecting for Terra to deliver their first quarter results. And within the next 2 weeks, as I mentioned before, we'll give our proposal to the market. So that's going to have the factor of interchange between our stock and their stock and also the explanation why we believe our transaction will be a very accretive one for Terra stockholders and for our stockholders. That's all I can mention.

[Operator]

Thank you. At this time, I would like to turn the conference back over to management of the company.

[Jorge Avalos Carpinteyro, executive]

Well, thank you, everyone, for this morning's conference call, and we'll talk to you next quarter. Have a great day. Bye-bye.

[Operator]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.