Fibra Mty SAPI de CV

BMV:FMTY14

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to the 2020 Fourth Quarter Fibra MTY Conference Call. With us this morning from Fibra, we have Mr. Jorge Avalos, CEO; Jaime Martínez, CFO; and Javier Llaca, COO. 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 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 the option to download the presentation in order to move the slides at your own pace.

Let me remind you that 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 materially differ, 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 statement.

I would now like to turn the call over to Mr. Jorge Avalos. Thank you. You may begin.

[Jorge Avalos Carpinteyro, executive]

Thank you, sir. Hello, everyone, and thank you for attending to our fourth quarter conference call. Almost a year into COVID-19 pandemic, we feel confident on how we've been able to navigate and face the challenges brought up by this crisis.

Despite broad market uncertainty and discussion around the demand of office space, our portfolio has performed well and we attribute our resilience to our corporate investment model, which is built up by high quality properties, [ AAA ] tenants and solid lease contracts.

Not surprisingly, we have the strongest balance sheet since our IPO. And at the beginning of 2020, we started a strategy to strengthen our capital structure and improve our financial flexibility, a strategy that has been addressed by our CFO -- that will be addressed by our CFO further on.

Nevertheless, current market conditions call for meticulous analysis in our strategy going forward. In this regard, we divided our efforts into 3 fronts: acquisitions, leverage levels and financial flexibility, and finally, property operations.

In regard to acquisitions, we decided to put them on hold until we had a full picture of the impact of the different economic sectors. We anticipated that this would bring a temporary reduction in distributions, but we were confident that this effort would offset by the benefits gained from the eventual activation of our acquisition programs.

In terms of leverage and financial flexibility, the strict debt guidelines established in Fibra Mty's business plan proved to be effective during these turbulent times. Last year, we carried out several transactions that allowed us to improve our capital structure and gain greater financial flexibility.

The most relevant ones were: the refinancing of 2 bilateral loans: for USD 35 million, with proceeds obtained from a syndicated credit facility of a longer maturity; two, the issuance of dollar-denominated local note made by the first Mexican FIBRA, whose terms allowed us to increase our leverage debt maturity and improve our funding costs starting from 2021; and three, the prepayment of a number of bilateral loans that allowed us to unsecure a sizable portion of our portfolio.

As a result, our current leverage level is under 26%, our cash holdings are approximately $100 million, a weighted average debt term of 5.3 years and 48% of our debt unsecured. Moreover, we have additional borrowing capacity, assuming a 35% LTV up to $100 million. We will use this $200 million of buying power to pursue acquisitions that will definitely create an attractive incremental and sustainable return for stakeholders.

For real estate operations, the consolidated retention rate remained around 80.3% in terms of revenue, highlighting the 80% rate achieved in the office segment. We believe this is a positive figure given the remaining uncertainty in both domestic and global markets. In this context, we sought to reach out to our tenants in an active and empathetic way with the aim of fostering long-term lasting relationships that generate sustainable benefits for both parties.

Some of the renewals performed during the quarter included concessions, that reflected prevailing market conditions. However, the value of the properties increased due to the features of the renewals, particularly the extended lease expirations. A number of these agreements may result in lower cash flows in the short term, but they provide greater certainty in the medium-term and help to maintain the quality of our tenants and leases.

Regarding the unprecedented headwinds from the COVID-19, I am proud to inform that for 6 consecutive years, we have achieved the objectives set at our guideline -- guidance. As we look forward to 2021, we are focused on the growth of our business through strategic acquisitions, dispositions, lease activity and operational programs that manage cost utilization and sustainability initiatives, such as real time monitoring, leave, wellness and others.

I would like to publicly like to acknowledge our property managers and operation staff for an exceptional work during 2020 that ensured the health and safety of our staff and tenants in our working space.

Regarding ESG matters, last year, we participated for the first time in the S&P Corporate Sustainability Assessment, one of the highest quality sustainability assessments in the market and a valuable tool to help -- that will help us to prepare to follow upcoming sustainability trends. We recently obtained the score for the 2020 assessment and we were only 3 points shy of the average score in the real estate industry.

Our strongest score was in the economic and governance dimension, and our biggest opportunity areas are in the environmental dimension. We still have a long way to go. However, we consider that we are in the right track, and we will continue deploying our ESG strategy. We have the conviction, the human capital and the track record to achieve material improvements going forward.

Lastly, I am glad to see the end of the pandemic. I'm sure that Fibra Mty will emerge with strength and momentum, given our portfolio's quality, income stability, growth potential, access to capital and a high engaged management team. We are aware that this pandemic has changed the way we work. For this reason, we have the responsibility and the commitment to adapt our office and industrial spaces to a more flexible, more digitalized, greener, socially responsible, safer and increasingly user-oriented environment.

Please take care and be safe. Now I would like to turn the call to Javier, who will walk you through key operational indicators. Javier, please go on.

[Javier Llaca García, executive]

Thank you, Jorge, and good morning, everyone. I hope you all are safe and sound, and saying at home. I will start the real estate section of the presentation with the same-property performance analysis of the portfolio for the fourth quarter of 2020 that we present on Page 3 of the webcast material. The portion of the portfolio for same-property purposes is comprised by 55 out of the 59 properties that we own by the end of the last quarter of 2020.

Occupancy dropped 225 basis points, mainly due to GLA reduction in some of our office buildings and the expiration of one of our industrial leases in Northern Mexico. In terms of gross revenue, this grew from MXN 311.7 million to more than MXN 314.1 million, a growth of 0.8%, driven mainly by means of scheduled escalation on rent rates.

Operating expenses of dropped 3.2%, mainly due to the continued under-demand of users in our office buildings in terms of electrical consumption and lesser need for minor repairs. This resulted in an increase on our net operating income of approximately MXN 3.4 million or 1.2% growth, which is below our weighted peso-dollar inflation rate.

It is important to point out that the same-property NOI margin improved from 90.1% in the last quarter of 2019 to 90.5% during last quarter. This is 250 basis points above our target margin rate of 88%.

Once we incorporated additional acquisitions and constructions, which are all triple net leases, our net operating income grew in 5.3% year-to-year, and our NOI margin increased 7 basis points from 90.2% to 90.9%. Margin levels continued to be atypical, and we still expect an adjustment in the next few months to levels under 90%.

On Page 4 of the presentation, you have the key performance indicators of the portfolio as well as the expansion profile of our lease contracts, all as percentages of our income. The combination of asset process of our portfolio continues to be practically half and half between our office and industrial properties, being our industrial component marginally predominant in terms of revenues. Our dollar-denominated leases stand for about 70% of gross income, in line with our capital structure that Jaime will address later during this call.

For our leases exploration profile, we have adjusted our projection to reflect potential early termination windows that some of our lease contracts provide, although we are actively pursuing continuity of such leases. We have a fall in the percentage of income expiration starting in 2022 all the way to 2025. The weighted average remaining term continues in the neighborhood of 5 years, with more than 58% of our total income scheduled to start expiring not before 2025.

On Page 6, we present some of the indicators by asset class of our portfolio. In terms of GLA, our office component presents an overall occupancy of 86.2%, with a weighted average lease term of 3.9 years, considering the early termination window that I just explained.

The occupancy levels of our industrial component of the portfolio remains at a strong 96.8% occupancy, with 5.5 years of weighted average lease term. Finally, our small retail component is beyond 9 years on average term, with more than 98% occupancy and high NOI margin, due to the nature of the leases that we had explained in prior reports.

Given the number of scheduled expiration during 2019 and 2020, it is important for us to detail our leasing activity for those years, which we present on Page 6 of the webcast material.

Between the first quarter of 2019 and the last quarter of 2020, we renewed a total of [ 191,934 ] square meters of GLA across our office and industrial portfolio, while a total of 24,167 square meters were not renewed and therefore vacated. This activity translates into a net positive leasing of more than 167,000 square meters, which represents close to 24% of our total existing portfolio.

It is worth to point out that out of that 24,000 square meters, 17,000 of these were not renewed within the industrial component of our portfolio in 3 transactions. This represents almost 72% of total vacancy during the last 8 quarters.

Finally, new leases and expansion excluding -- I'm sorry, new leases and expansion, we renewed a total of 178,000 square meters of a total potential expiration of 202,000 square meters. This translates into a rate of retention of about 88% in terms of GLA during that 2-year period.

In the same fashion of what we did in the 2 previous quarterly reports, and on Page 7, we present a comparison chart of the levels of collection of rents before and during the sanitary contingency due to COVID-19 pandemic.

As you can see, levels of collection during April reached pre-COVID-19 standards. And from May on, there has been a marginal contraction consistent with relief programs that calls for deferments and financing of a small portion of our revenues during the rest of 2020 and 2021.

Our accounts receivable in the last quarter presented a strong recovery from the previous quarter in terms of sale days outstanding equivalent, dropping from 9.1 days to 7.3 days quarter-to-quarter, most of which represent deferred payments as part of our [ tenant business ] program. As of the end of the quarter, we had approximately MXN 6.4 million of past due collections.

Moving on to Page 8 of the presentation. A lot has been said about the new reality of working in the office space during this pandemic. Many personal protection and safety measures have to be implemented in order to safeguard the health and well-being of employees and visitors, as well as to reduce the risk of a broader contagious spread outside the work environment.

For that reason and as a part of our already ongoing digital innovation initiative, we decided to [indiscernible] back in 2020. We allocated our own headquarters the new office space that would comply with above-standard health and safety equipment and protocols. While at the same time, designing an office environment to function as a [ model ] for our tenants to help them identify improvements and tools they could use at their own space with the possibility of Fibra Mty the required investment on their rent amortizable [ capital funding ].

We're pleased to inform that during the last quarter of 2020, we [ kicked off ] our new office space that includes, among other things, the implementation of measures such as face ID, in and out access control with thermal reading and proper mask use warnings, touchless elevator panels, automated sanitizing checkpoints for visitors in financial-related meetings to avoid concurrent use of certain number of people, air conditioning and air circulation system with UV systems to reduce more than 99% of bacterial and viral spread, safer personal protection equipment disposal, and hand sanitizers stations throughout the office space, signage in private offices and meeting rooms to avoid close distance between people, and proper physical distancing and flexi-glass panels between working stations. We continue to work on additional technology and will report back to you as we integrate it to our office space and common areas.

I would like to spend a couple of minutes talking about our take on the performance of core market office markets outlined on Page 8 of the presentation. After 3 full quarters into the pandemic, we begin to have some ratings for all 3 major office markets in Mexico that we would like to address. Our view rather than a predictive one is more of a performance analysis to help us properly approach opportunities with a deeper understanding on these market drivers.

In terms of net absorption, Mexico City has been in negative numbers for 3 consecutive quarters, followed by Guadalajara with almost no activity and Monterrey with a slight recovery during the last quarter of 2020. As you can see, the moving average for net absorption in Mexico City for all 2020 plunged, while Guadalajara and Monterrey almost paralyzed at 0 new occupancy.

As to vacancy rates, Mexico City and Monterrey have increased at an almost identical rate, reaching levels close to 20%, although there are substantial difference of market size of about 5:1. On the other hand, Guadalajara was able to lower that figure by the second quarter, but that then bounced to reach vacancy close to 24%. Let's keep in mind that Guadalajara is the smallest of all 3 markets and the dynamics of the market are different to Mexico City and Monterrey, as you can see on the chart.

Finally, in terms of new space construction, Mexico City has shown a positive reaction to the slowdown in construction, especially due to the fact that the federal government reduced significantly its occupancy activity 1 year prior to the pandemic. While Monterrey and Guadalajara reacted and slowed down construction once the pandemic started.

Looking at these 3 indicators and using our own interpretation in the market cycle clock of JLL, it is evident that all 3 markets have already entered into oversupply of office space, with a clear tendency to head toward a stagnant condition soon. We believe that Mexico City is moving faster and Guadalajara is moving slower than Monterrey to a [ still ] market, arriving all of them at a different moment.

But the fact of the matter is that our view is that recovery might not start before 2022. As vaccination in Mexico progresses and the U.S. economy and industrial activity continues to improve, we will have a clearer understanding of the pace and magnitude for a potential recovery.

Finally, I would like to talk about our target pricing levels for new potential acquisitions in the short-term as presented in the table on Page 9 of the webcast material. We continue to focus on industrial and office transaction in core markets divided into 3 main categories, all of which consider credit tenants as the users.

For office transactions, we are focused on stabilized buildings with less than 10 years of construction on their single or double net leases, expiration profile of higher than 5 years and most leases denominated in dollars. We are pursuing cap rates in the range of 9% to 10% for this asset class.

For stabilized industrial portfolios, both leased or potential sale and leasebacks, we are looking into buildings that are not older than 7 years with triple net or absolute triple net leases, expiration profile of no less than 5 years, preferably 10 to 15 years, all dollar-denominated. Our target in-place cap rate ranges between 7% and 8% for this type of portfolios.

Finally, for build-to-suit projects, we are currently evaluating new buildings with triple net dollar-denominated leases and 7 or more years of lease terms. We are looking into underwritings with a cap rate of between 8% to 9%. Since late third of quarter 2020, we retook our acquisitions program, but scarcity of attractive transaction has not allowed us to land proper investments. We continue to be patient and believe that few transactions under these guidelines could be closed before the end of 2021.

I will be more than happy to address in more detail any of the operations, markets and acquisitions aspects during the Q&A portion of the call. But [indiscernible] Jaime Martínez to talk about the key financial aspects of Fibra Mty. 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. I would like to [ follow ] my speech in 2 main topics, starting with the improvement in Fibra Mty's debt profile and financial flexibility, following to explain our 2021 guidance approved by our Corporate Practices Committee.

In terms of liability management, during 2020, several transactions were implemented to improve our debt profile in a meaningful way, including the early payment in May, April of a $3.6 million outstanding balance in a loan held with Seguros Monterrey New York Life to optimize guarantees' use. The substitution of the $35 million unsecured loan subscribed with HSBC, with proceeds from our current syndicated loan for the same account -- amount out in June. This transaction allowed to extend the maturity of this facility from March 2022 to December 2024.

The early payment of the $90.6 million outstanding balance of the Banamex syndicated loan, which, if I may add, was our first long-term loan using the proceeds from the issuance of the first dollar-denominated note for Fibra Mty in the domestic market. As a result, previous debt maturities for 2022 and 2023 were extended to the last quarter of 2027.

And finally, a $51.7 million outstanding balance of bilateral loans was paid in advance at the beginning of December, aiming to lessen the cash flows used to meet debt service obligations and have a greater amount of encumbered assets that may reduce more efficiently at a lower debt cost going forward.

As a result of this strategy, I would like to mention some of key financial indicators. As shown on the Slide 11, our leverage ratio went below 26% in fourth quarter '20, a 200 basis point reduction when compared with 28% at the beginning of the year. It helped with our disposal of undrawn revolving credit lines for a total amount of MXN 1.6 billion, which translates in roughly 10% of our total assets. We have modest projected financial expense for 2021, which amounts for approximately $9 million.

As shown on Slide 12, there are no significant debt maturities until December 2024. Scheduled maturities for 2021 include $3.3 million corresponding to our syndicated loan. The average debt term is 5.3 years, the longest since our IPO. Encumbered assets went from 100% to 56.7%. And our financial ratios and other specific thresholds defined in the financial covenants are fully and widely met.

I would like to take time to congratulate and express gratitude to our entire team as well as the investors and financial partners for their support in carrying out this strategy.

Moving on Slide 13, the guidance approved by at Corporate Practices Committee meeting held on February 24, reflects several relevant developments brought about largely by the downturn in economic activity resulting from the ongoing pandemic, which was -- which have weighted on Fibra Mty's projected results.

From an operational standpoint, as Javier mentioned, 2021 is a year with a significant number of renewals, Lockdowns and COVID-19 prevention measures have [ hindered ] the commercialization of available space in the office market. The current vacant basis, as well as the potential vacancy derived from 2021 maturities, will show a longer absorption than those observed historically.

On the financial front, the interest rate cuts on government securities, from an average of 5.67% in 2020 to a projected of 3.83%, will reduce the estimated financial income for 2021.

It worth mentioning that with the intent of discouraging potential acquisitions that could affect the company's profitability in the long term, 2021 guidance only considers same-property operations. None of this -- nonetheless, we will initiate a scenario of the potential cash distribution per share in considering current acquisition capacity.

You can say that, as expressed in Slide 14, the 2021 guidance considers 3 main aspects, each shall focus on low and high range. Given the current conditions, the guidance estimate a decline in organic cash flow between 7% and 10% and is represented in the second bar of [ all ] charts. The chart on your right considers a 7% decline and is used to estimate the high end of the guidance. And the chart on the left considers the [ deep predict ] line, therefore, is used to estimate the low end of the guidance.

In the [ fourth part ], you can find the effect caused by macroeconomic factors, mainly related to the reduction of interest rates, which has an effect due to our cash balance caused by the suspension of acquisition processes. This effect would be smoothed out as acquisition processes are resumed.

Finally, the appreciation of the Mexican pesos against the U.S. dollar, which considers an exchange rate between MXN 20 and MXN 20.5 per dollar in the first range and MXN 20.5 to MXN 21 per dollar in the second range. ForEx effect is negative because of our dollar-denominated revenue. This is shown in the last part, blue bars.

Taking that into account, our approved guidance for MXN 20 to MXN 20.5 per dollar, going from MXN 0.81 to MXN 0.83 per share and from MXN 0.83 to MXN 0.85 per share for a range of MXN 20.50 to MXN 21 per dollar. As mentioned before, the number excludes the acquisition effects in order to better align the management with shareholders. If we consider the annualized effect of acquisitions, considering a 35% leverage ratio, the accretive effect is estimated roughly MXN 0.17 per share.

In the last slide, we present a summary of financial indicators that might be useful for further analysis. I would like to end my remarks by mentioning that our strategy is committed to Fibra Mty's success on both short and long term.

That will be all. Operator, please proceed with questions.

[Operator]

[Operator Instructions] Our first question comes from Francisco Chavez with BBVA.

[Francisco Chávez Martínez, analyst]

My question is regarding the guidance for this year. Your view on the office segment outlook is significantly different from what we have heard from your peers at other FIBRAs. Is your guidance a pessimistic guidance or just realistic? And also, if you can if you can elaborate on the assumptions behind the office segment for this year, which increase of vacancy and what magnitude of drop in rents are you expecting.

[Javier Llaca García, executive]

Francisco, this is Javier. Well, our take or our view of the market might be different from some of our peers because of many things. One of them could be the nature itself of our portfolio and our tenant base. And also, I think that expiration profile makes a difference. Although we have a relatively high expiration, as had Jaime mentioned for this year, most of them is concentrated on the industrial portfolio, and we have a couple of office transactions that might be -- expire in this year and not renew.

But our take of the market is, as I said before, is not a predictive one, one thing is the market and the other one is the impact of our office portfolio on guidance. As Jaime mentioned before, we expect between 7.5% to 9.5% drop on cash flow. We are prudent at reviewing some unexpected vacancies. And also, we are expecting a similar rate of retention that we had last year. And that would led us to that 7.5% to 9.5% drop in cash flow. That's one thing on our office portfolio that reflects on guidance, as Jaime mentioned.

Talking about the market view that we have -- and again, our view is not a predictive one. We believe that based upon the information that we have, we could expect to -- all 3 markets to go to a standstill kind of situation pretty soon. And we believe that a recovery might start by 2022. I know that some of our peers are saying otherwise, but our business demand is different and I think it's logic.

But I think Guadalajara is going to start before Monterrey and Mexico City, and it would be followed by Monterrey and Mexico City. Mexico City can take longer on recovery in our own point of view. Guadalajara has a totally different dynamic. And Monterrey is starting to show some signs of recovery, but it's going to be slow. So that's our humble take of the market. I know it differs from some of our peers, but well, we are a different peer.

[Francisco Chávez Martínez, analyst]

And just a follow-up on this in your recent conversations with your tenants in the office segment, what kind of impact in average rent can you expect this year in the upcoming renewals?

[Javier Llaca García, executive]

Okay. Yes, sure. Without going into any confidential or privileged information, yes, we are talking to our tenants on a yearly basis, not only in office, but industrial and a small retail portfolio we want to -- as Jorge mentioned at the beginning, we have been trying to be supportive and [ empathetic ] with all of our tenants. So in that regard, we have a close relationship and communication.

I can tell you that you have all kind of different perspectives and reactions from all of our tenants. There are tenants that are going to reduce significantly their space. There are tenants that are going to increase the space or tenants that are going to keep pretty much their same composition. And there are some tenants that are working with us on the -- like what that I mentioned during my presentation. So they are very receptive on how to accommodate their space to the new reality. I don't like the term new normal, let's call it new reality.

Regarding the lease rates in the market, I mean you saw our numbers on same store, the same property, we are having an impact on the lease spread, an [ effective ] impact. We're trying to give that impact as small as possible. But there's going to be an impact on the lease rate on the markets in general.

I can tell you that with the exception of Guadalajara, we've seen a drop in dollar-denominated lease rent rate in both Mexico City and Monterrey. Guadalajara is staying kind of stabilized because [ they have ] no activity almost at all. With a negative impact on net absorption in Mexico City, you should expect a continued decrease on lease rates.

Thankfully, our portfolio -- office portfolio in Mexico City was recently [ renewed ] and it was renewed in dollars. So we don't expect a negative impact in our Mexico City office portfolio. Our Guadalajara office portfolio is very resilient. We have no vacancy at all. And we have almost a waiting list this for a couple of our tenants that want to expand into our space. And we could expect most of the hit for our office portfolio in Monterrey, we're already working on that. We renewed -- recently, we renewed a long-term couple of material leases. But we should expect a continued negative impact on lease rates in the market as a whole.

[Operator]

Our next question comes from Jorge Lagunas with Apalache.

[Jorge Lagunas, analyst]

I just have one inquiry, which is the reasoning behind the Fibra achieving such an important recovery in the rent per square meter for all the segments against the third quarter of 2020.

[Javier Llaca García, executive]

Okay. I want to make sure that I understand your question. Does your question regard a recovery in terms of retention? Or are you talking about a recovery in terms of lease rates?

[Jorge Lagunas, analyst]

Yes. Sorry for that. The recovery in the rent per square meter.

[Javier Llaca García, executive]

Well, we -- if you consider -- if you compare the fourth quarter of 2019 to the fourth quarter of 2020, we actually had a decrease of 1.6% in the overall lease rate for our office segment. We had an impact on the exchange rate. If you look at the exchange rate of the third quarter 2020 versus the fourth quarter of 2020, we had a decrease from MXN 22.3 to MXN 19.9 per dollar average. So that explains the drop on a yearly basis and increase on a quarter-to-quarter basis.

I'm not sure if that's -- but given the fact that our cash flow is mainly in dollars, we have those situations that have nothing to do with market conditions and many times with the lease conditions, but they have to do with the FX conditions, as Jaime mentioned before. So you're going to -- you have seen and you're going to continue to see a volatility correlation of the fixed market with our lease rates converted to dollars. So I hope that's a good answer.

[Jorge Avalos Carpinteyro, executive]

And just to complement what Javier is saying, Jorge, that's why Jaime gave a guidance using 2 different ranges of [Foreign Language] of the FX rate. One, the -- it is between MXN 21 and MXN 21.5. And the other one, Jaime, if you can help me with that, is it between MXN 20.5 and MXN 21?

[Jaime Martínez Trigueros, executive]

It's MXN 20.5 to MXN 21, exactly.

[Jorge Avalos Carpinteyro, executive]

Yes. And that's mainly, Jorge, because as Javier mentioned, almost 75% of our revenues are in dollar-denominated terms.

[Operator]

Our next question comes from [ Edson Nara with Sumna Capital ].

[Unknown Analyst]

Congrats for the results. I have 2 questions. You mentioned in your earnings release that you are planning or I understood whether you maybe are you going to plan to sell or repositioning -- I don't know if you have many assets, so on a specific asset. So I was wondering if you can give us more color about that.

And the second one is regarding this office tenant that terminated the lease before the commitment due. So I was wondering if you can give us color about who is the office tenant or what was the rationality about terminating before the ending period?

[Javier Llaca García, executive]

[ Edson ] we're terrible -- sorry, but we're having a real bad time understanding your question. I'm sorry, it's a very poor connection. Can you please repeat both questions quickly? [indiscernible].

[Unknown Analyst]

The first question, Javier, is about the repositioning and sale of our assets? If you can give some color on that.

[Javier Llaca García, executive]

Okay. Thank you. I'm glad that you have a better connection. Yes, it's about the repositioning of our assets. We have nonproductive assets right now that were scheduled to [ happen ]. One is a property that we bought that we're [indiscernible] by the time of our IPO. And that property, we knew that was going [indiscernible] and it already happened.

So we're working with a couple of brokerage firms and consultants to help define the best and highest use for the property. Obviously, the market has changed, and we are going to have a better understanding of how to approach that repositioning that could be either a sale or it could be a contribution for a new [indiscernible].

We have a couple of properties that are going to be vacated that are not going to be necessarily in the backlog. One of that is going to be the commissioning to -- as an office building for multi-tenant. It used to be a single tenant and it's going to become a multi-tenant. So we're going to do some investment in providing those specs up-to-date.

And we have 2 more assets that we are considering if either we'll reposition those or we'll develop those. But that's also happening as we speak, and we're going to have more color on that. The good news is that a couple of those properties are not empty and are producing income right now. We have scheduled those to be vacated during the last quarter of this year. So we are doing things with enough time to make the right decision and not hurry things on how to reposition those. And Jorge, if you can please help me with the second question from [ Edson ].

[Jorge Avalos Carpinteyro, executive]

Well, before we go to the second question, Javier, probably what I think it is missing is about the industrial part that we're doing some disposition. You have a property which probably will be dispositioned before the end of this first -- the second quarter of this year.

[Javier Llaca García, executive]

Yes. As part of our acquisitions program, we have not only acquisitions but dispositions as well, as Jorge mentioned. One of our industrial properties is in the noncore market. It's under negotiation right now. We have an LOI already secured and so -- on that property, and that's going to happen probably between March and April. We are trying [ to be pure ] and to enhance our portfolio. We're considering on selling a couple of income-producing assets in noncore markets, and that's going to develop throughout the rest of the year. Thank you for that question.

[Jorge Avalos Carpinteyro, executive]

And as for the second question, I didn't get it also. So if you could repeat that again?

[Unknown Analyst]

Yes, sure. The second question is regarding to the office tenant that you have and requested an early termination. I know it's going to be effective in October 2021, but I think the question is what was the rationality from the tenant to terminate -- to actually terminate it before 2023, which was a maturity contract?

[Javier Llaca García, executive]

Okay. Let me see if I got it right. Your question, and I'm not sure is what's criteria for an early termination of a lease, an office lease agreement. Is that your question?

[Unknown Analyst]

Yes.

[Javier Llaca García, executive]

Okay. Yes, you're referring to a specific property that we referred to on our report. That we are early terminating an office building that was scheduled for this year. Here's what happened. And this lease concept has an early termination window for 2021 that was supposed to happen in October of this year.

Instead of going all the way to October of this year, what we decided was to terminate it right now to have a small discount on that remaining term of about 1.5 months, but to have -- to recover the possession of the building right away so we can start decommissioning and repositioning the asset.

In that way, we have some -- we say in the office our time, we're buying or time to have the [indiscernible] on the cash flow because of the penalty on the lease termination, while at the same time we'll work on repositioning the assets. That was the strategy. That was the criteria behind that. And hopefully, it's going to pay off. We're going to have the building up and running for new marketing in a couple of months. So we're taking advantage of the time.

[Jorge Avalos Carpinteyro, executive]

And just to complement, [ Edson ], this is nothing to do with the pandemic. This -- our tenant is Axtel. Axtel, as is publicly known, is on sale. So they need to -- it's going to be probably bought by some other company, so they needed to terminate this leasing contract. And as Javier mentioned, having the position of the building right now would be more accretive than waiting until October of this year. And that's why we negotiated some -- let's say, some months in discount in terms of just having control of the whole building.

[Unknown Analyst]

Okay. Really clear. And the last -- I was convinced about the beginning of the conversation that you said the acquisition beyond the whole at least for '21 period, am I getting right? Or is it going to be more likely to be on the guidance side?

[Jorge Avalos Carpinteyro, executive]

No. The guidance that Jaime referred to and presented on the material does not consider additional acquisitions. That's a same-property guidance -- guideline.

[Operator]

Our next question comes from Pablo Duarte with Actinver.

[Pablo Enrique Duarte de León, analyst]

Regarding acquisitions, I think it may be hard to answer at this point, particularly considering the still ongoing uncertainty of the office segment and tight market conditions. But still, by when would you expect to achieve the full deployment of your firepower?

[Javier Llaca García, executive]

Yes. Pablo, nice talking to you. Nice hearing from you. As you might figure it out, we have a portfolio of about around $170 million, $180 million right now, including cash equivalents and debt. We are working, as I mentioned before, since late third quarter of last year, we have been actively working on new potential acquisitions. We are making some process on the pipeline. We could expect that probably we're going to be able to deploy all of our firepower in the following 9 to 12 months. Hopefully, we could even do it before the end of the year.

We're going to be focusing or we're focusing right now on about the same mix that you know from our current portfolio. We're exploring industrial transactions. We're exploring new development for build-to-suits on industrial and we're exploring some office transactions. We have not been definitive yet. We're making a lot of progress, as I said before, but we believe that we're going to be able to deploy our total $180 million fire power in the next 9 to 12 months.

[Operator]

At this point, we will be taking sub web's web questions. Please proceed with those questions.

[Cesar Rubalcava, executive]

In a webcast, too, we have our first question from Gordon Lee. On acquisitions, to clarify, do you expect to use all of your $200 million firepower in 2021?

[Javier Llaca García, executive]

Well, yes, this question comes from Gordon Lee. Well, the -- I believe we just answered that. Yes, we expect to be able to deploy all of our firepower in 2021. It's going to be difficult to answer the mix for how concentrated it's going to be. But I would say it's going to be close to our current [ composition ].

[Cesar Rubalcava, executive]

Regarding the...

[Javier Llaca García, executive]

Well, there's going to be a few transactions that's going to be probably concentrated in 3 to 4 different transactions, or either single office -- single buildings or several building portfolio. So that would be the first part of your question.

Then you're saying are you agnostic on segment provided that complies with the criteria you discussed? Or do you have a preference from one over the other? The answer is -- the short answer is we are more concentrated in trying looking into industrial right now. The long answer is that we're looking at both. We're looking at industrial and office. And we're looking into those 3 portfolio conditions that we discussed, satellite office buildings, so like industrial and/or sale and leaseback. And then new development, new [indiscernible] industrial probably in that quarter of concentration.

[Jaime Martínez Trigueros, executive]

And Javier mentioned, I think the best process is to maintain our balance. And of course, the price and the quality are going to play an important role in our decisions.

[Cesar Rubalcava, executive]

Thank you. Our next question comes from Mariana Cruz from BTG Pactual. What can we expect in terms of maintenance CapEx for 2021 for your annual CapEx budget in this year?

[Jaime Martínez Trigueros, executive]

Mariana, thank you for your question. In terms of CapEx -- more than maintenance Capex, in terms of CapEx for our buildings, we have, as we always do, CapEx reserve as part of our AFFO. This year, I believe it's going to be around MXN 42 million to MXN 45 million a year. It's pretty similar that we have had during 2020. To us, CapEx is a priority. So therefore, we're going to continue with that CapEx protocol and criteria so far. We had additional CapEx to face the pandemic, as we mentioned before, but that's not considered as part of the MXN 42 million to MXN 45 million that I just mentioned.

[Operator]

Our next audio question comes from the line of Francisco Suarez with Scotiabank.

[Francisco Suarez, analyst]

The question is one on move-out. Generally speaking, what sorts of penalties, fees you expect to earn-out of a move-out? Is it fair to say that you can expect something in the range of 1 year of lease? Is that so inaccurate? So does that depend on the quality of the tenant?

And secondly, on capital allocation, you did a wonderful job on liability management. You have a lot of financial flexibility. The question is, to what extent in the new reality, as you correctly put it, does it make sense to add more assets? Or perhaps better to engage in repositioning the existing assets that you may have, for instance, in office space to accommodate your tenants for flex work or other trends that we are seeing emerging in the market?

[Javier Llaca García, executive]

Paco, this is Javier. Really nice to hear of you and thank you for your questions. As always, those are 2 very good questions. First of all, in terms of penalty or the conventional penalty, there's no room for that. Every lease contract is a tailor-made suit and it requires different approach or a personalized approach.

In a nutshell or as a common practice, I could tell you that when you have a mandatory term, a reasonable penalty would be net present value of the remaining of the term, probably plus the benefit that you have on getting back the property before and start marketing again. So it varies a lot.

What we do is to -- we always try to leave it all open. We like long-term relationships. So we always pursue a reasonable negotiation. Thankfully, it's not been necessary so far with the exception of a couple of times. But we always try to leave it open.

In regards to your second question, which is great. What we are doing is that we're focusing our consolidation of the portfolio to 3 main aspects. Acquisition is always going to be there. As we do not develop, we can buy a fully stabilized, high-quality assets that is going to provide a net operating income right away or pretty soon, it's always a good idea to buy those.

Then there is the dispositions. As I mentioned before, we're going to be doing some dispositions this year. We are creating a brand-new practice as part of our acquisitions team that is going to do dispositions, not only of nonstrategic assets but also of assets that we want to redeploy that equity somewhere else.

We are not planning to do reconversions for -- to change the use of our -- of any of our assets right now. Our vacancies, it's slow enough to try to keep that use, with the exception of a couple of properties that I already mentioned. Most of our properties have no better or higher use of what they have right now. So we're going to keep that way.

We are doing, though, as we mentioned during our last presentation, we're going to be doing some investments in behalf of some of our tenants for tenant improvements and to redesign the layout, but that's going to be a rent amortizable CapEx investment. And it's going to be within the private space of our tenants. Right now, we -- other than what we already discussed, we're not planning on changing on the use or the nature of any of our assets.

[Operator]

At this time, we will take another web question. Please proceed with that question.

[Cesar Rubalcava, executive]

This question comes from one of our investors, [ Aurelio Ortiz ]. The low exposure to the retail market is coming to the current restrictions on the opening of the physical shopping centers. Have the current conditions and difficulties on the retail sector affected your long-term view on the exposure to this sector?

[Javier Llaca García, executive]

Right. Thank you, [ Antonio ]. Thank you for the question, [ Aurelio ]. Well, we're probably the wrong person or the wrong company to answer that given the fact that we do not invest in shopping centers. Our retail portion of the portfolio is either amenities for our office buildings or operations like a car dealership that behaves more like an industrial lease than a retail lease.

Having said that, obviously, our small retail portfolio has troubled a lot. We're seeing that on the gyms, the coffee shops and some of the restaurants that we have in our office buildings. We are -- we have [ deferments ] as part of our relief program. But to be honest, that represents less than 1% of our income, those deferments in the retail portion. So probably our answer won't be good enough in terms of being a reference to the market. So I'm going to leave it at that.

[Operator]

With no questions left in the queue. I'd like to turn the conference over to management of the company.

[Jorge Avalos Carpinteyro, executive]

Well, I want to thank everyone for your time. Please be safe. Take care, and we'll see you next time in the next conference call. Good morning.

[Operator]

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

[Jorge Avalos Carpinteyro, executive]

Thank you.